Holding

The Court held that the issue of an arbitrator's power to award pre‑reference interest under the Interest Act, 1839, without a contractual bar, requires consideration by a larger Bench.

Summary

The Supreme Court examined whether an arbitrator can award interest for the period before a reference (pre‑reference period) under the Interest Act, 1839 when the arbitration agreement is silent on interest. The Court noted earlier decisions—Executive Engineer v. Jena, State of Orissa v. G.C. Roy, and State of Orissa v. B.N. Agarwal—had held that arbitrators lack such jurisdiction for pendente lite interest and, by implication, for pre‑reference interest. Counsel for the respondents argued that the Constitution Bench in G.C. Roy, relying on English authority, effectively overruled Jena on both issues, including pre‑reference interest. The Court, after reviewing the Indian and English precedents, found the matter unsettled and decided to refer the question to a larger Bench for authoritative pronouncement. Consequently, the appeals remain pending and the papers were directed to the Chief Justice.

Issues considered

Whether an arbitrator has jurisdiction to award interest for the pre‑reference period under the Interest Act, 1839 in the absence of a contractual prohibition.

Legislation cited

Code of Civil Procedure, 1908s. 34
Interest Acts. 1839, s. 1978

Subjects

ArbitrationInterestPre‑reference periodInterest Act 1839Arbitrator jurisdictionPendente lite interestContractual prohibitionLarger Bench referral

Judgment

A EXECUTIVE ENGINEER, DHANKANAL MINOR IRRIGATION
DIVISION, ORISSA
v.
N.C. BUDHIRAJ (DEAD) BY LRS. ETC.

OCTOBER 29, 1999
B
[S.P. KURDUKAR, M. JAGANNADHA RAO AND
U.C. BANERJEE, JJ.]

Arbitration Act, I 940:
c
Arbitrator-Power to award interest under the Interest Act, 1839 for
the pre-reference period-Matter referred to larger Bench-Interest Act, 1839.

State of Orissa v. G.C. Roy, (1992) 1 SCC 508; Executive Engineer
(Irrigation) Balimela & Ors. v. Abhaduta Jena & Ors.. (1988) I SCC 418;
D State ofOrissa v. B.N. Agarwal/a, (1997) 2 SCC 469; Bengal Nagpur Railway
Co. v. Ruttanji Ranji, 65 IA 66; Seth Thawardas Pherumal v. UO!, [1955) 2
SCR 48; UOI. v. A.L. Rallia Ram, (1964) 3 SCR 164; UOJ v. Watkins Mayor &
Co., AIR (1966) SC 275; U.0.1. v. West Punjab Factories Ltd, (1966) 1 SCR
580; Jugo/ Kishore Prabhatila/ Sharma & Ors. v. Vijayendra Prabhatilal
E Sharma & Anr., (1993) 1 SCC 114; Mis. Ashok Construction Company v.
Union of India, [1971) 3 SCC 66; State of Madhya Pradesh v. Mis. Saith &
Skelton (P) Ltd, (1972) 1 SCC 702; Union of India v. Bungo Steel Furniture
Pvt. Ltd.. (1967) 1 SCR 324 and Firm Madan/a/ Roshan/a/ Mahajan v.
Hukumchand Mills Ltd., AIR (1967) SC 1030, referred to.

F Edwards v. G.W R/y. Co.. (1851) 138 ER 603; Chandris v. lsbrandsten-
Mo/ler Co. Inc., (1951) 1 KB 240; President of India v. La Pintado Cia
Navegacion SA, [1984) 2 All England Report 773 and Panchaud v. Pagnan,
(1974) I Lloyd's Law Report 394, referred to.

Russell on the law of Arbitration page 324, referred to.
G
CIVIL APPELLATE JURISDICTION: Civil Appeal No. 3586 of
1984 Etc.

