Holding

An arbitrator’s award is not invalid for lack of reasons unless the agreement requires them; the arbitrator lacked jurisdiction to award interest before the Interest Act, 1978, and the interest portion is severable, allowing the award to be partially upheld.

Summary

The State of Orissa contracted Niranjan Swain for construction of an earth dam and a dispute over the balance payment, security deposit and interest was referred to an arbitrator under the contract’s arbitration clause. The arbitrator awarded a lump‑sum of Rs 21,11,835 inclusive of interest, which the trial court made a rule of court and passed a decree with interest at 6% from the date of decree. On appeal the State argued that the award was invalid because the arbitrator gave no reasons, that he had no jurisdiction to award interest before the Interest Act, 1978 came into force, and that the award could not be severed; it also contested the High Court’s refusal to call the arbitrator as a witness. The Supreme Court held that lack of reasons does not invalidate an award unless the arbitration agreement requires them, that an arbitrator could not award interest for periods before the Interest Act, 1978, and that the interest component was severable from the principal sum. Consequently the Court modified the decree, retaining only Rs 8,45,963 as the valid award and directing interest at 6% from the decree date, thereby partly allowing the appeal.

Issues considered

The absence of reasons in an arbitrator’s award renders it invalid?
Whether an arbitrator could award interest up to the date of award before the commencement of the Interest Act, 1978
Whether the interest portion of the award can be severed from the principal sum
Whether a court may call an arbitrator as a competent witness

Legislation cited

Arbitration Act, 1940s. 20, s. 21, s. 34
Interest Act, 1978

Subjects

ArbitrationAward validitySeverabilityInterest awardArbitrator as witnessArbitration Act 1940Interest Act 1978

Judgment

). STATE OF ORISSA
A
v.
NIRANJAN SWAIN
"---~

AUGUST 10, 1989

'--( [L.M. SHARMA AND J.S. VERMA, JJ;] B
Arbitration Act, 1940: Award-Absence of retisons~Whether
affects validity-Valid and invalid part_:_Severability and effect of~
;-!, Arbitrator-A competent witness-Court to exercise power ·of calling

. \.;,,.,..
him as witness cautiously. · ··

c
} Interest Act, 1978: Arbitration-Reference before the cClmmefi~,
ment of Act-Arbitrator-Whether empowered to grant interest upio th.e

-·
,;r·
date of submission or pendente lite upto the date of award.

The respondent was awarded a contract for construction of Eanii
Dam by. the appellant-State of Orissa. His dispute reliltfug fO the ti
remaining claim for payment was referred to an arbitrat<ir for adjudi-
cBtion. Before the arbitrator the respondent claimed (i) the balance
amount due to him; (ii) his security deposit with the appellant; and (iii)
~ interest, on the ·balance amount due and security deposit, up to the date
of award. On 2.12.1980 the arbitrator gave a lump-sum award in
favour of the respondent inclusive ofinterest upto the date of award, E
The Trial Court made the award a rule of the Court and accord-
ingty passed a decree__ in_ favour of th~i>C!.nilc"'!h roi: the amount
awarded together with interest at the rate of six per cent from the date
of decree. The appeal filed by the State was dlsinis~d by the High
>t- Court. F
In this appeal it was contended on behalf of the State that the
award was invalid because; (i) the arbitrator gave no reasons; (ii) no
interest could be awarded by the arbitrator npto the date of award, and
the award being inclusive of interest was not se_yerable. It was also
contended that the High Court was wrong in assuming that the Trial G
Court was correct in refusing to call the arbitrator for being exainiiled.

Allowing the appeal partly,

HELD: I. The absence of reasons in the award does not by itself
result in its invaliditL except where the giving of reasons by the. H
821

••
822 SUPREME COURT REPORTS [1989] 3 S.C.R.

