UNION OF INDIA vs M/S K.K. BUILDERS AND ENGINEERS PVT. LTD.

1.This appeal u/s 37 of the Arbitration and Conciliation Act, 1996 is directed against the judgment and order dated 09/09/2010 passed by District

Judge, Kamrup in Misc. Arb. Case No. 184/2007, filed by the respondent, against the award of Arbitral Tribunal dated 24/02/2007 in respect of

Contract No. SE/473 dated 21/02/2002, whereby the learned District Judge dismissed the application u/s 34 of the Arbitration and Conciliation Act,

1996 filed by the appellant herein with modification in the rate of interest.

The brief facts leading to the present appeal which may be relevant for disposal of this appeal are that the respondent was awarded with a contract

by the appellant vide Contract No. SE/473 for the works on MG/TSR (P) for 4.48 km, from 121.80 to 123.80 km; 124.60 to 127.20 km, 128.00 to

130.50 km and 13.50 to 134.00 km in Lumding-Badarpur section and the nature of works was to replace the wooden sleepers by pre-stressed

concrete sleepers.

The dispute having arisen between the parties for termination of the contract on risk and cost terms, the respondent approached the Divisional

Manager (Works), Lumding for appointment of arbitrator as per terms of the contract. Despite receipt of notice, no arbitrator was appointed by the

appellant, and as such, the respondent approached the Hon’ble Chief Justice of the Gauhati High Court and the Hon’ble Chief Justice in the

exercise of power u/s 11 of the Arbitration and Conciliation Act, appointed Justice Smt. Meera Sharma (retd.) as sole arbitrator. The sole arbitrator

made the award on 24/2/2007.

Aggrieved by the arbitral award, the appellant filed an application u/s 34 of Arbitration and Conciliation Act, 1996, before the District Judge and the

learned District Judge by the impugned order dismissed the petition with modification in the award in respect of rate of interest.

Aggrieved, the appellant preferred the instant appeal.

I have heard Mr. BN Gogoi, learned Standing Counsel for the N.F. Railway and Mr. G.N. Sahewalla, learned Senior Counsel for the respondent.

Learned counsel for the appellant placing reliance on a decision of this Court in Union of India-VS- Major V.P. Najhawan reported in 2007 (4)

GLT 156 submitted that the composition of the arbitral tribunal having not been in accordance with Clause -64 (3) (a) (ii) of the General Condition of

Contract (GCC), the tribunal did not have the jurisdiction to arbitrate the matter, and as such, the learned District Judge ought to have set aside the

award as per sub-clause -5 of Section 34 (2) (a) of the Arbitration and Conciliation Act, 1996. Learned counsel for the appellant further contended,

that in view of clear prohibition in Clause-16 (3) of the GCC against granting of interest, learned District Judge at least ought to have set aside the

award to the extent of granting of interest being contrary to the agreement.

Refuting the submission of the learned counsel for the appellant, Mr. Sahewalla submitted, that while appointing an arbitrator u/s 11 of the

Arbitration and Conciliation Act, 1996, the Chief Justice or the designate of the Chief Justice is not bound by the terms of contract. Mr. Sahewalla

further contended that the arbitral tribunal is very much competent to award interest and the provision of clause 16 (3) of GCC is not a bar against the

tribunal in exercising its power and discretion to grant interest. In support of his submission, Mr. Sahewalla placed reliance on the following decisions :-

(i) North Eastern Railway and Ors. â€"VS- Triple Engineering Works (2014) 9 SCC 288

(ii) Northern Railway Administration, Ministry of Railway, New Delhi _VS- Patent engineering railway 2008 10 SCC 240.

(ii) Deep Trading Co. â€"VS- Indian Oil Corporation and Ors, 2013 4 SCC 35.

(iv) Madnami Construction Corporation Pvt. Ltd. â€"VS- Union of India (2010) 1 SCC 549.

From the rival contention of the learned counsel for both the parties the following two points emerges for determination in this appeal :-

i. Whether the arbitral tribunal was incompetent and without jurisdiction to arbitrate the matter for not being appointed in accordance with the

agreement.

ii. Whether awarding interest by the arbitral tribunal was beyond its jurisdiction and competence.

