Raghavendra Construction Company vs The General Manager, Southern Railway and Others

R. Banumathi, J.—This intra Court Appeal arises out of the order dated 10.11.2009 made in O.P. No. 573 of 2009, whereby the learned

single Judge has set aside the award of the Arbitral Tribunal in so far as it relates to interest pendente lite under Claim No. 11.

The facts in nutshell are as follows:

The work of ""Gauge Conversion between Madras Beach to Tiruchirappalli # Villupuram # Tiruchirappallai Section proposed regarding of existing

Metre Gauge track between Vridhachalam and Ariyalur Stations in Reaches III and IV"" was entrusted by the Railways to the Appellant under

letter of acceptance dated 17.9.1996 stipulating the completion period of nine months. The work was therefore to be completed by 16.6.1997.

Agreement was also entered into on 30.4.1997 in agreement No. 155/CN/97. There were number of extensions and the work was extended upto

31.12.1998. Certain disputes and differences arose and the Appellant prayed for arbitration. In all, 11 claims were raised by the Appellant and 3

counter claims by the Railways. In the award dated 12.3.2009, the Arbitral Tribunal partly allowed claims 1 to 8 and the claims 9 and 10 of the

1st Respondent were rejected. The 11th claim, which was towards interest was allowed directing the payment of the award amount at 14% per

annum from 1.1.1999 to 12.3.2009, the date of the award. The Arbitral Tribunal further directed that the award has to be complied with within a

period of 30 days, failing which interest at 18% per annum was payable on the entire award amount. Railways complied claims 1 to 8 and a total

sum of Rs. 53,64,716/- was paid to the Appellant. In so far as award of interest being 14 percent per annum on the amount awarded under claims

1 to 10 from 1.1.1999 to 12.3.2009 works out to Rs. 76,96,699/-.

Challenging the award of interest in claim No. 11, Railways filed Petition u/s 34 of the Arbitration and Conciliation Act, 1996. The award was

challenged on the ground that under Clause 16(2) of General Conditions of Contract, no interest was payable on the amounts due to the contractor

and that u/s 31(7)(a) of the Arbitration and Conciliation Act, 1996, the Arbitral Tribunal is entitled to award interest only if there was no contract

to the contrary.

The learned single Judge held that Clause 16(2) of General Conditions of Contract bars a claim of interest on the amounts payable to the

contractor and when there is a bar for claiming interest, it is binding on the parties. Placing reliance upon a decision of the Supreme Court in

Sayeed Ahmed and Co. Vs. State of U.P. and Others, , the learned single Judge further held that in view of specific bar under Clause 16(2), the

contractor cannot claim interest and that the contractor cannot take advantage of Clause 64.5.

The learned Counsel for the Appellant contended that the contract was awarded on 17.9.1996 and the period of completion was 9 months i.e.,

work was to be completed on or before 16.6.1997 and only due to the shortcomings and defaults of the Respondents the contract was completed

on 31.12.1998 and the learned single Judge did not keep in view the delay caused on the part of the Respondent. It was further submitted that

when the 1st Respondent has accepted the award on all other claims of the arbitrator, which represents only the principal amount, they cannot be

permitted to deny the legitimate claim of the Appellant on interest from the date of completion of the contract i.e., 1.1.1999 till the date of the

award i.e., 12.3.2009. It was further submitted that Clause 16(2) is not an absolute bar to award interest and while so the learned single Judge

erred in setting aside the award in respect of claim No. 11.

Mr. M. Vellaisamy, learned Counsel for the 1st Respondent contended that Clause 16(2) of the General Conditions of contract, which forms

part of the agreement between the parties, clearly stipulates that no interest is payable upon the earnest money or the security deposit or amounts

payable to the Contractor under the contract and thus under Clause 16(2) there is absolute bar regarding awarding of interest and Arbitral Tribunal

erred in awarding interest and the learned single Judge rightly set aside the same. The learned Counsel further submitted that the Arbitral Tribunal

erred in awarding interest for a period more than ten years under claim No. 11, which itself exceeds the totality of the award made in respect of

claims 1 to 10.

Upon consideration of the award, the order of the learned single judge and also the submissions made by the learned Counsel on either side, the

following point arises for determination in this appeal:

Whether Clause 16(2) of General Conditions of Contract contains express bar regarding award of interest? If so, whether the learned single Judge

was justified in interfering with the award and setting aside the award in so far as the awarding of interest by the Arbitrary Tribunal?

Point: Clause 16(2) of the General Conditions of contract governing the contract between the parties bars payment of interest. Clause 16(2)

reads as under:

No interest will be payable upon the earnest money or the security deposit or amounts payable to the Contractor under the contract, but

Government Securities deposited in terms of Clause (1) of this clause will be repayable with interest accrued thereon.

