CRP/2939/2001 of M/S.G.V.MALLA REDDY. ANDCO. Vs VICE-CHAIRMAN A.P.S.T.CORP.LTD.HYD. on 30 December 2009

1. (1984) 4 SCC 59 : AIR 1984 SC 1703

2. AIR 1989 SC 10343.1989 (2) ALT 320 (DB)4.(1999) 8 SCC 122: AIR 1999 SC 3275

5. (2002) 4 SCC 45: AIR 2002 SC 1272

6. (2007) 2 SCC 453: AIR 2007 SC 509

7. (1999) 9 SCC 610

8. (1991) 4 SCC 93: AIR 1992 SC 232

9. (1999) 9 SCC 283: AIR 1999 SC 362710.(2001) 5 SCC 62911.AIR 1977 SC 148112.(1999) 3 SCC 50013.1996 (3) ALT 1137 (DB)

14. (1992) 1 SCC 508 : AIR 1992 SC 732

15. (2005) 6 SCC 462 : AIR 2005 SC 2071

16.2009 (3) Arb.LR 140 (SC)

17. (1999) 4 SCC 327

THE HON’BLE SRI JUSTICE V.V.S.RAOAND

THE HON’BLE SRI JUSTICE B.N.RAO NALLA

CIVIL MISCELLANEOUS APPEAL Nos.1666 AND 1824 OF 2001AND

CIVIL REVISION PETITION Nos.2893 AND 2939 OF 2001

.12.2009

Between:M/s.G.V.Malla Reddy & Co., represented by itsManaging Partner Sri G.V.Malla Reddy

AND

… Appellant

A.P.State Trading Corporation Limited, represented by itsVice-Chairman & Managing Director, HyderabadAnd another … Respondents THE HON’BLE SRI JUSTICE V.V.S.RAOAND

THE HON’BLE SRI JUSTICE B.N.RAO NALLA

CIVIL MISCELLANEOUS APPEAL Nos.1666 AND 1824 OF 2001ANDCIVIL REVISION PETITION Nos.2893 AND 2939 OF 2001

COMMON JUDGMENT: (per Hon’ble Sri Justice V.V.S.Rao)

These four matters which arise out of common order, dated 19.01.2001 inarbitration O.P.Nos.318 and 365 of 1991 passed by the Court of I Senior CivilJudge, City Civil Courts, Hyderabad. These two O.Ps., were filed in connection withthe arbitration award, dated 06.07.1991 by Andhra Pradesh State TradingCorporation (Corporation, for brevity) and M/s.G.V.Malla Reddy and Company(Contractor, for brevity), a firm, in that, the former seeking to set aside the award andthe latter praying to make the award rule of the Court. By impugned commonJudgment, learned senior civil Judge set aside the award insofar as three claimsare concerned and thus partly allowing the petitions filed by Corporation as well asthe contractor.

The work of construction of Telugu Vanijya Bhavanam at A.C.Guards,Hyderabad, was taken up by Corporation. After due tender process, the work wasentrusted to the contractor under agreement, dated 18.06.1987, which vide clause65 of General Conditions of Contract (GCC) provides for settlement of disputes byarbitration. The contract period is eighteen (18) months, to be completed by28.12.1988. The site was handed over to the contractor on 26.06.1987 and therewas slow progress. The contractor blamed the Corporation and therefore, heinsisted prevailing market rates for the work already done after completion ofagreement period. He also requested for extension of period at revised rates. TheCorporation then terminated contract on 19.01.1989. The disputes which arosewere referred to sole arbitrator. Before the arbitrator, contractor made XXII claims.

Arguments

After adjudicating the same, the arbitrator allowed claim Nos.III, IV, VI, VII, VIII, XIand XII. These are payment of security deposit, refund of fixed security deposit,compensation for water brought from outside, compensation for dismantled distilledfabrication, compensation for cement brought from outside, loss of profit and refundof deductions made towards further security deposit. The arbitrator also partlyallowed claim Nos.I, II, V and XXI. These are payment of third running bill, paymentfor work done after submission of third bill, cost of borewell and interest at 21% perannum. The other reliefs being claim Nos.IX, X, XIII to XX and XXII were rejected.These are compensation for steel brought from outside, overhead charges, loss ofadvance paid to labour, loss of advance paid to metal supplier, loss of advancepaid to brick supplier, loss due to slow progress, increase in labour charges andmetal cost, increase in minimum wages, compensation for expenses incurred forremoving materials from the site and the amounts due under final bill. The counterclaims made by Corporation were totally rejected.

