Full Judgment Text
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CASE NO.:
Appeal (civil) 3586 of 1984
Appeal (civil) 710-711 of 1981 Appeal (civil) 6808-6809 of 1983
Appeal (civil) 6810 of 1983 Appeal (civil) 10649 of 1983 Appeal (civi
l) 779 of 1982 Appeal (civil) 2723 of 1981
PETITIONER:
STATE OF PUNJAB
Vs.
RESPONDENT:
N.C. BUDHARAJ (DEAD) BY L.RS., ETC. ETC.
DATE OF JUDGMENT: 10/01/2001
BENCH:
S.R.Babu, Doraswamy Raju, S.P.Patil
JUDGMENT:
L.....I.........T.......T.......T.......T.......T.......T..J
J U D G M E N T
RAJU, J.
The principal question arising in all these civil
appeals and stand referred to for the consideration of the
Constitution Bench is as to whether the Arbitrator has got
jurisdiction to award interest for the pre-reference period
in cases which arose prior to the commencement into force on
19.8.1981 of the Interest Act, 1978, when the provisions of
the Interest Act 1839 was holding the field. The cases
before us relate to the appointment of the Arbitrators
concerned by the specified authority, on a demand made
therefor by the contractor concerned without the
intervention of the Court. The Arbitrators concerned, while
sustaining portions of the claim made in the Awards also
allowed on those amounts interest from the due date of the
amount till date of Award. On the Awards being made the
Rule of Court, as per the determination made by the Civil
Court, the State pursued the matter before the High Court
unsuccessfully and the High Court sustained the claim of the
contractor for interest from the due date up to the date of
the Award. Aggrieved, the above appeals came to be filed
and entertained on certain limited and specified grounds,
inclusive of the dispute relating to the Award of interest
for the period prior to the date of the Award.
The Bench of three learned judges, who heard the
appeals initially, considered it necessary to refer to a
larger Bench for an authoritative pronouncement, the
following question of law:
In the absence of any prohibition to claim or grant
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interest under the arbitration agreement whether Arbitrator
has no jurisdiction to award interest for the pre-reference
period under the general law or equitable principles,
although such claim may not strictly fall within the
provisions of Interest Act, 1839 ? (since reported in 1999
(9) SCC 514)
The order of reference also further indicated that
there is no clause in the agreement as regards the payment
of interest for the pre-reference period and that there is
also no clause prohibiting the payment of interest for the
pre- reference period.
Before adverting even to the respective contentions of
parties on either side and undertaking a consideration of
the same, it would be necessary to refer to some of the
decisions of this Court and highlight the principles laid
down therein, since the chore of controversy centres around
the efficacy and effect of those principles on the issue
raised and stand referred to this Bench. The leading
decision which undertook an analysis of the case law on the
subject and laid down certain propositions of law is
reported in Executive Engineer (Irrigation), Balimela and
Others vs Abhaduta Jena and Others [(1988) 1 SCC 418] (to be
referred to hereinafter as Jenas Case). In paragraph 4
of the judgment, the general state of law is found stated as
follows:
It is important to notice at this stage that both the
Interest Act of 1839 and the Interest Act of 1978 provide
for the award of interest up to the date of the institution
of the proceedings. Neither the Interest Act of 1839 nor
the Interest Act of 1978 provides for the award of pendente
lite interest. We must look elsewhere for the law relating
to the award of interest pendente lite. This, we find,
provided for in Section 34 of the Civil Procedure Code in
the case of courts. Section 34, however, applies to
arbitrations in suit for the simple reason that where a
matter is referred to arbitration in a suit, the arbitrator
will have all the powers of the court in deciding the
dispute. Section 34 does not otherwise apply to
arbitrations as arbitrators are not courts within the
meaning of Section 34 Civil Procedure Code. Again, we must
look elsewhere to discover the right of the arbitrator to
award interest before the institution of the proceedings, in
cases where the proceedings had concluded before the
commencement of the Interest Act of 1978. While under the
Interest Act of 1978 the expression court was defined to
include an arbitrator, under the Interest Act of 1839 it was
not so defined. The result is that while in cases arising
after the commencement of Interest Act of 1978 an arbitrator
has the same power as the court to award interest up to the
date of institution of the proceedings, in cases which arose
prior to the commencement of the 1978 Act the arbitrator has
no such power under the Interest Act of 1839. It is,
therefore necessary, as we said, to look elsewhere for the
power of the arbitrator to award interest up to the date of
institution of the proceedings. Since the arbitrator is
required to conduct himself and make the award in accordance
with law we must look to the substantive law for the power
of the arbitrator to award interest before the commencement
of the proceedings. If the agreement between the parties
entitles the arbitrator to award interest no further
question arises and the arbitrator may award interest.
Similarly if there is a usage of trade having the force of
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law the arbitrator may award interest. Again if there are
any other provisions of the substantive law enabling the
award of interest the arbitrator may award interest. By way
of an illustration, we may mention Section 80 of the
Negotiable Instruments Act as a provision of the substantive
law under which the court may award interest even in a case
where no rate of interest is specified in the promissory
note or bill of exchange. We may also refer Section 61 (2)
of the Sale of Goods Act which provides for the award of
interest to the seller or the buyer as the case may be under
certain circumstances in suits filed by them. We may
further cite the instance of the non-performance of a
contract of which equity could give specific performance and
to award interest. We may also cite a case where one of the
parties is forced to pay interest to a third party, say on
an overdraft, consequent on the failure of the other party
to the contract not fulfilling the obligation of paying the
amount due to them. In such a case also equity may compel
the payment of interest. Loss of interest in the place of
the right to remain in possession may be rightfully claimed
in equity by the owner of a property who has been
dispossessed from it.