The learned single Judge held that Clause 16(2) bars payment of interest (i) upon the earnest money and security deposit and (ii) upon the amounts

payable to the contractor under the contract. Placing reliance upon Sayeed Ahmed and Co. Vs. State of U.P. and Others, , learned single Judge

held that the second limb of Clause 16(2) bars a claim for interest on the amounts payable to the contractor under the contract and in view of

Section 31(7)(a) as expounded by the Apex Court in Sayeed Ahmed and Co. Vs. State of U.P. and Others, , the award of interest cannot be

sustained.

The learned Counsel for the Appellant contended that in Sayeed Ahmed and Co. Vs. State of U.P. and Others, , the Hon''ble Supreme Court

was considering clause G. 1.09 of the contract between the parties. Clause G. 1.09 stipulated that no interest or damages will be paid by the

Government in regard to any money or balance which may be lying with the Government or may become due owing to any dispute, difference or

misunderstanding between the Engineer-in-Charge on the one hand and the contractor on the other hand. The learned Counsel for Appellant

submitted that contrary to Clause G. 1.09, Clause 16(2) of General Conditions of Contract stipulates that no interest will be payable upon the

earnest money or the security deposit or amounts payable to the contractor, which means that the Clause speaks about the admitted amount and

not on the award passed by the arbitrator. It was further contended that the learned single Judge ought to have seen that principles laid down in the

context of clause G. 1.09 contained in Sayeed Ahmed and Co. Vs. State of U.P. and Others, shall not be applicable to the facts of the present

case in view of the difference in the contractual conditions in both the cases. The learned Counsel would further contend that Section 31(7)(a) of

the Arbitration and Conciliation Act, 1996 is prefaced by the words ""unless otherwise agreed by the parties"" and the learned single judge ought to

have seen that such prohibition should be linked to the power of the arbitrators to award interest and it is for this reason and being conscious of this

the Respondents sought to introduce Clause 64(5) of General Conditions of Contract into the contract. It was further argued that the learned single

Judge was not right in concluding that Clause 64(5) of the General Conditions of Contract is only a specific bar and it would be open to parties to

fall back on clauses 16(2) of General Conditions of Contract.

General Conditions of Contract revised Clause 64.5, which stipulates that where the Arbitral award is for the payment of money, no interest

shall be payable on whole or any part of the amount for any period till the date on which the award is made. The contention of Appellant is that if

there is already bar for payment of pendente lite interest as per Clause 16(2) of General Conditions of Contract, then there would not have been

any instance for the 1st Respondent to introduce Clause 64(5) of General Conditions of Contract by corrected slip dated 6.8.1997, which came

into operation subsequently, whereas the contract was awarded to the Appellant on 17.9.1996 and therefore Clause 64(5) of General Conditions

of Contract has absolutely no application on the said contract. The contention of the Appellant does not merit acceptance. In our considered view,

Clause 64.5 does not in any way take away the effect of existing Clause 16(2). As rightly pointed out by the learned single judge, the introduction

of Clause 64.5 in the General Conditions of Contract by way of amendment is only a reiteration of what was already contained in Clause 16(2)

with the only difference being that there was little more emphasis on the expression ''where the award is for the payment of money"". The contractor

cannot take advantage of the introduction of Clause 64.5 to contend as though the bar was introduced by way of amendment for the first time in

1997.

The legislature while enacting the Arbitration and Conciliation Act, 1996, incorporated a specific provision in regard to award of interest by

arbitrators. Sub-section (7) of Section 31 of the Act deals with the arbitrator''s power to award interest. Clause (a) relates to the period between

the date on which the cause of action arose and the date on which the award is made. Clause (b) relates to the period from the date of award to

date of payment. The said Sub-section (7) is extracted below: #31. (7)(a) Unless otherwise agreed by the parties, where and insofar as an arbitral

award is for the payment of money, the Arbitral Tribunal may include in the sum for which the award is made interest, at such rate as it deems

reasonable, on the whole or any part of the money, for the whole or any part of the period between the date on which the cause of action arose

and the date on which the award is made.

(b) A sum directed to be paid by an arbitral award shall, unless the award otherwise directs, carry interest at the rate of eighteen per centum per

annum from the date of the award to the date of payment.#

Considering the scope of Section 31(7) of the Act, in Sayeed Ahmed and Co. Vs. State of U.P. and Others, , the Supreme Court has held as

under:

...Having regard to Sub-section (7) of Section 31 of the Act, the difference between pre-reference period and pendente lite period has

disappeared insofar as award of interest by the arbitrator. The said section recognises only two periods and makes the following provisions:

(a) In regard to the period between the date on which the cause of action arose and the date on which the award is made (pre-reference period

plus pendente lite), the Arbitral Tribunal may award interest at such rate as it deems reasonable, for the whole or any part of the period, unless

otherwise agreed by the parties.