The contractor filed O.P.No.365 of 1991 under Section 17 of Arbitration Act,1940 to make the award rule of the Court in terms thereof with interest at 18% perannum. The Corporation filed O.P.No.318 of 1991 praying the Court to set aside theaward and to remit back the portion of the award relating to the counter claims forfresh consideration. As noticed supra, both these O.Ps., were partly allowed andthe award was made rule of the Court except in respect of three claims and interestthereon. Aggrieved by the same, C.M.A.No.1666 of 2001 and C.R.P.No.2939 of2001 are filed by contractor and C.M.A.No.1824 of 2001 and C.R.P.No.2893 of2001 are filed by Corporation. Though Corporation filed the appeal and revisionagainst the entire award, submissions are made before us in relation to claim Nos.I,V and XI. Even out of these, Sri N.Subba Reddy, learned counsel for Corporationpressed and made submissions on claim No.XI which deals with loss of profit andalso touched upon other claims which are mainly the payments towards work doneor pending bills or refund of security deposit, fixed deposit etc. The contractormainly insisted upon the award of interest. Indeed, it is not denied before us that thecontractor did not contest the rejected claims before the Court below. Therefore,having regard to the settled position in law that the questions of fact recorded byarbitral tribunal cannot be ordinarily interfered and having perused the materialavailable on record, we are not inclined to interfere with the award or the Judgmentof Court below insofar as claims I to V are concerned. We nevertheless mainlyadvert to question of loss of profit and award of interest in view of the fact that someof the claims allowed by arbitrator were set aside by Court below, and there is noserious dispute about this. To appreciate the position that emerges in theseappeals as of now in relation to the claims made, awarded as well as decreed, wemay summarise these aspects in the following table.

Learned counsel, as mentioned above, concentrated on the question of lossof profit and award of interest. They made elaborate submissions and also relied onnumber of precedents. A reference to the arguments and precedents may be madeas and when we take up these two aspects.Award towards loss of profit

Learned counsel for Corporation submits that the award of arbitrator is vitiatedby misconduct in the sense that the arbitrator ignored clause 12 of GCC andawarded loss of profit. He would urge that clause 12 of GCC only permits extensionof time and prohibits any claim for compensation, and breach of contract byCorporation does not have any bearing on the question. Clause 12, according tohim, would disentitle any claim for compensation for execution of works. In hiscounter arguments, contractor’s counsel submits that clause 12 of GCC and clause40.1 of agreement only deal with a situation where the work is completed afterobtaining extensions and bars the contractor from claiming compensation by way ofescalation, overhead charges etc during the extension period. These two clauseshave no application when there is breach of contract by contractor and as a resultthereof, the contractor is put to loss of profits. In view of these submissions, it isnecessary to read clause 12 of GCC and clause 40.1 of agreement itself.

12. The contractor shall be entitled to any compensation or loss suffered byhim on account of delays in commencing or executing the work whateverthe cause of delays may be or in procuring Government controlled or otherbuilding materials or in obtaining water and power connections forconstruction purpose. The employer shall not be liable for any claim inrespect thereof. Suitable extension to time will be given to the contractor ifthe delay occurs on the part of the employers. The contractor is responsiblefor procuring the safe storage of all materials. All materials shall beapproved by the Architects before putting in place.

40.1 Should the amount of extra or additional work of any kind or otherspecial circumstances of any kind whatsoever which may occur, be such,as fairly to entitle the Contractor to an extension of time for the completionof the work, the Architect shall recommend the period of such extension, ifany the owner on such recommendations of the Architect may grant thenecessary extension, provided that the Architect is not bound to take intoaccount any extra or additional work or other special circumstances, unlessthe contractor has, within 28 days after such work has been commenced orsuch circumstances have arisen or as soon thereafter as is practicable,deliver to the Architect’s Representative full and detailed particulars of any claim to extension of time, to which he may consider himself entitled inorder that such claim may be investigated at the time. However, nocompensation by the owner shall be payable to the contractor for suchextension of time beyond the relevant clause of the contract.

