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REPORTABLE
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL NO. 4427 OF 2009
[Arising out of SLP (C) No.3501/2007]
Union of India ... Appellant
Versus
Saraswat Trading Agency & Ors. ... Respondents
JUDGMENT
AFTAB ALAM,J.
Leave granted.
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This appeal, at the instance of Union of India, arises from an
arbitration award dated September 9, 2000 made in favour of the respondent.
The appellant challenged the award before the Calcutta High Court by filing
an application under section 34 of the Arbitration and Conciliation Act,
1996. A learned Single Judge of the High Court upheld the challenge
substantially and by judgment and order dated November 20, 2001 passed in
G.A.No.87/01, arising out of AP No.325/98, sustained the award only on
one issue and set it aside on two of the three issues under reference. Against
the judgment of the Single Judge the respondent preferred an internal court
appeal and the Division Bench of the High Court by its judgment and order
dated July 4, 2006 passed in G.A.No.87/01: APOT No.792/01 with APO
No.362/01 allowed the appeal, set aside the judgment of the Single Judge
and fully restored the arbitrator's award in favour of the respondent on all
the three issues in dispute. Against the judgment of the Division Bench of
the High Court the appellant has come in appeal to this Court.
The facts of the case are brief and simple and may be stated thus. For
the work of "handling of goods, parcels and booked luggage" at a group of
six stations falling in its Nagpur Division, the South Eastern Railway,
Calcutta, invited tenders that were opened on May 16, 1990. The tender
submitted by the respondent was the lowest. Hence, after some negotiations
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and extension of the validity of offer the respondent's tender was accepted
on August 2, 1991 and it was given the work for a period of three years
commencing from August 3, 1991. The grant of the contract was formalized
in an agreement executed by the parties on December 3, 1991. The
agreement was deemed to have come into force with effect from August 3,
1991 and it was to remain in force for a period of three years, till August 2,
1994 unless determined by either of the parties in terms of clause 1(1)
(authorizing the appellant to determine the contract by giving three months
notice) and its proviso (giving the same right to the contractor, after expiry
of the period of one year of the contract). Clause 2 of the agreement dealt
with the nature of the work the contractor was required to do. Clause 4 of the
agreement along with a detailed schedule mentioned fixed rates for every
piece of work covered by the contract. Clause 7 stated that the contractor
would not be entitled to any increase in the accepted rates of remuneration or
compensation due to fluctuations in the traffic (increase or decrease) due to
any reason. Under clause 13 the contractor indemnified the Railway
Administration against all claims that might be made under the Workmen's
Compensation Act, 1923 in consequence of any accident or injury sustained
by any labourer/servant or person in his employment and engaged in the
performance of the contract. Clause 14 bound the contractor to pay to the
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labourers engaged by him not less than the fair wage. It further provided that
`fair wage' would be the wage including the allowances, notified at the time
of inviting tenders for the work. Clause 15 made the contractor responsible
for compliance with the provisions of the Payment of Wages Act, 1936, and
the rules made thereunder in respect of the staff employed by him. Clause 16
similarly made the contractor responsible for compliance with the provisions
of the Contract Labour (Regulation and Abolition) Act, 1970 and the rules
made thereunder and required him to obtain the statutory license from the
licensing authority. Clause 18 made the contractor responsible for
compliance with the provision of the Hours of Employment Regulations in
respect of the staff employed by him in the manner decided upon by the
appropriate authorities. Clause 19 stipulated that no labourer would be
unfairly treated or removed from work except for valid reasons and further
provided that the porters engaged in the handling of goods, parcels and
booked luggage under the terms of the agreement would be deemed as
employees of the contractor within the meaning of the Industrial Disputes
Act, 1947 or any other enactment that might be applicable. This clause
further stated that the contractor would comply with all the laws, regulations
and rules for the benefit of labour that were in force or might come into
force and he would indemnify and keep the Railway Administration
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indemnified against all loss, damage, claims and costs arising in any manner
whatsoever. Clause 20 reserved the right of the Railway Administration to
deduct from the moneys due to the contractor or from his security deposit
any sum required or estimated to be required for making good the loss
suffered by the labour or labourers or any other person in his employment
for the reasons of non-fulfillment of the conditions for the benefit of the
labourers, non-payment of wages or deductions made from him or their
wages which were unjustified or illegal. Clause 31 stipulated that no interest
or damage would be paid to the contractor for delay in payment of the bill
`for any reason whatsoever'. Clause 32 with its various sub-clauses
contained the provision for arbitration and provided that the General
Manager of the South Eastern Railway or a person appointed by him would
be the sole arbitrator in respect of any dispute as to the respective rights,
duties and obligations of the parties to the agreement or as to the
construction or interpretation of any of the terms and conditions of this
agreement or as to its applications.
