SREE KAMATCHI AMMAN CONSTRUCTIONSversusTHE DIVISIONAL RAILWAY MANAGER (WORKS), PALGHAT & ORS.

                  [2010] 10 S.C.R. 487      ·


      SREE KAMATCHI AMMAN CONSTRUCTIONS                               A
                                v.
    THE DIVISIONAL RAILWAY MANAGER (WORKS),
                  PALGHAT & ORS.
        (Civil Appeal Nos. 6815-6816 of 2010)
                                                                      B
                      AUGUST 20, 2010
     [R.V. RAVEENDRAN AND H.L. GOKHALE, JJ.]

      Interest - Award of - Contract - Arbitration - Award
refusing interest for pre-reference period and pendente lite -        C
Propriety of - Held: Award of interest for such period was
rightly denied by arbitral tribunal - General conditions of the
contract between the parties expressly barred award of interest
- In view of s. 37(1) of Arbitration and Conciliation Act, arbitral
tribunal is bound by the terms of the contract and thus cannot        D
award interest for pre-reference period or pendente lite -
Arbitration and Conciliation Act, 1996 - s. 37(1) - Contract.

     First respondent-Railways entrusted construction
work to the appellant under a contract. The appellant-                E
contractor invoked the arbitration clause, alleging breach
of contract by the first respondent. Disputes were
referred to arbitral tribunal, which ultimately passed a
reasoned award rejecting all the claims of the Railways.
It awarded only future interest and refused to award the
interest for pre-reference period and interest pendente lite.         F
However, it rejected two of the claims of the contractor.

     Railways as well as the contractor filed petitions u/
s. 34 of the Arbitration and Conciliation Act, 1996. Single
Judge of the High Court rejected both the challenges to               G
the award. As regards interest, it held that in view of the
bar contained in Clause 16(2) of General Conditions of
contract, the contractor was not entitled to it. Division
Bench of the High Court dismissed the writ appeal filed
                               487                                    H
    488      SUPREME COURT REPORTS            [2010] 10 S.C.R.


A   by the contractor and allowed the writ appeal filed by the
    Railways. Therefore, the instant appeals were filed.

       The questions for consideration in the instant appeal
    were:
B       (1) Whether the contract between the parties
    contained an express bar regarding award of interest;
    and

        (2) Whether the arbitral tribunal was justified in
c   refusing interest for the period between the date of cause
    of action to the date of the award.

          Dismissing the appeals, the Court

       HELD: 1. Clause 16(2) of the General Conditions of
D contract governing the contract between the parties in
  terms specifically bars payment of interest on earnest
  money or the security deposit or the amounts payable to
  the contractor under the contract. Claim No.4 (relating to
  erroneous billing) related to a work executed by the
E contractor as a part and parcel of the work contemplated
  under the agreement. Payment directed by the arbitral
  tribunal for such work was also in accordance with the
  Agreement Schedule Item No.19. Therefore it is evident
  that the amount awarded in regard to claim No. (4) was
F an amount payable to the contractor under the contract.
  Consequently, no interest could be paid thereon having
  regard to the bar under Clause 16(2) of the General
  conditions of contract. [Para 5] [492-F-H; 493-A-E]
      2.1 If there is a bar against payment of interest in the
G contract, the arbitrator cannot award any interest for the
  pre-reference period or pendente lite. In view of the
  specific bar under Clause 16(2) of the General Conditions
  of the contract, the arbitral tribunal was justified in
  refusing interest from the date of cause of action to the
H date of awards. [Para 6] [495-E-F]
 SREE KAMATCHI AMMAN CONSTRUCTIONS v. DIVISIONAL 489
         RLY MANAGER (WORKS), PALGHAT

    Sayeed Ahmed and Co. v. State of UP. 2009 (12) SCC          A
26; Union oflndia v. Saraswat Trading Agency 2009 (16)
sec 504, relied on.
     Irrigation Department, Government of Orissa v. G.C. Roy
1992 (1) SCC 508; Executive Engineer, Dhenkanal Minor           B
Irrigation Division v. NC. Budharaj 2001 (2) SCC 721;
Bhagawati Oxygen Ltd. v. Hindustan Copper Ltd. 2005 (6)
SCC 462; State of Rajasthan v. Ferro Concrete Construction
(P) Ltd. 2009 (12) SCC 1, referred to.