In so far as contract agreement is concerned, it contained arbitration clause and the appointment and composition of arbitrator have been laid

down in clause 64 (3) (a) (i) & (ii) of the GCC. Admittedly despite request from the contractor, the concerned authority failed to appoint arbitrator

within time and as such, the contractor approached the Hon’ble Chief Justice u/s 11 of the Arbitration and Conciliation Act, 1996 and the sole

arbitrator was appointed by the Hon’ble Chief Justice. It would be beneficial to have a look at the relevant provision of the GCC, i.e., clause 64

(3) (a) (i) & (ii) and Section 11 of the Arbitration and Conciliation Act, 1996 which read as under :- Clause 64 (3) (a) (i) --- In cases where the total

value of all claims in question added together does not exceed Rs. 10,00,000/- Rupees ten lakhs only), the Arbitral Tribunal shall consist of a sole

arbitrator who shall be a gazetted officer of Railway not below JA grade, nominated by the General Manager. The sole arbitrator shall be appointed

within 60 days from the day when a written and valid demand for arbitration is received by GM. Clause 64 (3) (a) (ii) “In cases not covered by the

clause 64 (3) (a) (i), the Arbitral Tribunal shall consist of a panel of three gazetted Rly. officers not below JA grade or 2 Railway gazetted officers not

below JA grade and a retired Railway Officer, retired not below the rank of SAG officer, as the arbitrators. For this purpose, the Railway will send a

panel of more than 3 names of gazetted Rly. officers of one or more departments of the Rly. which may also include the name (s) of retired Railway

officer (s) empanelled to work as Railway arbitrator to the contractor within 60 days from the day when a written and valid demand for arbitration is

received by the GM contractor will be asked to suggest to general Manager at least two names out of the panel for appointment as contractor’s

nominee within 30 days from the date of dispatch of the request by Railway. The general manager shall appoint at least one out of them as the

contractor’s nominee and will, also simultaneously appoint the balance number of arbitrators from either from the panel or from outside the panel,

duly indicating the ‘presiding arbitrator’ from amongst the three arbitrators so appointed. GM shall complete this exercise of appointing the

arbitral tribunal within 30 days from the receipt of the names of contractor’s nominees. While nominating the arbitrators it will be necessary to

ensure that one of them is from the accounts department. An officer of selection grade of the accounts department shall be considered of equal status

to the officers in SA grade of other departments of the Railway for the purpose of appointment of arbitrator.â€​

Sub-sections (2), ( 3), (4), (5), (6) and (8) of Section 11 of the Arbitration and Conciliation Act, 1996 being crucial, so far appointment of arbitrator

is concerned, they are reproduced below :-

“(2) Subject to sub-section (6), the parties are free to agree on a procedure for appointing the arbitrator or arbitrators.

(3) Failing any agreement referred to in sub-section (2), in an arbitration with three arbitrators, each party shall appoint one arbitrator, and the two

appointed arbitrators shall appoint the third arbitrator who shall act as the presiding arbitrator.

(4) If the appointment procedure in sub-section (3) applies andâ€

(a) a party fails to appoint an arbitrator within thirty days from the receipt of a request to do so from the other party; or

(b) the two appointed arbitrators fail to agree on the third arbitrator within thirty days from the date of their appointment, the appointment shall be

made, upon request of a party, by the Chief Justice or any person or institution designated by him.

(5) Failing any agreement referred to in sub-section (2), in an arbitration with a sole arbitrator, if the parties fail to agree on the arbitrator within thirty

days from receipt of a request by one party from the other party to so agree the appointment shall be made, upon request of a party, by the Chief

Justice or any person or institution designated by him.

(6) Where, under an appointment procedure agreed upon by the parties,â€

(a) a party fails to act as required under that procedure; or

(b) the parties, or the two appointed arbitrators, fail to reach an agreement expected of them under that procedure; or

(c) a person, including an institution, fails to perform any function entrusted to him or it under that procedure, a party may request the Chief Justice or

any person or institution designated by him to take the necessary measure, unless the agreement on the appointment procedure provides other means

for securing the appointment.