We next come to what is at the root of the dispute between the parties.
It needs to be noted that at the time of submission of tender by the
respondent the base fair rate of wages for the casual labour was Rs.31=15
paise as per the Circular dated January 17, 1990. During the period of the
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contract the Railway authorities are said to have issued circulars/guidelines
revising the rates of casual labourers from retrospective dates. The manner
in which rates were revised by the circulars/guidelines issued by the Railway
authorities is noted in the arbitrator's award as follows:
PARTICULARS
Circular No. Circular Effect Average
dated from rate of
unskilled
labour
P/EN/C- 17.1.90 1.7.89 Rs.31.15
RAT/1/90
P/EN/NGP/ P/EN/NGP/ 16.4.92 1.7.91 Rs.42.40
Casual Labour
90-91
P/EN/NGP 10.2.93 1.1.92 Rs.47.45
Casual
Labour/MS/92 10.2.93 1.7.92 Rs.50.50
P/EN/NGP 15.2.94 1.1.93 Rs.51.10
Casual Labour
93 15.2.94 1.7.93 Rs.53.50
P/EN/NGP/MS 16.3.95 1.1.94 Rs.57.45
/94
1.7.94 Rs.62.0
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On August 25, 1992, the respondent wrote a letter to the Railway
authorities demanding enhancement of rates under the contract on the
ground that the rates stated in the agreement were based on the circular dated
January 17, 1990 that had undergone a number of revisions and as a result
the contract rates had become unrealistic and unviable. The Railway
authorities rejected the respondent's demand for enhancement and/or
revision of rates taking the stand that the contract was a "fixed price
contract" and it had no clause for enhancement of rates. Faced with the
authorities' refusal to revise the contract rates the respondent terminated the
contract by giving three months notice as provided under the proviso to
clause 1(1) of the agreement. The Railway authorities accepted the
termination of the contract with effect from December 31, 1992 but in order
to avoid any dislocation requested the respondent to carry on the work on the
same terms and conditions, promising that its claim would receive due
consideration. On the appellant's request the respondent continued with the
work under the contract, though under protest, till august 1994.
At the time of the final settlement of the respondent's claims the
Railway authorities offered to it a sum of Rs.6,848=00 as additional
payment for the period January 1993 to August 1994. The respondent
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naturally declined to accept the paltry amount offered by the authorities and
requested for a proper consideration of its claim as earlier promised.
Finally, the Railway authorities appointed a high level committee to
consider the respondent's claim for enhanced payment for the period
January 1, 1993 to August 31, 1994. The committee fixed the respondent's
claim at Rs.3, 61,058=00 but it was not acceptable to the respondent.
A departmental arbitrator was then appointed in order to resolve the
disputes and differences arising between the parties. The departmental
arbitrator gave his award on June 4, 1998. Not being satisfied with the award
the respondent challenged it by filing an application under section 34 of the
Act before the High Court. The High Court by its order dated February 12,
1999 upheld the award on items 1 & 2 but set it aside in respect of items 3, 4
& 5 and appointed a certain advocate, a member of the bar to decide afresh
in regard to the respondent's claim under those three items. On an
application made under section 11, the Acting Chief Justice of the High
Court, by order dated July 1, 1999, substituted another advocate as arbitrator
in place of the one appointed by the Court on the application under section
34 of the Act.