     2.2 The appellant will not be entitled to interest C
pendente lite, that is, for the period from the date of
reference to the date of the award. Section 37(1) of the
Arbitration and Conciliation Act, 1996, by using the words
"unless otherwise agreed by the parties" categorically
clarifies that the arbitrator is bound by the terms of the D
contract insofar as the award of interest from the date of
cause of action to the date of the award. Therefore, where
the parties have agreed that no interest shall be payable,
arbitral tribunal cannot award interest between the date
when the cause of action arose and the date of the award. E
[Paras 7 and 10) [495-G-H; 499-8)

     Board of Trustees for the Port of Calcutta v. Engineers-
De-Space-Age1996 (1) SCC 516; Madnani Construction
Corporation Pvt. Ltd. v. Union of India 2010 (1) SCC 549 -
distinguished and held inapplicable.                            F

                     Case Law Reference:
  2009 (12) SCC' 26      relied on.           Para 6
  1992 (1) sec 508       referred to.         Para 6            G
  2001 (2) sec 121       referred to.         Para 6
  2005 (6) sec 462       referred to.         Para 6
  2009 (12) sec 1        referred to.         Para 6            H
    490       SUPREME COURT REPORTS                [2010] 10 S.C.R.


A     2009 (16) sec 504         relied on.            Para 6
      1996 (1) sec 516          distinguished and Para 7
                                held inapplicable.
      2010 (1) SCC 549          distinguished and Para 7
B                               held inapplicable.
        CIVIL APPELLATE JURISDICTION : Civil Appeal No.
    6815-6816 of 2010.

      From the Judgment & Order dated 18.07.2007 of the High
C Court of Judicature at Madras in O.S.A. Nos. 109 and 247 of
  2005.

          Rekha Palli, Anant Vijay Palli for the Appellant.
      Mohan Jain, ASG. Prabhat Kumar, Shweta Verma, Yogita
D Yadav, A.K. Sharma, Anil Katiyar for the Respondents.
          The Judgment of the Court was delivered by
          R.V.RAVEENDRAN, J. 1. Leave granted.

E      2. The first respondent entrusted certain construction work
  to the appellant under a contract in the year 1995. Alleging
  breach by the first respondent (for short 'Railways') the appellant
  invoked the arbitration Clause and the disputes were referred
  to an arbitral tribunal of which respondents 2 to 4 are the
  members. The arbitral tribunal made a non-speaking award
F dated 14.5.1999 in favour of the appellant. The High Court by
  order dated 9.1.2001 set aside the said award and remitted
  the matter to the arbitral tribunal with a direction to make ·a
  reasoned award after fresh consideration. The arbitral tribunal
  accordingly passed an award dated 5.12.2001 awarding
G certain amounts with a direction that the award amount should
  be paid to the appellant by 4.1.2002 and if it failed to do so,
  the appellant will be entitled to simple interest at 10% per annum
  on the amounts awarded from 5.12002 till date of payment.
  That is, the arbitral tribunal awarded only future interest and
H refused to award the interest for pre-reference period and
SREE KAMATCHI AMMAN CONSTRUCTIONS v. DIVISIONAL 491
RLY MANAGER (WORKS), PALGHAT [RV RAVEENDRAN, J.]

 interest pendente lite. It may be mentioned that the award           A
rejected two of the claims of the appellants and rejected all the
claims of the Railways.

