P.L. Raju and Company vs State of A.P. and Another

P. Venkatarama Reddi, J.—Seeking review of the judgment in C.M.A. No. 1301/1989 and C.R.P. No. 3611 /19.88, dated 21-7-1995, these review petitions are filed. It is contended by the review petitioner that the refusal to grant interest pendente lite is not in accordance with the binding pronouncements of the Supreme Court. Therefore, the judgment suffers from an error apparent on its face. It is submitted by the learned Counsel for the review petitioner that there is also ''sufficient reason'' within the meaning of Order 47 Rule 1 C.P.C. for reviewing the judgment, as otherwise, it would lead to miscarriage of justice. A factual error that has occurred in paragraph 35 on account of the representation made by the Counsel himself has also been pointed out:

At paragraph 35, we held as follows:

"Thus, following the decision of the Supreme Court in Durga Ram Prasad (25 supra) and of this Bench in Prasad and Co. Vs. The Superintending Engineer and Others, , we negative the claim for interest for the period between the date of reference and the date of award and hold that the award directing payment of interest should have been set aside as being without jurisdiction and the Court below should have directed payment of interest only from the date of award."

In our judgment, we referred to the Constitution Bench decision of the Supreme Court in Secretary, Irrigation Department, Government of Orissa and others Vs. G.C. Roy, ; Jugal Kishore Prabhatilal Sharma and others Vs. Vijayendra Prabhatilal Sharma and another, ; State of Orissa Vs. B.N. Agarwala, according to which the arbitrator had the power to award interest pendente lite, especially after the Interest Act, 1978, came into force. However, we held that Clause 69 of A.P. Detailed Standard Specifications which formed part of the contract is a bar against payment of interest. In reaching that conclusion, we placed reliance on the decision of the Supreme Court in Durga Ram Prasad Vs. Govt. of A.P., which also referred to Secretary, Irrigation Department, Government of Orissa and others Vs. G.C. Roy, etc., and came to the conclusion that although a different interpretation of Clause 69 was possible, we cannot but follow the direct decision in Durgaram Prasad''s case*. We commented that the binding effect of the Supreme Court''s decision cannot be whittled down merely because a point which should have been raised but not raised did not come up for consideration before the Supreme Court.

On a closer scrutiny of the decision of the Supreme Court in the light of the facts which presented themselves for consideration in that case, we find force in the contention of the review petitioner. We get a clear picture of the facts of that case from the judgment of the High Court from which the appeal went upto the Supreme Court. On the analysis of the decision of the Supreme Court in Durga Ram Prasad Vs. Govt. of A.P., with special reference to the context and factual setting in which the observations were made, we have now come to the irresistible conclusion that the true ratio underlying the Supreme Court''s decision was not understood by us in its proper perspective. By wrongly understanding the ratio, we declined to follow the larger Bench decisions including the Constitution Bench decision of the Supreme Court in Secretary, Irrigation Department, Government of Orissa and others Vs. G.C. Roy, . When once this mistake was realised in the course of arguments presented to the Division Bench of which one of us (PVR, J.) was a member, the Division Bench explained at length the true scope and ratio of the said decision in the judgment delivered by the Division Bench on 14-6-1996 in C.M.A. No.357 of 1991 and batch M. Gangareddy, rep. by his G.P.A., A. Srinivas Goud Vs. The State of A.P. and Others, . As we are in agreement with the views and clarificatory remarks made by the Bench in that case, we better quote extensively what the Division Bench has said in that case.

"We have closely and carefully examined the observations made and the dicta laid down by their Lordships in Durga Ram Prasad Vs. Govt. of A.P., . The judgment of the High Court which was affirmed by the Supreme Court is reported in 1975 ALT 370. The facts leading to the controversy are clearly discernible from the High Court''s judgment. The ''factual scenario'', to put it in the words of the Supreme Court, which led to the conclusion reached by their Lordships unfolds the true ratio of the decision and the context in which some of the observations were made could be clearly understood in the background of the facts presenting themselves for consideration in that case. On a careful analysis of the decision, we are unable to share the view of the Division Bench in the two cases mentioned above that Clause 69 was so interpreted by the Supreme Court as placing a clog on the arbitrator''s power to grant interest for the pre-award period on any and every type of amount payable to the contractor under the award."