(8) The Supreme Court or, as the case may be, the High Court or the person or institution designated by such court, before appointing an arbitrator,

shall seek disclosure in writing from the prospective arbitrator in terms of sub-section (1) of Section 12, and have due regard to ---

(a) any qualifications required for the arbitrator by the agreement of the parties; and

(b) the contents of the disclosure and other considerations as are likely to secure the appointment of an independent and impartial arbitrator.â€​

Sub-section (2) to (5) of Section 11 deals with the procedure for appointment of arbitrator as per agreement as well as when the arbitrator shall be

appointed by the Chief Justice or any person or institution designated by him. Sub-section (6) of Section 11 provides for the three contingencies under

which the parties may request the Chief Justice or any person or institution designated by him for appointment of an arbitrator. Sub-Section (8)

provides that the Chief Justice or the person or the institution designated by him, while appointing arbitrator, required to have due regard to the twin

requirement, i.e., qualification required of the arbitrator by agreement of the parties and other considerations for securing independent and impartial

appointment of arbitrator.

The contention of the learned counsel for the respondent is that the Chief Justice or his designate is not bound by the terms of agreement between

the parties in appointing arbitrator. The Apex Court, in Northern Railway Administration â€"VS- Patent Engineering Works (supra) while dealing with

the matters to be considered in appointing arbitrator by the Chief Justice or his designate observed, that “it needs no reiteration that appointment of

arbitrator or arbitrator named in the arbitration agreement is not must, but while making the appointment, requirement of Sub-Section (8) of Section 11

have to be kept in view, considered and taken into account. If it is not done, the appointment becomes vulnerableâ€​.

In Deep Trading Co. -Vs- Indian Oil Corpn. the Apex Court observed, that once the arbitrator is not appointed as per agreed procedure within the

stipulated time, right of the party concerned to appoint arbitrator stands forfeited. The Apex court, while dealing with the power of the Chief Justice or

the designated person or institution in appointing an arbitrator held in para 18 & 20 as under :-

“Section 11 (8) provides that Chief Justice or the designated person or institution, in appointing an arbitrator, shall have due regard to two

aspects, (a) qualifications required of the arbitrator by the agreement of the parties; and (b) other considerations as are likely to secure the

appointment of an independent and impartial arbitrator. In Northern Railway Administration3, a three-Judge Bench of this Court considered the

scheme of Section 11. Insofar as Section 11(8) is concerned, this Court stated that appointment of the arbitrator or arbitrators named in the arbitration

agreement is not a must, but while making the appointment the twin requirements mentioned therein have to be kept in view.â€​

“Section 11 (8) does not help the Corporation at all in the fact situation. Firstly, there is no qualification for the arbitrator prescribed in the

agreement. Secondly, to secure the appointment of an independent and impartial arbitrator, it is rather necessary that someone other than an officer of

the Corporation is appointed as arbitrator once the Corporation has forfeited its right to appoint the arbitrator under Clause 29 of the agreement.â€​

In North Eastern Railway and Ors â€"VS- Tripple Engineering Works (supra) where a retired Judge was appointed by the Chief Justice as sole

arbitrator and the appointment of such arbitrator was contested by the Railway department on the ground, that the said appointment of arbitrator by

the High Court was contrary to the agreement as to qualification, required of arbitrator as per clause 64 (3) (a) (ii) and (iii) of the GCC. The Apex

Court, after considering various earlier decisions as well as the clause 63 (a) (ii) and (iii) of the GCC held at para 9 & 10 as under :-

“9. A pronouncement of late in Deep Trading Company Vs. Indian Oil Corporation and Others [7] followed the legal position laid down in Punj

Lloyd Ltd. (supra) which in turn had followed a two Judges Bench decision in Datar Switchgears Ltd. Vs. Tata Finance Ltd.[8]. The theory of

forfeiture of the rights of a party under the agreement to appoint its arbitrator once the proceedings under Section 11(6) of the Act had commenced

came to be even more formally embedded in Deep Trading Company (supra) subject, of course, to the provisions of Section 11(8), which provision in

any event, had been held in Northern Railway Administration (supra) not to be mandatory, but only embodying a requirement of keeping the same in

view at the time of exercise of jurisdiction under Section 11(6) of the Act.