      3. Feeling aggrieved by the award, the Railways filed a
petition under section 34 of the Arbitration and Conciliation Act,
                                                                      B
1996 ('Act' for short). Aggrieved by the rejection of its claims
1 and 2 and the failure to award interest for the pre-reference
period and pendente lite, the appellant also filed a petition
under section 34 of the Act. A learned Single Judge of the High
Court rejected both the challenges to the award. Insofar as
interest is concerned, the learned Single Judge held that having      C
regard to the bar contained in Clause 16(2) of the General
Conditions of Contract, the contractor was not entitled to it.
Again both Railways and the appellant filed appeals against
the order of the learned Single Judge. The Division Bench· of
the Madras High Court by the impugned judgment dated                  D
18.7.2007 dismissed the appeal by the appellant- contractor.
It allowed the Railways appeal and set aside the award made
on claim No.3 (damages for idle labour) and claim No.5
(damages for overstay). As a result what remained was award
of Rs.38,92,455/- under claim No. (4) (erroneous billing with         E
reference to unit of measurement/unit rate of payment for the
work covered under the optional item No. 19 of Schedule of
Work) and award of Rs.94, 100 (refund of security deposit)
under claim 6 with interest at 10% per annum from 5.1.2002
till date of payment. The appellant has challenged the said           F
common judgment in these appeals. This court on 7.7.2008
granted leave only in regard to the non-award of interest
pendente lite and for pre-reference period. This court refused
to interfere with the decision of the division bench, setting aside
the award insofar as claim Nos. 3 and 5.                              G
     4. The appellant urged the following contentions : (i) Clause
16(2) of the General conditions of contract did not prohibit or
prevent arbitrator to direct payment of interest; and therefore
the.award insofar as it denied interest for pre-reference period
and pendente lite by relying upon Clause 16(2) was liable to          H
    492       SUPREME COURT REPORTS                  [2010] 10 S.C.R.


A   be interfered with. (ii) As the arbitrators had recorded a clear
    finding that the delay in completion of the work was occasioned
    due to reasons attributable to Railways and not on account of
    the appellants, the appellant cannot be denied interest for pre-
    reference period and pendente lite. On the other hand Railways
s   contended that the contract contained a specific bar against
    award of interest on any amount payable to the contractor under
    the contract or upon the earnest money or security deposit and
    therefore the arbitral tribunal was barred from awarding interest
    for the said periods under section 31 (?)(a) of the Act. It was
c   further submitted that if the contract between the parties barred
    payment of interest, arbitral tribunal cannot award interest for
    the period between the date on which the cause of action arose
    and the date on which the award was made and therefore the
    arbitral tribunal had rightly not awarded the interest for the same
    period. On the aforesaid contentions the following questions
0
    arise for consideration :

                 (i)    whether the contract between the parties
                        contains an express bar regarding award of
                        interest?
E
                 (ii)   If so whether the arbitral tribunal was justified
                        in refusing interest for the period between the
                        date of cause of action to date of award?

    Re : Point (i)
F
         5. Clause 16(2) of the General Conditions of contract
    governing the contract between the parties bars payment of
    interest and the same is extracted below :

          "16(2). No interest will be payable upon the earnest
G         money or the security deposit or amounts payable to the
          Contractor under the Contract, but Government Securities
          deposit in terms of sub-Clause (1) of this Clause will be
          repayable (with) interest accrued thereon".

H                                                 (emphasis supplied)
 SREE KAMATCHI AMMAN CONSTRUCTIONS v. DIVISIONAL 493
RLY. MANAGER (WORKS), PALGHAT [RV RAVEENDRAN, J.]
The two claims on which amounts are awarded are with                  A
reference to claim No. (4) relating to erroneous billing and claim
No. (6) relating to security deposit. Clause 16(2) in terms
specifically bars payment of interest on security deposit. Insofar
as claim No. (4) is concerned, the question is whether the
amount awarded is an "amount payable to the contractor under          B
the contract". Learned counsel for the appellant made a faint
attempt to contend that the award relating to claim No. (4) was
not in regard to an amount payable to the contractor under the
contract. This contention has absolutely no merit as the award
itself categorically recorded a finding that under item No.19 "the    c
actual quantity executed by the claimant at the orders of the
respondent very much becomes a part and parcel of the original
agreement quantity". What was awarded for the "rate per metre
of rails to be led to SLY Yard and stacked vide Agreement
Schedule Item No. 19" at the rate of Rs.225 per metre. Thus
                                                                      0
claim No.4 related to a work executed by the contractor as a
part and parcel of the work contemplated under the agreement.
Payment directed qy the arbitral tribunal for such work was also
in accordance with the Agreement Schedule Item No.19.
Therefore it is evident that the amount awarded in regard to          E
claim No. (4) was an amount payable to the contractor under
the contract. Consequently no interest could be paid thereon
having regard to the bar under Clause 16(2) of the General
conditions of contract.