The Division Bench then proceeded to refer to and analyse the observations made in that judgment so as to understand the true ratio of that decision. It was then observed:

"A perusal of the judgment of the High Court from which the appeal arose in the Supreme Court makes it clear that the ''withheld amount'' referred to by their Lordships of the Supreme Court represents the recoveries from the running bills. Clause 68 of the APDSS (forming part of the agreement) provides for certain percentage to be withheld and retained as a security for the due fulfilment of the contract. Clause 68 further provides that on the completion of the entire work and on the basis of the certificate issued by the Executive Engineer, the contractor will receive the final payment of all the monies payable to him except the E.M.D. and a sum equal to 21/2% of the total value of the work done. The amount so withheld from the final bill will be paid to the contractor together with the E.M.D. after a period of six months so that during this period, the defects shall have been made good by the contractor. It is this money that falls under item (C) of Clause 69 as indicated by the Supreme Court. We get it from the decision of the Supreme Court itself that there was a dispute as to whether the contractor constructed the godowns as per the specifications and therefore the Government withheld the payment. Therefore, their Lordships took the view that unless that dispute is resolved, the final settlement of the account cannot take place. The Supreme Court therefore held that till the dispute is resolved by the arbitrator by passing the award, accrual of interest thereon is by the express terms of the contract, namely by Clause 69, specifically excluded. Therefore, the arbitrator has no jurisdiction to award any interest on the withheld amount, that is to say, the amount deducted from the running bills or final bill under Clause 68.

The broad observation that unless the dispute is resolved and the amount is found due, the contractor is not entitled to the payment of it and the interest thereon is contractually excluded by Clause 69 should be understood in the light of the particular facts of that case and the context in which the dispute as to entitlement of interest arose. The decision in Durga Ram Prasad Vs. Govt. of A.P., cannot be treated as an authority for the proposition that the payment of interest is prohibited in fespect of any and every type of amount claimed by the contractor when once the dispute arises as to the right to receive payment for the disputed item. For instance, let us take a case where the arbitrator finds thai; certain payments were due for the actual work done but the Department paid for lesser quantities or, let us take a case where the arbitrator finds that the payment should have been made to the contractor at an extra rate on account of prolongation of the contract by reason of breach on the part of the Government. In such cases, it would be unjust to deny interest upto the date of the award. Principle No. 1 laid down in Secretary, Irrigation Department, Government of Orissa and others Vs. G.C. Roy, squarely applies in such case. The prohibition contained in Clause 69 against the payment of interest does not apply to such fact situations. As pointed out by the Supreme Court in The Board of Trustees for the Port of Calcutta Vs. Engineers-De-Space-Age, , a provision in the agreement excluding payment of interest shall be strictly construed and the prohibition cannot be extended to cover any and every type of situation. We are therefore of the view that Clause 69 is not in the nature of a blanket ban or an absolute ban on the entitlement of interest for the amounts due to be paid to the contractor. It depends on the nature and character of the amount claimed.

No doubt, their Lordships of the Supreme Court said in so many terms that the interpretation placed on Clause 69 by a learned single Judge of this Court in APSRTC v. Ramana Reddi is not correct but it does not mean that the Supreme Court viewed Clause 69 as placing a total prohibition against payment of interest in all cases in which disputes arise between the parties and such disputes are referred to arbitration. In saying that the interpretation placed by the learned single Judge in APSRTC v. Ramana Reddi is wrong, their Lordships only disapproved of the view taken by this Court that Clause 69 operates as a bar against payment of interest for a limited period of six months from the date of completion of the work (which is known as observation period) and not beyond that. The view of the Supreme Court appears to be that the bar extends even beyond the period of six months provided, of course, the sum is of the nature referred to in the second part of Clause 69."

On the question whether the case warrants reference to Full Bench, the Division Bench said:

"Although we have differed with the view expressed in the aforementioned cases, we do not consider it necessary to refer this case to a Full Bench inasmuch as the binding decision of the Constitution Bench in Secretary, Irrigation Department, Government of Orissa and others Vs. G.C. Roy, followed by various other subsequent decisions of the Supreme Court as well as the law laid down by a three-Judge Bench in Executive Engineer (Irrigation), Balimela and Others Vs. Abhaduta Jena and Others, as regards pre-reference interest was not followed by the Division Bench on a misunderstanding of the ratio of the decision in Durga Ram Prasad Vs. Govt. of A.P., . The two Division Bench decisions referred to above must be taken to be decisions rendered Per Incuriam as far as arbitrator''s power to award interest is concerned. However, we are still of the view that Durga Ram Prasad Vs. Govt. of A.P., operates in a limited sphere and it must still be considered to be an authority for the proposition that the arbitrator has no jurisdiction to award interest in regard to matters enumerated in the second part of Clause 69 which were compendiously referred to as 2(a), (b) and (c) by the Supreme Court."

