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Petitioner: EXECUTIVE ENGINEER, IRRIGATION, GALIMALA And Others VS Respondent: ABNADUTA JENA
Court Name: Supreme Court of India Judge(s): O. Chinnappa Reddy, K Jaganatha Shetty, I. M. H. Kania Title: EXECUTIVE ENGINEER, IRRIGATION, GALIMALA And Others vs ABNADUTA JENA Case No.: Civil Appeals Nos.6245-46 of 1983 Civil Appeals Nos.6019-22/83 Date of Judgment:1987-09-22 Reported As: 1989 MLD 1257 Result: Order accordingly
JUDGMENT
JUDGMENT CHINNAPPA REDDY, J.--This group of appeal raises the question of award of interest by an arbitrator to whom a reference is made without the intervention of the Court. Special leave to appeal was granted under Art.l36 of the Constitution limited to the question of award of interest during the period prior to the reference and during the pendency of the arbitration proceedings. Special leave was not granted in regard to the award of interest subsequent to the date of the arbitrator's award. This question, therefore, does not concern us in these appeals. 2. The various references to arbitration in these cases were in regard to work done by different contractors in excess of what was stipulated under the several contracts. The contracts generally contained a clause to the following effect: "Clause 11--The Engineer-in-charge shall have power to make any alterations in or additions to the original specifications, drawings, designs, and instructions that may appear to him to be necessary or advisable during the progress of the work, and the contractor shall be bound to carry out the work in accordance with any instructions which may be given to him in writing signed by the Engineer-in-charge, and such alterations shall not invalidate the contract; and any additional work which the contractor may be directed to do in the manner above specified as part of the work shall be carried out by the contractor on the same conditions in all respects on which he agreed to do the main work, and at the same rates as are specified in the tender for the main work. The time for the completion of the work shall be extended in the proportion that the additional work bears to the original contract work and the certificate of the Engineer-in-charge shall be conclusive as to such proportion. And if the additional work includes any class of work, for which no rate is specified in this contract, then such class of work shall be carried out at the rates entered in the sanctioned
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schedule of rates of the locality during the period when the work is being carried on and if such last mentioned class of work is not entered in the schedule of rates of the district then the contractor shall within seven days of the date of his receipt of the order to carry out the work inform the Engineer-in--charge of the rate which it is his intention to charge for such class of work, and if the Engineer-in-charge does not agree to this rate he shall by notice in writing be at liberty to cancel his order to carry out such class of work and arrange to carry it out in such manner as he may consider advisable, provided always that if the contractor shall commence work order of any expenditure in regard thereof before the rates shall have been determined as lastly hereinbefore mentioned, then and in such case he shall only be entitled to be paid in respect of the work carried out or expenditure incurred by him prior to the date, of the determination of the rate as aforesaid according to such rate or rates as shall be fixed by the Engineer-in-charge. In the event of a dispute, the decision of the Superintending Engineer of the circle will be final: Provided always that the contractor shall not be entitled to any payment for any additional work done unless he has received an order in writing from the Engineer-in-charge for the additional work, that the contractor shall be bound to submit his claim for, any additional work done during any month on or before the 15th day of the following month accompanied by a copy of the order in writing of the Engineer-in-charge: for the additional work, and that the contractor shall not be entitled to any payment in respect of such additional work if he fails to submit his claim within the aforesaid period." 3. All the contracts also contained a provision for a reference to arbitration in case of disputes. The clause of the contract enabling the reference was as follows:-- "Clause 23.--Except where otherwise provided in the contract all questions and disputes relating to the meaning of the specifications, designs, drawings, and instructions hereinbefore mentioned and as to the quality of workmanship, or materials used on the work, or as to any other question, claim, right, matter, or thing whatsoever, in any way arising out of, or relating to the contract, designs, drawings, specifications, estimates instructions, orders, or these conditions, or otherwise concerning the work or the execution, or failure to execute the same, whenever arising during the progress of the work, or after the completion or abandonment thereof shall be referred to the sole arbitration of a Superintending Engineer of the State Public Works Department unconnected with the work at any stage nominated by the concerned Chief Engineer. If there be no such Superintending Engineer it should be referred to the sole arbitration of the Chief Engineer concerned. It will be no objection to any such appointment that the arbitrator so appointed is a Government servant. The award of the arbitrator so appointed shall be final, conclusive and binding on all parties to these contracts." Pursuant to the clause in the contracts enabling the Chief Engineer to refer disputes to an arbitrator, references were made. For the purposes of our decision, we are proceeding on the basis that in the notices of demand made by the contractors before the disputes were referred to arbitration interest on the amounts said to be payable was claimed. 4. The general statutory provisions in regard to the award of interest by a Court are contained in the Interest Act and the Civil Procedure Code. The Interest Act of 1839 contained only one section and it was as follows: "1. It is, therefore, hereby enacted that, upon all debts or sums certain payable at a certain time or otherwise, the Court before which such debts or sums may be recovered may, if it shall think fit, allow interest to the creditor at a rate not exceeding the current rate of interest from the time when such debts or sums certain were payable, if such debts or sums be payable by virtue of some written instrument at a certain time; or if payable otherwise, then from the time when demand of payment shall have been made in writing so as such demand shall give notice to the debtor that
