Holding

The arbitrator’s factual findings are binding unless perverse, and absent a contractual bar, the arbitrator may award interest; thus the High Court’s interference was erroneous.

Summary

Madnani Construction Corporation entered into a contract with the North Eastern Railway for bridge work. Disputes arose over alleged manipulations in measurement books, leading the contractor to seek arbitration. The arbitrator, after examining the level book, graph sheets and log books, found that the railway had altered entries, reducing the contractor's claimed work, and awarded Rs.4,48,873.22 with interest. The High Court held several items were "excepted matters" and non‑arbitrable and barred interest, setting aside the award. The Supreme Court held that the arbitrator’s factual findings cannot be ignored, that the contract did not prohibit interest, and that under Section 29 of the Arbitration Act, 1940 (and the Interest Act, 1978) the arbitrator could award interest. Consequently, the High Court’s order was set aside and the arbitrator’s award upheld.

Issues considered

The scope of "excepted matters" under the contract and whether the items held non‑arbitrable were indeed excepted.
Whether a High Court may disregard the arbitrator’s specific factual findings not deemed perverse.
Whether the arbitrator is empowered to award interest under the Arbitration Act, 1940 and the Interest Act, 1978 in the absence of a contractual prohibition.
The interpretation of clauses 16(2) of the GCC and clause 30 of the SCC regarding interest.

Legislation cited

Arbitration Act, 1940s. 20, s. 29, s. 30, s. 33, s. 34
Arbitration and Conciliation Act, 1996s. 31
Code of Civil Procedure, 1908s. 34
Interest Act, 1978s. 2(a), s. 3

Subjects

ArbitrationExcepted mattersArbitrabilityInterest awardArbitrator's factual findingsArbitration Act 1940Interest Act 1978Contractual clauses

Judgment

(2009] 16 (ADDL.) S.C.R. 216
'
A M/S. MADNANI CONSTRUCTION CORPORATION (P)
LTD.
v.
UNION OF INDIA & OTHERS
(Civil Appeal No. 8385 of 2004)
B DECEMBER 7, 2009 .
[MARKANDEY KATJU AND ASOK KUMAR
GANGULY, JJ.]
Arbitration Act, 1940:
c
Arbitration award - Scope of interference - Held: When
arbitrator on the basis of record and materials placed before
him arrives at specific findings which are not stigmatized as
perverse by High Court, then High Court in reaching its
D conclusions cannot ignore those findings.
s. 29 - Interest -Award of interest by arbitrator- Interfered
by High Court - On facts, held: Arbitration agreement did not
contain prohibition on arbitrator to entertain claim for interest
on the amounts due under the contract - High Court erred in
E interfering with the award of interest.

Dispute arose between the parties. Appellant served
notice dated 16.11.1983 for appointment of arbitrator to
settle the dispute. The authorities rejected the prayer.
F Appellant filed application under Section 20 of Arbitration
Act, 1940. The court appointed arbitrator. The Arbitrator
gave his a.ward on 13.4.1992 holding that the Railways
should pay an amount of Rs.4.48 lacs along wit!-. interest
prevalent at that time from 16.11.1983 to 21.3.1992. In
G passing the award, arbitrator relied on the Level book No. ),,

I, the Graph Sheets, the Log Book No. IA and the Log
Book No. 4. The arbitrator found that there were
subsequent alterations and overwriting in the entries
made in the Log Book No.IA and the same were without
H 216
MADNANI CONSTRUCTION CORPORATION (P) LTD. 217
v. UNION OF INDIA
.\
any initials by the concerned authority on behalf of the A
respondent Railways. From such materials the arbitrator
held that all the manipulations/alterations/overwritings
had resulted in reducing the quantities of the work done

- by the appellant. Moreover in violation of the Railway
rules and orders on the subject, the measurements were
not entered in the measurement book directly and mostly
B

entries in the measurement books were copied down
),
from subsidiary records or note books. High Court held
that Items Nos.1 to 3 of award were excepted matters and
hence not arbitrable. On the award of interest, High Court c
held that interest could not be awarded since the contract
prohibited payment of interest. Hence the present appeal.

