M/S RAVEECHEE AND CO versus UNION OF INDIA on 3 July 2018

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SUPREME COURT REPORTS[2018] 5 S.C.R. 138

[2018] 5 S.C.R.

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M/S RAVEECHEE AND CO.

v.

UNION OF INDIA

(Civil Appeal Nos. 5964-65 of 2018)

BJULY 03, 2018

[S. A. BOBDE AND L. NAGESWARA RAO, JJ.]

Arbitration Act, 1940 – Interest pendente lite – Award of –Power of the arbitrator – Award of mining contract to appellant –Dispute between parties – Award of interest pendente lite on damagesCexcluding the security deposits, from the date of commencement ofthe arbitral proceedings to the date of award – High Court set asidethe award in so far as the order of pendente lite interest – On appeal,held: Liability to pay interest pendente lite arises because theclaimant has been found entitled to the damages and has been keptDout from those dues due to the pendency of the arbitration-pendentelite – Thus, the liability for interest pendente lite does not arise fromany term of the contract, or during the terms of the contract, but inthe course of determination by the Arbitrators of the losses ordamages that are due to the claimant – When a dispute is referredto for adjudication to an arbitrator, a contract clause excludingEinterest upon the earnest money and security deposit, that is bindingon the parties cannot be extended to bind an Arbitrator – Arbitratorhas power to award interest pendente lite where justified – Thus,judgment of the High Court is set aside – Order of interest pendentelite restored.

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Allowing the appeals, the Court

HELD: 1.1 The Arbitrators have awarded amounts to theclaimant on account of the losses suffered by them for variousreasons, mainly due to the ban on mining. These amounts arenot awarded on account of any payment due under the contractGbut are awarded on losses determined in the course of arbitrationor the ‘lis’. A claimant becomes entitled to interest not ascompensation for any damage done but for being kept out of themoney due to him. Obviously, in a case of unascertained damagessuch as this, the question of interest would arise upon the H

ascertainment of the damages in the course of the lis. Suchdamages could attract interest pendente lite for the period fromthe commencement of the arbitration to the award. Thus, theliability for interest pendente lite does not arise from any term ofthe contract, or during the terms of the contract, but in the courseof determination by the Arbitrators of the losses or damages thatare due to the claimant. Specifically, the liability to pay interestpendente lite arises because the claimant has been found entitledto the damages and has been kept out from those dues due tothe pendency of the arbitration i.e. pendente lite. [Para 11][143-D-G]

1.2 The Arbitrators rightly awarded interest pendente litefor the period from 26.09.1988 to 23.03.2001 which is the date ofthe award, on the amounts found due to the claimant. Undoubtedly,such a power must be considered inherent in an Arbitrator whoalso exercises the power to do equity, unless the agreementexpressly bars an Arbitrator from awarding interest pendentelite. An agreement which bars interest is essentially an agreementthat the parties will not claim interest on specified amounts. Itdoes not bar an Arbitrator, who is never a party to the agreementfrom awarding it. The instant case must be decided on the generalrule that an arbitrator has the power to award interest unlessspecifically barred from awarding it; and the bar must be clearand specific. [Para 12][143-H; 144-A-C]

1.3 When a dispute is referred to for adjudication to anarbitrator, a term of such a nature as contained in the Clause16(3) of General Clauses Contract, that is binding on the partiescannot be extended to bind an Arbitrator. The Arbitrator haspower to award interest pendente lite where justified. Therefore,the judgment of the High Court is set aside and the award passedby the Arbitral Tribunal is restored. [Para 18][146-B]

Irrigation Deptt., State of Orissa v. G.C Roy [1991] 3Suppl. SCR 417: (1992) 1 SCC 508; Board of Trusteefor the Port of Calcutta v. Engineers-De-Space Age[1995] 6 Suppl. SCR 327 : (1996) 1 SCC 516; MadnaniConstruction Corporation Pvt. Ltd. v. Union of Indiaand Ors. [2009] 16 SCR 216 : (2010) 1 SCC 549[;]Sayeed Ahmed & Co v. State of Uttar Pradesh and Ors.