The same reasons which dissuaded the Division Bench from referring the case to a Full Bench hold good for reviewing our judgment inso far as the pendente lite interest is concerned. We are of the view that it is a fit case for exercising the power of review to set right an apparent error in the judgment at the earliest opportunity so as to avoid miscarriage of justice.

It is to be noted that the reference in this case was made after the commencement of the Interest Act, 1978 under which the definition of ''Court'' includes an arbitrator and hence he is invested with the same power as the Court to award pendente lite interest, unless he is prohibited from doing so under the terms of the contract. As pointed out supra by the Division Bench in the judgment aforementioned, the prohibition under Clause 69 against payment of interest extends only to the three categories of sums specified therein provided that there is a dispute between the parties as to liability to pay the said sums. But for the erroneous impression that there is a blanket prohibition on the payment of interest on any and every type of amount awarded, we would have allowed pendente lite interest. Now, applying the true ratio and principle laid down by the Supreme Court in Durgaram Prasad''s case (4 supra) in juxtaposition with the principles laid down by the Constitution Bench in G.C. Roy''s case (1 supra), we are clearly of the view that the arbitrator could have legitimately allowed pendente lite interest on items 1-A (Rs.1,19,094/-), 4-A (Rs.4,000/-) and 5-A (Rs.3,120/-).

Under item 1-A, the contractor claimed differential payment due to him for the works executed under the head "Balance amount payable as per agreement rates." The balance amount was arrived at after deducting the intermediate payments paid already. The details of the claim were set out in the statements accompanying the contractor''s letter dated 26-11-1984 filed before the arbitrator. The item and quantum of work for which the balance payment is due are shown in the said statement. We were under the impression that claim 1-A stands on the same footing as the withheld amounts covered by claim No. 7-A. On the basis of the representation made by both the Counsel, we thought that the ''balance amount'' referred to in item 1-A is nothing but the amount withheld from the running bills at a certain percentage. But, considering the nature of claim put forward in item 1-A, in the light of the submission now made by the learned Counsel for the contractor, we come to the irresistible conclusion that the nature of the claim under 1-A is different from 7-A. What is claimed under item 1-A is the payment due to the contractor at the agreement rates for the work actually done by the" contractor. The arbitrator awarded a sum of Rs. 1,19,094/- under this head. On this amount, pendente lite interest at the rate of 18% per annum from the date of reference i.e., 7-3-1984 till the date of decree or till the date of payment is legally justified and the civil Court was equally justified in upholding the grant of interest.

The other two claims are for refund of penalties wrongfully imposed (4-A) and payment of amount towards supplemental items (5-A). The arbitrator awarded Rs. 4,000/- and Rs. 3,120/- respectively against these claims. As such the claims do not fall within the mischief of Clause 69, and the arbitrator''s power to award pendente lite interest thereon ought to be upheld.

As regards item 7-A, we are of the view that no interest thereon is admissible in view of the bar contained in Clause 69 as interpreted by the Supreme Court. Under item 7-A, the contractor claimed refund of Earnest Money Deposit, Security Deposit and the amounts withheld under running bills. As there was a dispute whether a contract was liable to be terminated under Clause 60 and these sums could be forfeited, the ratio of Durgaram Prasad''s case (4 supra) is attracted and till the dispute is resolved by the arbitrator, the contractor cannot claim interest thereon. We are, therefore, of the view that as far as this claim is concerned, there is no warrant to review our judgment. Even with regard to the compensation or damages awarded by the arbitrator for the non-payment of the amounts found to be due under items 1-A, 4-A, 5-A and 7-A, we do not think that any review is called for. At best, it is a debatable point whether interest to supplement the compensation already awarded could be granted by the arbitrator. It is, therefore, not a case for exercise of power of review.

Thus, we partly allow the Review Petition and direct that interest from the date of reference at 18% per annum should be granted on a sum of Rs. 1,26,214/-. Our judgment dated 21-7-1995 shall stand modified accordingly.