Allowing the appeal, the Court

HELD: 1. The arbitrator in his award after perusal of D
i the level Book No.1, Graph-Sheets, Logbook No. 1A and
Logbook No.4 came to a clear finding that there were
manipulations/alterations/over writings by the railways
and as a result of which the volume of work done by the·
contactor was reduced. It is well settled that the arbitrator E
is the master of facts. When the arbitrator on the basis
of record and materials placed before him by the railways
came to such specific findings and which were not
-I stigmatized as perverse by the High Court, the High
Court in reaching its conclusions cannot ignore those F
findings. It goes without saying that in order to deny the
claims of the contractor as covered under excepted
matters, the procedure prescribed for bringing those
claims under excepted matters must be scrupulously
followed. The clear finding of the arbitrator is that it has G
not been followed and the High Court did not express
any dis-agreement on that. Therefore, finding of the High
Court that those items were non-arbitrable cannot be
sustained. [Paras 22 and 24] [225-F-H; 226-B-C]
H
218 SUPREME COURT REPORTS [2009] 16 (ADDL.) S.C.R.

_A 2.1. Section 29 of the Arbitration Act enables the
Court to award interest from the date of the decree and
at such rate as the Court deems reasonable. The
arbitrator's power to grant interest is governed by the
provisions of Interest Act of 1978. There are three periods
B for which interests are awarded - (a) pre-reference period
i.e. from the date of the cause of action for going to
arbitration and to the date of reference; (b) the pendente
lite period i.e. from the date of reference to the date of
award; and (c) the post-reference period i.e. from the date
c of the award to the date of realization. [Paras 29, 30, 32
and 34) [227-A-B; D-H; 228-A]

Executive Engineer (Irrigation), Balimela and Others v.
Abhaduta Jena and Others 1988(1 )SCC 418; Hindustan
Construction Company Limited vs. State of Jammu and
D Kashmir (1992) 4 SCC 217; State of Orissa v. B.N. Agarwal/a
(1997) 2 SCC 469; Executive Engineer, D.M.I. Division v. N.
C. Budhraj AIR 2001 SC 628; State of UP. v. Harish Chandra
and Company (1999) 1 SCC 63; Board of Trustees for the
Port of Calcutta v. Engineers-De-Space-Age (1996) 1 SCC
E 516; Union of India v. Saraswat Trading Agency & others JT
2009 (9) SC 648, referred to.

2.2. Clause 16(2) of GCC and Clause 30 of the sec
do not contain any prohibition on the arbitrator to grant
F interest. Therefore High Court was not right in interfering
with the arbitrator's award on the matter of interest on the
basis of these clauses. By agreeing to have settlement
of disputes through arbitration, the party concerned
must be understood to have only opted for a different
G forum of adjudication with less cumbersome procedure,
delay and expense and not to abandon all or any of its
substantive rights under the various laws in force,
according to which only even the arbitrator is obliged to
adjudicate the claims referred to him. As long as there is
H
MADNANI CONSTRUCTION CORPORATION (P) LTD. 219
v. UNION OF INDIA

.. nothing in the arbitration agreement to exclude the
jurisdiction of the arbitrator to entertain a claim for interest
on the amounts due under the contract, or any prohibition
A

to claim interest on the amounts due and become
payable under the contract, the jurisdiction of the
arbitrator to consider and award interest in respect of all B
periods subject only to Section 29 of the Arbitration Act,
1940 and that too the powers of the court thereunder, has
> to be upheld. [Paras 53 and 56] (235-C-D; 236-8-D]

Secretary, Irrigation Department, Government of Orissa
and Others v. G.C. Roy, 1992 (1) SCC 508; Executive
c
Engineer, Dhenkanal Minor Irrigation Division, Orissa and
others v. N.C. Budharaj (deceased) by Lrs. and others (2001)
2 sec 721, relied on.

