TaxTMI 
TaxTMI 
2001 (1) TMI 916
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....e 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. 2. 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 interest under the arbitration agreement whether Arbitrator has no jurisdiction to award interest for the pre-reference ....
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.... 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 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 ....
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....bstantive 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 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 int....
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.... 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 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,....
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.... 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 exercised in the light of all facts and circumstances of the case, keeping the ends of justice in view. 8. 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. W....
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....y 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 justice between the parties, such power has always been inferred. 9. 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. 10. 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)....
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.... 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 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. 12. 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, t....
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....different reasoning. We, therefore, think that the award on Item No.8 should have been upheld. 14. 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 i....
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....ments 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 lo....
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....: (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. 19. 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 i....
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....s 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 tri....
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....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. 22. 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 sa....
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....er 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 bu....
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....iding 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....
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....reement 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 ....
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.....) vs. Abhaduta Jena 1988 (1) SCC 418 (hereinafter referred to as 'Abhaduta Jena's case) and in the case of State of Orissa vs. B.N. Agarwalla (1997) 2 SCC 469, requires reconsideration. 4. The question of competence of an arbitrator to award interest has engaged the attention of this Court in umpteen cases. The claim of interest can be broadly split up into 3 periods - a) for the period before the arbitrator enters upon the reference, in other words, pre-reference period; (b) for the period during which the proceeding is pending before the arbitrator which is otherwise called pendente lite period; (c) for the period from the date of the award till the award is made rule of the court. The question to be considered in the present case is confined to the jurisdiction of the arbitrator to award interest for the pre-reference period only. After hearing the learned counsel appearing for the appellants and the respondents it appears to me that the moot question to be answered by this Bench is whether the decision in Abhaduta Jena case (supra) holding that the arbitrator has no competence to award interest for the pre-reference period unless any of the three conditions namely - 1) if t....
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....ver 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. ....
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....t by the Court. It was laid down in those three cases that interest could not be awarded for the period prior to the suit in the absence of an agreement for the payment of interest or any usage of trade having the force of law or any provision of the substantive law entitling the plaintiff to recover interest. Interest could also be awarded by the court under the Interest Act if the amount claimed was a sum certain payable at a certain time by virtue of a written instrument. In regard to pendente lite interest, the provisions of the Civil Procedure Code governed the same. 16. The question of award of 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 po....
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....at the arbitrator was wrong in awarding the interest." (emphasis supplied) 7. The ultimate conclusions reached by the Court were summed up in these words: "In regard to pendente lite interest, that is, interest from the date of reference to the date or 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 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 ref....
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.... value. 11. A Bench of three learned Judges of this Court in the case of Jugal Kishore Prabhatilal Sharma v. Vijayendra Prabhatilal Sharma (1993) 1 SCC 114) considered the question of power of an arbitrator to award interest for pre-reference period in a case where reference of a dispute to arbitrator was made prior to coming into force of the Interest Act, 1978. The Bench had occasion to consider the decision in Abhaduta Jena case (supra) and also G.C. Roy case (supra). The Bench rejected the contention that the decision in Abhaduta Jena case had been overruled in G.C. Roy case on the aspect of award of interest for pre-reference period also. B.P. Jeevan Reddy, J., in his concurring judgment specifically dealt with the question. The relevant portions of the judgment are quoted hereunder: "During the course of arguments, two different interpretations were placed upon the principles enunciated by the Constitution Bench in Secretary Irrigation Department v. G.C. Roy. On one hand it was contended, relying upon the first of the five principles set out in para 43 that the said decision lays down that even for the pre-reference period, interest can be granted in all cases and....
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....vations in para 10 of the Judgment are quoted hereunder : "We cannot agree with Shri Bhagat. Both of us were members of the Constitution Bench which decided G.C. Roy. It was confined to the power of the arbitrator to award interest pendente lite. It did not pertain to nor did it pronounce upon the power of the Arbitrator to award interest for the period prior to his entering upon the reference (pre-reference period). This very aspect has been clarified by one of us (B.P. Jeevan Reddy, J.) in his concurring order in Jugal Kishore Prabhatilal Sharma v. Vijayendra Prabhatilal Sharma. Accordingly, we hold following the decision in Jena that the arbitrator had no power to award interest for the pre-reference period in this case inasmuch as the award was made prior to coming into force of the Interest Act, 1978 (The Interest Act, 1978 came into force with effect from August 19, 1981). So far as interest for the period during which the arbitration proceedings were pending (pendente lite interest) is concerned, the arbitrator does have the power to award the same as held in G.C. Roy. A request is made by Shri Bhagat to refer the matter to a larger Bench to decide the question rela....