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interest will be claimed from the date of such demand until the term of payment; provided that interest shall be payable in all cases in which it is now payable by law." 5.In 1978, the Interest Act of 1839 was repealed and a new Interest Act was enacted. The Statement of Objects and Reasons of the new Act recited: "The Law Commission of India in its sixty-third report had recommended the revision of the existing Interest Act, 1839. This Act is a very short one; besides a preamble, it contains only one section and a proviso. However, it is a statute of importance, since it prescribes the general law of interest which becomes applicable in the absence of any contractual or statutory provisions specifically dealing with the subject. According to the Commission, almost every phrase used in the Act has given rise to problems of interpretation and judicial decisions have disclosed divergence of views in respect of the same. The Commission has revised the Act comprehensively so as to make its provisions more precise, specific, unambiguous and juristically satisfactory. It is proposed to replace the existing Act by a new Act based on the recommendations of the Law Commission." The new Act has made some important changes. One of the important changes is that the expression `Court' is defined to include a tribunal and an arbitrator. Debt is defined as meaning any liability for an ascertained sum of money, including a debt payable in kind, but not including a judgment debt. Section 3(1) enables the Court, if it so thinks fit, to award interest, in any proceeding for the recovery of any debt or damages or in any proceeding in which a claim for interest in respect of any debt or damages already paid is made, to the person entitled to the debt or damages or to the person making such claim, for the whole or part of the following period: (a) if the proceeding relates to a debt payable by virtue of a written instrument at a certain time, then, from the date when the debt is payable to the date of institution of the proceedings; (b) if the proceeding does not relate to any such debt, then from the date mentioned in this regard in a written notice given by the person entitled or the person making the claim to the person liable that interest will be claimed, to the date of institution of the proceeding. Section 3(3) provides that nothing in the section shall apply in relation to (i) any debt or damages upon which interest is payable as of right, by virtue of any agreement; or (ii) any debt or damages upon which payment of interest is bared by virtue of an express agreement. Section 3(3)(c) provides that nothing in the section shall empower the Court to award interest upon interest. Section 4(1) provides, "notwithstanding anything contained in S.3, interest shall be payable in all cases in which it is payable by virtue of any enactment or other rule of law or usage having the force of law." Section 4(2) further provides, notwithstanding anything as aforesaid the Court shall allow interest in the class of cases specified in section 4(2) from the dates stipulated to the dates stipulated in the provision. Section 5 provides that nothing in the Act shall affect the provisions of section 34 of the Code of Civil Procedure, 1908. 6. It is important to notice at this stage that both the Interest Act of 1839 and the Interest Act of 1978 provide for the award of interest up to the date of the institution of the proceedings. Neither the Interest Act of 1839 nor the Interest Act of 1978 provides for the award of pendente lite interest. We must look elsewhere for the law relating to the award of interest pendente lite. This, we find, provided for in S.34 of the Civil Procedure Code in the case of Courts. Section 34, however, applies to arbitrations in suits for the simple reason that where a matter is referred to arbitration in suit, the arbitrator will have all the powers of the Court in deciding the dispute. Section 34 does riot otherwise apply to arbitrations as arbitrators are not Courts within the meaning of S.34, Civil Procedure Code. Again, we must look elsewhere to discover 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 the Interest Act of 1978
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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 Izw we must look to the substantive law for the power of the arbitrator to award interest before the commencement of the proceedings. 