Case Law Reference: D
AIR 2001 SC 628 referred to Para 14

1988 (1) sec 418 referred to Para 35
1992 (1) sec 508 relied on Para 37
E
(1992) 4 sec 211 referred to Para 42

(1997) 2 sec 469 referred to Para 43
-~ (1999) 1 sec 63 referred to Para 46
F
(1996) 1 sec 516 referred to Para 48
2009 (9) SC 648 referred to Para 50

(2001) 2 sec 121 relied on Para 54

CIVIL APPELLATE JURISDICTION : Civil Appeal No. G
8385 of 2004.
From the Judgment & Order dated 29.4.2003 of the High
Court of Judicature at Allahabad in FAFO No. 40 of 1993.
L. Nageswar Rao, Shibashish Misra for the Appellant. H
220 SUPREME COURT REPORTS [2009) 16 (ADDL.) S.C.R.

A S.W.A. Qadri, Sadhna Sandhu, AK. Sharma, B. Krishna
Prasad for the Respondents. (II

The Judgment of the Court was delivered by
GANGULY, J. 1. The subject matter of challenge in this
B appeal is the judgment and order dated 29.04.2003 passed
by the High Court of judicature at Allahabad in F.A.F.O. No. 40
of 1993, in a matter arising from the order dated 1.12.1992 of
the learned Senior Civil Judge, making the Award a Rule of the
Court, and whereby the High Court had partly allowed the
c Appeal filed by the respondent.
2. The appellant, a private limited company, is carrying on,
inter alia, various construction works for both the State and
Central Government and their undertakings. The appellant's
case is that an agreement dated 03.11.1981 was entered
D between the appellant and the North Eastern Railway for the
construction of bridge island nos. 13 and 14 over the Kosi river.
There were certain special conditions of the contract
(hereinafter, SCC) and they stipulate that the General
Conditions of Contract (hereinafter, GCC) and standard
E specifications of the North Eastern Railways shall form part of
the aforesaid contract. In terms of the contract, the construction
was to be completed by 15.02.1982. Certain payments were
made to the appellant after completion of the contract but they
were received by them "under protest". Thus, disputes cropped-
F up between the parties. The appellant is said to have served a
notice dated 16.11.1983 for the appointment of an arbitrator
to settle the disputes. The General Manager of the respondent-
Railways by an order dated 24.03.1986 rejected the appellant's
prayer for appointment of an arbitrator on the ground that the
G disputes were not arbitrable, as they fell under 'expected matter'
in the contract.
3. On or about 18.08.1987, the appellant filed an
application under Section 20 of the Arbitration Act, 1940
(hereinafter, the Act) before the Court of Addi. Civil Judge,
H
MADNANI CONSTRUCTION CORPORATION (P) LTD. 221
v. UNION OF INDIA [ASOK KUMAR GANGULY, J.]
Gorakhpur for appointment of an arbitrator which was A
transferred on 21st February, 1990, to the Court of Judge of
Small Causes /Additional Civil Judge (hereinafter, the Court
below). The Court below passed an order on 2.3.1990 that 'file
received, put up on the date fixed'. Then by an order dated
31.05.1991 the learned Civil Judge appointed one Mr. B. N. B
Shukla, the Sole Arbitrator, to adjudicate the disputes arising
out of the agreement dated 03.11.1981. Against the order of
appointment of arbitrator the responder approached the High
Court by filing F.A.F.O. No. 534 of 1991 (the earlier F.A.F.O.),
but the same was dismissed vide order dated 27.08.1991. c
4. The learned Arbitrator gave his award on 13.4.1992
holding that the Railways should pay an amount of
Rs.4,48,873.22 along with compoundable bank interest
prevalent at that time from 16.11.1983 to 21.3.1992. In passing
the award the Arbitrator relied on the Level book No. I, the Graph D
Sheets, the Log Book No. IA and the Log Book No. 4. The
Arbitrator found that there were subsequent alterations and over
writing in the entries made in the Log Book No.IA and the same
were without any initials by the concerned authority on behalf
of the respondent Railways. From such materials the Arbitrator E
held that all the manipulations/alterations/overwritings had
resulted in reducing the quantities of the work done by the
appellant. It was further observed that clause 21 (iv) of the
special conditions was not followed by the respondent Railways
-'
at all. Moreover in utter violation of the Railway rules and orders F
on the subject, the measurements were hardly entered in the
measurement book directly and mostly entries in the
measurement books were copied down from subsidiary
records or note books. After recording such findings, the
Arbitrator gave the aforesaid award. G
5. Thereafter on 08.05.1992 the appellant filed an
application under Section 17 of the Act for pronouncing
judgment and making decree according to the award.
6. On 20.5.1992 the respondent Railways filed application H
222 SUPREME COURT REPORTS [2009] 16 (ADDL.) S.C.R.