(b) For the period from the date of award to the date of payment the interest shall be 18% per annum if no specific order is made in regard to

interest. The arbitrator may however award interest at a different rate for the period between the date of award and date of payment.

Contending that Sayeed Ahmed and Co. Vs. State of U.P. and Others, was only considering Clause G. 1.09 and that the same cannot be held

applicable to the case on hand, learned Counsel for Appellants placed reliance upon Madnani Construction Corporation (P) Ltd. Vs. Union of

India (UOI) and Others, , wherein the Supreme Court has considered the Clauses 16(2) and 30 of the General Conditions of Contract. Learned

Counsel for the Appellant contended that in Madnani Construction Corporation (P) Ltd. Vs. Union of India (UOI) and Others, , the Supreme

Court has held that Clauses 16(2) and 30 of General Conditions of Contract do not impose any bar on the arbitrator in granting interest and

therefore the learned single Judge was not right in interfering with the arbitrators award on the matter of interest.

In Madnani Construction Corporation (P) Ltd. Vs. Union of India (UOI) and Others, , the arbitral Tribunal awarded interest. The High Court

of Allahabad relying on the decision of Secretary, Irrigation Department, Government of Orissa and others Vs. G.C. Roy, set aside the award in

so far as awarding of interest. Pointing out that no interference was called for in the award of the Arbitral Tribunal, the Supreme Court has set

aside the order passed by the High Court. It is pertinent to note that Madnani Construction Corporation (P) Ltd. Vs. Union of India (UOI) and

Others, is a matter arising under Arbitration Act, 1940, which did not contain a provision similar to Section 31(7) of the Arbitration and

Conciliation Act, 1996. Under the 1996 Act, the only dates relevant in the context of award of interest are the date of cause of action and the date

of Arbitral Award. Thus, the decisions relating to the awards under 1940 Act is making a distinction between pre-reference period and the

pendente lite period holding that inspite of clause prohibiting interest there is a distinction vested on the arbitrator to award interest, which do not

apply to the Scheme of the Arbitration Act, 1996. In Sayeed Ahmed and Co. Vs. State of U.P. and Others, , the Supreme Court has held thus:

The clause is comprehensive and bars interest under any head in clear and categorical terms.

In view of Clause (a) of Sub-section (7) of Section 31 of the Act, it is clear that the arbitrator could not have awarded interest up to the date

of the award, as the agreement between the parties barred payment of interest. The bar against award of interest would operate not only during the

pre-reference period,...but also during the pendente lite period....

Madnani Construction Corporation (P) Ltd. Vs. Union of India (UOI) and Others, came to be considered in Sree Kamatchi Amman

constructions v. Divisional Railway Manager (Works), Palghat And Others (2010) 8 SCC 767, in which the Supreme Court considered an

identical matter. In the said case, in view of specific bar contained in Clause 16(2), in exercise of discretion, Arbitral Tribunal awarded only future

interest and refused to award interest for pre-reference period and interest pendente lite. Being aggrieved by the rejection of interest for pre-

reference period and interest pendente lite, the Appellant filed petition u/s 34 of the Act. In so far as the claim of interest, both the learned single

judge and the Division Bench held that having regard to the bar contained in Clause 16(2), the Arbitral Tribunal cannot award interest. Being

aggrieved by the same, the contractor preferred appeal before the Supreme Court and the Supreme Court held as under:

We may also refer to the decision of this Court in Union of India (UOI) Vs. Saraswat Trading Agency and Others, . This Court reiterated that

if there is a bar against payment of interest in the contract, the arbitrator cannot award any interest for the pre-reference period or pendente lite. In

view of the specific bar under Clause 16(2), we are of the view that the Arbitral Tribunal was justified in refusing interest from the date of cause of

action to the date of award.

Making a distinction between old Act 1940 and new Act 1996 and the cases arising under the old Act 1940 and new Act 1996, the Supreme

Court in Kamatchi Amman Constructions case (2010) 8 SCC 767) further held as under:

At the outset it should be noticed that The Board of Trustees for the Port of Calcutta Vs. Engineers-De-Space-Age, and Madnani

Construction Corporation (P) Ltd. Vs. Union of India (UOI) and Others, arose under the old Arbitration Act, 1940 which did not contain a

provision similar to Section 31(7) of the new Act. This Court, in Sayeed Ahmed1 held that the decisions rendered under the old Act may not be of

assistance to decide the validity of grant of interest under the new Act. The logic in The Board of Trustees for the Port of Calcutta Vs. Engineers-