After considering the earlier cases on the subject, it
has been observed thus: 16. The question of award of@@
JJJJJ
interest by an arbitrator was considered in the remaining
cases to which we have referred earlier. Nachiappa Chettiar
v. Subramaniam Chettiar, Satinder Singh v. Amrao Singh,
Firm Madanlal Roshanlal Mahajan v. Hukumchand Mills Ltd.,
Union of India v. Bungo Steel Furniture Pvt. Ltd., Ashok
Construction Co. v. Union of India and State of Madhya
Pradesh v. M/s Saith & Skelton Pvt. Ltd. were all cases
in which the reference to arbitration was made by the court,
of all the disputes in the suit. It was held that the
arbitrator must be assumed in those circumstances to have
the same power to award interest as the court. It was on
that basis that the award of pendente lite interest was made
on the principle of Section 34 Civil Procedure Code in
Nachiappa Chettiar v. Subramaniam Chettiar, Firm Madanlal
Roshanlal Mahajan v. Hukumchand Mills Ltd., Union of India
v. Bungo Furniture Pvt. Ltd. and State of Madhya Pradesh
v. M/s Saith & Skelton Pvt. Ltd. In regard to interest
prior to the suit, it was held in these cases that since the
Interest Act, 1839 was not applicable, interest could be
awarded if there was an agreement to pay interest or a usage
of trade having the force of law or any other provision of
substantive law entitling the claimant to recover interest.
Illustrations of the provisions of substantive law under
which the arbitrator could award interest were also given in
some of the cases. It was said, for instance, where an
owner was deprived of his property, the right to receive
interest took the place of the right to retain possession,
and the owner of immovable property who lost possession of
it was, therefore, entitled to claim interest in the place
of right to retain possession. It was further said that it
would be so whether possession of immovable property was
taken away by private treaty or by compulsory acquisition.
Another instance where interest could be awarded was under
Section 61 (2) of the Sale of Goods Act which provided for
the award of interest to the seller or the buyer, as the
case may be, under the circumstances specified in that
section.
17. Section 80 of the Negotiable Instruments Act was
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mentioned as an instance of a provision of the substantive
law under which interest prior to the institution of the
proceedings could be awarded. Interest could also be
awarded in cases of non- performance of a contract of which
equity could give specific performance. Seth Thawardas
Pherumal was a case of direct reference to arbitration
without the intervention of a court. Neither the Interest
Act, 1839 nor the Civil Procedure Code applied as an
arbitrator was not a court. Interest could, therefore, be
awarded only if there was an agreement to pay interest or a
usage of trade having the force of law or some other
provision of the substantive law which entitled the
plaintiff to receive interest. In that case, interest had
been awarded on the ground that it was reasonable to award
interest and the court, therefore, held that the arbitrator
was wrong in awarding the interest.
18. While this is the position in cases which arose
prior to the coming into force of the Interest Act, 1978, in
cases arising after the coming into force of the Act, the
position now is that though the award of pendente lite
interest is still governed by the same principles, the award
of interest prior to the suit is now governed by the
Interest Act, 1978. Under the Interest Act, 1978, an
arbitrator is, by definition, a court and may now award
interest in all the cases to which the Interest Act
applies.
Thereupon, dealing with the cases before them, the
general principles noticed were applied and they were
disposed of in the following terms:
20. Coming to the cases before us, we find that in
Civil Appeal Nos. 120 and 121 of 1981 before the
arbitrator, there was no answer to the claim for interest
and we see no justification for us at this stage to go into
the question whether interest was rightly awarded or not.
Out of the remaining cases we find that in all cases except
two (Civil Appeal Nos. 6019-22 of 1983 and Civil Appeal
No.2257 of 1984), the reference to arbitration were made
prior to the commencement of the new Act which was on August
19, 1981. In the cases to which the Interest Act, 1978
applies, it was argued by Dr Chitale, learned counsel for
the respondents, that the amount claimed was a sum certain
payable at a certain time by virtue of a written instrument
and, therefore, interest was payable under the Interest Act
for the period before the commencement of the proceedings.
In support of his contention that the amount claimed was a
sum certain payable at a certain time by virtue of a written
instrument, the learned counsel relied upon the decision of
this Court in State of Rajasthan v. Raghubir Singh. The
case certainly supports him and in the cases to which the
1978 Interest Act applies the award of interest prior to the
proceeding is not open to question. In regard to pendente
lite interest, that is, interest from the date of reference
to the date of the award, the claimants would not be
entitled to the same for the simple reason that the
arbitrator is not a court within the meaning of Section 34
of the CPC, nor were the references to arbitration made in
the course of suits. In the remaining cases which arose
before the commencement of the Interest Act, 1978, the
respondents are not entitled to claim interest either before
the commencement of the proceedings or during the pendency
of the arbitration. They are not entitled to claim interest
for the period prior to the commencement of the arbitration
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proceedings for the reason that the Interest Act, 1839 does
not apply to their cases and there is no agreement to pay
interest or any usage of trade having the force of law or
any other provision of law under which the claimants were
entitled to recover interest. They are not entitled to
claim pendente lite interest as the arbitrator is not a
court nor were the references to arbitration made in suits.