Re : Point (ii)                                                       F
     6. This court had occasion to consider the jurisdiction and
authority of the arbitrator to award interest under the Arbitration
Act, 1940 and under the new Act in Sayeed Ahmed & Co. v.
State of UP. [2009 (12) SCC 26]. Relying upon the earlier
decisions of this court in Irrigation Department, Government          G
of Orissa v. G C Roy [1992 (1) SCC 508], Executive Engineer,
Dhenkanal Minor Irrigation Division v. N C Budharaj [2001
(2) SCC 721] and Bhagawati Oxygen Ltd. v. Hindustan
Copper Ltd. [2005 (6) SCC 462] and State of Rajasthan v.
Ferro Concrete Construction (P) Ltd. [2009 (12) SCC 1], this          H
    494       SUPREME COURT REPORTS                [2010] 10 S.C.R.


A   court held that the arbitrator had the jurisdiction and authority
    to award interest for three distinct periods namely, the pre-
    reference period (which referred to the period between date
    of cause of action to date of reference), pendente lite (which
    referred to the period between date of reference to date of
B   award) and future period (which referred to the period between
    the date of award to date of payment) if there was no express
    bar in the contract regarding award of interest. This court then
    noticed the change under the new Act as follows :

          "13. The Legislature while enacting the Arbitration and
c         Conciliation Act, 1996, incorporated a specific provision
          in regard to award of interest by Arbitrators. Sub-section
          (7) of Section 31 of the Act deals with the Arbitrator's
          power to award interest. Clause (a) relates to the period
          between the date on which the cause of action arose and
D         the date on which the award is made. Clause (b) relates
          to the period from the date of award to date of payment.
          The said Sub-section (7) is extracted below:

          "31. 7(a) Unless otherwise agreed by the parties, where
          and in so far as an arbitral award is for the payment of
E
          money, the arbitral tribunal may include in the sum for which
          the award is made interest, at such rate as it deems
          reasonable, on the whole or ~ny part of the money, for the
          whole or any part of the period between the date on which
          the cause of action arose and the date on which the award
F         is made.

          (b) A sum directed to be paid by an arbitral award shall,
          unless the award otherwise. directs, carry interest at the
          rate of eighteen per centum per annum from the date of
G         the award to the date of payment."

          Having regard to sub-section (7) of Section 31 of the Act,
          the difference between pre-reference period and pendente
          lite period has disappeared in so far as award of interest
          by arbitrator. The said section recognises only two periods
H         and makes the following provisions:
SREE KAMATCHI AMMAN CONSTRUCTIONS v. DIVISIONAL 495
RLY MANAGER (WORKS), PALGHAT [R.V. RAVEENDRAN, J.]

     (a) In regard to the period between the date on which the         A
     cause of action arose and the date on which the award is
     made (pre-reference period plus pendente lite), the arbitral
     tribunal may award interest at such rate as it deems
     reasonable, for the whole or any part of the period, unless
     otherwise agreed by the parties.                                  B

     (b) For the period from the date of award to the date of
     payment the interest shall be 18% per annum if no specific
     order is made in regard to interest. The arbitrator may
     however award interest at a different rate for the period
     between the date of award and date of payment.                    C

     14. The decisions of this Court with reference to the
     awards under the old Arbitration Act making a distinction
     between the pre-reference period and pendente lite period
     and the observation therein that arbitrator has the               D
     discretion to award interest during pendente lite period
     inspite of any bar against interest contained in the contract
     between the parties are not applicable to arbitrations
     governed by the Arbitration and Conciliation Act 1996."