A arbitrator for the award is the requirement of the arbitration agree-
ment or the deed of submission or an order made by the Court or
statute governing the arbitration. [823G-H]

Raipur Development Authority & Ors. v. M/s Chokhamal Con-
tractors and Ors., [1989] 2 S.C.C. 721, applied.
E
2. Even though an arbitrator is a competent witness, the Court
must exercise the power of calling him as a witness cautiously and
sparingly and not in a routine manner. When the Court is requested to
call the arbitrator for examination as a witness it must be shown that ....
there is some cogent ground for his examination within the permissible -j.(
limits. [826D] ·
c
~
In the instant case, nothing has been shown to indicate that it was '
at all necessary to call the arbitrator as a witness to depose on any matter .._
which could legitimately be examined by the Court in the proceedings.
The High Court was, therefore, justified in refusing to call the arbi-
D trator for examination. [826E]

State of Orissa v. D.C. Routray, A.I.R. 1983 Orissa 163,
approved.

3. In cases wherein the reference to arbitrator was made prior to
E the commencement of the Interest Act, 1978, on August 19, 1981 the
arbitrator is not empowered to grant interest for the period either
before the commencement of the proceedings or during the pendency of
the arbitration.

In the instant case, the reference to arbitrator was made and even
F the award was given prior to the commencement of the Interest Act,
1978. Therefore, the arbitrator had no jurisdiction to grant any amount
as· interest for any period either up to the date ofsubmission of the claim
before him or pendente lite upto the date of the award. [827F-G]

Executive Engineer (Irrigation), Balimela & Ors. v. Abhaduta
G Jena & Ors., [1988] 1sec418, applied.

Gujarat Water Supply and Sewerage Board v. Unique Erectors
(Gujarat) (P) Ltd. &Anr., [1989] 1 SCCS32, held inapplicable.

4. In the instant case, the inclusion of the amount of interest in
H the lumpsum award by the arbitrator does not render the whole award
. ii

STATE OF ORISSA v. NIRANJAN SWAIN [VERMA, J.] 823

J invalid since it is possible to sever the invalid part relating to interest.
The balance amount of award remaining after deduction of interest
A
would not be tainted with any invalidity, and it would be just and
proper to sustain the award to this extent only. The decree is, therefore,
_,v modified to this extent. [828E-F; 829C]
•
'
-1 CIVIL APPELLATE JURISDICTION: Civil Appeal No. 3297
of 1981.
B

From the Judgment and Order dated 17.8.1981 of the Orissa
~: High Court in Misc. Appeal No. 145 of 1981.
~ R.K. Mehta for the Appellant.
c

!');
>
'
A.K. Sen, Arnn Madan, R.K. Sahoo and J.D.B. Raju for the
Respondent.

The Judgment of the Court was delivered by
D
VERMA, J. This appeal by special leave under Article 136 of the
Constitution challenges the judgment dated 17.8.1981 of the High
Court of Orissa dismissing Misc. Appeal No. 145 of 1981 against the
judgment dated February 28, 1981 passed by the Subordinate Judge,
--{ Baripada, District Mayurbhanj in Title Suit No. 106 ~f 1980 by which
the arbitrator's award for a sum of Rs.21, 11,835.00 .in favour of the E
plaintiff-respondent, Niranjan Swain, was made a ruldo·f the court and
, a decree was passed for that amount together-with interest at the rate
of six per cent per annum from the date of the decree.
,,
The main ground. taken in this appeal was that the arbitrator's
·--+-- award was per se invalid since it gave no reasons. Some other points F
were raised to which we shall advert later. The question of invalidity of
J, an arbitrator's award merely on the ground that it gave no reasons was
involved for decision in a large number of matters pending in this
Court and in view of the importance of this common question the
~ bunch of cases was heard and decided by the Constitution Bench in
Raipur Development Authority and others v. Mis Chokhamal Con- G
tractors and others, [1989] 2 SCC 721. The Constitution Bench has held
j that the absence of reasons in the award does not by itself result in its
invalidity except where the giving of reasons by the arbitrator for the
\
award is the requirement' of the arbitration agreement or the deed of
submission or an order made by· the Court or statute governing the
arbitration. Accordingly, this contention raised)n the present appeal H
824 SUPREME COURT REPORTS [1989] 3 S.C.R.

A and all other similar matters was rejected by the Constitution Bench A
with a direction that all such cases should go back to the Division
Bench for disposal in accordance with law on the remaining points
surviving therein for decision. This 'is how the present appeal has come
before us.