One of the submissions made on behalf of the respondents was
that in every case, all disputes were referred to
arbitration and the jurisdiction of the arbitrator to award
interest under certain circumstances was undeniable. The
award not being a speaking award, it was not permissible to
speculate on the reasons for the award of interest and the
court was not entitled to go behind the award and disallow
the interest. It is difficult to agree with this
submission. The arbitrator is bound to make his award in
accordance with law. If the arbitrator could not possibly
have awarded interest on any permissible ground because such
ground did not exist, it would be open to the court to set
aside the award relating to the award of interest on the
ground of an error apparent on the record. On the other
hand, if there was the slightest possibility of the
entitlement of the claimant to interest on one or other of
the legally permissible grounds, it may not be open to the
court to go behind the award and decide whether the award of
interest was justifiable. We do not want to enter into a
discussion on the legality or propriety of a non- speaking
award as we understand the question is now awaiting the
decision of a Seven Judge Bench. In the light of what we
have said above, Civil Appeal Nos. 120 and 121 of 1981 are
dismissed, Civil Appeal Nos. 6019-22 of 1983 and Civil
Appeal No.2257 of 1984 are allowed to this extent that
interest during the pendency of the arbitration proceedings
is disallowed and the rest of the civil appeals are allowed
to the extent that both interest prior to the proceedings
and interest during the pendency of the proceedings are
disallowed. There will be no order as to costs.
S.L.P.8640/81 is disposed of on the same lines.
The decision, which equally need a detailed reference,
is that of Constitution Bench reported in Secretary,
Irrigation Department, Government of Orissa and Others vs
G.C. Roy [(1992) 1 SCC 508] (hereinafter referred to as
Roys case). Of the two issues raised in the appeal
therein, the one which related to the jurisdiction of the
Arbitrator to award pendente lite interest when taken up for
hearing before a Bench, the correctness of Jenas case
(supra) insofar as it held that the Arbitrator had no power
to award interest pendente lite was contested and on the
view taken by that Bench that the said question required
further consideration by a larger Bench, the matter was
placed before the Constitution Bench. Ultimately, the
Constitution Bench held that the decision in Jenas case
(supra) does not lay down good law and where the agreement
between the parties does not prohibit grant of interest and
where a party claims interest and that dispute (along with
the claim for principal amount or independently) is referred
to the Arbitrator, he will have the power to award interest
pendente lite, for the reason that in such a case it must be
presumed that interest was an implied term of the agreement
between the parties and therefore the parties refer all
their disputes - or refer the dispute as to interest as such
to the Arbitrator- which he shall have power to decide. It
was also emphasised therein that the matter being one within
the discretion of the Arbitrator - the same requires to be
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exercised in the light of all facts and circumstances of the
case, keeping the ends of justice in view.
The Constitution Bench, which decided Roys case
(supra) after a critical analysis of the earlier decisions
including the one in Jenas case (supra), held as follows:
43. The question still remains whether arbitrator
has the power to award interest pendente lite, and if so on
what principle. We must reiterate that we are dealing with
the situation where the agreement does not provide for grant
of such interest nor does it prohibit such grant. In other
words, we are dealing with a case where the agreement is
silent as to award of interest. On a conspectus of
aforementioned decisions, the following principles emerge:
(i) A person deprived of the use of money to which he
is legitimately entitled has a right to be compensated for
the deprivation, call it by any name. It may be called
interest, compensation or damages. This basic consideration
is as valid for the period the dispute is pending before the
arbitrator as it is for the period prior to the arbitrator
entering upon the reference. This is the principle of
Section 34, Civil Procedure Code and there is no reason or
principle to hold otherwise in the case of arbitrator.
(ii) An arbitrator is an alternative form (sic forum)
for resolution of disputes arising between the parties. If
so, he must have the power to decide all the disputes or
differences arising between the parties. If the arbitrator
has no power to award interest pendente lite, the party
claiming it would have to approach the court for that
purpose, even though he may have obtained satisfaction in
respect of other claims from the arbitrator. This would
lead to multiplicity of proceedings.
(iii) An arbitrator is the creature of an agreement.
It is open to the parties to confer upon him such powers and
prescribe such procedure for him to follow, as they think
fit, so long as they are not opposed to law. (The proviso
to Section 41 and Section 3 of Arbitration Act illustrate
this point). All the same, the agreement must be in
conformity with law. The arbitrator must also act and make
his award in accordance with the general law of the land and
the agreement.
(iv) Over the years, the English and Indian courts
have acted on the assumption that where the agreement does
not prohibit and a party to the reference makes a claim for
interest, the arbitrator must have the power to award
interest pendente lite. Thawardas has not been followed in
the later decisions of this Court. It has been explained
and distinguished on the basis that in that case there was
no claim for interest but only a claim for unliquidated
damages. It has been said repeatedly that observations in
the said judgment were not intended to lay down any such
absolute or universal rule as they appear to, on first
impression. Until Jena case almost all the courts in the
country had upheld the power of the arbitrator to award
interest pendente lite. Continuity and certainty is a
highly desirable feature of law.
(v) Interest pendente lite is not a matter of
substantive law, like interest for the period anterior to
reference (pre-reference period). For doing complete
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justice between the parties, such power has always been
inferred.
While overruling Jenas case on the above principles,
this Court applied the principle of prospective overruling
making it clear that their decision shall not entitle any
party nor shall it empower any Court to re-open proceedings
which have already become final and that the law declared
shall apply only to pending proceedings.