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The three issues/claims that came up before the arbitrator appointed
by the High Court were as follows:
"Claim No.3: Claim for increase in rates from
3.8.91 to 31.12.92 during the
Contractual period being sum
of Rs.10,74,408/-
Claim No.4: Claim for increase in rates from
1.1.93 to 31.8.94 during the
extended period being sum of
Rs.14, 454,581/-
Claim No.5: Payment of 18% interest on
Claim of contractor claim
No.3 and 4 on the (sic and)
from 1.11.94 till the (sic)date."
The arbitrator appointed vide order dated July 1, 1999 passed by the
Court took up the proceedings on August 3, 1999 and made and published
his award on September 9, 2000. The award held the respondent entitled to
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receive from the appellant the sum of Rs. 32, 71,774=00 along with interest
on that amount @ 18% per annum from the date of the award till the date of
payment.
The appellant challenged the award by filing an application under section
34 of the Act before the High Court on January 2, 2001. As noted above, a
learned Single Judge of the High Court substantially upheld the appellant's
challenge and set aside the award on items 1 and 3, upholding it only insofar
as the respondent's claim under item 4 was concerned. Against the judgment
and order passed by the learned Singe Judge the respondent preferred an
appeal before the Division Bench of the High Court. Here it is significant to
note that the appellant did not prefer any appeal against the judgment of the
Single Judge insofar as it upheld the arbitrator's award on item no.4. Thus
before the Division Bench of the High Court there was no challenge to the
arbitrator's award in regard to the respondent's claim for enhanced payment
from January 1, 1993 to August 31, 1994, that is to say, for the period after
the parties had agreed on the cancellation of the agreement.
The Division Bench of the High Court after an elaborate consideration
of the matter and after referring to a host of decisions of this Court and the
Calcutta High Court allowed the appeal, set aside the judgment and order
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passed by the learned Single Judge and restored the arbitrator's award fully
on all the three items.
Mr. S. Wasim Qadri, learned counsel appearing on behalf of the
appellant, submitted that in the absence of any escalation clause in the
agreement the respondent's claim for enhanced payments for the period
August 3, 1991 to December 31, 1992 during which the agreement was in
force was quite unfounded and both the arbitrator and the Division Bench of
the High Court were in error in granting the claim for that period. The
submission made by Mr. Qadri is fully answered by the decision of this
Court in Tarapore & Co. vs. State of M.P., (1994) 3 SCC 521, (noticed both
by the arbitrator and the Division Bench of the High Court). In paragraph 27
of the judgment this Court observed as follows:
"27. But then, the terms at hand did require the
appellant (who is the contractor) not to pay less
than fair wages as would appear from what has
been stated in Para 2.10 and Para 1 of Annexure-B.
The Explanation to latter Para states that where fair
wages have not been notified these wages would
be the one "prescribed by the PWD (Irrigation
Department) for the division in which the work is
done". Now these wages were being increased
from time to time as would appear from the
decisions of the wage committee referred to above;
and if the appellant was being required to pay
wages as per these decisions, we do read a meeting
of mind insofar as the claim of escalated payment
on account of increase of fair wages is concerned.
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It has to be assumed that when the appellant was
required to pay fair wages at increased rates, the
authorities did visualize that the appellant would
not do so by cutting down its profit. By asking the
appellant to give tender by taking into account the
fair wages notified at the time of inviting tenders,
the authorities did give an impression that fair
wages to be paid would be the one then
notified/prescribed, a 1a the explanation to para 1.