B The conclusion reached by the Constitution Bench in the above ).
case and the direction given therein is as under:

"Having given our careful and anxious consideration to the
contentions urged by the parties we feel that law should be
allowed to remain as it is until the competent legislature
c amends the law. In the result we hold that an award passed
under the Arbitration Act is not liable to be remitted or set
"'' '
aside merely on the ground that no reasons have been given
in its support except where the arbitration agreement or
the deed of submission or an order made by the.court such
....
as the one under Section 20 or Section 21 or Section 34 of
D the Act or the statute governing the arbitration requires
that the arbitrator or the umpire should give reasonsJor the
award. These cases will now go back ti> the Division Bench
for disposal in accordance with law and the view expressed
by us in this decision."

E The only points now urged by Shri G .L. Sanghi, learned counsel
for the appellant, are two, namely, (1) no interest could be awarded by
the arbitrator in the present case upto the date of the award but the
same is obviously included in the lumpsum award of Rs.21,11,835.00;
and the invalid part of the award not being severable from the rest, the
entire award must be set aside; and (2) the High Court in its cryptic
F order has wrongly assumed as correct the trial court's refusal to call the
arbitrator for being examined in the court. The learned counsel con-
tended that any one of these defects was sufficient to set aside the
entire award.

In reply Shri Arun Madan, learned counsel for the respondent,
G primarily contended that the arbitrator was empowered to award
interest upto the date of award. In the alternative, learned counsel for
the respondent contended that the invalid part of the award relating to
grant of interest upto the date of the award was severable and, there-
fore, only that part should be set aside instead of setting aside the
whole··award. He also contended that the High Court did not make any
H wrong assumption and refusal to call the arbitrator for examination
STATE OF ORISSA v. NIRANJAN SWAIN (VERMA, J.] 825

was justified. It was also urged that in the present case there was A
nothing to indicate that calling the arbitrator for examination in the
court was at all necessary.

Before proceeding to consider the surviving points now urged on
behalf of the appellant we may refer briefly- to tlie few facts which
alone are relevant at this stage. The contract for the work "Construc- B
tion of Earth Dam (balance work) of Sansiali Nai M.I. Project" in
Division Mayurbhanj, Baripada, was given by the appellant, State of
Orissa, to respondent, Niranjan Swain and the agreement between the
parties contained an arbitration clause for adjudication of disputes
arising out of the contract. Consequently, the dispute relating to the ..-1
remaining claim for payment made 'by the respondent was referred for
adjudication to the arbitrator in terms of the arbitration claus~ con-
c
tained in the agreement. The respondent's claim before the arbitrator
was.for the amount of Rs.19,04,689.00 as the balance amount due to
him and for return of the security deposit of Rs.28,000.00 or in all the
total of Rs.19,32,689.00 as the principal amount. The respondent also
claimed interest on the sum of Rs.19,04,689.00 at the rate of 18.per D
cent per annum from 15.4.1977 to 15.5.1978, namely, the date of suo-
miSsion of the statement of claim before the arbitrator amounting to
Rs.3,71,414.00 and interest on the security deposit of Rs.28,000.00 at·
the same rate from 15.9.1977 to 15.5.1978 amounting to Rs.3,360.00.
The respondent further claimed interest at the rate of 18% per annum
from 16.5.1978 till payment of the amount to the respondent by the· E
appellant. In the statement of claim the total amount claimed_ was
..... mentioned at Rs.23,07,463.00 together with interest @ 18% per
annum on Rs.19,32,689.00 from 16.5.1978 to the date of the .award.
The appellant denied the respondent's claim including the Claim for
payment of interest. ·
F
The arbitrator gave the award dated 2.12. 1980 as under:

"AWARD

After perusal of the claim statements and counter state-
ments, the counter claim of. the respondent, the rejoinder G
of the claimant, the documentary and oral evidence and on
)· a careful consideration of the submissions and arguments
of the parties and the. IR advocate, I have come to the
conclusion that the claimant is entitled to get a sum of
Rs.21,11,835.00 (Rupees twenty-one lakhs eleven thous-
and eight hundred thirty-five only) in full and final satisfac- H
826 SUPREME COURT REPORTS [1989] 3 S.C.R.