The area of consideration and the questions which fell
for the determination of the cases in Jenas case and Roys
case have been adverted to in Roys case itself and in para
8 of the judgment it has been observed as follows:
Generally, the question of award of interest by the
arbitrator may arise in respect of three different periods,
namely: (i) for the period commencing from the date of
dispute till the date the arbitrator enters upon the
reference; (ii) for the period commencing from the date of
the arbitrators entering upon reference till the date of
making the award; and (iii) for the period commencing from
the date of making of the award till the date the award is
made the rule of the court or till the date of realisation,
whichever is earlier. In the appeals before us we are
concerned only with the second of the three aforementioned
periods. In Jena Case, two questions arose for
consideration of the Court, namely: (i) the power of the
arbitrator to award interest for the period prior to his
entering upon reference, and; (ii) the powers of the
arbitrator to award interest for the period the dispute
remained pending before him pendente lite. Since, the Court
dealt with the second question in detail and held that the
arbitrator had no jurisdiction or authority to award
interest pendente lite, we think it necessary to consider
the reasons for the decision. Justice Chinnappa Reddy, J.
speaking for the bench held that neither the Interest Act,
1839 nor the Interest Act, 1978 conferred power on the
arbitrator for awarding interest pendente lite. The learned
Judge observed that Section 34 of the Civil Procedure Code
which provides for the same did not apply to arbitrator
inasmuch as an arbitrator is not a court within the meaning
of the said provision. Consequently the arbitrator could
not award interest pendente lite.
In Jugal Kishore Prabhatilal Sharma & Ors. vs
Vijayendra P. Sharma & Anr.[(1993) 1 SCC 114] a Bench of
three learned judges to which B.P. Jeevan Reddy, J. was a
party observed that there was force in the contention that
the decision in Roys case did not affect the position of
law relating to the power of the Arbitrator in respect of
the period prior to reference in respect of a pre 1978 Act
period. B.P. Jeevan Reddy, J. who was also a member of
the Constitution Bench which decided Roys case, wrote a
separate concurring opinion clarifying the position that
Roys case was concerned with the power of the Arbitrator to
award interest pendente lite unlike Jenas case which
considered the question both for the pre-reference period as
well as the pendente lite period and therefore, it may not
be right to read the decision in Roys case as overruling
Jenas case insofar as it dealt with the power of the
arbitrator to award interest for the pre-reference period.
The learned Judge (Jeevan Reddy, J.) speaking for another
Bench in the decision reported in State of Orissa vs B.N.
Agarwala [(1993) 1 SCC 140] reaffirmed the same position and
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even rejected a request for reference of the matter to a
larger Bench of this Court. The decision in State of Orissa
vs B.N. Agarwalla [(1997) 2 SCC 469], also reaffirmed the
above position.
In B.N. Agarwallas case (supra) [(1997)2 SCC 469],
B.N. Kirpal, J., speaking for a Bench of three learned
judges of this Court, adverted to the earlier decisions some
of which rendered even after those noticed above and held as
follows:
18. 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 well-settled are that the arbitrator has the
jurisdiction to award pre- reference interest in cases which
arose after the Interest Act, 1978 had become applicable.
With regard to those cases pertaining to the 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 period
during which the arbitration proceedings were pending in
view of the decision in G.C. Roy case and Hindustan
Construction Ltd. case, the arbitrator has the power to
award interest. The power of the arbitrator to award
interest for the post-award 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.
As to what should happen for the post Award period,
Section 29 of the Arbitration Act, 1940, itself provides
clue for an answer by stipulating that where and insofar as
an award is for the payment of money, the Court may in the
decree order interest from the date of the decree at such
rate as the Court deems reasonable to be paid on the
principal sum as adjudged by the award and confirmed by the
decree. This question has been specifically dealt with in
Hindustan Construction Company Ltd. vs State of Jammu &
Kashmir [(1992) 4 SCC 217] by a Bench of three learned
judges and it was held therein as follows:
5. The question of interest can be easily disposed
of as it is covered by recent decisions of this Court. It
is sufficient to refer to the latest decision of a five
Judge bench of this Court in Secretary, Irrigation
Department, Govt. of Orisssa vs G.C. Roy. Though the said
decision deals with the power of the arbitrator to award
interest pendente lite, the principle of the decision makes
it clear that the arbitrator is competent to award interest
for the period commencing with the date of award to the date
of decree or date of realisation, whichever is earlier.
This is also quite logical for, while award of interest for
the period prior to an arbitrator entering upon the
reference is a matter of substantive law, the grant of
interest for the post- award period is a matter of
procedure. Section 34 of Code of Civil Procedure provides
both for awarding of interest pendente lite as well as for
the post-decree period and the principle of Section 34 has
been held applicable to proceedings before the arbitrator,
though the section as such may not apply. In this
connection, the decision in Union of India vs Bungo Steel
Furniture (P) Ltd. may be seen as also the decision in
Gujarat Water Supply & Sewerage Board vs Unique Erectors
(Gujarat) P. Ltd. which upholds the said power though on a
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somewhat different reasoning. We, therefore, think that the
award on Item No.8 should have been upheld.