De-Space-Age, was that while the contract governed the interest from the date of cause of action to date of reference, the arbitrator had the

discretion to decide the rate of interest from the date of reference to date of award and he was not bound by any prohibition regarding interest

contained in the contract, insofar as pendente lite period is concerned. This Court in Sayeed Ahmed and Co. Vs. State of U.P. and Others, held

that the decision in The Board of Trustees for the Port of Calcutta Vs. Engineers-De-Space-Age, would not apply to cases arising under the new

Act. We extract below, the relevant portion from Sayeed Ahmed and Co. Vs. State of U.P. and Others, . The observation in The Board of

Trustees for the Port of Calcutta Vs. Engineers-De-Space-Age, that the term of the contract merely prohibits the department/employer from

paying interest to the contractor for delayed payment but once the matter goes to the arbitrator, the discretion of the arbitrator is not in any manner

stifled by the terms of the contract and the arbitrator will be entitled to consider and grant the interest pendente lite, cannot be used to support an

outlandish argument that bar on the Government or department paying interest is not a bar on the arbitrator awarding interest. Whether the

provision in the contract bars the employer from entertaining any claim for interest or bars the contractor from making any claim for interest, it

amounts to a clear prohibition regarding interest. The provision need not contain another bar prohibiting the arbitrator from awarding interest. The

observations made in the context of interest pendente lite cannot be used out of contract.

The learned Counsel for the Appellant next contended on the basis of the above observations in The Board of Trustees for the Port of Calcutta

Vs. Engineers-De-Space-Age, that even if Clause G 1.09 is held to bar interest in the pre-reference period, it should be held not to apply to the

pendente lite period, that is, from 14-3-1997 to 31-7-2001. He contended that the award of interest during the pendency of the reference was

within the discretion of the arbitrator and therefore, the award of interest for that period could not have been interfered with by the High Court. In

view of the Constitution Bench decisions in Secretary, Irrigation Department, Government of Orissa and others Vs. G.C. Roy, and N.C. Budharaj

(2001) 2 SCC 721 rendered before and after the decision in The Board of Trustees for the Port of Calcutta Vs. Engineers-De-Space-Age, , it is

doubtful whether the observation in The Board of Trustees for the Port of Calcutta Vs. Engineers-De-Space-Age, in a case arising under the

Arbitration Act, 1940 that the arbitrator could award interest pendente lite, ignoring the express bar in the contract, is good law. But that need not

be considered further as this is a case under the new Act where there is a specific provision regarding award of interest by the arbitrator.#

The same reasoning applies to the decision in Madnani Construction Corporation (P) Ltd. Vs. Union of India (UOI) and Others, also as that also

relates to a case under the old Act and did not independently consider the issue but merely relied upon the decision in The Board of Trustees for

the Port of Calcutta Vs. Engineers-De-Space-Age, .

...

We are of the view that the decisions in The Board of Trustees for the Port of Calcutta Vs. Engineers-De-Space-Age, and Madnani

Construction Corporation (P) Ltd. Vs. Union of India (UOI) and Others, are inapplicable for yet another reason. In The Board of Trustees for the

Port of Calcutta Vs. Engineers-De-Space-Age, and Madnani Construction Corporation (P) Ltd. Vs. Union of India (UOI) and Others, the

arbitrator had awarded interest for the pendente lite period. This Court upheld the award of such interest under the old Act on the ground that the

arbitrator had the discretion to decide whether interest should be awarded or not during the pendente lite period and he was not bound by the

contractual terms insofar as the interest for the pendente lite period. But in the instant case the Arbitral Tribunal has refused to award interest for

the pendente lite period. Where the Arbitral Tribunal has exercised its discretion and refused award of interest for the period pendente lite, even if

the principles in those two cases were applicable, the award of the arbitrator could not be interfered with. On this ground also the decisions in The

Board of Trustees for the Port of Calcutta Vs. Engineers-De-Space-Age, and Madnani Construction Corporation (P) Ltd. Vs. Union of India

(UOI) and Others, are inapplicable. Be that as it may.

In Sri Kamatchi Amman Constructions case (2010) 8 SCC 767), the Supreme Court categorically held that the decision rendered under 1940

Act may not be of assistance to decide the validity of grant of interest under 1996 Act. The ratio of the above decision is squarely applicable to the

case on hand. In view of specific bar under Clause 16(2), the Arbitral tribunal was not justified in granting interest. If the agreement between the

parties bars or restricts the grant of interest for any amount payable to the contractor under the contract, no such interest can be granted against the

express agreement of the parties. The learned single Judge rightly set aside the award of interest in respect of claim No. 11. We do not find any

reason to interfere with the order of the learned single Judge.

In the result, the appeal is dismissed. However, there is no order as to costs.