In clause 12, there is a glaring typing error, in that the word ‘not’ is missing inthe first sentence of the clause, but there is no denial that it is a typing mistake andit does not make any difference in understanding the same. Be that as it is, clause12 of GCC and clause 40 of agreement are to the effect that in case the work is notcompleted or extra/additional work of any kind comes up, contractor would beentitled for extension of time and Corporation is not liable to pay any compensationto the contractor for extension of time beyond the stipulated time for completion ofthe contract. If delay occurs either in commencing or executing the work due toprocurement of Government controlled building materials, or obtaining water andpower connections for the construction purpose, the contractor would be entitledonly for suitable extension of time and he cannot claim any compensation. Counselfor rival parties do not deny the purport of these clauses that the contractor wouldnot be entitled for compensation. When does clause 12 of GCC or clause 40.1 ofagreement not attracted?

At this stage, we may refer to the relevant factual basis which supports theview that the total value of the work is about Rs.2.05 crores. The parties enteredinto agreement on 18.06.1987 and the work has to be completed by 28.12.1988within a period of eighteen (18) months. Part of the site was handed over on26.06.1987. As found by the arbitrator, the failure to hand over complete site, delayin giving water connection, delay in supply of electricity, delay in supply of cementas per agreement, delay in payment of bills and delay in ordering extra items ofwork, attributable to Corporation. By the due date only the work worth about Rs.24lakhs should be completed. As extra work was entrusted, for which extra rates werenot fixed and as delays were occasioned by the breach of terms of the contract byCorporation, the work could not be completed. On 05.12.1988, the contractoraddressed Superintending Engineer of the Corporation seeking extension of timefrom 05.12.1988 to 04.04.1990, at revised and escalated rates. The SuperintendingEngineer sent a letter on 19.01.1989 terminating the contract and there was abreach of contract. By that date, balance of work valued at Rs.1.81 crores remainsto be completed. In view of this, the contractor claimed normal profit of 15% on thebalance value. The arbitrator, on considering the facts, came to the conclusion thatthe breach of contract was committed by the Corporation by causing various delaysand defaults and terminated the contract, and accordingly awarded loss of profit at15%, having regard to the decisions of Supreme Court in M/s.A.T.Brij Paul Singhv State of Gujarat[[1]]and P.M.Paul v Union of India[[2]]and Government of Andhra Pradesh v E.C.Techno Industries[[3]].

Learned counsel for Corporation relied on Steel Authority of India Ltd. vJ.C. Budharaja, Govt. and Mining Contractor[[4]], General Manager, NorthernRailway v Sarvesh Chopra[[5]]and Ramnath International Construction (P) Ltd.v Union of India[[6]].

In Steel Authority of India Limited (supra), respondent obtained a contractfor construction of tailing-cum-storage reservoir at iron ore project of the appellant.The contract has to be completed within a period of two years. Clause 5 (vi) of General Conditions of Contract (GCC) provided as follows: “Failure or delay by theCorporation to hand over to the Contractor possession of the lands necessary forthe execution of the work, or to give the necessary drawings, instructions or anyother delay by the Corporation which due to any other cause whatsoever shall in noway affect or vitiate the contract or alter the character thereof or entitle theContractor to damages or compensation therefor provided that the Corporation mayextend the time for completion of the work by such period as it may considernecessary and proper.” Clause 32 was to the following effect: “Site for execution ofwork will be available as soon as the work is awarded. In case it is not possible forthe Corporation to make the entire site available on the award of work theContractor will have to arrange his working programme accordingly. No claimwhatsoever for not giving the entire site on award of work and for giving the sitegradually will be tenable.” The contractor after contract period, raised a claim ofabout Rs.18,00,000/- as damages for delay in handing over work sites. Onreference, the arbitrators gave award with modification with regard to interest. SAILwas unsuccessful before High Court. Before the Supreme Court, it was contendedthat the award is without jurisdiction. Accepting the plea of SAIL, the apex Courtrelied on clause 32 of the contract and clause 5 (vi) of GCC and observed as under.

