State of J&K and another vs Abdul Gaffer Surma

Raina, J.—Has the arbitrator the jurisdiction to award interest on the amount found due; if so, for what period can he allow it?

This is the controversy raised in this appeal. Answer to the first part of the poser is now a well settled principle that in the absence of the

contract to the contrary, the arbitrator has the jurisdiction to award interest. It is the second part of the controversy which calls for determination. It

stems from the dispute between the parties, hereto, that arose in respect of the contract of construction of super passage/ crossingdrainage on

Neej Nallah, RD 6236 Lower Jehlum Hydle Electricity Project, Kashmir. The contract was allotted in the year 1970 to the respondent but the

agreement thereabout came to be executed on 2471971. Clause 19 of the agreement provided for adjudication by arbitration of disputes qua the

execution of the contract. The clause nominated the Chief Engineer of the Project to be the arbitrator.

Dispute having arisen in respect of the contractor, an application seeking reference for arbitration diarisedas A. A. No. 48/ 97 lead to the

passing of the order of reference u/s 20 of the Arbitration Act, by this court on 3151976. The then Chief Engineer of the Project, namely Shri

R.N.Bakshi, entered upon the reference and made the award on 1991979. The award having been filed in the court lead to the filing of the

objections thereto by the parties. On consideration of the matter this court setaside the award vide the order dated: 17031982, and referred the

dispute to another arbitrator namely Peerzada Gh.Nabi, the retired Chief Engineer. The so nominated arbitrator did not enter upon the reference

consequent upon which the court appointed vide the order dated: 12091983, Shri Qazi Gh.Rasool, yet another retired Chief Engineer, as the

arbitrator to adjudicate upon the dispute in reference.

The arbitrator published the award on20101996 whereby the sum of Rs. 7,32,355/ was adjudged due from the appellants to the

contractor/respondent. The contractor had claimed interest @ 18% from April 1972. This claim too was the subject matter of the reference. The

arbitrator allowed the interest on the sum found due @ 12% P.a from April, 1972 till the date of award i.e. 20101986, The award thus allowed in

the first place the interest on the adjudged amount for two years for the prereference period and in the second place for the pendentelite period. It

appears that the arbitrator being conscious of the provisions of section 20 of the Arbitration Act, did not provide in the award for the payment of

interest after the date of the award. The award was objected to but the court vide its order dated: 18121991 repelled all the objections and made

the award, the rule of court and consequently the decree followed.

The decree came to be challenged in terms of section 39 of the Arbitration Act, but the appeal thereon which came up before the Division

Bench of this court was rejected on 1971993 at the admission stage itself. The decree was however modified to the extent that interest @ 5% P.a

from the date of the award onwards was allowed. The contractor sought review of the order but his attempt aborted as the court refused to oblige.

The contractor thereafter filed SLP No. 1792627/93 in the Hon'ble Supreme Court. This SLP was disposed of by the Apex Court on 1421994

with the observations:

We, therefore, set aside the above mentioned order relating to interest of the High Court and remit the matter to the High Court for disposal in

accordance with the law on the question of entitlement or otherwise to interest awarded by the arbitrator to appellant. The High Court appeal may

be disposed of at an early date.....

The appeal diarised as CIMA No. 28/92 got thereafter admitted for consideration on the entitlement to interest on the sum adjudged by the

arbitrator.

Entitlement to interest is not as a concession or grace. Award of interest is only a part of the damage recoverable for withholding or not paying

the amount due to the claimant. Payment of interest is in mercantile reference an implied term of contract and the arbitrator to whom the dispute

thereabout is to the contrary, the entitlement of the interest on the sum adjudged due. If the agreement of arbitration expressly provides that

interests shall not be due to the party deprived of the sum found due, the arbitrator cannot in that situation assume jurisdiction to award interest. In

the absence of a covenant to that effect in the agreement the arbitrator has the power to award interest; moreso, when the claim to interest is raised

and referred alongwith the main claim for arbitration.

In the case at hand the dispute about the claimed amount and the interest there on came to be referred for arbitration. This is spoken to in the

award and is not disputed. The arbitrator had in the case thus the jurisdiction to adjudicate upon the claim to interest and the award provided for

payment of interest @ 12% P.a from April 1972 till the date of the award, notwithstanding that the reference for arbitration was made on

3151976. It is thus clear that the award has allowed interest for the period prior to the date of reference, called the prereference period.