In the present case Clauses 64(3)(a)(ii) and (iii) of the General Conditions of Contract do not prescribe any specific qualification of the arbitrators

that are to be appointed under the agreement except that they should be railway officers. As already noticed, even if the arbitration agreement was to

specifically provide for any particular qualification(s) of an arbitrator the same would not denude the power of the Court acting under Section 11(6), in

an appropriate case to depart therefrom…………………….â€​

Apparently clause 64 (3) (a) (ii) provides for appointment of Railway officers as arbitrators. The said clause of the GCC has not provided any

specific qualification and there was also no allegation against the arbitral tribunal of being impartial and not independent. Therefore, the present case is

squarely covered by the decision of the Apex Court in North Eastern Railway â€"VS- Tripple Engg. Works (supra).

In Union of India â€"VS- Major V. P. Najhawan (supra), relied by the learned counsel for the appellant, the learned Single Judge of this Court

held that â€" “From the above discussion of the relevant provisions of the Act, 1996, it transpires that the Hon’ble Chief Justice or his

designate while appointing the arbitrator shall consider any qualification required of the arbitrator by the agreement of the parties. An appointment of

arbitrator, who does not have qualification required of the arbitrator by the agreement of the parties, by the Hon’ble Chief Justice or his designate

is not an arbitrator or arbitral tribunal duly appointed under Section 11 of the said Act and also that an order of the Hon’ble Chief Justice or his

designate appointing the unqualified arbitrator could be challenged under clause (b) of sub-section (3) of Section 12 of he said Act. Under sub-section

(5) of Section 13 of the said Act 1996, a party aggrieved by an arbitral award made by an unqualified arbitrator may make an application under

Section 34 (2) (a) (v) of the said Act 1996 for setting aside such an arbitral award. “

The provision of clause 64 (3) (a) (ii) provided that arbitral tribunal shall consist of railway officers. It does not provide for any special qualification

and as such, the said decision does not appear to be of any help to the appellant. This apart, even if the arbitration agreement provides for any specific

qualification, that “would not denude the power to the court acting under section 11 (6)†to depart from the terms of the agreement , as held by

the Apex Court in Tripple Engineering Works’ case (supra). What therefore, follows is that the Chief Justice or the designated person or

institution, while appointing arbitrator u/s 11 (6) of the Act shall not be bound by the agreement.

In the facts and circumstances of the present case, when there was no allegation against the arbitral tribunal of not being impartial or not

independent and the GCC also not providing for any specific qualification, there was no reason for holding the appointment of arbitral tribunal illegal

and as such, the learned District Judge has not committed any error by not interfering with the award of the tribunal on the ground of composition of

arbitral tribunal. Accordingly, the point no. 1 is decided in favour of the respondent or against the appellant.

The Tribunal in the instant case granted interest @ 18 % pendente lite and future interest from the date of award till realization. Learned District

Judge, while declining to interfere with the entire award reduced the rate of interest from 18% awarded by the tribunal to 9%. However, the

respondent did not take any cross objection against the judgment of the District Judge reducing the rate of interest. The learned counsel for the

appellant contended that granting of interest by the tribunal itself was prohibited by the terms of contract, more particularly, clause 16 (3) of the GCC.

The issue whether arbitral tribunal possesses the power to grant interest is no longer res integra.

Sub-section (7) (a) and (b) of Section 31 of the Arbitration and Conciliation Act, 1996, empowers the tribunal to grant interest which reads as

under :- (7) (a) Unless otherwise agreed by the parties, where and in so far 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 two per cent higher than the

current rate of interest prevalent on the date of award, from the date of award to the date of payment.â€​

A plain reading of Section 7 (b) of the Arbitration and Conciliation Act, 1996 makes it clear, that so far granting of interest from the date of award

till realisation is concerned, it is statutorily provided that when payment of money is ordered, the tribunal has to award the interest irrespective of any

agreement between the parties. As per Clause 7 (a) of the Act, so far the interest pendente lite is concerned, it is discretionary power of the tribunal

to grant interest pendente lite, unless contrary is provided by the agreement between the parties.