A under Section 30 read with Section 33 (Section 30/33) of the
Act before the Civil Judge for setting aside the award. Then
on 24.08.1992 they also filed their objections against the
application filed by the contractor under Section 17 of the Act.
The following facts were recorded in the judgment of the High
8 Court.
"The Railways filed an application before the District Judge
for transfer of the application filed by the contractor under
Section 20 of the Act and under Section 24 of the Civil
Procedure Code. It was dismissed on 13th November,
c 1992. The Railways filed an application on 23rd
November, 1992, before the court below for summoning
their application and under Section 30/33 of the Act from
the Court where it was filed. This was objected to by the
Contractor on the same date. However, the Court below
D summoned it and not only rejected it but also rejected their
objections against the application under Section 17 of the
Act. The Court below by its order dated 1.12.1992 also
pronounced judgment according to the award and
decreed interest at the rate given by the Bank from the
E date of the award till actual payment".
7. On 1st December 1992, the Senior Civil Judge,
Gorakhpur of the Court of Judge, Small Causes Gorakhpur
made the award a Rule of Court and directed that a decree
be prepared accordingly and directed that from the date of the •
F award to the date of payment the rate of interest on the Bank
loan is to be paid.
8. Challenging the aforesaid order of the Civil Judge, the
Railways filed an appeal before the High Court.
G 9. Before the High Court, 7 issues were framed. The
appeal was partly allowed by the High Court and in doing so
the High Court came to the conclusion that the court below had
the jurisdiction to entertain the application under Section 17 of
the Act.
H
~

MADNANI CONSTRUCTION CORPORATION (P) LTD. 223
v. UNION OF !NOIA [ASOK KUMAR GANGULY, J.]
10. On the application of the Railways under Section 30/ A
33 of the Act, the High Court held that the case is not required
to be remanded as the court below decided the case correctly
on merits.
11. Referring to the decision of the General Manager dated
8
24.03.1986 rejecting request for appointment of Arbitrator on
the ground that dispute fell under excepted matters, the High
Court concluded that there is difference of opinion between the
parties whether the dispute falls under excepted matters or not
and the decision of the General Manager regarding excepted
matters is not final between the parties. The General Manager c
by wrongly deciding this question could not exclude the
jurisdiction of the Court.
12. On the issue as to whether the respondent Railways
are entitled to raise objections regarding the excepted matters 0
at the stage of Section 20, the High Court concluded that the
' trial Court did not say a wo[(iabout it and the High Court merely
affirmed the order passed by the trial court. As such the issue
was left to be decided by the Arbitrator who has held that none
of the claims of the contractor were excepted matters. It was
E
held that as the question was not decided in the earlier litigation,
it cannot be said that the Railways are precluded from raising
this question in these proceedings.
-\ 13. On the issue of excepted matters the High Court held
that Item Nos. 1 to 3 and 5 to 8 were excepted matters and F
were non-arbitrable and the Arbitrator committed an illegality
in allowing them. For the remaining items viz. item No. 9 (a)&
(d) relating to supply of boats, 11 (b) relating to cost of wastage
of labour, it was held that these were not covered by Clause
22 (5) or 45 (a) of the GCC, as such they do not fall in the G
category of non-arbitrable matters and are arbitrable.
14. On the award of interest it was contended that clause
16 (1) read with 16 (2) of GCC prohibits payment of interest
on amounts payable to the appellant under the contract except
the Government securities mentioned therein. In this regard, the H
224 SUPREME COURT REPORTS [2009] 16 (ADDL.) S.C.R.