1f 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 S.80 of the Negotiable Instruments Act as a provision of the substantive law under which the Court may award interest even in a case where no rate of interest is specified in the promissory note or bill of exchange. We may also refer section 61(2) of the Sale of Goods Act which provides for the award of interest to the seller or the buyer as the case may be under certain circumstances in suit filed by them. We may further cite the instance of the non-performance of a contract of which equity could give specific performance and to award interest. We may also cite a case where one of the parties is forced to pay interest to a third party, say on an overdraft, consequent on the failure of the other party to the contract not fulfilling the obligation of paying the amount due to them. In such a case also equity may compel the payment of interest. Loss of interest in the place of the right to remain in possession may be rightfully claimed in equity by the owner of a property who has been dispossessed from it. 7. We may now refer to the case-law. We may start the discussion of the topic with the case of Bengal Nagpur Railway Company Limited v. Ruttanji Ramji, 65 Ind. App. 66; (AIR 1938 PC 67). There certain rates of payment under an agreement for the construction of a railway line were abandoned by mutual consent of the parties and the contractor was required to be paid at rates which were fair and reasonable for the work done. The question arose whether the contractor was entitled to be paid interest on the amount which the Railway Company was liable to pay. The Privy Council found that the railway was liable to pay to the plaintiff an amount of Rs.66,980-10-6 on July 26, 1925. The suit for recovery of the amount was filed on November 29, 1927. The Privy Council held that award of interest from the date of the institution of the suit was governed by section 34 of the Code of Civil Procedure and went on to observe that the crucial question was whether the Court had authority to allow interest for the period prior to the institution of the suit. They observed that the solution of the question depended not upon the Code of Civil Procedure but upon substantive law. Interest for the period prior to the date of suit may be awarded if there was an agreement for the payment of interest at a fixed rate or it was payable by the usage of trade having the force of law or under the provision of any substantive law entitling the plaintiff to recover interest. Section 80 of the Negotiable Instruments Act was cited as a provision of the substantive law under which (he Court may award interest when no rate of interest is specified in the promissory note or bill of exchange. In the case before them however, they observed there was neither usage nor any contract, express or implied, to justify the award of interest. Interest was not payable by virtue of any provision of the law governing the case. Under the Interest Act of 1839, the Court may allow interest to the plaintiff if the amount claimed is a sum certain which is payable at a certain time by virtue of a written instrument. But it was conceded that the amount claimed in the case was not a sum certain. Referring to the provisions of section 1 of the Interest Act which stated that interest shall be payable in all cases in which interest was then payable by law, the Privy Council observed that the proviso applied to cases in which the Court of equity exercised the jurisdiction to allow interest. But then they said that the case before them did not attract the jurisdiction of the Court. An example of cases which attract the equitable jurisdiction of the Court to award interest was
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given as the non-performance of a contract of which equity could give specific performance. Considering next the question whether interest could be awarded by way of damages, it was held that it could not be so done. It was categorically stated that interest could trot be allowed by way of damages. It was also pointed out that in England, the law had been amended by the Law Reform Miscellaneous Provisions Act which empowered a Court of record to award interest on whole or any part of damages. But there was no such amendment of the law in India (at that time). 8. Seth Thawardas Pherumal v. Union of India, (1955) 2 SCR 48; (AIR 1955 SC 468) was a case which arose out of a decision of the Patna High Court, which is reported in Union of India v. Prem Chand Satnam Das, AIR 1951 Pat. 201. Some of the facts have been taken by us from the judgment of the Patna High Court as those facts were not evident from the judgment of this Court. Pursuant to Cl. 14 of the contract between the Dominion of India and the contractor which provided that all disputes arising out of or relating to the contract should be referred to the Superintending Engineer, a reference w;v; made on January 21, 1949 and an award followed on May 8, 1949. Before the arbitrator the contractor submitted a claim under 17 heads. Item No-17 as mentioned in the Statement of claim before the arbitrator was "interest on the amount of money involved in this claim at the rate of six per cent--Rs.27,656. This work was finished in May, 1946 and it was proper for the Department to have decided all our claims at least by 31st December, 1947. But this was not done. Due to this, a heavy amount remained blocked and we were compelled to take money from our bankers on interest. We pray, therefore, for interest for 15 months from January 1, 1948 to March 31, 1945." The arbitrator held: "The contractor's contention that his claims should have been settled by January 1948 is, in my opinion, reasonable. 1, therefore, award interest at six per cent for sixteen months on the total amount of the awards given, that is, Rs.17,363." The question arose whether the arbitrator could award the interest? The Patna High Court noticed that the contractor did not include any claim for interest for the period March 31, 1947 to April 20, 1949 in the bill originally submitted by him to the Chief Engineer and that the claim was made for the first time before the arbitrator during the progress of the arbitration proceedings. The High Court also noticed that the Executive Engineer who appeared on behalf of the Union of India before the arbitrator did not seem to have submitted to the jurisdiction of the arbitrator to decide the question of interest. In those circumstances, the High Court held that it could not be said that the claim for interest was one of the matters referred to arbitration. The arbitrator, it was, therefore, held, had no jurisdiction to entertain the claim and award interest. In the appeal by the contractor, the Supreme Court noticed that the claim under each head on which interest