Section 2 (a) of the Interest Act 1978 defines the Court which includes both tribunal and arbitrator. Section 3 of the Interest Act empowers the

court to allow interest and therefore, under the provision of the Interest Act, the arbitral tribunal is competent to grant interest. However, Section 3 (3)

(a) of the Interest act provides that when any debt or damages upon which payment of interest is barred by virtue of an expressed agreement, the

provision of “Section 3 shall not apply. Therefore, as per Sub-section (3) clause (a) of Section 3 of the Interest Act if there is expressed bar to

grant interest by the tribunal, section 3 of the Interest Act will not come into play. This provision of Sub-Section 3 of Section 3 of the Interest Act

appears to be more or less consistent and coherent with the provision of Clause (a), Sub-section (7) of Section 31 Arbitration and Conciliation Act,

1996. So far the interest pendente lite is concerned, a combined reading of Section 31 sub-section (7) clause (a) of the Arbitration and Conciliation

Act, 1996 and sub-section (3) of Section 3 of the Interest Act would show, that usually the grant of interest pendente lite is within the discretionary

power of the tribunal, and such discretion is subject to any agreement specifically debarring the tribunal to grant interest. Unless there is specific bar in

the agreement between the parties, specifically debarring the tribunal to grant interest pendente lite, the arbitral tribunal enjoys the power and

discretion to grant interest pendente lite. The question arises whether the clause 16 (3) of the GCC referred by the learned counsel for the appellant

creates any bar against granting of interest by the arbitrator. The Apex Court in Madnani Construction (P) Ltd. â€"VS- Union of India (supra) having

confronted with the same question in respect of an identical clause incorporated in GCC with regard to interest observed as under : “In the instant

case also the relevant clauses, which have been quoted above, Clause 16 (2) of GCC and Clause 30 of SCC do not contain any prohibition on the

arbitrator to grant interest. Therefore, the High Court was not right in interfering with the arbitrator’s award on the matter of interest on the basis

of the aforesaid clauses. We therefore, on a strict construction of those clauses and relying on the ratio in Engineering find that the said clauses do not

impose any bar on the arbitrator in granting interest.â€​

Clause 16 (2) of the GCC dealt by the Apex Court in Madnani Construction Corp. (P) Ltd Vs. Union of India (supra) reads as under :- “16 (2)

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 such clause (1) of this Clause will be repayable with interest accrued thereto.â€​

Clause 16 (3) of the GCC referred to by the appellant in the instant case relating to interest reads as under :- “16 (2) 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 such clause (1) of this Clause will be repayable with interest accrued thereto.â€​

The above provision of the GCC would show, that Clause -16 (2) of the GCC involved in the case of Madnami Construction (P) Ltd. and the

clause 16(3) of the GCC in the instant case are identical. Therefore, the ratio laid down by the Apex Court in Madnani Construction (P) Ltd. squarely

covers the present case as the facts of both the cases are identical. Thus, in view of the ratio laid down by the Apex Court in Madnani Construction

(P) Ltd. case, where North Eastern Railway was one of the party, it is abundantly clear that the bar under clause 16(3) is only against the concerned

authority and not against the tribunal, nor such clause imposes any restriction on the power of the tribunal to grant interest. Since the arbitral tribunal is

empowered to grant interest under the provision of Section 31 of sub-section (7) of the Arbitration & Conciliation Act, 1996, as well as the Interest

Act, and the clause 16 (3) does not create any bar against the arbitral tribunal to grant interest, learned District Judge rightly rejected the plea of the

appellant that clause 16 (3) GCC created bar against the tribunal to grant interest and on this count also the learned District Judge cannot be faulted.

Accordingly, the point No. 2 is also answered in favour of the respondent.

Although the appellant took a ground in the appeal that the learned District Judge failed to take into consideration the facts, on the basis of which,

tribunal made the award, such ground was not pressed seriously, as the learned counsel for both the sides agreed on the settle position that the tribunal

is the master of facts and the District judge cannot sit in appeal against the arbitral award to re-appreciate the facts.

The settled position of law is that in a petition u/s 34 of the Arbitration and Conciliation Act, 1996 the power of the court is more or less

supervisory in nature and it does not sit in appeal over an arbitral award and the order of the arbitral tribunal can only be set aside when there is

jurisdictional error committed by the tribunal or under any of the ground set out in section 34 of the Arbitration and Conciliation Act. Both the ground

of challenge to the impugned judgment having found not sustainable, the present appeal deserves to be dismissed.

For the reason stated above, this appeal is dismissed.

Send back the LCR.