Controversy about the powers of the arbitrator to allow interest for the prereference period having been thus raised, reliance is placed on the

civil appeal, State of Orissa (Appellant) Vs. B.N.Agarwal andOthers (AIR 1997 SC 925) to canvass that in the absence of substantive law or the

agreement between the parties, the arbitrator is powerless to award interest for the prereference period. But in other words the legal position

propounded for the appellants is that the arbitrator can award interest for the prereference period only if such a claim can be based on a

substantive law or express contract or on the basis of tradeusage.

Delving on this aspect of the matter it is contended for the appellants that as no legal provision in any substantive law as applicable to the State

of J and K, exists to provide for payment of interest for the period from the claim to the order of reference, so the award providing for payment of

interest prior to the reference is bad in law.

Admittedly no contract existed, between the parties in this case, whereby interest on the adjudged sum from the date of claim till the date of

reference could be allowed. It too is not even whispered, muchless proved, that under any trade usage 01 practice the interest for prereference

period could be allowed by the arbitrator. It is thus to be determined whether the award for payment of interest, on the sum found due,up to the

date of reference is lawful.

The controversy as to the arbitrator's powers to award interest has been raised and discussed in various authoritative judicial pronouncement

which need to be referred to. The first judicial pronouncement on the arbitrator's powers to award interest is the case Executive Engineer Vs.

AbahaDuta Jena (AIR 1988 SC 1520). The Hon'ble Apex Court held in this case that the arbitrator could not award interest for the prereference

period in a case which arose prior to the commencement of the interest Act, 1978 unless the claimant had a right to get interest under the terms of

the contract or under the provision of any law. The Apex Court further ruled in this case that as the arbitrator is not a court within the meaning of

section 34 CPC, he cannot, therefore, award pendentelite interest.

The controversy was examined again by the Apex Court in the case reported in AIR 1989 SC 973 and it was held that the interest

pendentelite, that is the period for which the proceedings remained pending with the arbitrator, could not be awarded by the arbitrator but with to

regard to the prereference period it was held in this case that as the reference had been made after the commencement of interest Act of 1978, so,

the arbitrator was competent to award interest.

The third case in this line is Secretary Irrigation Department Govt. of Orissa Vs. G.C.Roy (1992) ISCC 508. The question that arose for

determination in this case was whether the arbitrator had the power to award pendentelite interest. While overruling partly the decision of

AbahaDuta Jena's case (supra) the Constitutional Bench held that the arbitrator had the power to award pendentelite interest. The Hon'ble Court

observed:

where the agreement between the parties does not prohibit grant of interest and where a party claims interest and that dispute (alongwith the claim

for principal amount or independently) is referred to the arbitrator, he shall have the power to award interest pendentelite. This is for the reason the

in such a case it must be presumed that interest was an implied term or the agreement between the parties and therefore when the parties refer all

their disputes or refer the disputes as to interest as such to the arbitrator, he shall have the power to award interest.......

The Hon'ble court held that decision in Jena's case (supra) in so far as it ran counter to the above proposition did not lay the correct law. The

decision in Jena's case is that the arbitrator could not in the absence of substantive law or the terms of the contract award interest for the

prereference period was left in tact to that extent.

The extract

...Interest pendentelite is not a matter of substantive law, like interest for period anterior to reference (prereference) for doing complete justice

between the parties such power has been inferred...

Clearly makers out that to allow interest for the prereference period there must be substantive right or contract but for pendentelite interest the

requirement is that it should not be prohibited by the contract or else it is allowable as a matter of procedure.

The decision in case Smt. Manjit Johl Vs. Dewan Modern Brewinis Ltd. CIMA NO. 43 of 1989 (1994) (SLJ 420) lays that the arbitrator has

the competence to award interest for the prereference period provided that no provision in the agreement exists for its exclusion. The division

Bench of this Court in Manjit Johl's case (supra), held that interest for prereference period can be claimed even if no statutory provision like the

Interest Act, is applicable but subject to the condition that the parties have had entered into the agreement providing for payment of interest or the

party to an agreement proves existence of a particular usage of paying interest on the outstanding amount for the prereference period.

The latest decision of the Apex Court rendered in B.N.Agarwal's case (supra) settles the controversy in all its contours. The Hon'ble court

observed:

In view of the aforesaid decisions there can now be no doubt with regard to the jurisdiction of the arbitrator to grant interest. The principles which

can now be said to be wellsettled are that the arbitrator has the jurisdiction to award prereference interest in case which arose after the Interest

Act, 1978 has become applicable. With regard to those cases pertaining to period prior to the applicability of the Interest Act, 1978, in the

absence of any substantive law, contract or usage, the arbitrator has no jurisdiction to award interest. For the periods during which the arbitration

proceedings were pending in view of the decision in G.C. Roy's case (1992AIR SCW 389) (supra) and Hindustan Construction Limited case

(1992 AIR SCW 2647) (supra), the arbitrator has the power to award interest. The power of the arbitrator to award interest for the postaward

period also exists and this aspect has been considered in the discussion relating to Civil Appeal No. 9234 of 1994 in the later part of this

judgment.