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A[2009] 10 SCR 841: (2009) 12 SCC 26; SuperintendingEngineer and Ors. v. B. Subba Reddy [1999] 2 SCR880 : (1999) 4 SCC 423; Union of India v. AmbicaConstruction [2016] 2 SCR 810 : (2016) 6 SCC 36;Ambica Constructions v. Union of India (2017) 14 SCC323 - referred to.B

Case Law Reference

DCIVIL APPELLATE JURISDICTION: Civil Appeal Nos.5964-5965 of 2018.

From the Judgment and Order dated 23.07.2015 and 05.11.2015of the High Court of Gujarat at Ahmedabad in FA No. 189 of 2005 andMisc. Civil Application No. 3178 of 2015 respectively E

K. V. Viswanathan, Sr. Adv., Mohit Paul, Ayush Agrawal, AnugramNiraj Ekka, Vikarant Singh Baloria, Advs. for the Appellant.

Vikramjit Banerjee, ASG, A. K. Panda, Sr. Adv., A. K. Srivastav,Ms. Sushma Verma, Ayush Anand, Shubhandu Anand, Raj Bahadur,Bharat Sood, Shreekant N. Terdal, Advs. for the Respondent.F

The Judgment of the Court was delivered by

S. A. BOBDE, J. 1. Leave granted.

2. These Civil Appeals arise out of the final judgment and order ofGujarat High Court dated 23.07.2015 in F.A No 189 of 2005 and theGfinal judgment and order dated 5.11.2015 in MCA No 3178 of 2015 inF.A No 189 of 2005. The High Court partly allowed the appeal of theRespondent- Union of India and quashed Order of the Arbitrators andset aside the amount awarded by them in respect of Claim No 12. TheArbitrators, under Claim No. 12 awarded interest pendente lite at 12%on the award of Rs. 30 lacs excluding security deposits amounting to H

Rs. 44,92,800/- per annum from 26.09.1988 to 22.03.2001. Further, theHigh Court dismissed the review application filed by the appellant.

3. The appellant – M/s Raveechee and Co. and the respondent-Union of India entered into a contract dated 02.06.1981 for quarrying,stacking and loading stone ballast, broken stone aggregate, rubble etc.from the Western Railway quarry at Udvada at an estimated cost of Rs.55,81,000/-. Thereafter, disputes arose between the parties due to whichthe appellant called upon the General Manager, Western Railway toappoint Arbitrators in order to settle the dispute. The Arbitrationproceedings commenced on 26.09.1988 and the award was passed on22.03.2001.

4. The Arbitral Tribunal comprising of Shri N.K. Gupta, ChiefEngineer (C&S) and Shri R.K. Sinha, Director, Finance, KRCL, awardeda total of Rs. 76,43,800/- as against the claim of Rs. 1,34,87,044/- raisedby the appellant. An award for the Claim Nos. 1-12 raised by the appellantwas made. The present dispute relates to the amount awarded underClaim No. 12 i.e. Interest. The Arbitrators awarded the appellant interestpendente lite at 12% on the award for damages excluding security depositsamounting to Rs. 44,92,800/- from 26.09.1988 to 22.03.2001.

5. The appellant thereafter filed a Civil Miscellaneous ApplicationNo.22 of 2001 along with the award dated 22.03.2001 in the Civil Court.The award was made a rule of the Court by an order dated 29.07.2004under Section 17 of the Arbitration Act of 1940 (hereinafter referred toas ‘the Act’) by the Civil Court. The respondent challenged the order ofthe Civil Court dated 29.07.2004 in appeal. The High Court partly allowedthe appeal and set aside the order of Arbitrators qua Claim No.12 underwhich the Arbitrators had awarded Rs. 44,92,800/- as interest pendentelite. The Arbitrators awarded amounts in favour of the appellant asfollows: Claim No.1 – Rs. 12 lacs, Claim No.3 – Rs. 8 lacs and ClaimNo. 5 – Rs. 10 lacs and interest on the total amount of damages (i.e. Rs.12 lacs + Rs. 8 lacs + Rs. 10 lacs = Rs. 30 lacs) excluding the amount ofsecurity deposits. Thus, interest on Rs. 30 lacs from 26.09.1988 to23.03.2001 at 12 % amounting to Rs. 44,92,800/-.