Clause 32 of the agreement specifically stipulates that no claimwhatsoever for not giving the entire site on award of work and for giving thesite gradually will be tenable and the Contractor is required to arrange hisworking programme accordingly. Clause 39 further stipulates that no failureor omission to carry out the provisions of the contract shall give rise to anyclaim by the Corporation and the Contractor, one against the other, if suchfailure or omission arises from compliance with any statute or regulation ofthe Government or other reasons beyond the control of either theCorporation or the Contractor. Obtaining permission from the ForestDepartment to carry out the work in the wildlife sanctuary depends onstatutory regulations. Clause (vi) of the general conditions of the contractalso provides that failure or delay by the Corporation to hand over to theContractor possession of the lands necessary for the execution of the workor any other delay by the Corporation due to any other cause whatsoeverwould not entitle the Contractor to damage or compensation thereof; in suchcases, the only duty of the Corporation was to extend the time forcompletion of the work by such period as it may think necessary andproper. These conditions specifically prohibit granting claim fordamages for the breaches mentioned therein. It was not open to thearbitrator to ignore the said conditions which are binding on thecontracting parties. By ignoring the same, he has acted beyond thejurisdiction conferred upon him. It is settled law that the arbitratorderives the authority from the contract and if he acts in manifestdisregard of the contract, the award given by him would be anarbitrary one. This deliberate departure from the contract amounts notonly to manifest disregard of the authority or misconduct on his part,but it may tantamount to mala fide action. site gradually will be tenable and the Contractor is required to arrange hisworking programme accordingly. Clause 39 further stipulates that no failureor omission to carry out the provisions of the contract shall give rise to anyclaim by the Corporation and the Contractor, one against the other, if suchfailure or omission arises from compliance with any statute or regulation ofthe Government or other reasons beyond the control of either theCorporation or the Contractor. Obtaining permission from the ForestDepartment to carry out the work in the wildlife sanctuary depends onstatutory regulations. Clause (vi) of the general conditions of the contractalso provides that failure or delay by the Corporation to hand over to theContractor possession of the lands necessary for the execution of the workor any other delay by the Corporation due to any other cause whatsoeverwould not entitle the Contractor to damage or compensation thereof; in suchcases, the only duty of the Corporation was to extend the time forcompletion of the work by such period as it may think necessary andproper. These conditions specifically prohibit granting claim fordamages for the breaches mentioned therein. It was not open to thearbitrator to ignore the said conditions which are binding on thecontracting parties. By ignoring the same, he has acted beyond thejurisdiction conferred upon him. It is settled law that the arbitratorderives the authority from the contract and if he acts in manifestdisregard of the contract, the award given by him would be anarbitrary one. This deliberate departure from the contract amounts notonly to manifest disregard of the authority or misconduct on his part,but it may tantamount to mala fide action.

In Sarvesh Chopra (supra), work of construction and widening of a railwaybridge was entrusted to respondent. The disputes, which arose in relation theretowith reference to six claims of contractor, were sought to be referred to arbitrator. Asingle Judge of Delhi High Court referred two claims to arbitration holding that fourclaims being “excepted matters” within the meaning of clause 63 of GCC, were notliable to be referred to arbitration. The Division Bench however disagreed andreferred the matters to arbitrator. The Supreme Court speaking about the scope ofclause disentitling the contractor for any compensation, held as follows.

Each of these clauses provides for such claims being not capable ofbeing raised or adjudged by employing such phraseology as “shall not bepayable”, “no claim whatsoever will be entertained by the Railways”, or “noclaim will/shall be entertained”. These are “no claim”, “no damage”, or “noliability” clauses. The other category of claims is where the dispute ordifference has to be determined by an authority of the Railways as providedin the relevant clause. In such other category fall such claims as were readout by the learned counsel for the respondent by way of illustration fromseveral clauses of the contract such as General Conditions Clause 18 andSpecial Conditions Clauses 2.4.2(b) and 12.1.2. The first category is an“excepted matter” because the claim as per the terms and conditionsof the contract is simply not entertainable; the second category ofclaims falls within “excepted matters” because the claim is liable to beadjudicated upon by an authority of the Railways whose decision theparties have, under the contract, agreed to treat as final and bindingand hence not arbitrable. The expression “and decision thereon shall befinal and binding on the contractor” as occurring in clause 63 refers to thesecond category of “excepted matters”.

In Ramnath International Construction (P) Ltd (supra), the Government ofIndia awarded the contract of construction of aircraft hangar, airtech hangar andconnected works as well as road works to the appellant. Disputes in the executionof contract were referred to arbitrator, who passed awards. On appropriateapplications, learned single Judge rejected the cases to set aside and madeawards rule of the Court. Division Bench partly allowed appeals of Government,aggrieved by which, the contractor filed appeals before Supreme Court. Clause11(c) of the contract provided that no claim in respect of compensation or otherwise,howsoever arisen, as a result of extensions granted shall be admitted. One of thequestions before Supreme Court was whether arbitrator committed legalmisconduct in ignoring clause 11(c). Answering the question in the affirmative,apex Court dismissed appeals placing reliance on Ch. Ramalinga Reddyv Superintending Engineer[[7]]and Associated Engineering Co. v Government ofAndhra Pradesh[[8]]observing as under.

