Supreme Court Rules No Interest on Recovered Amounts Pre-Arbitration Award

Union of India (UOI) Versus Concrete Products and Const. Co. and Ors.

Union of India (UOI) Versus Concrete Products and Const. Co. and Ors. - 2014 (3) SCALE 372, (2014) 4 SCC416, 2014 (5) SCJ 733 Issues Involved:
1. Validity of the recovery of excess payments made under the escalation clause.
2. Maintainability of the writ petitions and the necessity of arbitration.
3. Authority of the arbitrator to award interest.
4. Applicability of Clause 2401 and 2403 of the Indian Railways Standard Conditions of Contract regarding lien and interest.

Detailed Analysis:

1. Validity of the Recovery of Excess Payments:
The Union of India entered into agreements with the Respondents for the supply of mono block concrete sleepers, with provisions for price escalation based on the cost of raw materials. The Railway Board later determined that excess payments had been made under the escalation clause for HTS wires between 1989 and November 1994, amounting to Rs. 1,80,92,462/- and Rs. 1,78,09,789/-. The Respondents challenged this recovery, leading to multiple rounds of litigation, including writ petitions and appeals.

2. Maintainability of the Writ Petitions and Necessity of Arbitration:
The Respondents initially filed writ petitions challenging the recovery. The Railway administration objected, arguing that the dispute should be referred to arbitration as per the contract terms. The High Court appointed an arbitrator, but this decision was overturned on appeal, remanding the matter back to the Single Judge. Eventually, the Supreme Court referred the dispute to an Arbitration Tribunal, which rendered an award in favor of the Respondents, directing the Railway administration to refund the amounts with interest.

3. Authority of the Arbitrator to Award Interest:
The Railway administration challenged the arbitration award, particularly the interest component, arguing that the arbitrator had no authority to award interest due to the prohibition under Section 31(7) of the Arbitration Act, 1996 and specific contract clauses. The High Court upheld the arbitrator's award, but the Supreme Court found that the arbitrator and the High Court failed to consider the contractual provisions barring interest.

4. Applicability of Clause 2401 and 2403 of the Indian Railways Standard Conditions of Contract:
Clause 2401 allows the Railway to withhold and retain sums from the contractor's security deposit or payments due under the contract pending finalization of any claims. Clause 2403 extends this lien to amounts due under any other contract with the Railway. Both clauses explicitly prohibit the contractor from claiming interest on withheld amounts. The Supreme Court concluded that the arbitrator erred in awarding interest, as these clauses barred such payments.

Conclusion:
The Supreme Court allowed the appeals, holding that the Respondents were not entitled to interest on the amounts recovered by the Railway administration from the date of recovery until the date of the arbitration award. Interest would only be payable from the date of the award until the amount was deposited in the High Court. The appeals were allowed in these terms, emphasizing the binding nature of the contractual clauses prohibiting interest on withheld amounts.