A tion of his claims till the date of the award from the respon-
dent. The respondent is not entitled to get any amount
towards his counter claim from the claimant.

sd/-
B.S. Patnaik
B Arbitrator
2/ 12/ 1980"
(emphasis supplied)

It is on the basis of the contents of this award that the above
',....__ ~
contentions have to be considered and decided.
'
c · We may dispose of the second point urged by learned counsel for ~'
the appellant straightaway since it does not merit any elaborate consi- I
deration. The argument of the learned counsel for the appellant relat-
ing to calling the arbitrator for examination as a witness in the court
was based on the decision of the Orissa High Court in State of Orissa v.
D D. C. Routray, AIR 1983 Orissa 163. That decision itself says that even
though an arbitrator is a competent witness, the court must exercise
the power of calling him as a witness cautiously and sparingly and not
in a routine manner. It is obvious that when the court is requested to
call the arbitrator for examination as a witness it must be shown that >-
there is some cogent ground for his examination within the permissible
E limits. Nothing has been shown in the present case to indicate that it
was at all necessary to call the arbitrator as a witness to depose on any
matter which could legitimately be examined by the court in the pro-
ceedings. This alone is sufficient to justify the view taken by the High
Court. This contention of learned counsel for the appellant is, there-
-
fore, rejected. ~+..--.
F '
The only point surviving for consideration now relates to the
grant of interest by the arbitrator and its effect on the validity of the
award. It is obvious from the contents of the award and the details of
the respondent's claim before the arbitrator that a lumpsum amount of
Rs.21, 11,835.00 awarded in the respondent's favour by the arbitrator
G was in full and final satisfaction of all the respondent's claims before
the arbitrator till the date of the award. As mentioned earlier, the
respondent's claim before the arbitrator mentioned the sum of
Rs.19,04,689.00 plus the security deposit of Rs.28,000.00 or in all
""
Rs. 19,32,689.00 only as the total principal amount of the claim and the
sum claimed in excess thereof was on account of interest. The grant of
H a lumpsum amount of Rs.21, 11,835.00 in the award in full and final
STATE OF ORISSA v. NIRANJAN SWAIN [VERMA, J.] '827

J, satisfaction of all the claims till the date of the award must, therefore,
obviously include interest also. It is equally plain that the claim for the
A
entire principal amount was not accepted by the arbitrator. The effect
on the question of validity of the award has to be decided on this basis.

It is settled by the decision of this Court in Exe,cutive Engineer
~ (Irrigation), Balimela and others v. Abhaduta Jena and others, [1988] l
sec 418 that in cases wherein the reference to arbitration was made
B

prior to the commencement of the Interest Act, 1978, on August 19,
1981, the arbitrator is not empowered to grant interest for the period
~
either before the commencement, of the proceedings or during the
~- pendency of the arbitration. This is clear from the position sum-
marized inAbhadutaJena's case (supra), as under:
c
> "In the remaining cases which arose before the commence-
men! 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 arbitra-
tion. They are not entitled to claim interest for the period D
prior to the commencement of the arbitration proceedings
for the reason that the Interest Act, 1939, does not apply to
their cases and there is no agreement to pay interest or any
-~ usage or trade having the force of law or any other provi-
sion of law under which the claimants were entitled to
recover interest. They are not entitled to claim pendente E
lite interest as the arbitrator is not a court nor were the

- reference to arbitration made in suits."

The learned counsel for the respondent placed reliance on the

---t·
\
decision of this Court in Gujarat Water Supply and Severage Board v.
Unique Erectors (Gujarat) (P) Ltd. and another, [1989] 1 SCC 532 in F
support of his primary contention that the arbitrator was empowered
r\ to grant interest upto the date of award. We are unable to construe this
! judgment in the manner suggested by learned counsel for the respon-
I dent. The decision clearly refers to Abhadu.ta Jena's case (supra) and
also follows it. The primary contention of the learned counsel for the
respondent that the award does not suffer from any infirmity by grant G
of interest therein upto the date of award is, therefore, rejected.
;
It cannot, therefore, be disputed that in the present case wherein
., the reference to arbitration was made and even the award was given
prior to the commencement of the Interest Act, 1978, on August 19,
,,
\
1981, the arbitrator had no jurisdiction to grant any amount as interest H

\ c.,,_,
\.-
828 SUPREME COURT REPORTS [1989] 3 S.C.R.