From the Judgment and Order dated 15.5.82 of the Orissa High Court
H in Misc. A.No. 254 of 1981.
230
XEN. MINOR IRRIGATION DIVISION v. N.C. BUDHIRAJ 231
Raj Kumar Mehta, Ms. Mana Chakraborty and Ms. M. Sarada for the A
Appellant.

A.B. Diwan, A.K. Panda, G.L. Sanghi, Vinoo Bhagat, S. Misra, R.P.
Wadhwani and R.S. Jena for the Respondents.
The following Order of the Court was delivered :
B
In this batch of civil appeals the principal question that arises for
consideration is as to whether the Arbitrator has got jurisdiction to award
interest for the pre-reference period in cases which arose prior to
commencement of the Interest Act, 1978. The Interest Act, 1978 came into
force w.e.f. 19.8.1981. Before enforcement of this, the Interest Act, 1839 was C
holding the field. Under the impugned judgment, the High Court has awarded
interest for the pre-reference period and this is how the State of Orissa has
tiled all these appeals.
Mr. Raj Kumar Mehta, learned Advocate appearing in support of these
appeals urged that the question of payment of interest for the pre-reference D
, period is no more resintergra as the said question has been answered in the
negative by this Court in catena of judgments. However, Mr. Anil Diwan,
the learned Senior Counsel appearing for the respondents, urged that in view
of judgment of this Court in State ofOrissa v. G.C. Roy, [1992) I S.C.C. 508,
..
-. - the judgment in Executive Engineer {Irrigation) Balime/a & Ors. v. Abhaduta
Jena & Ors., [1988) l SCC 418, and State ofOrissa v. B.N. Agarwal/a, [1997) E

-
2 SCC 469, require reconsideration. Some English decisions as well as
decisions of this Court were also relied upon.
Mr. Mehta drew our attention to various judgment of this Court
including the Privy Council to support his submission. A strong reliance
has been placed by him on two decisions rendered by the three-Judge Bench, F
(1) Executive Engineer {Irrigation) Ba/ime/a & Ors. v. Abhaduta Jena & Ors.,
[1988) I SCC 418, (2) State of Orissa v. G.C. Roy, [1992) l SCC 508 and
State of Orissa v. B.N. Agarwal/a, [1997) 2 SCC 469. He also drew our
attention to the following decisions and urged that cases governed by the
Interest Act, I 839 the arbitrator has no jurisdiction to award pre-reference
interest in the absence of any custom or usage of trade having the force of G
law or any other provision of substantive law entitling the claimant to
recover interest.
I. Bengal Nagpur Railway Co., 65 IA 66.

2 Seth Thawardas Pherumal v. UOI. [1955) 2 SCR 48. H
232 SUPREME COURT REPORTS [1999] SUPP. 4 S.C.R.

A 3. UOI v. A.L. Rallia Ram, (1964] 3 SCR 164.

4. UOI v. Watkins Mayor & Co., AIR (1966) SC 275.

5. UOI v. West Punjab Factories Ltd, [1966] I SCR 580.

In Executive Engineer v. Abhaduta Jena & Ors., the 3-Judge Bench
B has held that the Arbitrator has no jurisdiction to award interest for the pre-
reference period where provisions of the Interest Act, 1839 apply as also
pendente lite. Later on the Constitution Bench of this Court in the State of
Orissa v. G.C. Roy, [1992] I SCC 508, was required to consider the correctness
of the view taken by this Court in Jena's case so far it held that the Arbitrator
C has no power to award pendente lite interest.

