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State of Kerala Vs. K.R. Narayanan - Court Judgment

LegalCrystal Citation
SubjectArbitration
CourtKerala High Court
Decided On
Case NumberA.S. Nos. 49 and 50 of 1970
Judge
Reported inAIR1971Ker243
ActsArbitration Act, 1940 - Sections 29 and 30; Code of Civil Procedure (CPC) , 1908 - Sections 34
AppellantState of Kerala
RespondentK.R. Narayanan
Appellant AdvocateGovt. Pleader
Respondent Advocate Visivanatha Iyer, Adv.
Cases ReferredIn Union of India v. Watkins and Co.
Excerpt:
.....and whether the award is liable to be set aside - arbitrator granted interest for period prior to reference - award bad on ground of error of law on face of it - award set aside. - - 12. we are satisfied from the award before us that the claim for interest was impliedly a subject-matter of the reference. a is not liable to make good to b, anything except the principal sum he contracted to pay. it only shows that if any person breaks his contract to pay to another person a sum of money on a specific date, and in consequence of that breach the latter is unable to pay his debts and is ruined, the former is not liable to make good to the latter anything except the principal sum which he promised to pay, together with interest up to the date of payment. but it is now firmly established..........908.10. in firm madanlal roshanlal v. hukumchand mills, air 1967 sc 1030. the respondent filed a suit claiming rs. 1,72,856/- with interest thereon from 1-7-1948 till 30-1-1950. the suit was filed on 6-2-1950. interest from the date of suit was also claimed. all the disputes in the suit were referred to arbitration on 15-5-1950. before the arbitrator the respondent did not press his claim for interest for the period prior to the suit but claimed interest from the date of suit till recovery of the amount. the arbitrator allowed interest from the date of the award to the date of recovery of the amount found due. it was contended before the supreme court relying on the decision in air 1955 sc 468. that the arbitrator had no power to award interest during the pendency of the suit, in.....
Judgment:

Narayana Pillai, J.

1. These are appeals by the State of Kerala from the common judgment of the Subordinate Judge, Trivandrum, disposing of two petitions, one filed by the appellant for setting aside the award passed by the Arbitrator, Mr. R. Sankaranarayana Iyer, Retired Judge of the erstwhile Travan-core High Court, and the other filed by the respondent, a contractor, for correction and modification of the award. The Subordinate Judge refused to set aside the award in its entirety but modified it.

2. The salient facts giving rise to the disputes between the parties are as follows. The respondent had undertaken the construction of Mukunnara bridge under the appellant consequent on the acceptance of his tender. The work connected with it was started in 1958 and completed in May 1963. There was delay in the execution of the work. While the respondent imputed it to the appellant the latter imputed it to the former. The work done included not only the construction of the bridge but also the approach roads to it and certain other extra items. When disputes arose between the parties about the amount to be paid to the respondent for the work done by him they were referred to arbitration and Mr. R. Sankaranarayana Iyer was appointed Arbitrator. After he passed the award on 26-3-1969 the petitions referred to above for setting aside the award and correction of it were filed.

3. Only three points were pressed in these appeals by the learned Government Pleader who appeared on behalf of the appellant and they were about (1) compensation given to the respondent for the extra work done by him (2) compensation given to him for the delay on the part of the appellant and (3) granting of interest on the amount due to him.

4. The first point does not appear to have been pressed before the Subordinate Judge. There is no ground in the appeal memoranda that the point was pressed and was not considered by him. Further there is no ground also taken In the appeal memoranda regarding the first point. In these circumstances the appellant cannot be allowed to resuscitate first point which it had practically abandoned and we decline to consider it.

5. The only argument advanced on behalf of the appellant regarding the second point was that the Arbitrator was not competent to go into the question as to who was responsible for the delay in the execution of the work as the tender submitted by the respondent and accepted by the appellant did not provide for compensation for delay. That has no force because in the subsequent agreement dated 28-9-1968 between the parties referring the disputes to Arbitrator two of the points specifically referred to him were:

'I. Whether the Public Works Department or the contractor, is responsible for the delay, in completing the work as per the contract within the stipulated period.

II. If the contractor is not responsible, for such delays, what is the extent of relief to which he is entitled.'

and they authorised him to decide who was responsible for the delay in the execution of the work and grant relief regarding the same. There is no merit in the second point.

6. The only other point surviving for consideration is that regarding interest and in considering it we have to see whether the Arbitrator is competent to grant interest, and if so from, what date and whether the award is liable to be set aside if the awarding of interest is illegal.