This aspect was also specifically dealt with and it
was held in B.N. Agarwallas case (Supra), as hereunder:
37. When the arbitrator makes an award, it is not
necessary that in every case the award has to be filed in a
court and a decree, in terms thereof, is passed. It does
happen that when an award is made, the party against whom it
is made, may accept the award and comply with the same. It
is rightly not disputed that from the date of passing of the
award, future interest can be awarded by the arbitrator as
held by this Court in the cases of Unique Erectors (Gujarat)
(P) Ltd. and Hindustan Construction Co. Ltd. The correct
procedure which should be adopted by the arbitrator is to
award future interest till the date of the decree or the
date of payment, whichever is earlier. The effect of this
would be that if the award is voluntarily accepted, which
may not result in a decree being passed, then payment of
interest would be made from the date of award till the date
of payment. Where, however, as in the present case, the
award is filed in the court and a decree is passed in terms
thereof, then Mr. Sanyal has rightly contended that it is
for the court to determine under Section 29 of the
Arbitration Act as to whether interest should be ordered to
be paid and if so at what rate.
It is in the above backdrop of the legal principles
enunciated and considered holding the field that this
reference came to be made for determining the jurisdiction
of the Arbitrator to award interest for the pre- reference
period, in the circumstances stated in the very question of
reference.
Shri Gobind Das, learned senior counsel for the
appellants, submitted that having regard to the principles
and ratio laid down in Jenas case and B.N. Agarwalas case
(Supra) and the other decisions wherein the position came to
be re-affirmed and followed consistently, the Arbitrator
will have no jurisdiction to award interest for the
pre-reference period in a matter relating to the pre 1978
Act, period. The decision of this Court in G.C. Roys
case, according to the learned counsel, has no relevance to
the case pertaining to pre-reference period, the same
being only concerned with pendente lite period and therefore
the authority of the Jenas case in respect of the pre-
reference period holding that no interest is payable for
pre-reference period never stood undermined or overruled by
the decision of the Constitution Bench rendered in G.C.
Roys case. Emphasis has been laid to derive support to
this stand on the decisions reported in Bengal Nagpur
Railway Co. Ltd. vs Ruttanji Ramji and others [AIR 1938 PC
67]; Seth Thawardas Pherumal and another vs Union of India
[AIR 1955 SC 468 = 1955(2) SCR 48]; Union of India vs A.L.
Rallia Ram [(1964) 3 SCR 164]; Union of India vs Watkins
Mayor & Co. [AIR 1966 SC 275]; Union of India vs West
Punjab Factories Ltd. [(1966) 1 SCR 580 = AIR 1966 SC 395];
M/s Ashok Construction Companys case (Supra) and State of
Madhya Pradesh vs M/s Saith & Skelton (P) Ltd. [(1972) 3
SCR 233]. According to the learned counsel for the
appellants, the principles laid down in Jenas case as
affirmed in G.C. Roys case and as clarified and declared
in the subsequent decisions of this Court including the one
in B.N. Agarwalas case (Supra), do not call for any change
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or modification or alteration and the reference should be
answered in favour of the appellants.
Per contra, Shri Anil B. Divan, learned Senior
Counsel spear heading the arguments on behalf of the
respondents followed by Sharvashri V.Bhagat and A.K. Panda
strenuously contended that the ratio or the reasons which
formed the basis for the judgment and the principles laid
down in G.C. Roys case dehors their ultimate application
to the actual case before court for according relief,
renders the decision in Jenas case, insofar as it related
to award of interest for pre-reference period also bad even
for the very reasons on which the Court in G.C.Roys case
found the judgment in Jenas case bad or unsustainable in
respect of award of interest for pendente lite period. The
conclusions in Jenas case are said to be directly in
conflict with the earlier three judges judgment of this
Court and all these cases having been quoted with approval
in G.C.Roys case, Jenas case must be held to be no longer
good law even in respect of award of interest for the
pre-reference period. Argued the learned senior counsel
further that inasmuch as the principles laid down in the
English cases (Chandris case, Edwards case) came to be
approved in G.C.Roys case, it becomes inevitably necessary
to hold that the Arbitrator has jurisdiction to award
interest for pre-reference period as long as there is no
specific prohibition as such in the agreement/contract
between parties restraining the claim/payment of interest,
on the principle of an implied term of the agreement between
the parties, that the Arbitrator could award interest in a
case where the Court could award it and that as a
consequence thereof when the parties refer all their
disputes/ or the dispute as to interest as such - to the
Arbitrator, he shall have the necessary power to award
interest - though such power may be exercised in his
discretion in the light of all the facts and circumstances
of the case and in the interests of justice. Our attention
has also been invited in this regard to certain English
cases: Chandris Vs. Isbrandtsen Moller Co. Inc. (1950
(2) All England Law Reports 618); President of India Vs.
La Pintada Compania Navigacion S.A. (Law Reports [1985] 1
A.C. 104); and Food Corporation of India Vs. Marastro
Compania Naviera S.A. of Panama (1986 (3) All England Law
Reports 500 = [1987] 1 Weekly Law Reports 134), and those of
the Supreme Court in G.C. Roys case and some of the
decisions referred to therein. We have carefully considered
the submissions of the learned counsel appearing on either
side. The mere reference and reliance placed by the counsel
for the appellants on the earlier decisions which have been
already considered by this Court in deciding Jenas case and
G.C. Roys case and explained, does not help to improve the
position of the appellants in any manner to sustain their
plea. The Constitution Bench which dealt with G.C. Roys
case while adverting to the English cases reported in
Edwards vs Great Western Railway Company [(1851) 138 ER
603]; Podar Trading Co. Ltd. vs Francois Tagher [(1949) 2
All E.R. 62]; Chandris vs Isbrandsten- Moller Co. Inc.
[1950 (1) All E.R. 768], observed, while quoting with
approval the decision in Ashok Construction Companys case
(supra), that the principles laid down by this Court it only
accorded with the principles laid down in Edwards case
(Supra) as understood in Chandris case (Supra). Reference
has also been made in G.C. Roys case to the decision
reported in Union of India vs Bungo Steel Furniture Pvt.