Reverting back to the judgment in Abhaduta Jena, a three-Judge Bench
judgment held that the interest is not payable either for the pre-reference ( '
period or pendente lite. There the question arose under the Interest Act of
1839. It is true thatthe Constitution Bench in G.C. Ray's case was principally
D concerned as to whether the decision in Abhaduta Jena's case rejecting the
claim of pendente lite interest was correctly decided or not. The Constitution
Bench in paragraph 44 and 45 held as under:

"44 .. Having regard to the above consideration, we think that the
following is the correct principle which should be followed in this
E behalf: ·

Where the agreement between the parties does not prohibit grant
of interest and where a party claims interest and that dispute (along
with the claim for principal amount or independently) is referred to
the arbitrator, he shall have the power to award interest pendente lite.
F This is for the reason that in such a case it must be presumed that
interest was an implied term of the agreement between the parties
and therefore when the parties refer all their disputes- or refer the
dispute as to interest as such- to the arbitrator, he shall have the
power to award interest. This does not mean that in every case the
arbitrator should necessarily award interest pendente lite. It is a
G matter within his discretion to be exercised in the light of all the
facts and circumstances of the case, keeping the ends of justice in .
view."
-
Paragraph 45 :

H "For the reasons aforesaid we must hold that the decision in Jena,
XEN. MINOR IRRIGATION DIVISION v. N.C. BUDHIRAJ 233

in so far as it runs counter to the above proposition, did not lay down A
correct law."

Later on in Jugal Kishore Prabhatilal Sharma & Ors. v. Vijayendra
Prabhatilal Sharma & anr., [1993) l SCC 114, again a three-Judge Bench has
clarified the judgment in Jena's case holding that in G. C. Roy's case the
only question that was concluded by the Constitution Bench was relating B
to pendente lite interest and not awardability of interest for the pre-reference
period prior to the enforcement of the Interest Act, 1978. This clarification
was given by Jeeven Reddy, J. while disposing of this appeal. Incidentally it
may be mentioned that Jeevan Reddy, J. was also a member of the Constitution
Bench.
c
Again a question was raised before a 3-Judge Bench in State of Orissa
v. B.N. Agarwala, [1997) 2 SCC 469, as to whether decision in Jena's case
has been overruled also as regards awardability of interest for the pre-
reference period under the Interest Act, 1839 and it was held that the said
decision has been overruled only as regards pendente lite interest. Mr. D
Mehta, learned counsel for the appellant, therefore, urged that the decision
in Jeno 'a case holds the field and the issue of awardability of interest for the
pre-reference period under the Interest Act, 1839 stands concluded. He also
drew our attention to many reported and un-reported decisions of this Court
disposing of the appeals on the basis of Jena's decision. In view of this
settled position of Law, he urged that all these appeals be allowed. E
Mr. Anil Diwan, the learned senior Counsel could not dispute that in
I
.{ Jena's case the claim for award of interest for the pre-reference period under
the Interest Act, 1839 has been rejected. He, however, strongly relied upon
the observations/findings recorded by the Constitution Bench in G. C. Roy's F
case in paragraph 43, which read as under :

"The question still remains whether arbitrator has the power to award
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 G
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 fpr the deprivation, call H
234 SUPREME COURT REPORTS [1999] SUPP. 4 S.C.R.