7. The provision In the Arbitration Act, X of 1940, dealing with interest is Section 29 which reads:

'Where and in so far as an award is for the payment of money the Court may in the decree order interest, from the date of the decree at such rate as the Court deems reasonable, to be paid on the principal sum as adjudged by the award and confirmed by the decree.'

It only empowers the Court to award interest from the date of the decree on the principal sum adjudged by the award and confirmed by the decree. There is ' nothing in the Arbitration Act 'giving power to the Arbitrator to award interest whether it be from the date of the award or from the date of the reference to arbitration or for the period anterior thereto.

8. In Thawardas Pherumal v. Union of India. AIR 1955 SC 468, a decision of the Supreme Court, the arbitrator granted interest in respect of a claim for unliquidated damages for a period antecedent to the reference and also for the period after the reference. The High Court set aside the award of interest on the ground that the claim for interest was not referred to arbitration and the arbitrator had thus no power to entertain the claim for interest. Bose, J. in dealing with the award of interest by the arbitrator observed:

'Then the arbitrator sets out the amounts awarded under each head of claim. A perusal of them shows that each head relates to a claim for an unliquidated sum. The Interest Act, 1839 applies, as interest is not otherwise payable by law in this kind of case (see --'B. N. Ry. Co. Ltd. v. Ruttanji Ramji', AIR 1938 PC 67). but even if it be assumed that an arbitrator is a 'Court' within the meaning of that Act, (a fact that by no means appears to be the case), the following among other conditions must be fulfilled before interest can be awarded under the Act:

(1) there must be a debt or a sum certain;

(2) it must be payable at a certain time or otherwise;

(3) these debts or sums must be payable by virtue of some written contract at a certain time;

(4) there must have been a demand in writing stating that interest will be demanded from the date of the demand.

Not one of these elements is present, so the arbitrator erred in law in thinking that he had the power to allow interest simply because he thought the demand was reasonable.

It was suggested that at least interest from the date of 'suit' could be awarded on the analogy of Section 34 of the Civil Procedure Code, 1908. But Section 34 does not apply because an arbitrator ia not a 'Court' within the meaning of the Code nor does the Code apply to arbitrators, and, but for Section 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.'

In Nachiappa Chettiar v. Subramaniam Chettiar, AIR 1960 SC 307, it was argued relying on the above observations that in no case could arbitrators award interest. Gajendragadkar, J. observed:

'It is open to doubt whether the observations on which Mr. Viswanatha Sastri relies support or were intended to lay down such a broad and unqualified proposition. However we do not propose to pursue this matter any further because the present contention was not urged before the High Court.'

9. The above observation of Gajendragadkar, J. was quoted with approval in Satinder Singh v. Umrao Singh, AIR 1961 SC 908.

10. In Firm Madanlal Roshanlal v. Hukumchand Mills, AIR 1967 SC 1030. the respondent filed a suit claiming Rs. 1,72,856/- with interest thereon from 1-7-1948 till 30-1-1950. The suit was filed on 6-2-1950. Interest from the date of suit was also claimed. All the disputes in the suit were referred to arbitration on 15-5-1950. Before the arbitrator the respondent did not press his claim for interest for the period prior to the suit but claimed interest from the date of suit till recovery of the amount. The arbitrator allowed interest from the date of the award to the date of recovery of the amount found due. It was contended before the Supreme Court relying on the decision in AIR 1955 SC 468. that the arbitrator had no power to award interest during the pendency of the suit, In rejecting the contention Bachawat. J. after referring to the observations of Bose, J. in AIR 1955 SC 468. pointed out:

'These observations divorced from their context, lend colour to the argument that the arbitrator has no power to award pendente lite interest. But. in later cases, this Court has pointed out that the observations in Thawardas's case. 1955-2 SCR 48 - (AIR 1955 SC 468). were not intended to lay down such a broad and unqualified proposition, see 1960-2 SCR 209 at p. 238 = (AIR 1960 SC 307 at p. 320). 1961-3 SCR 676 at p. 695 = (AIR 1961 SC 908 at p. 916).