A High Court considered Clause 30 of sec and Clause 52 of
GCC and found them to be similar and these clauses,
according to High Court, bar interest and damages in respect
of withholding or retention under the lien. Further by placing ,.
reliance on the case of Executive Engineer, D.M.I. Division
8 v. N. C. Budhraj, AIR 2001 SC 628 High Court held that interest
could not be awarded since there was specific prohibition in
the contract regarding awarding of interest.
15. On the award of interest High Court's specific
conclusions are:
c
"(f) The contract prohibited payment of interest. Item 10 is
award for interest; it could not be awarded. Similarly no
interest could be awarded under clause 3 of the Award.
(g) There is no illegality in awarding interest payable at the
D bank rate, but it could only be awarded from the date of
decree and not from the date of award."
16. Appellant also filed a review petition before the High
Court but the same was dismissed vide order dated
E 15.05.2003.
17. This Court finds that the High Court's conclusion that
Item Nos. 1 to 3 and 5 to 8 of the award are 'excepted matters'
and non-arbitrable is not correct for the reasons discussed
below.
F
18. In coming to the aforesaid finding, the High Court relied
on Clause 45 (a) of GCC. Clause 45(a) of the GCC is set out
below:
"45(a): It shall be open to the Contractor to take specific
G objection to any recorded measurement or classification
on any ground within seven days of the date of such
measurements. Any re-measurements take11 by the
Engineer or the Engineer's Representative in the presence
of the Contractor or in his absence after due notice has
H been given to him in consequence of objection made by
MADNANI CONSTRUCTION CORPORATION (P) LTD. 225
v. UNION OF INDIA [ASOK KUMAR GANGULY, J.)
the Contractor shall be final and binding on the Contractor A
and no claim whatsoever shall thereafter be entertained
regarding the accuracy and classification of the
measurements."

19. A plain reading of Clause 45(a) of the GCC makes it B
clear that re-measurement are to be made by the Engineer or
the Engineer's representative in the presence of the
Contractor. It may be done in the absence of the contractor but
that has to be done only after due notice. On a proper
construction of Clause 45(a) it appears that'it gives the
contractor, (a) an opportunity to take a specific objection to any C
recorded measurement within seven days of such
measurements; (b) Then any re-measurements is to be taken
by the Engineer or the Engineer's representative in the
presence of the contractor or in his absence after due notice;
if the steps under (a) and (b) are strictly followed, (c) no claim D
whatsoever by the contractor shall be entertained about the
classification or the accuracy of the measurement.

20. Under Clause 62 of the GCC it is provided that matters
for which provisions have been made in Clause 45(a) shall be E
excepted matters.

21. The arbitrator in his award after perusal of the level
Book No.1, Graph-Sheets, Logbook No. 1A and Logbook No.4
came to a clear finding that there were manipulations/
.\
alterations/over writings by the railways and as a result of which F
the volume of work done by the contactor has been reduced.

22. It is well settled that the arbitrator is the master of facts.
When the arbitrator on the basis of record and materials which
are placed before him by the railways came to such specific G
findings and which have not been stigmatized as perverse by
the High Court, the High Court in reaching its conclusions cannot
ignore those findings.