Clause (C) provides that where extensions have been granted byreason of the delays enumerated in Clause (A) which were beyond thecontrol of the contractor, or on account of the delays on the part of theemployer specified in Clause (B), the contractor is not entitled to make anyclaim either for compensation or otherwise, arising in whatsoever manner,as a result of such extensions. After enumerating certain delays, sub-clause (viii) of Clause (A) specifically mentions delay on account of anyother cause beyond the control of the contractor. The causes for delaysspecified in clause A, thus, encompass all delays over which the contractorhas no control. This will necessarily include any delays attributable to theemployer or any delay for which both the employer and the contractor areresponsible. The contract thus provides that if there is any delay,attributable either to the contractor or the employer or to both, and thecontractor seeks and obtains extension of time for execution on thataccount, he will not be entitled to claim compensation of any nature, on theground of such delay, in addition to the extension of time obtained by him.Therefore, the claims for compensation as a consequence of delays, that isclaim 24 of Hangar Contract and claims 13 to 16 of Road Contract arebarred by clause 11(C).

We have briefly referred to the fact situation obtaining in the three apexdecisions referred to hereinabove. Those were the cases wherein the contract was completed or the contractor sought reference to arbitration in respect of certainitems of work beyond the scope of arbitration. These cases do not involvetermination of contract by one party. Therefore, we cannot countenance thesubmission of the counsel for Corporation with regard to the claim for loss of profitmade by contractor. On that ground, the award cannot be said to have vitiated orthe contractor can be said to be committed misconduct. As held by Supreme Court in Rajasthan State Mines & Minerals Ltd. v Eastern Engg. Enterprises[[9]]and Sikkim Subba Associates v State of Sikkim[[10]], if the arbitrator has passed areasoned award on appreciation of facts and law, it is not open to the Court tointerfere with the award probing into the mental process of arbitrator to speculatethe reasons for and against the award. It is also reiterated in these decisions that ifthe arbitrator ignored the law or misapplied it, it amounts to arbitrary adjudicationand therefore, the Court can interfere in such matters. To say the least, no suchground exists in the award impugned before us calling for interference. Consideringthe exchange of correspondence between the contractor and the Corporationduring the subsistence of contract and at or about the termination, came to theconclusion that delays occurred for the number of breaches committed byCorporation, when the contractor sought for extension of time, the agreement wascancelled. Therefore, any interference is not called for.

The next aspect of the matter is award of loss of profit at 15% per annum. Thelaw appears to be well settled that loss of profit can be validly claimed by contractoras and when there is breach of contract by employer. In Hudson’s treatise on‘Building and Engineering Contracts’ (tenth edn., by I.N.Duncan Wallace, 1970), itis pointed out that in completing contracts, a percent of profit varies from contractorto contractor and in Great Britain, as per the evidence given in litigation it rangesbetween 3% to 7% of the total prime cost of the project. In Mohd.Salamatullah v Government of Andhra Pradesh[[11]],Supreme Court indicated that awardamount of 15% towards loss of profit or towards quantum of damages would bejustified. In Brij Paul Singh (supra), Supreme Court while upholding the principlethat the contractor would be entitled to claim damages for loss of profit which heexpected to earn by undertaking the works contract, observed as under.

It was not disputed before us that where in a works contract, the partyentrusting the work commits breach of the contract, the contractor would beentitled to claim damages for loss of profit which he expected to earn byundertaking the works contract. What must be the measure of profit andwhat proof should be tendered to sustain the claim are different matters. Butthe claim under this head is certainly admissible. … What would be themeasure of profit would depend upon facts and circumstances of eachcase. But that there shall be a reasonable expectation of profit is implicit in aworks contract and its loss has to be compensated by way of damages ifthe other party to the contract is guilty of breach of contract cannot begainsaid. In this case we have the additional reason for rejecting thecontention that for the same type of work, the work site being in the vicinityof each other and for identical type of work between the same parties, aDivision Bench of the same High Court has accepted 15% of the value ofthe balance of the works contract would not be an unreasonable measure ofdamages for loss of profit. We are therefore, of the opinion that the HighCourt was in error in wholly rejecting the claim under this head.