A 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.
B
(ii) An arbitrator is an alternative form (sic 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
c court for that purpose, even though he may have obtained
satisfaction in respect of other claims from the arbitrator. 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
D 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 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
E 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
F
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
G 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.
(v) Interest pendente lite is not a matter of substantive law, like
interest for the period anterior to reference (pre-reference period).
H For doing complete justice between the parties, such power has
XEN. MINOR IRRIGATION DIVISION v. N.C. BUDHIRAJ 235
always been inferred." A
Relying upon these paragraphs, he urged that the amount payable to
the claimants if found was unauthorisedly withheld, it is nothing but a debt
and for such deprivation why interest be not paid particularly when the
agreement between the parties does not prohibit award of interest. Shri
Diwan then contended that the Indian Interest Act, 1839 no doubt does not B
expressly cover the arbitrator as does the Interest Act, 1978. But the Interest
Act, 1839 corresponds almost verbatim to the English Civil Procedure Act,
1833. Under that Act, interest was awarded in England for the pre-reference
period in Edwards v. G. W. Rly. Co., (1851) 138 ER 603. This case was approved
in Chandris v. lsbrandsten-Mol/er Co. Inc., (1951) 1 KB 240 on the principle C
that the arbitrator was bound to apply the substantive law· as administered
by the ordinary courts of the land unless prohibited by contract or statute.
It was these English cases that have been relied upon in G. C. Roy to hold
that the arbitrator has power to grant pendente lite interest as does the
ordinary Court. That is why in para 44(i) (p. 532-533) of G.C. Roy it is stated
: "This basic consideration is as valid for the period the dispute is pending D
before the arbitrator as it is valid for the period prior to the arbitrator
entering upon the reference. " If that is the basis of G. C. Roy for holding
that arbitrator can award pendente lite interest, then afortiori when the question
of pre-reference interest directly arises, the answer must only be that the
arbitrator can award interest for the pre-reference period if in a similar situation, E
a court of law grants interest for the period before suit. Mr. Diwan contends
that this aspect is fundamental and has not been considered in State of Orissa
v. B.N. Aggarwal, [1997] 2 SCC 469. There this Court merely held that G.C.
Roy was not concerned with pre-reference interest. That may be true but the
result in G. C. Roy was based on a principle relating to grant of interest for
the pre-reference period under general law in England. It would be most F
equitable to adopt such course to avoid multiplicity of proceedings.

He, therefore, urged that the correct reading of the judgment in G. C. Roy
would be that the said judgment has overruled the judgment in Jena's case
on both the issues, namely, award of interest for the pre-reference period
under the Interest Act, I 839 as also the pendente lite interest. The observations G
in paragraph 8 according to the learned counsel support his contention.
Paragraph 8 thereof reads as under :

"8. Generally, the question of award of interest by ·the arbitrator
may arise in respect of three different periods, namely : (i) for the
period commencing from the date of dispute till the date the ·arbitrator H
236 SUPREME COURT REPORTS [1999] SUPP. 4 S.C.R.

A enters upon the reference; (ii) for the period commencing from the
date of the arbitrator's entering upon reference till the date of making
the award; and (iii) for the period commencing from the date of making
of the award till the date the award is made the rule of the court or
tiU the date of realisation, whichever is earlier. In the appeals before
us we are concerned only with the second of the three aforementioned
B periods. In Jena case, two questions arose for consideration of the
Court, namely : (i) the power of the arbitrator to award interest for the
period prior to his entering upon reference, and; (ii) the powers of the
arbitrator to award interest for the period the dispute remained pending
before him pendente lite. Since, the Court dealt with the second
c question in detail and held that the arbitrator had no jurisdiction or
authority to award interest pendente lite, we think it necessary to
consider the reasons for the decision. Justice Chinnappa Reddy, J.
speaking for the Bench held that neither the Interest Act, 1839 nor the
Interest Act, 1978 conferred power on the arbitrator for awarding
interest pendente lite. The learned Judge observed that Section 34 of
D the Civil Procedure Code which provides for the same did not apply
to arbitrator inasmuch as an arbitrator is not a court within the meaning
of the said provision. Consequently, the arbitrator could not award
interest pendente lite."

The Constitution Bench placed reliance on the English decision
E including the decision in Chandris v. Isbrandsem-Moller Co. Inc., (1951) I
KB 240 : (1950) All ER 768. Certain Indian decisions were also referred to
in the said paragraph. He also relied upon the decision of the English Court
in President ofIndia v. La Pintada Cia Navegacion SA (1984) 2 All England
Report 773. This is a case where the power of Arbitrator to award interest
F for the pre-reference period was directly involved and it was answered
accordingly in favour of the claimants. He also drew our attention to the
passage from the decision in Panchaud v. Pagnan (1974) I Lloyd's Law
Reports 394 at page 411. In addition to this he relied upon the statement of
law from the book Russell on the Law of Arbitration page 324 which reads
thus :
G
"A distinction must be drawn between the power of an arbitrator
to \!-ward interest up to the date when he makes his award, and his
power to award interest on his awar<J.
As concerns his power to award interest up to the date of his
H award it was always considered that he had power to do so, by virtue
XEN. MINOR IRRIGATION DIVISION v. N.C. BUDHIRAJ 237
of his implied authority to follow the ordinary rules of law, and he not A
only has the power but he should normally exercise it in the absence
of a cogent objection.