was awarded was for an unliquidated sum and observed that in that kind of case, interest was hot payable by law otherwise than by the application of the Interest Act. Reference was made to the Bengal Nagpur Rly. Co. v. Ruttanji Ramji, 65. Ind App 66; AIR 1938 PC 67 as an authority for that proposition. The Court then proceeded to say that even if an arbitrator could be assumed to be a Court within the meaning of the Act, which he did not appear to be, none of the four conditions, which required to be fulfilled, was present in the case before him. It was then said that the arbitrator erred in thinking he had the power to allow interest simply because he thought the demand was reasonable. A further argument that interest could be awarded at least from the date of the suit on the analogy of S.34 of the Civil Procedure Code was repelled with the following observations: "It was suggested that at (cast interest from the date of suit could be awarded on the analogy of S.34 of the Civil Procedure Code, 1908. But S.34 does not apply because an arbitrator is not a Court within the meaning of the Code nor does the Code apply to arbitrator, and,, but for S.34 even a Court would not have the power to give interest after the suit. This was, therefore, also rightly struck out from the award." These observations of Bose, J gave rise to considerable difficulty in later cases, but in the series of cases, Nachiappa Chettitar v. Subramaniam Chettiar, (1960) 2 SCR 209; (,1 I R 1960 SC 307), Satinder Singh v. Umrao Singh (1961) 3 SCR 676; (AIR 1961 SC 908); Firm Madanlal Roshanlal Mahalan v. Hukumchand Mills
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Ltd. (1967) 1 SCR 105; (AIR 1967 SC 1030), Union of India v. Bungo Steel Furniture Pvt. Ltd., (1967) 1 SCR 324; (AIR 1967 SC 1032) and State of Madhya Pradesh v. M/s. Saith and Skelton Pvt. Ltd., (1972) 3 SCR 233; (AIR 1972 SC 1507), these observations have been explained and it was held that the observations never intended to lay down the broad and unqualified proposition that they appeared to lay down on a first impression. We will presently refer to these cases. At this juncture, it is necessary to note that in Seth Thawardas Pherumal's case (AIR 1955 SC 468)'the question of payment of interest was not the subject-matter of reference to the arbitrator and that the interest claimed before the arbitrator and awarded by the arbitrator related to the period prior to the reference to arbitration and the period during the pendency of the arbitration. It is also to be noted that the reference was not in the course of a suit. 9. Nachiappa Chettiar v. Su6ramaniam Chettiar, (AIR 1960 SC 307) (supra) was a case of arbitration in a suit. The arbitrator made an interim award on August I, 1944 and December 6, 1944. He awarded interest pendente lite as well as future interest until the date of payment. Relying on the observations in Seth Thawardas Pherumal v. Union of India, the award of interest was questioned. The Court doubted whether the observations in Seth Thawardas Pherumal's ise were intended to lay down such a broad and unqualified proposition, but did not pursue the matter further as that contention was not urged before the High Court. 10. Satinder Singh v. Umrao Singh (AIR 1901 SC 908) (supra) was a case which arose under the East Punjab Acquisition and Requisition of Immovable Property (Temporary) Powers Act, 1948. The Act contained no provision for payment of interest. It was argued that in the absence of a provision providing for interest, interest could be awarded. The Court approved the observation of the Privy Council in 1928 AC -192: (AIR 1928 PC 287) that where the owner is deprived of his property "the right to receive the interest takes the place of the right to retain possession and is within the rules." The Court then observed, "it would thus be noticed that the claim for interest proceeds on the assumption that when the owner of immovable property loses possession of it he is entitled to claim interest in place of right to retain possession;" and held that this general rule was not excluded by the 1948 Act. Referring then to the observation's in Seth Thawardas Pherumal v. Union of India, (AIR 1955,5 C 468) (supra), what was said in Nachiappa Chettiar v. Subramaniam Chettiar, (AIR 1960 SC 307) (supra) was reiterated that no broad and unqualified proposition was intended to be laid down in Seth Thawardas Pherumal v. Union of India. Referring to the Interest Act and the power of the Court to allow interest, it was expressly noticed that the proviso to S.1 of the Interest Act, 1839 made it clear that interest shall be payable in all cases in which it was now payable by law. The power to award interest on equitable grounds or under any provision of the law was held to be expressly saved by the proviso. The award of interest by the arbitrator was upheld on the ground that the right to receive interest in lieu of possession of immovable property taken away either by private treaty or by compulsory acquisition was generally regarded by judicial decisions as an equitable right. 11. In Union of India v. Watkins and Co., AIR 1966 SC 275, the question arose when interest could be awarded for the period prior to the date of the institution of the suit. The suit there was for compensation for storage of over 600 tonnes of iron sheets for a period of about five years. It was held that interest could not be awarded for the period prior to the suit as there was no agreement for the payment of interest nor was there any usage of trade having the force of law or any provision of the substantive law which entitled the plaintiff to recover interest. Under the Interest Act, 1839, the Court could allow interest if the amount claimed was a sum certain, payable at a certain time, by virtue of a written instrument. The compensation for an unliquidated amount was not a sum certain. Interest prior to the institution of the suit was not awardable. 12. In Union of India…
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