I n Dwaraka Das v State of Madhya Pradesh[[12]], the work for the construction of hostel for hundred boys at Polytechnic Ujjain was entrusted to theappellant therein. The work was to be completed within twenty-nine months.Allegedly due to the reason that Superintending Engineer obstructed the progressof the work, the work could not be completed and the contract between the partieswas rescinded. The appellant contended that termination of the contract was inbreach thereof and claimed damages for breach of contract besides other amounts.The suit was decreed with 6% interest per annum. The High Court partly allowedthe appeal. Aggrieved by which, the contractor filed appeal. Before Supreme Court,one of the questions was whether the claim on account damages as expected profitout of contract was illegal? Referring to Mohd.Salamatullah (supra) and Brij PaulSingh (supra), Supreme Court allowed the appeal observing as under.

This Court in A.T.Brij Pal Singh v State of Gujarat ((1984) 4 SCC 59)while interpreting the provisions of Section 73 of the Contract Act, has heldthat damages can be claimed by a contractor where the government isproved to have committed breach by improperly rescinding the contract andfor estimating the amount of damages court should make a broadevaluation instead of going into minute details. It was specifically held thatwhere in the works contract, the party entrusting the work committedbreach of contract, the contractor is entitled to claim the damages for lossof profit which he expected to earn by undertaking the works contract.Claim of expected profits is legally admissible on proof of the breach ofcontract by the erring party. ….. To the same effect is the judgment inMohd. Salamatullah v Government of Andhra Pradesh ((1977) 3 SCC 590 :AIR 1977 SC 1481). After approving the grant of damages in case of breachof contract, the court further held that the appellate court was not justified tointerfere with finding of fact given by the trial court regarding quantification ofthe damages even if it was based upon guess work. In both the casesreferred to hereinabove. 15% of the contract price was granted as damagesto the contractor.

in Superintending Engineer vSuperintending Engineer v

in Superintending Engineer vSuperintending Engineer v A Division Bench of this Court in Superintending Engineer vSuperintending Engineer vP.Radhakrishna Murthy[[13]], while following Brij Paul Singh (supra) held thatcompensation in the form of loss of profit could be legitimately awarded if as aresult of breach of contractual obligations, the other party is disabled from carryingout the work fully and the damages on account of loss of profit cannot beconsidered to be too remote.

Thus, the principle is well settled that when there is breach of works contractby employer, the contractor can claim loss of profit. The percentage of profit wouldcertainly differ from contract to contract and in the absence of any contra evidence,award of 15% by the arbitrator and the Court below are reasonable and does notcall for any interference.Award of Interest Learned counsel for contractor submits that if only his client was allowed tocomplete the work, he would have earned profit at 15%, that the claim for 15% onsuch count was not specific dispute before the arbitrator and that the claim beingsubstantial, the award of interest during pendente lite and post award is necessary.He would urge that the denial of the same by Court below is erroneous.Per contra,learned counsel for Corporation submits that when the loss of profit is itself in thenature of interest at 15% per annum, the question of awarding further interestpendente lite and post award period would not arise. These submissions need tobe considered in the light of the relevant case law.

A Constitution Bench of Supreme Court in Secretary, Irrigation Department,Government of Orissa v G.C.Roy[[14]], considered jurisdiction of arbitral tribunal toaward pendente lite interest, when

(i) agreement is silent as to award of interest; (ii) agreement does not specificallyprovide for grant of such interest; and (iii) agreement does not prohibit grant ofinterest. On consideration of various precedents, the conspectus and the principleswere summarized which are as below.

(i) A person deprived of the use of money to which he is legitimatelyentitled has a right to be compensated for the deprivation, call it byany name. It may be called interest, compensation or damages. Thisbasic consideration is as valid for the period the dispute is pending beforethe arbitrator as it is for the period prior to the arbitrator entering upon thereference. This is the principle of Section 34, Civil Procedure Code andthere is no reason or principle to hold otherwise in the case of arbitrator.

(ii) An arbitrator is an alternative form (sic forum) for resolution ofdisputes arising between the parties. If so, he must have the power todecide all the disputes or differences arising between the parties. If thearbitrator has no power to award interest pendente lite, the party claiming itwould have to approach the court for that purpose, even though he mayhave 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 theparties to confer upon him such powers and prescribe such procedure forhim to follow, as they think fit, so long as they are not opposed to law. (Theproviso to Section 41 and Section 3 of Arbitration Act illustrate this point). Allthe same, the agreement must be in conformity with law. The arbitratormust also act and make his award in accordance with the general law of theland and the agreement.