6. The appellant, aggrieved by the High Court’s judgment andorder dated 23.07.2015 filed a review application before the High Court.The High Court dismissed the review application vide judgment and orderdated 05.11.2015. The present SLPs are filed against the High Courtjudgments and orders dated 23.07.2015 & 05.11.2015 passed by theHigh Court.

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142SUPREME COURT REPORTS

A7. The question that arises for determination before this Court is:Whether Clause 16(3) (reproduced hereafter) of the General ContractClauses (hereinafter referred to as “GCC”) restricted the power of thearbitrator to award interest pendente lite?

8. In the present case, the Arbitral Tribunal giving effect to theBpurport of Clause 16(3) did not award any interest on security deposits.The clause in terms states that no interest will be payable on earnestmoney, security deposits or on any amounts payable to the contractorunder the contract.

The Arbitrators in their award have relied on Clause 16(3) ofCthe contract to deny interest on the security deposit. The Arbitratorsheld that what was intended under Clause 16(3) barred the grant ofinterest on earnest money, security deposit and amounts payable to theappellant, it does not in any way bar grant of interest pendente lite.

9. Clause 16(1) and 16(3), which are relevant, read as follows:D

“16(1):- The earnest money deposited by the contractor withhis tender will be retained by the Railways as part of securityfor the due and faithful fulfillment of the contract by thecontractor. The balance to make up the security deposit, therates for which are given below, may be deposited by theEcontractor in cash or in the form of Government Securitiesor may be recovered by percentage deduction from thecontractor’s ‘on account’ bills.

Provide also that in case of defaulting contractor the Railwaymay retain any amount due for payment to the contractor onFthe pending ‘on account bills’ so that the amounts so retainedmay not exceed 10% of the total value of the contract.

“16(3):- No interest will be payable upon the earnest moneyand the security deposit or amounts payable to the Contractorunder the Contract, but Government Securities deposited inGterms of sub clause (1) of this clause will be payable withinterest accrued thereon.”

10. On behalf of the Union of India, it is contended that theArbitrators by reason of Clause 16(3) could not have awarded interest pendente lite. This contention is incorrect. Ex facie the clause does notdeal with interest pendente lite. In terms, the clause only bars interestupon earnest money and security deposits or amounts payable to thecontractor under the contract. The above mentioned amounts are amountswhich in a sense belong to the contractor. They are amounts voluntarilydeposited with the other contracting party in order to be refunded orforfeited depending on performance of the contract. As such they arenot amounts of which the contractor is deprived the use of against hiswishes, so as to attract interest.

It is not the case of the Government before us that interest hasbeen awarded to the contractor under any of the three heads. Neitherdoes any question of interest payable on Government security arise inthe present case. The contention put forth by the Government is that theabove clause in the agreement bars the Arbitrators from awarding interestpendete lite. On a plain reading we find that there is no such bar.

11. In fact, the Arbitrators have awarded amounts to the claimanton account of the losses suffered by them for various reasons, mainlydue to the ban on mining. These amounts are not awarded on accountof any payment due under the contract but are awarded on lossesdetermined in the course of arbitration or the ‘lis’.

A claimant becomes entitled to interest not as compensation forany damage done but for being kept out of the money due to him. Obviously,in a case of unascertained damages such as this, the question of interestwould arise upon the ascertainment of the damages in the course of thelis. Such damages could attract interest pendente lite for the period fromthe commencement of the arbitration to the award.

Thus, the liability for interest pendente lite does not arise fromany term of the contract, or during the terms of the contract, but in thecourse of determination by the Arbitrators of the losses or damages thatare due to the claimant. Specifically, the liability to pay interest pendentelite arises because the claimant has been found entitled to the damagesand has been kept out from those dues due to the pendency of thearbitration i.e. pendente lite.

12. We are, therefore, of the view that the Arbitrators rightlyawarded interest pendente lite for the period from 26.09.1988 to23.03.2001 which is the date of the award, on the amounts found due tothe claimant. Undoubtedly, such a power must be considered inherent in A

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Aan Arbitrator who also exercises the power to do equity, unless theagreement expressly bars an Arbitrator from awarding interest pendentelite. An agreement which bars interest is essentially an agreement thatthe parties will not claim interest on specified amounts. It does not baran Arbitrator, who is never a party to the agreement from awarding it.