In such a situation, if rates of fair wages were
raised afterwards, the tendered sum cannot be
taken to be agreed amount for completing the
contract, in the face of the directions of the
authorities requiring the appellant to pay wages at
rates higher than those prescribed or notified at the
time of inviting tenders. On this fact situation, we
hold that the State had by necessary implication
agreed to reimburse this increased payment."
In a more recent decision in Food Corporation of India vs. M/s. A. M.
Ahmed & Co. & Anr., AIR 2007 SC 829, the Court reiterated the same view
and in paragraph 32 of the judgment observed as follows:
"Escalation, in our view, is normal and routine
incident arising out of gap of time in this
inflationary age in performing any contract of any
type. In this case, the arbitrator has found that
there was escalation by way of statutory wage
revision and, therefore, he came to the conclusion
that it was reasonable to allow escalation under the
claim. Once it was found that the arbitrator had
jurisdiction to find that there was delay in
execution of the contract due to the conduct of the
FCI, the Corporation was liable for the
consequences of the delay, namely, increase in
statutory wages. Therefore, the arbitrator, in our
opinion, had jurisdiction to go into this question.
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He has gone into that question and has awarded as
he did. The Arbitrator by awarding wage revision
has not mis-conducted himself. The award was,
therefore, made rule of the High Court, rightly so
in our opinion."
Mr. Qadri next questioned the grant of interest on the amounts arrived at by
allowing the respondent's claim for higher rates for the work done by it.
Learned counsel submitted that clause 31 of the agreement expressly barred
the claim of any interest by the contractor and hence, the award was clearly
unsustainable insofar as the grant of interest was concerned.
The arbitrator gave to the respondent pre-reference, pendente lite and
post-award interest on both its claims under items 3 & 4 as would be evident
from the following passages from the award:
"However, I am allowing interest to the claimant at
the rate of 16% per annum on and from 1st
November, 1994 till 9th September, 2000 the date
of award amounting to Rs.15, 85,359.85 on the
following basis.
Interest calculated from 1.11.94 to 9.9.2000 as per
demand notice dated 19th September, 1994 till the
date of award on Rs.16, 85,234.14 being the total
amount of claim item Nos.3 and 4."
**** **** ****
Therefore, I, hereby award to the claimant (1) a
sum of Rs.6,05,777.34 for the claim item No.3 (ii)
a sum of Rs.10,79,456.80 for the claim Item No.4
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and (iii) a sum of Rs.15,86,539.85 towards interest
on Item No.3 and 4 for the claim Item No.5. The
aggregate sum of Rs.32, 71,773.99 (Rupees Thirty
two lacs seventy one thousand seven hundred
seventy three and ninety nine paise only) rounded
to Rs.32, 71,774/-. I further award an interest @
18% per annum on the aforesaid sum till the date
of payment."
It is thus to be seen that the arbitrator allowed interest on the amounts
determined under Items Nos.3 and 4 both for the pre-reference period and
pendente lite at the rate of 16% per annum. He further allowed interest on
the consolidated amount for the post-award period at the rate of 18% per
annum till the date of payment.
The question of interest for the pre-reference period stands settled by
the Constitution Bench decision in Executive Engineer, Dhenkanal Minor
Irrigation Division, Orissa & Ors. Vs. N. C. Budharaj, 2001 (2) SCC 721.
The majority judgment (3:2) in that case held in paragraph 26 as follows:
"For all the reasons stated above, we answer the
reference by holding that the arbitrator appointed
with or without the intervention of the court, has
jurisdiction to award interest, on the sums found
due and payable, for the pre-reference period, in
the absence of any specific stipulation or
prohibition in the contract to claim or grant any
such interest. The decision in Jena case taking a
contra view does not lay down the correct position
and stands overruled, prospectively, which means
that this decision shall not entitle any party nor
shall it employer any court to reopen proceedings
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which have already become final, and apply only
to any pending proceedings. No costs."