(iv) Over the years, the English and Indian courts have acted on theassumption that where the agreement does not prohibit and a party tothe reference makes a claim for interest, the arbitrator must have thepower to award interest pendente lite.Seth Thawardas Pherumal vUnion of India (AIR 1955 SC 468) has not been followed in the laterdecisions of this Court. It has been explained and distinguished on the basisthat in that case there was no claim for interest but only a claim forunliquidated damages. It has been said repeatedly that observations in thesaid judgment were not intended to lay down any such absolute or universalrule as they appear to, on first impression. Until Executive Engineer(Irrigation), Balimela v Abhaduta Jena((1988) 1 SCC 418) almost all thecourts in the country had upheld the power of the arbitrator to award interestpendente lite. Continuity and certainty is a highly desirable feature of law.

(v) Interest pendente lite is not a matter of substantive law, likeinterest for the period anterior to reference (pre-reference period). Fordoing complete justice between the parties, such power has always beeninferred.

Supreme Court further held

Where the agreement between the parties does not prohibit grant ofinterest and where a party claims interest and that dispute (along withthe claim for principal amount or independently) is referred to thearbitrator, he shall have the power to award interest pendente lite. Thisis for the reason that in such a case it must be presumed that interest wasan implied term of the agreement between the parties and therefore whenthe parties refer all their disputes — or refer the dispute as to interest assuch — to the arbitrator, he shall have the power to award interest. This does not mean that in every case the arbitrator should necessarily awardinterest pendente lite. It is a matter within his discretion to be exercised inthe light of all the facts and circumstances of the case, keeping the ends ofjustice in view.

In Bhagawati Oxygen Limited v Hindustan Copper Limited[[15]], SupremeCourt considered the question as to whether arbitral tribunal has had power toaward interest at 18% per annum for pre-reference period, pendente lite and post-award period i.e., future interest from the date of award till the date of payment.Insofar as interest pendente lite is concerned, the apex Court followed G.C.Roy(supra) and reiterated the principles (extracted hereinabove). Making reference toG.C.Roy (supra) and other cases, the law laid down by their Lordships with regardto interest for pre-reference period and post award period is as follows (paras 38and 40).

So far as interest for pre-reference period is concerned, in view ofthe conflicting decisions of this Court, the matter was referred to a largerBench in Executive Engineer, Dhenkanal Minor Irrigation Division vN.C. Budharaj((2001) 2 SCC 721). The Court, by majority, held that anarbitrator has power to grant interest for pre-reference periodprovided there is no prohibition in the arbitration agreement excludinghis jurisdiction to grant interest. The forum of arbitration is created by theconsent of parties and is a substitute for conventional civil court. It is,therefore, of unavoidable necessity that the parties be deemed to haveagreed by implication that the arbitrator would have power to award interestin the same way and same manner as a court. ….. As to post-awardinterest, the point is covered by the decision of this Court inHindustan Construction Company Limited v State of J&K ((1992) 4SCC 217). It was held there that an arbitrator is competent to awardinterest for the period from the date of the award to the date of decreeor date of realisation, whichever is earlier.

In G.C. Roy (supra) and Bhagawati Oxygen Limited (supra), the SupremeCourt considered the right of a building contractor to claim interest on the amountsdue for pre-reference, pendente lite and post arbitration periods. The two casesapplied the principle that even if there is no agreed term between the partiesregarding payment of interest, in the absence of specific prohibition, the arbitratorhas got power to award interest. If the agreement specifically prohibits and barsclaim for interest, the arbitrator has no power to award interest. This aspect of thematter has again been considered by Supreme Court in a recent judgment dealtwith hereunder.

In State of Rajasthan v Ferro Concrete Construction Private Limited[[16]],the question was related to awarding pre-reference interest, interest pendente liteand post arbitration interest. Observing that in the absence of express bar in thecontract in regard to interest, the arbitral tribunal can award interest, the SupremeCourt laid down as follows.