23. But it appears that in the instant case, the High Court
has come to the aforesaid finding that the items mentioned H
226 SUPREME COURT REPORTS [2009] 16 (ADDL.) S.C.R.

A above are excepted matters and non-arbitrable by completely
ignoring the factual finding by the arbitrator and without holding
that those findings are perverse.
24. It goes without saying that in order to deny the claims
of the contractor as covered under excepted matters, the
8
procedure prescribed for bringing those claims under excepted
matters must be scrupulously followed. The clear finding of the
arbitrator is that it has not been followed and the High Court
has not expressed any dis-agreement on that. Therefore, the
finding of the High Court that those items are non-arbitrable
C cannot be sustained.
25. On the question of grant of interest by the arbitrator,
the High Court held that Clause 16(2) of the GCC contains a
provision against grant of interest. Clause 16(2)of the GCC is
o set out below:
"16(2): No interest will be payable upon the earnest money
or the security deposit or amounts payable to the
contractor under the contract but government securities
deposited in terms of such clause (1) of this clause will be
E repayable with interest accrued thereto."
26. The High Court has also relied on Clause 30 of the
SCC and Clause 52 of the GCC to hold that payment of interest
has been barred. The relevant portion of Clause 30 of the SCC
F relating to interest is set out below:
"... That the contractor will have no claim for interest and
damage whatsoever on any account in respect of such
with-holding or retention under the lien referred to supra
and duly notified as such to the Contractor."
G
27. The High Court has held that Clause 30 of the SCC is
similar to Clause 52 of the GCC.
28. Before discussing the implication of these clauses, it
may be noted that the Arbitration Act, 1940 does not contain
H any provision enabling the arbitrator to give interest.
MADNANI CONSTRUCTION CORPORATION (P) LTD. 227
v. UNION OF INDIA [ASOK KUMAR GANGULY, J.]
29. Section 29 of the Arbitration Act enables the Court to A
award interest from the date of the decree and at such rate as
the Court deems reasonable.
30. The present Act of 1996 (the Arbitration and
..;..· Conciliation Act, 1996), however, empowers the Arbitrator
8
under Section 31 (7)(a) and (b) to grant interest. Admittedly, in
this case the 1996 Act is not attracted. Therefore, the provisions
of 1940 Act will govern. The arbitrator's power to grant interest
is governed by the various judicial pronouncements and the
provisions of Interest Act of 1978.
c
31. It goes without saying that in the instant case, the
provision of the Interest Act, 1978 is attracted. Under the Interest
Act, 1978, Section 2(a) defines "Court" to include both a tribunal
and an arbitrator.
32. Under the Interest Act, Section 3 empowers the Court D
to allow interest. But sub-Section (3) of Section 3 contains a
proviso, namely, Section 3, sub-Section (3), Clause (a) (ii), to
the following effect:-
"3. (3) Nothing in this section, -

-
E
(a) shall apply in relation to -

•· (i) )()()( xxx

.. (ii) any debt or damages upon which payment of
interest is barred, ,by virtue of an express F
agreement"'
33. In the context of the aforesaid provision in the Interest
Act, the Clauses in the agreement quoted hereinabove assume
importance. G
34. Normally there are three periods for which interests are
awarded - (a) pre-reference period i.e. from the date of the
cause of action for going to arbitration and to the date of
reference; (b) the pendente lite period i.e. from the date of
reference to the date of award; and (c) the post-reference H
228 SUPREME COURT REPORTS [2009) 16 (ADDL.) S.C.R.

A period i.e. from the date of the award to the date of realization.
35. Initially there was a judgment of this Court in the case
of Executive Engineer (Irrigation), Balimela and Others vs.
Abhaduta Jena and Others [1988 (1) SCC 418) which held,
the arbitrator has no power to award interests in the absence
B of contract or any substantive law.