It is thus now settled principle that the arbitrator has the jurisdiction to award interest for the period the proceedings remained pending before

him.

On the touch stone of the judicial pronouncement it can safely be said that the arbitrator had in the case at hand the jurisdiction to award

interest for the period from the date of reference till the date of award i.e. pendentelite period. The arbitrator had of course, no power to grant

interest for the prereference period as no such right had the basis in any substantive law nor did presumably the agreement provide for payment of

interest for that period. The existence of usage to justify the payment of interest for the prereference period is nowhere pleaded muchless

established. Arbitrator was, therefore, wrong to allow interest from April 1972 to 31st of May, 1976, that is the prereference period. This part of

the award is separable from the 'rest of it so the award to that extent has to be held bad in law.

It is to be noted at the cost of repetition that the arbitrator allowed interest @12% p. a on the adjudged sum form April 1972 to May 1976 i.e.

the period prior in time to the order of reference. Interest is allowable either under the Interest Act, 1978 or under section 34 C.P.C. There is

apparently no other substantive law where under interest can be allowed. The interest Act, of 1978 is admittedly not applicable to the State of J

and K. The arbitrator had no jurisdiction to award interest for the period prior to the institution of the arbitration proceedings as the Interest Act,

1978 being not applicable to the State of J and K, so the expression ""court"" as defined in the Interest Act, does not for the purpose of arbitration

proceedings in the State include the arbitrator. Put in other words the power of the arbitrator to allow interest for the prereference period has the

basis in the Interest Act, 1978 and in all cases which arose prior to the application for the Interest Act, 1978 or to the case which arise in the

territories to which the Interest Act of 1978 is not applicable, the arbitrator has no power to award interest for the prereference period. It can thus

be said without ado that there is no substantive legal provision, as applicable to the State of J and K, whereunder the arbitrator can be said to be a

court clothed with the powers to allow interest upto the date of reference.

The other contention raised in the appeal is that the pendentelite period in the case be counted from the date when Mr. Qazi Gh.Rasool

entered upon the reference. The plea advanced, put in other words, is that no interest can be awarded for the period when the proceedings

remained pending with the 1st arbitrator namely Mr.R.N.Bakshi or for the period till Qazi Gh.Rasool entered into the picture. This contention is

answered by the decision in the case Santokh Singh Arora (Appellant) Vs. U.O.I and others 1992 (I) SCC 492 wherein it has been held that

pendentelite period should not be confined to the period between the date of reference to the new arbitrator till date of award made by him but

should also extend to the period of initial appointment of arbitrator and pendency of the matter before him or his successor or in court in

connection with the proceedings arising out of the arbitration. On the basis of this authority the contention has to be repelled that pendentelite

period be confined to the period when the proceedings remained pending with the second arbitrator, namely Mr. Qazi Gh.Rasool. Pendentelite

period has to be reckoned from the date of reference to arbitration i.e. 3151976 till 20101986, when the award was made.

Yet again it came to be contended that the pendentelite period must be computed not from the date of reference but from the date when the

arbitrator entered upon the reference. No precedent has been cited in support of this preposition nor is it otherwise tenable. A person deprived of

the use of money to which he is legitimately entitled has a right to be compensated for the deprivation. The compensation can be called either

interest or damage. This consideration is valid for the period prior to the arbitrator entering upon the reference. Prereference period is to be

counted or reckoned for the period prior to the order of reference. It matters not as to when does the arbitrator enter upon the reference after it is

made by the court. The pendentelite period commences from the date of reference till the award is filed.

In the result we do not find any reason not to allow interest on the adjudged sum from the date of reference till payment. We accordingly dismiss

the appeal but allow the interest on the sum due in the following manner:

I. the award of interest allowed by the arbitrator from April, 1972 to 3151976 is bad in law as being interest for the prereference period which is

accordingly disallowed;

II. we modify the award and the decree and allow 12% p.a interest on the adjudged due sum(Rs. 7,32,355) from 31st of May, 1976 i.e. date of

reference till 20101986, that is the date of award;

III. the respondent shall be entitled to recovery of interest as well @ 12% p.a on the adjudged sum from the date of decree till realisation.

The appeal is accordingly disposed of with no order as to costs.