* * * * *

It will be noticed that the judgment of this Court in Thawardas's case, 1955-2 SCR 48 = (AIR 1955 SC 468), is silent on the question whether the arbitrator can award interest during the pendency of arbitration proceedings if the claim regarding interest is referred to arbitration. In the present case, all the disputes in the suit were referred to the arbitrator for his decision. One of the disputes in the suit was whether the respondent was entitled to pendente lite interest. The arbitrator could decide the dispute and he could award pendente lite interest just as a Court could do so under Section 34 of the Code of Civil Procedure. Though, in terms, Section 34 of the Code of Civil Procedure does not apply to arbitrations, it was an implied term of the reference in the suit that the arbitrator would decide the dispute according to law and would give such relief with regard to pendente lite interest as the Court could give if it decided the dispute. This power of the arbitrator was not fettered either by the arbitration agreement or by the Arbitration Act, 1940. The contention that in an arbitration in a suit the arbitrator had no power to award pendente lite interest must be rejected.'

In Union of India v. Bungo Steel Furniture, AIR 1967 SC 1032. the question was again raised regarding the power of the arbitrator to award interest from the date of the award. The reference was outside Court. Ramaswami, J., said:

'.....but it should be noticed that the judgment of this Court in Thawardas's case, 1955-2 SCR 48 = (AIR 1955 SC 468), does not deal with the question whether the arbitrator can award interest subsequent to the passing of the award if the claim regarding interest was referred to arbitration. In the present case, all the disputes in the suit, including the question of interest, were referred to the arbitrator for his decision. In our opinion, the arbitrator had jurisdiction, in the present case, to grant interest on the amount of the award from the date of the award till the date of the decree granted by Mallick, J. The reason is that it is an implied term of the reference that the arbitrator will decide the dispute according to existing law and give such relief with regard to interest as a Court could give if it decided the dispute. Though, in terms, Section 34 of the Code of Civil Procedure does not apply to arbitration proceedings, the principle of that section will be applied by the arbitrator for awarding interest in cases where a Court of law in a suit having jurisdiction of the subject-matter covered by Section 34 could grant a decree for interest.'

11. Though in AIR 1967 SC 1030 and AIR 1967 SC 1032 interest was awarded from the date of the award, the ratio of the decisions is that if the claim regarding interest is an implied term of the reference the arbitrator will have the power to decide the dispute according to existing law and give such relief with regard to interest as a Court could give on the basis of the principle underlying Section 34, Civil P. C.

12. We are satisfied from the award before us that the claim for interest was impliedly a subject-matter of the reference. We therefore hold that the award of interest from the date of the reference is legal and cannot be interfered with,

13. But we are unable to support the award in so far as it awards interest for the period prior to the date of reference. The arbitrator awarded interest on Rs. 1,46.922.32 and Rs. 8,500/- at the rate of 5% per annum from May 1963. The reference to the arbitrator was on 3-12-1968. The learned Government Pleader appearing for the State placed before us a number of decisions of the Supreme Court to disallow interest for the period prior to 3-12-1968. In the award the arbitrator said:

'The total amount due to the claimant on account of the work be Rs. 1,46,922.32 including 20 per cent increase. Since accounts were not settled and since the amount due to him was not offered to him by the Department, he is entitled to get 5% interest on this sum, from May 1963.'

It was agreed before us that there was no contract between the parties for payment of interest on the amount due to the respondent.

14. It is convenient here to interpose by observing that if it be a suit interest for the period prior to suit can be awarded only if there is an agreement for payment of interest at a fixed rate, or it is payable by the usage of trade having the force of law, or under the provision of any substantive law as was held in AIR 3938 PC 67. It is open to the Court to allow interest under Section 1 of the Interest Act, 32 of 1839, if the four conditions set out by Bose. J. in AIR 1955 SC 468, and quoted above are fulfilled. No doubt that section contains a proviso which says that interest shall be payable in all cases in which it is now payable by law but about that proviso the Privy Council observed in AIR 1938 PC 67, that it applied only to cases in which the Court of equity exercised its jurisdiction to allow interest. As pointed out by Lord Tomlin in Maine and New Brunswick Electrical Power Co. Ltd v. Hart, 1929 AC 631 = (AIR 1929 PC 185) :

'In order to invoke a rule of equity, it is necessary in the first instance to establish the existence of a state of circumstances which attracts the equitable jurisdiction, as for example, the non-performance of a contract of which equity Can give specific performance.'

15. In AIR 1955 SC 468, the dispute was between the Union of India which had succeeded to the rights and obligations of the Dominion of India and contractor in respect of money due to the contractor under a contract between him and the Dominion of India for the supply Of bricks. Bose, J. held there relying on AIR 1938 PC 67, that interest was not Otherwise payable by law in a case of that kind and that the arbitrator had no power to allow interest simply because he thought that the demand was reasonable.