Ltd. [AIR 1967 SC 1032] wherein also this Court accorded
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approval to the principles laid down in the English cases,
observing as follows:
26. The above passages show that the Court laid down
two principles: (i) it is an implied term of the reference
that the arbitrator will decide the dispute according to
existing law and give such relief with regard to interest as
a court could give if it decides the dispute; (ii) though
in terms Section 34 of the Code of Civil Procedure does not
apply to arbitration proceedings, the principle of that
section will be applied by the arbitrator for awarding
interest in cases where a court of law in a suit having
jurisdiction of the subject matter covered by Section 34
could grant a decree for interest. It is also relevant to
notice that this decision refers with approval to both the
English decisions in Edwards and Chandris case besides the
decision of this Court in Firm Madanlal Roshanlal. It is
noteworthy that the decision explains and distinguishes the
decision in Thawardas on the same lines as was done in Firm
Madanlal Roshanlal case.
The subsequent development and march of law in
England, in this connection also deserve to be noticed. In
President of India vs La Pintada Compania Navigacion S.A.
(supra), the House of Lords approved the rule in Chandris
case as follows:
The true position in law is, in my opinion, not in
doubt. It is this. Where parties refer a dispute between
them to arbitration in England, they impliedly agree that
the arbitration is to be conducted in accordance in all
respects with the law of England, unless, which seldom
occurs, the agreement of reference provides otherwise. It
is on this basis that it was held by the Court of Appeal in
Chandris vs Isbrandtsen-Moller Co. Inc.[1951] 1 K.B. 240
that, although section 3(1) of the Act 1934, by its terms,
empowered only courts of record to include interest in sums
for which judgment was given for damages or debt,
arbitrators were nevertheless empowered, by the agreement of
reference, to apply English law, including so much of that
law as is to be found in section 3(1) of the Act of 1934.
(At page 119.)
In Food Corporation of India vs Marastro Compania
Naviera S.A. of Panama (supra), it was held by the Court of
Appeal as hereunder:
Before section 19A there was no general statutory
provision empowering arbitrators to award interest on the
sums they awarded. But it was held by this court in
Chandris vs Isbrandtsen-Moller Co. Inc. [1951] 1 K.B. 240
that, just as before the Act of 1934 came into force an
arbitrator had been held entitled to award interest in the
circumstances in which, under the Civil Procedure Act 1933,
a jury could have awarded interest, so equally, after the
Act of 1934 came into force, an arbitrator had impliedly the
power to award interest which section 3 had conferred upon
courts of record.
The decision in the Chandris case was approved by the
House of Lords in President of India vs La Pintada Compania
Navigacion S.A.[1985] A.C. 104. There, Lord Brandon of
Oakbrook said that, where parties refer a dispute between
them to arbitration in England, they impliedly agree that
the arbitration is to be conducted in accordance in all
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respects with the law of England, unless the agreement of
reference provides otherwise. Thus, although section 3 of
the Act of 1934 by its terms empowered only courts of record
to include interest in sums for which judgment was given for
damages or debt, arbitrators were nevertheless empowered, by
the agreement of reference, to apply English law, including
so much of that law as was to be found in section 3 of the
Act of 1934.
In my judgment, this implied agreement in the
arbitration agreement is naturally to be understood as
empowering arbitrators to apply English law as it is from
time to time during the course of the reference (and in
particular in the context of the present case as it was at
the time of the hearing and the award) and not as an
agreement empowering the arbitrator to apply English law
crystallised as at the date of the arbitration agreement.
As it was put by Cohen L.J. in the Chandris case [1951] 1
K.B. 240, 264 (though admittedly without having his mind
addressed to transitional problems):
In my opinion, the right of arbitrators to award
interest was not derived from sections 28 and 29 of the
Civil Procedure Act, 1833, but from the rule that
arbitrators had the powers of the appropriate court in the
matter of awarding interest. In my opinion, therefore, the
effect of the Act of 1934 is that, after it came into force,
an arbitrator had no longer the powers of awarding interest
on damages conferred on juries by sections 28 and 29 of the
Civil Procedure Act, 1833, but he had the power conferred on
the appropriate court in the act of 1934 described as a
‘court of record.
In the present case, the power of the court under
section 3 of the Act of 1934 to award interest on a judgment
at the trial of proceedings which the arbitrator would by
implication prospectively have had at the time of the
arbitration agreement had been superseded by the time of the
hearing, and afortiori by the date of the award, by the
wider powers of the court as a result of section 15 of the
Act of 1982. It is those wider powers which, by the
Chandris process of implication, the arbitrator would have
had when he made the award if section 19A had not been
inserted into the Arbitration Act 1950. The purpose of
section 19A is to make explicit powers to award interest
which had previously rested on implication. There is thus a
further strong pointer to holding that section 19A has
retrospective effect and applies to pending and future
arbitrations under arbitration agreements whenever made,
just as the powers of the High Court and of the county
courts under section 35A of the Act of 1981 and section 97A
of the Act of 1959 apply to proceedings whenever
instituted. (At pages 141 & 142)
The Constitution Bench in G.C.Roys case also
recognised and accorded approval to this principle in para
43 (iii) by stating, The Arbitrator must also act and make
his award in accordance with the general law of the land and
the agreement.
