Holding

The arbitrator lacked jurisdiction to award escalation charges, but could award pendente lite interest, and the award of pre‑reference interest is enforceable subject to a bank guarantee and undertaking.

Summary

The State of Orissa appealed a decree based on an arbitration award made against the estate of the late Sudhakar Das. The arbitration agreement lacked an escalation clause, and the arbitrator had awarded escalation charges, pendente‑lite interest, and interest for the pre‑reference period. The Supreme Court held that, in the absence of an escalation clause, the arbitrator had no jurisdiction to award escalation charges, rendering that part of the award unsustainable. It affirmed the award of pendente‑lite interest, relying on Secretary, Irrigation Department v. G.C. Roy. Regarding pre‑reference interest, the Court allowed execution of the decree conditioned on the respondents furnishing a bank guarantee and an undertaking that the State could encash the guarantee if a Constitution Bench later decided against the respondents. Consequently, the appeal was dismissed and the decree was modified accordingly.

Issues considered

Whether the arbitrator could award escalation charges in the absence of an escalation clause in the arbitration agreement
Whether the arbitrator could award pendente lite interest in favour of the contractor
Whether the arbitrator could award interest for the pre‑reference period

Subjects

ArbitrationEscalation clausePendente lite interestPre‑reference interestBank guaranteeSupreme CourtAppeal

Judgment

A

A STATE OF ORISSA
v.
SUDHAKAR DAS (DEAD) BY LRS.

FEBRUARY 23, 2000
B [DR. A.S. ANAND CJ., S. RAJENDRA BABU AND
R.C. LAHOTI, JJ.)

Arbitration-Award-Subordinate Judge made award rule of Court-
Appeal dismissed by High Court-Appeal before Supreme Court-Validity of
C decree passed based on award.

Arbitration-Agreement-Absence of escalation clause-In such a case
arbitrator cannot ~·sume any jurisdiction to award any amount towards
escalatiort-Held decree insofar as it awards escalatioll charges cannot be
D sustained.

Arbitrator-Power to award imerest pendente lite-Decree to the extent
awards pendente lite interest in favour of contractor held sustainable.

Secretary, Irrigation Department, Government of Orissa&: Ors. v. G. C.
E Roy, (1992] 1 SCC 508; Executive Engineer (Irrigation) Balimela &: Ors. v.
Abhaduta lena & Ors., [1988] 1 SCC 418, referred to .

Arbitrator--Power to award interest for pre-reference period-Arbitra-
tion proceedings pending for one and a half decade-In view of this contractor
allowed to execute decree relating to award of pre-reference interest on fur-
F nishing a bank guarantee-Contractor should also give an undenaking that if
issue is decided against /rim State will be entitled to encash the bank guaran-
tee.

CML APPELLATE JURISDICI'ION: Civil Appeal No. 2256 of
G 1984.
From the Judgment and Order dated 9.U .83 of the Orissa High
Court in Misc. A. No. 209 of 1982.

Raj Kumar Mehta, Ms. Mana Chakraborty and Ms. M. Sarda for the
H Appellant.
1136
STATEv. SUDHAKARDAS 1137

J .K. Das for the Respondent. A
The following Order of the Court was delivered :

This appeal by special leave arises out of arbitration proceedings.
The High Court of Orissa dismissed an appeal filed by the appellant
against the order of Subordinate Judge, Bhubancshwar making an award B
madt: by the Arbitrator a rule of th!! Court. The three main issues with
which we are concerned in this appeal are :

al. Whether the Arbitrator could have granted an award for
escalation in favour of the contractor?
c
2. Whether the Arbitrator could have awarded pendente lite inter-
est in favour of the contractor? and

3. Whether the Arbitrator could have granted interest for the
pn:-reference period'?"
D
It is not disputed that the arbitration agreement contained no escala-
tion clause. In the absence of any escalation clause, an Arbitrator cannot
assume any jurisdiction to award any amount towards escalation. That part
of the Award which grants escalation charges is clearly not sustainable and
suffers from a patent error. The decree, insofar as the award of escalation E
charges is concerned, cannot, therefore, be sustained.

It is conceded by Ms. Mana Chakraborty, learned counsel for the
State that the issue relating to the power of the Arbitrator to grant interest
pendente lite where the agreement between the parties, as in the present
case, did not prohibit grant of interest and the dispute referred to the F
Arbitrator included the claim of interest, is no longer res-integra and stands
settled in favour of the claimant and against the State in Secretary, Irrigation
Department, Government of Orissa & Others v. G. C. Roy, (1992] 1 SCC 508,
overruling the view to the contrary as expressed in Executive Engineer
(Inigation) Balimela & Others v.Abhaduta lena & Others, [1998)1 SCC 418. G
The decree to the extent, it awards pendente lite interest in favour of the
respondents, therefore, is sustained and the challenge to it fails.

So far as the award of interest for pre-ccference period i~ con-
cerned, it appears appropriate to us, keeping in view the fact that the
proceedings in this case have remained pending for almost one and a half H
A

1138 SVPREME CO CRT REPORTS (2000]1 S.C.R.
A decade and the arbitration started as t:arly as in 1975, to direct that tht:
respondent shall ex~cute the decree relating to the award of pre-reference
intert:st only on furnishing a bank guarant<.:e to thc cxtent of that amount
tog~tb.er with an undertaking that in tbe event the Constitution Bench, to
which this issue has been n.:ferred to in Executive Ettgineer, Dftankanal
:\linur Irrigation Division, Olissa v. N.C. Budltiruj (Dead) by L.Rs. (Civil
B Appeal !'lo. 3586 of l YM), decides against the decrc.:chulder-respoudents,
the State shall be t.:ntit:cd to t:ncash tbt: bank guarantet!.. The rc:.pondt:nts
shall keep the bank guarantee aliv<.: during the pendency of the matter
before the Constitution Bench and on furnishing the bank guarantee and
tbt: undertaking the respondents can execute the decree in that behalf.
c Thus, the appeal is dispo!.t:d of in above terms. The impugned
judgmt:nt and dt:crl..t: shall stand modified accordingly. No costs.

T.NA. Appeal disposed of.