BWe are not called upon, in this case, to decide whether partiescan agree that they will not claim interest pendente lite even in respectof unascertained damages determined in the course of arbitration. Thepresent case must be decided on the general rule that an arbitrator hasthe power to award interest unless specifically barred from awarding it;and the bar must be clear and specific.C

13. In Irrigation Deptt., State of Orissa v. G.C Roy[1]this Courtthoroughly considered the question of power of the arbitrator to awardinterest pendente lite and held that when the agreement between theparties does not prohibit grant of interest and where the party claimsinterest and that dispute has been referred to an arbitrator, then theDarbitrator does have the power to award interest pendente lite.

14. Subsequently, this Court in the cases of Board of Trustee forthe Port of Calcutta v. Engineers-De-Space Age[2] and MadnaniConstruction Corporation Pvt. Ltd. v. Union of India and Ors.[3] heldthat according to the view taken in the case of Irrigation Deptt., StateEof Orissa (supra), the arbitrator does have the power to award interestpendente lite. The Court observed that it essentially depends upon theouster in each clause, which means that unless there is an express barthat provides that the arbitrator cannot award interest pendente lite, thegrant of interest pendente lite will predominantly be based on thearbitrator’s discretion to award the same.F

15. In Sayeed Ahmed & Co v. State of Uttar Pradesh and Ors.[4],this Court referred to the decision in Superintending Engineer andOrs. v. B. Subba Reddy[5]and observed thus:

“11. Two more decisions dealing with cases arising under theGArbitration Act, 1940 require to be noticed. In SuperintendingEngineer v. B. Subba Reddy (1999) 4 SCC 423 this Court

1 (1992) 1 SCC 508 2 (1996) 1 SCC 516 3 (2010) 1 SCC 549 4 (2009) 12 SCC 26H 5 (1999) 4 SCC 423

held that interest for pre-reference period can be awardedonly if there was an agreement to that effect or if it wasallowable under the Interest Act, 1978. Therefore, claim forinterest for pre-reference period, which is barred as per theagreement or under the Interest Act, 1978 could not beallowed. This Court however held that the Arbitrator canaward interest pendente lite and future interest.”

16. A three Judge Bench of this Court in the case of Union ofIndia v. Ambica Construction[6] held that the power of an arbitrator togrant pendente lite interest will depend upon several factors such as;phraseology used in the agreement clauses conferring power relating toarbitration, nature of claim and dispute referred to arbitrator, and onwhat items power to award interest has been taken away and for whichperiod. The Court observed:

“34. Thus our answer to the reference is that if contractexpressly bars award of interest pendente lite, the same cannotbe awarded by the Arbitrator. And that the bar to award intereston delayed payment by itself will not be readily inferred asexpress bar to award interest pendente lite by the ArbitralTribunal, as ouster of power of the arbitrator has to beconsidered on various relevant aspects referred to in thedecisions of this Court , it would be for the Division Bench toconsider the case on merits.”

17. Further, this Court considered an identical clause in the contractin the case of Ambica Constructions v. Union of India[7], wherein itobserved that the Clause of the GCC did not bar the arbitrator fromawarding interest pendente lite and affirmed the award passed by thearbitrator. The three Judge Bench of this Court held that the contentionraised by the Union of India based on the Clause of the GCC that thearbitrator could not award interest pendente lite was not a valid contentionand the arbitrator was completely justified in granting interest pendentelite.

Relying on the three Judge Bench judgment in Union of India v.Ambica Construction (supra) and in Irrigation Deptt., State of Orissa(supra), this Court held that the bar to award interest on the amounts 6 (2016) 6 SCC 36

7 (2017) 14 SCC 323

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Apayable under the contract would not be sufficient to deny the paymentof interest pendente lite.

18. Thus when a dispute is referred to for adjudication to anArbitrator, a term of such a nature as contained in the Clause 16(3) ofGCC, that is binding on the parties cannot be extended to bind anBArbitrator. The Arbitrator has the power to award interest pendente litewhere justified. We, therefore, set aside the judgment of the High Courtand restore the award passed by the Arbitral Tribunal in respect of ClaimNo. 12.

19. Appeals are allowed accordingly.

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Appeals allowed.

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