As for the reliance placed for the appellants upon the
decisions reported in AIR 1938 PC 67; AIR 1955 SC 468 and
1966 (1) SCR 580, we are of the view that the observations
contained in those judgments have to be construed in the
factual context and nature of the claims involved therein
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and not in the abstract and out of their context.
Thawardas case (Supra) is one where the Arbitrator awarded
interest on unliquidated damages for a period before the
reference to arbitration as well as for the period
subsequent to reference. The Bengal Nagpur Railway Company
Ltd. case (Supra) dealt with the claim of interest by way
of damages under Section 73 of the Contract Act and it was
observed therein that Section 73 is merely declaratory of
the common law as to damages and that it was not available
to the plaintiff therein. In West Punjab Factories Ltd.
Case (Supra) also the suit claim was for damages for loss of
goods destroyed by fire, and issue No. (iv) considered
therein related to the question of awarding interest for the
period before the suit on the amount of damages decreed. A
careful analysis of the principles underlying those
decisions would show that the claim of interest for the
period prior to the commencement of proceedings was not
countenanced in view of the settled and indisputable
position of law that damages till quantified is not and
cannot be said to be an ascertained or definite sum and
until it is ascertained and crystalised into a definite sum
and decreed, no question of payment of interest for the
period prior to such quantification would either arise or be
permissible in law, even if made before regular civil
courts, in ordinary suits filed.
There can be no controversy over the position that the
Constitution Bench of this Court in G.C. Roys case while
declaring that the decision in Jenas case does not lay down
good law upheld, as a consequence the jurisdiction of the
Arbitrator to award only pendente lite interest, as
explained and highlighted in the subsequent decisions of
this Court. When the claim involved for consideration in
G.C. Roys case was only with reference to pendente lite
interest it cannot be expected of the Court to travel
outside, except for analysing the general principles, to
academically adjudicate the other aspects of the matter also
decided by the Bench in Jenas case and overrule the same on
such other points, too. Be that as it may, the ratio or the
basis of reasons and principles underlying a decision is
distinct from the ultimate relief granted or manner of
disposal adopted in a given case. While laying down
principle No. (i) in para 43, it has been in unmistakable
terms declared that the basic proposition that a person
deprived of the use of money to which he is legitimately
entitled to has a right to be compensated for the
deprivation, by whatever name it may be called viz.,
interest, compensation or damages, is as valid for the
period the dispute is pending before the Arbitrator as it is
for the period prior to the Arbitrator entering upon the
reference. The efficacy and binding nature of this
declaration of law cannot be either diminished or whittled
down even on any known principle underlying the doctrine of
stare decisis. The same is the position with reference to
the principle Nos. (ii) and (iii). It cannot be
legitimately contended that these principles would either
vary or could be different in a case relating to the award
of interest for the pre-reference period and to assume such
a contra position in juxta position would not only be
destructive in nature but also illogical and
self-contradictory resulting in grave miscarriage of
justice. Some of the very reasons and principles which
weighed with the Constitution Bench in G.C.Roys case to
sustain the jurisdiction of the Arbitrator to award pendente
lite interest in a claim arising out of an agreement which
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does not also prohibit the grant of interest, in our view
would equally suffice and provide sound basis of reasoning
for upholding the power of the Arbitrator to award interest
in respect of the pre- reference period, too. The further
fact that the decisions of this Court, including the Jenas
case, envisaged four circumstances or contingencies wherein
such interest for pre-reference period can be countenanced
by the Arbitrator, is by itself sufficient to confer
jurisdiction upon the Arbitrator to entertain and consider
the said claim also, and consequently there is no
justification to thwart the same even at the threshold
denying the Arbitrator power even to entertain the claim as
such.
What difference it would make and consequences would
follow, if principle No. (i) is read along with principle
No. (v), be it even that, interest for the pre-reference
period is a matter of substantive law unlike the interest
for the period pendente lite, which ultimately came to be
allowed applying the principles engrafted in Section 34 of
the Code of Civil Procedure would next deserve our
consideration. Substantive Law, is that part of the law
which creates, defines and regulates rights in contrast to
what is called adjective or remedial law which provides the
method of enforcing rights. Decisions, including the one in
Jenas case while adverting to the question of substantive
law has chosen to indicate by way of illustration laws such
as Sale of Goods Act, 1930 [Section 61(2)], Negotiable
Instruments Act, 1881 (Section 80) etc. The provisions of
the Interest Act 1839, which prescribes the general law of
interest and becomes applicable in the absence of any
contractual or other statutory provisions specially dealing
with the subject, would also answer the description of
substantive law. This Act was excluded from consideration
for the simple reason that unlike the inclusive definition
of Court in 1978 Act so as to include an Arbitrator, also
the 1839 Act did not provide any definition clause much
less an expansive one. Not only, Section 1 of the Interest
Act but even the provisions contained in Sale of Goods Act
and Negotiable Instruments Act themselves only envisage and
enable courts to grant or award interest. But on that
ground alone it could not be reasonably postulated that such
Acts applied only to proceedings before Courts and not to
proceedings before forums created in lieu of conventional
Civil Courts. Once it is construed and considered that the
method of redressal of disputes by an alternative forum of
arbitration as agreed to between the parties, with or
without the intervention of Court is only a substitute of
the conventional Civil Courts by forums created by consent
of parties, it is but inevitably necessary that the parties
must be deemed to have by implication also agreed that the
arbitrator shall have power to award interest, the same way
and in the same manner as courts do and would have done, had
there not been an agreement for arbitration. It is in this
connection that the practice followed by English Courts
which came to be noticed and approved by this Court also
lend support and strength to adopt such construction in
order to render complete and substantial justice between the
parties. That there is nothing in the Interest Act, 1839 to
confine its operation and applicability only to proceedings
before ordinary and conventional Courts, cannot also be
ignored, in this connection. In our view any such
restricted and literal construction which is bound to create
numerous anomalies and ultimately defeat the ends of justice
should be scrupulously avoided. On the other hand, that
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interpretation which makes the text not only match the
context but also make a reading of the provisions of an Act,
just, meaningful and purposeful and help to further and
advance the ends of justice must alone commend for the
acceptance of courts of law. Adopting a different
construction to deny a claimant who opts for adjudication of
disputes by arbitral process alone and that too when
recourse to such process is made without the intervention of
Court would amount to applying different and discriminatory
norms and standards to situations which admits of no such
difference and that too where there is no real distinction
based upon any acceptable or tangible reason.