16. In Union of India v. Rallia Ram, AIR 1903 SC 1685 on the ground that for carrying out his contract with the Government of India the contractor borrowed money from his bankers and had to pay them interest on the same the arbitrator awarded interest to the contractor. Referring to it Shah, J. said:

'We know of no principle on which the Government of India could be rendered liable for payment of interest in the circumstances relied upon.'

17. In Union of India v. Watkins and Co., AIR 1966 SC 275 referring to AIR 1955 SC 468, Ramaswamy, J. said :

'Bose, J., in delivering the judgment of the Court, observed that the interest awarded to the contractor could not, in law, be awarded. He pointed out that the arbitrator is not a Court within the meaning of the Interest Act. 1839 and, in any event, interest could only be awarded if there was a debt or a sum certain payable at a certain time or otherwise by virtue of some written contract and there must have been a demand in writing stating that interest will be demanded from the date of the demand,'

and held :

'In the absence of any usage or contract express or implied, or of any provision of law to justify the award of interest, the arbitrator cannot award interest by way of damages caused to the respondent for wrongful detention of money.'

18. It is also not open to the respondent to claim interest on the principle embodied in illustration (n) of Section 73 of the Indian Contract Act which reads:

'A contracts to pay a sum of money to B, on a day specified. A does not pay the money on that day; B, in consequence of not receiving the money on that day. is unable to pay his debts, and is totally ruined. A is not liable to make good to B, anything except the principal sum he contracted to pay. together with interest up to the day of payment.'

In discussing the scope of the above illustration the Judicial Committee in AIR 1938 PC 67, said :

'The illustration, however, does not deal with 'the right of a creditor to recover interest from his debtor on a loan advanced to the latter by the former. It only shows that if any person breaks his contract to pay to another person a sum of money on a specific date, and in consequence of that breach the latter is unable to pay his debts and is ruined, the former is not liable to make good to the latter anything except the principal sum which he promised to pay, together with interest up to the date of payment. He is not liable to pay damages of a remote character. The illustration does not confer upon a creditor a right to recover interest upon a debt which is due to him, when he is not entitled to such interest under any provision of the law. Nor can an illustration have the effect of modifying the language of the section which alone forms the enactment.'

It is not open to the respondent therefore to claim interest on that basis. The award of interest by the arbitrator for the period prior to the date of reference is therefore not warranted by law.

19. The question will then arise whether this can be a ground sufficient to modify the award. This aspect of the case need not detain us in view of the decision of the Supreme Court in AIR 1963 SC 1685, where Shah, J., observed :

'The award is the decision of a domestic tribunal chosen by the parties, and the Civil Courts which are entrusted with the power to facilitate arbitration and to effectuate the awards, cannot exercise appellate powers over the decision. Wrong or right the decision is binding if it be reached fairly after giving adequate opportunity to the parties to place their grievances in the manner provided by the arbitration agreement. But it is now firmly established that an award is bad on the ground of error of law on the face of it, when in the award itself or in a document actually incorporated in it, there is found some legal proposition which is the basis of the award and which is erroneous. An error in law on the face of the award means: 'you can find in the award or a document actually incorporated thereto as for instance, a note appended by the arbitrator stating the reasons for his judgment, some legal proposition which is the basis of the award and which you can then say is erroneous. It does not mean that if in a narrative a 'reference is made to a contention of one party, that opens the door to setting first what that contention is, and then going to the contract on which the parties' rights depend to see if that contention is sound'... But this rule does not apply where questions of law are specifically referred to the arbitrator for his decision; the award of the arbitrator on these questions is binding upon the parties, for by referring the specific questions the parties desire to have decision from the arbitrator on those questions rather than from the Court, and the Court will not, unless it is satisfied that the arbitrator had proceeded illegally, interfere with the decision.'

In view of the above, the jurisdiction of this Court to interfere with the award if on the face of it there is error in law in respect of a matter which was not specifically referred to the abritrator but was only incidentally material cannot be doubted. In the present case regarding the liability of the appellant to pay interest on the amount due to the respondent it was a question of law which was only incidentally material in order to decide the question actually referred and the granting of interest for the period prior to the reference was an error apparent on the face of the award.

20. In the result we set aside the award in so far as it relates to the granting of interest for the period prior to 3-12-1968. To that extent alone these appeals are allowed. In all other respects they shall stand dismissed. In the circumstances of the case the parties are directed to suffer their costs in these appeals.


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