(emphasis added)
The legal position in regard to interest for the different periods has been
summed up, with reference to the earlier decisions, in the decision in
Bhagawati Oxygen Ltd. Vs. Hindustan Copper Ltd., 2005 (6) SCC 462. In
paragraphs 38, 39 and 40 of the judgment it was observed as follows:
"38. So far as interest for pre-reference period is
concerned, in view of the conflicting decisions of
this Court, the matter was referred to a larger
Bench in Executive Engineer, Dhenkanal Minor
Irrigation Division vs. N.C. Budharaj, 2001 (2)
SCC 721. The Court, by majority, held that an
arbitrator has power to grant interest for pre-
reference period provided there is no prohibition in
the arbitration agreement excluding his jurisdiction
to grant interest. The forum of arbitration is
created by the consent of parties and is a substitute
for conventional civil court. It is, therefore, of
unavoidable necessity that the parties be deemed to
have agreed by implication that the arbitrator
would have power to award interest in the same
way and same manner as a court."
"39. Regarding interest pendent lite also, there was
cleavage of opinion. The question was, therefore,
referred to a larger Bench in Secy., Irrigation
Deptt., Govt. of Orissa vs. G. C. Roy, 1992 (1)
SCC 508. The Court considered several cases and
laid down the following principles: (pp.532-33,
para 43)
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43. The question still remains whether
arbitrator has the power to award the interest
pendente lite, and if so on what principle.
We must reiterate that we are dealing with
the situation where the agreement does not
provide for grant of such interest nor does it
prohibit such grant. In other words, we are
dealing with a case where the agreement is
silent as to award of interest. On a
conspectus of aforementioned decisions, the
following principles emerge:
(i) a person deprived of the use of money
to which he is legitimately entitled
has a right to be compensated for the
deprivation, call it by any name. It
may be called interest, compensation
or damages. This basic consideration
is as valid for the period the dispute is
pending before the arbitrator as it is
for the period prior to the arbitrator
entering upon the reference. This is
the principle of Section 34, Civil
Procedure Code and there is no reason
or principle to hold otherwise in the
case of arbitrator.
(ii) An arbitrator is an alternative forum
for resolution of disputes arising
between the parties. If so, he must
have the power to decide all the
disputes or differences arising
between the parties. If the arbitrator
has no power to award interest
pendente lite, the party claiming it
would have to approach the court for
that purpose, even though he may
have obtained satisfaction in respect
of other claims from the arbitrator.
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This would lead to multiplicity of
proceedings.
(iii) An arbitrator is the creature of an
agreement. It is open to the parties to
confer upon him such powers and
prescribe such procedure for him to
follow, as they think fit, so long as
they are not opposed to law. (The
proviso to Section 41 and Section 3 of
the Arbitration Act illustrate this
point). All the same, the agreement
must be in conformity with law. The
arbitrator must also act and make his
award in accordance with the general
law of the land and the agreement.
(iv) Over the years, the English and Indian
courts have acted on the assumption
that where the agreement does not
prohibit and a party to the reference
makes a claim for interest, the
arbitrator must have the power to
award interest pendente lite.
Thawardas has not been followed in
the later decisions of this Court. It has
been explained and distinguished on
the basis that in that case there was no
claim for interest but only a claim for
unliquidated damages. It has been
said repeatedly that observations in
the said judgment were not intended
to lay 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.
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(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."
"40. As to post-award interest, the point is covered
by the decision of this Court in Hindustan
Construction Co. Ltd. vs. State of J & K , 1992 (4)
SCC 217. It was held there that an arbitrator is
competent to award interest for the period from the
date of the award to the date of decree or date of
realization, whichever is earlier."
In the case in hand, the respondent's claim was in regard to two periods; one
from August 3, 1991 to December 31, 1992 when the agreement was
subsisting and the parties were bound by its terms, and the other from
January 1, 1993 to August 31, 1994 when the agreement was admittedly
terminated and the respondent was carrying on the work on the request of
the appellant. In our view the fact that the first period was covered by the
agreement while the second fell beyond it is significant and on that score the
two periods must receive different treatments.