"In a commercial transaction if the plaintiff has been out of his
money for a period, the usual order is that the defendant should pay
interest for the time for which the sum has been outstanding. No B
exception should be made except for good reason."

Mr. Anil Diwan, learned Senior Counsel, then drew our attention to
Paragraph 13 in G. C. Roy's case wherein it observed as under :

"The question with which we are faced has been considered by C
the Indian and English courts in details. The decisions of the English
•
courts have been followed by the Indian courts. It is, therefore,
necessary to refer to some of the English decisions to examine how
this question has been dealt with the courts in England. In Edwards
v. Great Western Railway Company, the question raised before the D
court was whether the arbitrator is empowered to award interest on
the amount awarded by him if he thinks such a course proper. The
plaintiff's case was that he was entitled to such interest whereas the
defendant company disputed the power of the arbitrator. The
Company's case was that inasmuch as the notice of action did not
demand interest, the plaintiff was not entitled to claim interest. This E
argument was repelled by Jarvis C.J. in the following words :

"There are two answers to this : one is that there is no plea of
want of notice of action, but only a plea of never indebted 'by
statute', - the effect of which is altered by Sir F. Pollock's act, 5 & 6 F
Viet., c. 97, s. 3. The defendants had, therefore, no right to rely upon
the general plea; they are bound to plead specially the want of notice
of action. A further answer would be, that this is a submission, not
only of the action, but of all matters in difference; and the interest
would be a matter in difference, whether demanded by the notice of
action or not. If the arbitrator could give it, he might give it in that G
way, notwithstanding the want of claim of interest in the ·notice."

Mr. Anil Diwan urged that in none of the judgments relied upon by
the appellants the attention of this Court was drawn to the decisions of the
English Courts and some judgments of the Indian Courts, namely, Mis Ashok
Construction' Company v. Union of India, (1971] 3 SCC 66, State of Madhya H
238 SUPREME COURT REPORTS [1999) SUPP. 4 S.C.R.

A Pradesh v. Mis Saith & Skelton (P) Ltd, [1972] 1 SCC 702, Union of India
v. Bungo Steel Furniture Pvt. Ltd, [1967] l SCR 324, Firm Madan/a/ Roshan/a/
Mahajan v. Hukum Chand Mills Ltd., AIR (1967) SC 1030. He therefore,
urged that it would be appropriate to refer to all these appeals involving the
issue as regards awardability of interest under the Interest Act 1839 for the
B pre-reference1Jeriod to a larger Bench for authoritative pronouncement.

We have heard the learned counsel for the parties at great length and
perused the decisions of this Court as well as the English Court referred to
in above. In our opinion the observations made by the Constitution Bench
in G. C. Roy's case referred to herein above, prima facie support the contention
C raised on behalfofthe respondents. But in view of the decisions of this Court
by three-Judge Bench in Jena's case and B.N. Agarwal/a 's case (supra) which
had rejected the claim of the claimants for the interest•tmder the Interest Act,
1839 for the pre-reference period, it would be appropriate to refer the following
issue to a larger Bench for authoritative pronouncement.

D The question that needs to be considered is :

"In the absence of any prohibition to claim or grant interest
under the arbitration agreement whether Arbitrator has no jurisdiction
to award interest for the pre-reference period under the general law or
on equitable principles although such claim may not strictly fall within
E the provisions of Interest Act 1839 ?"

It may be mentioned that there is no clause in the agreement as regards
the payment of interest for the pre-reference period but there is also no clause
prohibiting the payment of interest for the pre-reference period.

p The Registry is directed to place the papers before the Learned Chief
Justice for appropriate directions.

RP. Appeals Still pending.