A
for any period either upto the date of submission of the claim before .~
him or pendente lite upto the date of the award.

From the above, it follows that inclusion of the amount of
interest in the lumpsum award of Rs.21,11,835.00 by the arbitrator
does render that part of the award invalid.
B
The question now is of the consequence of this invalidity on the
entire award. The learned counsel for the appellant contended that the
invalid part of the award not being severable from the rest the entire .__
award must be set aside. On the other hand, the learned counsel for i;
the respondent urged that there is no difficulty in separating the ' .
invalid part from the rest and this could easily be done by deducting
c from the total sum of Rs.21, 11,835.00 granted in the award, the
mai<imum interest calculated at the rate of 18% per annum which was
~-
claimed by the respondent before the arbitrator upto the date of the
award (2.12.1980). He urged that such a view cannot, in any manner,
prejudice the appellant and if at all it can work only to the detriment of
D the respondent who make this suggestion.

In our opinion it is possible in the present case to sever the
invalid part relating to interest in order to sustain the valid part of
award. Accordingly, we requested both sides to calculate the total
amount of interest and give to us the agreed figure. The agreed figure
E of Rs.12,65,871.97 has been given by them as the maximum amount of
interest which could be included in the award of Rs.21,11,835.00, in
accordance with the respondent's claim before the arbitrator. It is
common ground that the invalid part of the award on the basis of grant
of interest by the arbitrator cannot exceed the amount of
-
Rs.12,65,871.97 out of the total Sum of Rs.21, 11,835.00. It is also not dis-
F puted that the balance amount remaining after deduction of
Rs.12,65,871.97 cannot be tainted with any invalidity. The learned
counsel for the respondent has confined the respondent's claim in the
alternative to upholding of the award only in respect of this baiance
amount and no more.

G We do not see any reason why the award should not be modified
and sustained to this extent only. We are conscious of the fact that the
interest amount of Rs.12,65,871.97 so calculated for deduction from
the total amount of Rs.21, 11,835.00 granted in the award is in excess of
the interest calculated on the remaining balance treated as principal
amount at this stage on the above suggestion. However, in the peculiar
H circumstances of this case and in view of the alternative contention on

l
ii
STATE OF ORISSA v. NIRANJAN SWAIN [VERMA, J.] 829

J. behalf of the respondent, we see no reason for rejecting, in the present
case, this alternative contention also. Viewed in this manner, the
A

balance amount of the award would not be tainted with any invalidity
and, therefore, it would also be just and proper to sustain the award to
this extent only. We, therefore, reject the cotention of learned counsel
for the appellant that the entire award should be set aside and instead
accept the alternative contention of learned counsel for the res- B
pondent.

In view of the above, the agreed amount of interest upto the date
of the award (2.12.1980), that is, Rs.12,65,871.97 is deducted from the
amount of Rs.21, 11,835.00 leaving the balance amount of
' ~s.8,45,963.03 say Rs.8,45,963.00. This amount of Rs.8,45,963,00 c
> ~urvives as the valid part of the award and, therefore, the decr~e of the
.courts below is modified to this extent so that the decree in favour of
the respondent now remains for the sum of Rs.8,45,963.00 only
together with interest thereon at the rate of 6% per annum from the
date of the decree passed by the trial court until payment. In view of
the partial success of both sides, the parties shall bear their own costs D
throughout. The appeal is partly allowed in this manner.

We are informed that the respondent has withdrawn a certain
amount against the decree during the pendency of this appeal. We
direct that the amount due to the respondent shall be calculated on the
basis of this modified decree. In case, the amount obtained by the E
respondent is less than the amount to which the respondent is found
entitled as a result of this modified decree, the remaining amount shall
be p-aid to the respondent with interest @ 12% per annum from
8.12.1981 in terms of the interim order of that date passed in this
appeal; and in case, the amount obtained by the respondent is in
excess of that to which he is found entitled, the excess amount shall be F
refunded by the respondent to the appellant similarly with interest at
the same rate of 12% per annum from 8.12.1981 upto the date of its
refund. ·

T.N.A. Appeal allowed partly.
G