 We may also refer to the decision of this court in Union of India     E
 v. Saraswat Trading Agency [2009 (16~SCC 504] this court
 reiterated that if there is a bar against/Payment of interest in
 the contract, the arbitrator cannot award any interest for the prec
 reference period or pendente lite. In view of the ·specific bar
 under Clause 16(2), we are of the view that the arbitral tribunal     F
 was justified in refusing interest from the date of cause of action
 to date of awards.

        7. We may at this juncture refer to the contention of the
  appellant that even if the appellant was not entitled to interest    G
  for the pre-reference period, that ;is date of cause of action to
· date of reference, the appellant will be entitled to interest
  pendente lite, that is for the period from the date of reference
  to date of award, having regard to the decisions of this court
  in Board of Trustees for the Port of Calcutta v. Engineers-De-
                                                                       H
    496       SUPREME COURT REPORTS                  [2010] 10 S.C.R.


A   Space-Age [1996 (1) SCC 516] and Madnani Construction
    Corporation Pvt. Ltd. v. Union of India [2010 (1) SCC 549].
          8. In Engineers-De-Space-Age (supra) this court held :

          "4.    We are not dealing with a case in regard to award
B         of interest for the period prior to the reference. We are
          dealing with a case in regard to award of interest by the
          arbitrator post reference. The short question, therefore, is
          whether in view of Sub-Clause (g) of Clause 13 of the
          contract extracted earlier the arbitrator was prohibited from
c         granting interest under the contract. Now the term in Sub-
          Clause (g) merely prohibits the Commissioner from
          entertaining any claim for interest and does not prohibit the
          arbitrator from awarding interest. The opening words 'no
          claim for interest will be entertained by the Commissioner"
D         clearly establishes that the intention was to prohibit the
          Commissioner from granting interest on account of
          delayed payment to the contractor. Clause has to be strictly
          construed for the simple reason that as pointed out by the
          Constitution Bench, ordinarily, a person who has a
E         legitimate claim is entitled to payment within a reasonable
          time and if the payment has been delayed beyond
          reasonable time he can legitimately claim to be
          compensated for that delay whatever nomenclature one
          may give to his claim in that behalf. If that be so, we would
          be justified in placing a strict construction on the term of
F
          the contract on which reliance has been placed. Strictly
          construed the terms of the contract merely prohibits the
          Commissioner from paying interest to the contractor for
          delayed payment but once the matter goes to arbitration
          the discretion of the arbitrator is not, in any manner, stifled
G         by this term of the contract and the arbitrator would be
          entitled to consider the question of grant of interest
          pendente lite and award interest if he finds the claim to
          be justified. We are, therefore, of the opinion that under
          the Clause of the contract the arbitrator was in no manner
H         prohibited from awarding interest pendente lite.
 SREE KAMATCHI AMMAN CONSTRUCTIONS v. DIVISIONAL 497
RLY. MANAGER (WORKS), PALGHAT [RV. RAVEENDRAN, J.]

In Madnani i(supra) the arbitrator had awarded interest               A
pendente lite, that is from the date of appointment of arbitrator
to date of award. The High Court had interfered with the same
on the ground that there was a specific prohibition in the contract
regarding awarding of interest. This court following the decision
in Engineers-De-Space-Age reversed the said rejection and             B
held as follows :

     "39. In the instant case also the relevant Clauses, which
     have been quoted above, namely, Clause 16(2) of GCC
     and Clause 30 of SCC do not contain any prohibition on
     the arbitrator to grant interest. Therefore, the High Court      C
     was not right in interfering with the arbitrator's aw~rd on
     the matter of interest on the basis of the aforesaid Clauses.
     We, therefore, on a strict construction of those Clauses and
     relying on the ratio in Engineers find that the said Clauses
     do not impose any bar on the arbitrator in granting              D
     interest."