The appellants contended that there was no provision in the contract forpayment of interest on any of the amounts payable to the contractor and,therefore, no interest ought to be awarded. But this court has held that inthe absence of an express bar, the arbitrator has the jurisdiction andauthority to award interest for all the three periods – pre-reference,pendente lite and future [v ide decisions of Constitution Bench in Secretary, Irrigation Department, Government of Orissa v G.C.Roy,(1992) 1 SCC 508:1992(1) Arb.LR 145 (SC); Executive Engineer,Dhenkanal Minor Irrigation Division v N.C.Budharaj, (2001) 2 SCC 721:2001(1) Arb. LR 346 (SC) and the subsequent decision in BhagawatiOxygen Ltd v Hindustan Copper Limited, (2005) 6 SCC 462: 2005(1)Arb. LR 608 (SC). In this case as there was no express bar in the contractin regard to interest, the arbitrator could award interest.

Thus, it is settled law that even though there is no specific covenant in theagreement unless it is specifically barred, the claim for interest during pre-referenceperiod, pendente lite and post award period is sustainable. It is even competent tothe arbitrator to award future interest from the date of the award till the date ofdecree or date of realization whichever is earlier. When the claim for 15% of thecontract value towards loss of profit is awarded, whether the same would carryfurther interest? While denying interest pendente lite, the arbitrator awarded interestat 18% per annum from 10.03.1989 to 06.01.1990 and again from the date of theaward till the date of payment whichever is earlier.

Learned senior civil Judge, however, disallowed interest at 18% amountawarded under claim No.XI observing that such award of interest is impermissiblein law. Before us, learned counsel for contractor pressed for post award interest tillthe date of decree. He relied on Oil and Natural Gas Commission v M.C.Clelland Engineers S.A[[17]]. Dispute in that case was whether the award of the arbitratorsfor certain amounts payable with subsequent interest was sustainable. ONGCcontended that the amount claimed under two claims was itself interest for differentperiods and therefore, arbitrator could not have further awarded interest on theclaims awarded at 12% per annum from the date of award till realization. Reliancewas placed on Section 3 of the Interest Act, 1978. This contention was negativedby the apex Court observing as under.

There cannot be any doubt that the Arbitrators have powers to grant interestakin to Section 34 of the CPC which is the power of the court in view ofSection 29 of the Arbitration Act, 1940. It is clear that interest is not grantedupon interest awarded but upon the claim made. The claim made in theproceedings is under two heads - one is the balance of amount claimedunder invoices and letter dated February 10, 1981 and the amount certifiedand paid by the appellant and the second is the interest on delayedpayment. That is how the claim for interest on delayed payment stoodcrystallized by the time the claim was filed before the Arbitrators. Therefore,the power of the Arbitrators to grant interest on the amount of interest whichmay, in other words, be termed as interest on damages or compensationfor delayed payment which would also become part of the principal. If that isthe correct position in law, we do not think that Section 3 of the Interest Acthas any relevance in the context of the matter which we are dealing with inthe present case.

From the above, it may be taken as fairly well settled that if the amount underany claim before arbitration, is crystallized, interest for post arbitration cannot bedenied even if the claim itself is towards interest. Therefore, we are convinced thatthe denial of interest at 18% per annum by the Court below is not justified. To thatextent, the contractor must succeed in the C.R.P.No.2939 of 2001.Other claims In the appeal and civil revision petition filed by contractor, grievance is madeout not only with regard to denial of interest on claim No.XI but also with regard to

Conclusion

claim Nos.V, VI and VIII which have been set aside by the Court below. We haveperused the award passed by arbitrator and we have no hesitation to say thatcondition No.47, clause 12, 14.5 and 15.2 were ignored by the arbitrator whileallowing these claims. We may mention that these clauses provide that thecontractor shall obtain written permission before there is any deviation/alteration oraddition. The contractor did not obtain any written permission from the Corporationto dig the borewell, to bring water from outside or to bring cement from outside. These aspects are not seriously disputed before us. Therefore, we do not find anyreason to disagree with the Court below.

Accordingly, C.M.A.No.1824 of 2001 and C.R.P.No.2893 of 2001 filed byAndhra Pradesh State Trading Corporation are dismissed without any order as tocosts. C.M.A.No.1666 of 2001 and C.R.P.No.2939 of 2001 filed by M/s.G.V.MallaReddy and Company, a registered partnership firm, are partly allowed as indicatedhereinabove. There shall be no order as to costs.

_______________(V.V.S.RAO, J)

.12.2009NOTE:L.R. Copy be marked.(By order)pln ____________________(B.N.RAO NALLA, J)

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