Clause 31 of the agreement provided as follows:
"31. No interest or damage for delay in payment
- No interest or damage shall be paid to the
Contractor for delay in payment of the bill or any
other amount due to the contractor for any reason
whatsoever. The Railway Administration will,
however, make every endeavour for payment of
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the bills or other amount due to the contractor
within a reasonable time."
(emphasis added)
The Division Bench of the High Court took the view that Clause 31 of the
agreement operated as a bar only between the parties but it would not affect
the authority of the arbitrator to grant interest for the pre reference period
and pendente lite. In this connection the High Court has referred to the
decisions of this Court in Executive Engineer, Dhenkanal Minor Irrigation
Division, Orissa (supra), Executive Engineer (Irrigation) vs. Abhaduta Jena,
(1988) 1 SCC 418 (which was overruled by Executive Engineer, Dhenkanal)
and Secretary, Irrigation Department, Govt. of Orissa vs. G.C. Roy, (1992) 1
SCC 508, (which was referred to in Executive Engineer, Dhenkanal). But in
Executive Engineer, Dhenkanal it is not even remotely said that a clause in
the agreement like clause 31 (quoted above) would only act as a bar between
the parties to the agreement and would not restrict the powers of the
arbitrator to allow interest for pre-reference period and pendente lite. The
High Court has then relied upon another decision of this court in The Board
of Trustees for the Port of Calcutta vs. Engineers-De-Space-Age, AIR 1996
SC 2853. The High Court has observed that in this case a similar clause in
the agreement was held not restrictive of the arbitrator's powers to allow
interest pendente lite and for pre reference period. We have closely
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examined the decision in Engineers-De-Space-Age and we find that the
relevant clause in the agreement in that case was completely differently
worded and the view taken by the High Court cannot be supported on the
basis of that decision. In Engineers-De-Space-Age the court was dealing
with a case in regard to award of interest for the post-reference period and
clause 13(g), the relevant clause in the agreement, was as follows:
"No claim for interest will be entertained by the
Commissioners with respect to any money or
balance which may be in their hands owing to any
dispute between themselves and the Contractor or
with respect to any delay on the part of the
Commissioners in making interim or final payment
or otherwise."
In that context this court held that clause 13(g) of the agreement merely
prohibited the Commissioners from entertaining any claim for interest and
did not affect the arbitrator's powers to award interest.
In the case in hand clause 31 of the agreement is materially different.
It bars payment of any interest or damage to the contractor for any reason
whatsoever. We are, therefore, clearly of the view that no pre-reference or
pendente lite interest was payable to the respondent on the amount under
Item No.3 and the arbitrator's award allowing pre-reference and pendente
lite interest on that amount was plainly in breach of the express term of the
agreement. The order of the High Court insofar as pre-reference and
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pendente lite interest on the amount under Item No.3 is concerned is,
therefore, unsustainable.
The position with regard to the claim under Item No.4 is quite
different. That relates to the period after the termination of the agreement
and hence, the bar of clause 31 would not apply to it in the same way as it
would apply to Item No.3. We, therefore, find no infirmity in grant of pre-
reference and pendente lite interest on the amount under Item No.4.
In light of the discussions made above, the respondent shall be entitled
to interest only on the sum of Rs.10, 79,456=80, the amount determined
under Item No.4, at the rate of 16% per annum for the period November 1,
1994 to September 9, 2000. The final amount under the award shall be
accordingly worked out. The consolidated amount of the award after being
re-calculated shall carry, as provided in the award, interest at the rate of 18%
from the date of the award till the date of payment. In working out the
amount of interest for the post-award period, the period(s) for which the
operation of the award was stayed by the court would be excluded.
In the result the appeal is allowed to the limited extent indicated
above. There shall be no order as to costs.
....................................J.
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[Tarun Chatterjee]
...................................J.
[Aftab Alam]
New Delhi,
July 16, 2009.
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