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.... that each head relates to a claim for an unliquidated sum. The Interest Act, 1839 applies as interest is not otherwise payable by law in this kind of case (see Bengal Nagpur Ry. Co. v. Ruttanji Ramji but even if it be assumed that an arbitrator is a "court" within the meaning of that Act, (a fact that by no means appears to be the case), the following among other conditions must be fulfilled before interest can be awarded under the Act:- (1) there must be a debt or a sum certain; (2) it must be payable at a certain time or otherwise; (3) these debts or sums must be payable by virtue of some written contract at a certain time; (4) there must have been a demand in writing stating that interest will be demanded from the date of the demand. Not one of these elements is present, so the arbitrator erred in law in thinking that he had the power to allow interest simply because he thought the demand was reasonable." 16. In the case of Union of India vs. West Punjab Factories Ltd. (supra) a Constitution Bench of this Court considered the question of an award of interest for a period prior to filing of the suit and held that in the absence of any usage....
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....t of pre-reference interest also. At the cost of repetition I may state here that this contention was not accepted by this Court in Jugal Kishore Prabhatilal Sharma & Ors. v. Vijayendra Prabhatilal Sharma and another (supra), State of Orissa v. B.N. Agarwala (supra), State of Orissa v. B.N. Agarwalla (1997) 2 SCC 469 (supra). In my view this contention cannot be accepted for the reason that the two periods, the period during which the proceeding was pending before the arbitrator (pendente lite) and the period before the arbitrator entered upon the reference (pre-reference) stand on different footing. While the former refers to a period when the arbitrator was ceased of the matter for adjudication, the latter refers to the period before he (arbitrator) came into the picture. Further during the period when the arbitrator is ceased of the proceeding the parties are aware of the claims made by the applicant against the opposite party and the matter is pending adjudication; but during the pre-reference period neither the claims are crystallized nor has the opposite party any notice that it may be required to pay certain amount to the claimant depending on the adjudication of the dispute....
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....ll only compel the claimant to a civil suit for interest and that would result in multiplicity of proceedings. This contention is based on the assumption that a Civil Court can award interest for a period prior to the institution of the suit without being satisfied that any of the conditions laid down in Abhaduta Jena's case is satisfied. This assumption, in my view is incorrect. The plaintiff in a suit has to base his claim on a cause of action in law and in the absence of a firm basis in law the Court cannot entertain such a claim. The plaintiff has to lay a firm basis for the claim in the pleading. That position has only been reiterated by this Court in Abhaduta Jena case (supra). 20. On the discussions in the foregoing paragraphs I am of the view that the decision in Abhaduta Jena case (supra) lays down the correct position of law and does not require reconsideration. An arbitrator has no competence to award interest for the pre-reference period unless any of the conditions namely - (1) if the agreement between the parties entitles the arbitrator to award interest; (2) if there is a usage of trade having the force of law for award of interest, and (3) if there are other prov....
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....he question had been disposed of in one sentence in paragraph(6). While this was the position, for the first time, this Court made an in- depth examination of the question in Jenas case, 1988(1) SCC 418. Three learned judges considered the competence of the arbitrator on reference made without intervention of the Court and came to the conclusion that in cases, which arose prior to the commencement of the Interest Act, 1978, the arbitrator did not have the power to grant interest either pendente lite or for the period prior to the reference. In this case, though several English cases have been cited, including the case of Chandris, but the Court refrained from referring, in view of the abundance of authoritative pronouncement of the Supreme Court. Since the Interest Act of 1839 did not confer power on the arbitrator to award interest, the Court looked elsewhere for that power of the arbitrator to award interest up to the institution of the proceeding but could not find any such power, and, therefore, ultimately came to the conclusion that the arbitrator did not possess any power to award interest for the pre-reference period. So far as the power of arbitrator to grant interest pende....
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.... interest prior to the institution of the suit and not so far as the power to award interest pendente lite is concerned. If the Constitution Bench in the case of Union of India vs. West Punjab Factories Ltd., approved Thawardas, Bengal Nagpur Railway and Rallia Ram and held that even in a suit, interest prior to the institution of the suit cannot be granted, following the principles in Thawardas and two others, which decided the power of the arbitrator in relation to the grant of interest for pre-reference period, it is unimaginable on my part to think that an arbitrator does possess the power on the ground that otherwise it would lead to multiplicity of proceedings. It would be appropriate for me to indicate that in G.C. Roy, the ratio of Thawardas, Bengal Nagpur Railway and Rallia Ram had not been doubted even, and possibly could not have been doubted in view of its acceptance by the earlier Constitution Bench decision in Union of India vs. West Punjab Factories Ltd., so far as the power of award of interest for the pre-reference period is concerned. Even subsequent to Roys case, there have been decisions of three Judge Bench and two Judge Bench, which have been noticed by Mohapa....