It is not in dispute that an Arbitrator appointed in a
pending suit or with the intervention of the Court, will
have all the powers of the Court, in deciding the dispute
and the dispute is only in respect of an Arbitrator to whom
the reference has been made by the parties, under the
agreement without the intervention of the Court. It would
then mean that the parties have to be driven to vexatious
litigation before Courts by passing an agreement of
arbitration, to be ultimately told to abide by it and have
the matter formally referred by staying such proceedings
before Civil Court to secure to the Arbitrator power to
award interest also. In G.C. Roys case while emphasising
the importance and need for availing arbitration process, it
has been observed as follows:
4. A dispute between two parties may be determined
by court through judicial process or by arbitrator through a
non-judicial process. The resolution of dispute by court,
through judicial process is costly and time consuming.
Therefore, generally the parties with a view to avoid delay
and cost, prefer alternative method of settlement of dispute
through arbitration proceedings. In addition to these two
known process of settlement of dispute there is another
alternative method of settlement of dispute through
statutory arbitration. Statutory arbitrations are regulated
by the statutory provisions while the parties entering into
agreement for the resolution of their dispute through the
process of arbitration are free to enter into agreement
regarding the method, mode and procedure of the resolution
of their dispute provided the same are not opposed to any
provision of law. Many a time while suit is pending for
adjudication before a court, the court with the consent of
the parties, refers the dispute to arbitration. On account
of the growth in the international trade and commerce and
also on account of long delays occurring in the disposal of
suits and appeals in courts, there has been tremendous
movement towards the resolution of disputes through
alternative forum of arbitrators. The alternative method of
settlement of dispute through arbitration is a speedy and
convenient process, which is being followed throughout the
world. In India since ancient days settlement of disputes
by Panches has been a common process for resolution of
disputes in an informal manner. But now arbitration is
regulated by statutory provisions.
If that be the position, Courts which of late
encourage litigants to opt for and avail of the alternative
method of resolution of disputes, would be penalising or
placing those who avail of the same in a serious
disadvantage. Both logic and reason should counsel courts
to lean more in favour of the Arbitrator holding to possess
all the powers as are necessary to do complete and full
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justice between the parties in the same manner in which the
Civil Court seized of the same dispute could have done. By
agreeing to settle all the disputes and claims arising out
of or relating to the contract between the parties through
arbitration instead of having recourse to Civil Court to
vindicate their rights the party concerned cannot be
considered to have frittered away and given up any claim
which otherwise he could have successfully asserted before
Courts and obtained relief. By agreeing to have settlement
of disputes through arbitration, the party concerned must be
understood to have only opted for a different forum of
adjudication with less cumbersome procedure, delay and
expense and not to abandon all or any of his substantive
rights under the various laws in force, according to which
only even the Arbitrator is obliged to adjudicate the claims
referred to him. As long as there is nothing in the
arbitration agreement to exclude the jurisdiction of the
Arbitrator to entertain a claim for interest on the amounts
due under the contract, or any prohibition to claim interest
on the amounts due and become payable under the contract,
the jurisdiction of the Arbitrator to consider and award
interest in respect of all periods subject only to Section
29 of the Arbitration Act, 1940 and that too the powers of
the Court thereunder, has to be upheld. The submission that
the Arbitrator cannot have jurisdiction to award interest
for the period prior to the date of his appointment or
entering into reference which alone confers him power is too
stale and technical to be countenanced in our hands, for the
simple reason that in every case the appointment of an
Arbitrator or even resort to Court to vindicate rights could
be only after disputes have cropped up between the parties
and continue to subsist unresolved and that if the
Arbitrator has the power to deal with and decide disputes
which cropped up at a point of time and for the period prior
to the appointment of an Arbitrator, it is beyond
comprehension as to why and for what reason and with what
justification the Arbitrator should be denied only the power
to award interest for the pre-reference period when such
interest becomes payable and has to be awarded as an
accessory or incidental to the sum awarded as due and
payable, taking into account the deprivation of the use of
such sum to the person lawfully entitled to the same. For
all the reasons stated above, we answer the reference by
holding that the Arbitrator appointed with or without the
intervention of the court, has jurisdiction to award
interest, on the sums found due and payable, for the pre-
reference period, in the absence of any specific stipulation
or prohibition in the contract to claim or grant any such
interest. The decision in Jenas case [1988 (1) SCC 418]
taking a contra view does not lay down the correct position
and stands overruled, prospectively, which means that this
decision shall not entitle any party nor shall it empower
any Court to reopen proceedings which have already become
final, and apply only to any pending proceedings. No costs.