     9. At the outset it should be noticed that Engineers-De-
Space-Age and Madnani arose under the old Arbitration Act,
1940 which did not contain a provision similar to section 31 (7)      E
of the new Act. This court, in Sayeed Ahmed held that the
decisions rendered under the old Act may not be of assistance
to decide the validity of grant of interest under the new Act. The
logic in Engineers-De-Space-Age was that while the contract
governed the interest from the date of cause of action to date
                                                                      F
of reference, the arbitrator had the discretion to decide the rate
of interest from the date of reference to date of award and he
was not bound by any prohibition regarding interest contained
in the contract, insofar as pendente lite period is concerned.
This Court in Sayeed Ahmed (supra) held that the decision in          G
Engineers-De-Space-Age would not apply to cases arising
under the new Act. We extract below, the relevant portion from
Sayeed Ahmed:

     "23. The observation in Engineers-De-Space-Age
     (supra) that the term of the contract merely prohibits the       H
    498       SUPREME COURT REPORTS                [2010] 10 S.C.R.


A         departmenUemployer from paying interest to the contractor
          for delayed payment but once the matter goes to arbitrator,
          the discretion of the arbitrator is not in any manner stifled
          by the terms of the contract and the arbitrator will be
          entitled to consider and grant the interest pendente lite,
B         cannot be used to support an outlandish argument that bar
          on the Government or department paying interest is not a
          bar on the arbitrator awarding interest. Whether the
          provision in .the contract bars the employer from
          entertaining any claim for interest or bars the contractor
c         from making any claim for interest, it amounts to a clear
          prohibition regarding interest. The provision need not
          contain another bar prohibiting Arbitrator from awarding
          interest. The observations made in the context of interest
          pendente lite cannot be used out of contract.
D         24. The learned Counsel for appellant next contended on
          the basis of the above observations in Engineers-De-
          Space-Age, that even if Clause G-1.09 is held to bar
          interest in the pre-reference period, it should be held not
          to apply to the pendente lite period that is from 14.3.1997
E         to 31. 7 .2001. He contended that the award of interest
          during the pendency of the reference was within the
          discretion of the arbitrator and therefore, the award of
          interest for that period could not have been interfered by
          the High Court. In view of the Constitution Bench decisions
F         in G.C. Roy and N.C. Budharaj (supra) rendered before
          and after the decision in Engineers-De-Space-Age, it is
          doubtful whether the observation in Engineers-De-Space-
          Age in a case arising under Arbitration Act, 1940 that
          Arbitrator could award interest pendente lite, ignoring the
G         express bar in the contract, is good law. But that need not
          be considered further as this is a case under the new Act
          where there is a specific provision regarding award of
          interest by Arbitrator."

          The same reasoning applies to the decision in Madnani
H         also as that also relates to a case of under the old Act and
SREE KAMATCHI AMMAN CONSTRUCTIONS v. DIVISIONAL 499
RLY MANAGER (WORKS), PALGHAT [RV RAVEENDRAN, J.]

    did not independently consider the issue but merely relied       A
    upon the decision in Engineers-De-Space-Age.

     10. Section 37(1) of the new Act by using the words
"unless otherwise agreed by the parties" categorically clarifies
that the arbitrator is bound by the terms of the contract insofar
                                                                     B
as the award of interest from the date of cause of action to
date of award. Therefore where the parties had agreed that no
interest shall be payable, arbitral tribunal cannot award interest
between the date when the cause of action arose to date of
award.
                                                                     c
      11. We are of the view that the decisions in Engineers-
De-Space-Age and Madnani are inapplicable for yet another
reason. In Engineers-De-Space-Age and Madnani the
arbitrator had awarded interest for the pendente lite period.
This court upheld the award of such interest under the old Act       D
on the ground that the arbitrator had the discretion to decide
whether interest should be awa'rded or not during the pendente
lite period and he was not bound by the contractual terms
insofar as the interest for the pendente lite period. But in this
case the arbitral tribunal has refused to award interest for the     E
pendente lite period. Where the arbitral tribunal has exercised
its discretion and refused award of interest for the period
pendente lite, even if the principles in those two cases were
applicable, the award of the arbitrator could not be interfered
with. On this ground also the decisions in Engineers-De-Space-
                                                                     F
Age and Madnani are inapplicable. Be that as it may.

    12. For the aforesaid reasons, we find no merit in these
appeals and they are dismissed. Parties to bear their
respective costs.
                                                                     G
K.K.T                                      Appeals dismissed.