36. Construing the provision of the 1940 Act, the Court
held:-
"..in cases arising after the commencement of Interest Act
c of 1978 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." (Para 4)
D
37. The decision in Abhaduta Jena (supra), however, was
overruled by the Constitution Bench of this Court in Secretary,
Irrigation Department, Government of Orissa and Others Vs.
G.c. Roy, [1992 (1) sec 508).
E 38. The Constitution Bench in G.C. Roy (supra) discussed
several aspects of the Act of 1940 and also the provisions of ...
Section 34 of the Civil Procedure Code and also those of the
Interest Act. After discussing those provisions, the Constitution
Bench formulated the question which arose in that case as
F follows:-
"...... In the context of these provisions the question arises
whether an arbitrator to whom reference is made by the
parties has jurisdiction or authority to award interest
pendente lite. If the arbitration agreement or the contract
G
itself provides for award of interest on the amount found
due from one party to the other, no question regarding the
absence of arbitrator's jurisdiction to award the interest
could arise as in that case the arbitrator has power to
award interest pendente lite as well. Similarly, where the
H
MADNANI CONSTRUCTION CORPORATION (P) LTD. 229
v. UNION OF INDIA [ASOK KUMAR GANGULY, J.]
agreement expressly provides that no interest pendente lite A
shall be payable on the amount due, the arbitrator has no
power to award pendents lite interest. But where the
agreement does not provide either for grant or denial of
interest on the amount found due, the question arises
whether in such an event the arbitrator has power and B
authority to grant pendente lite interest.
39. After formulating the above question and discussing
various decisions and legal issues, the Constitution Bench in
paragraph 43 at page 532 further held:
c
"The question still remains whether arbitrator has the power
to award interest pendents 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 o
are dealing with a case where the agreement is silent as
to award of interest. ... "
40. After posing the question as above, the Constitution
Bench laid down the following principles in paragraph 43 at
page 532 to 533: E
"(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 F
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.
G
(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 H
230 SUPREME COURT REPORTS [2009] 16 (ADDL.) S.C.R.

A 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. This would lead to
multiplicity of proceedings.
(iii) An arbitrator is the creature of an agreement. It is open
B 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 Arbitration Act illustrate this
point). All the same, the agreement must be in conformity
c 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
D 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
E
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
F country had upheld the power of the arbitrator to award
interest pendente lite. Continuity and certainty is a hfghly
desirable feature of law.
(v) Interest pendente lite is not a matter of substantive law,
G like interest for the period anterior to reference (pre-
reference period). For doing complete justice between the
parties, such power has always been inferred."
41. Ultimately in paragraphs 44 and 45 at page 533 to 534
of the report the Constitution Bench held as follows:
H
MADNANI CONSTRL)CTION CORPORATION (P) LTD. 231
i v. UNION OF INDIA [ASOK KUMAR GANGULY, J.]
. "Where the agreement between the parties does not A
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. This is for the
reason that in such a case it must be presumed that B
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 c
necessarily award interest pendente lite. It is a 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.

45. For the reasons aforesaid we must hold that the D
decision in Jena, insofar as it runs counter to the above
proposition, did not lay down correct law."

42. Following the Constitution Bench ratio in G.C. Roy
(supra), another three-Judge Bench in the case of Hindustan E
Construction Company Limited vs. State of Jammu and
Kashmir - (1992) 4 SCC 217, while referring to the ratio in
G. C. Roy (supra), held in paragraph 5 at page 220:
~

"...... Though the said decision deals with the power of the
arbitrator to award interest pendente lite, the principle of F
the decision makes it clear that the arbitrator is competent
to award interest for the period commencing with the date
of award to the date of decree or date of realisation,
whichever is earlier. This is also quite logical for, while
award of interest for the period prior to an arbitrator G
entering upon the reference is a matter of substantive law,
the grant of interest for the post-award period is a matter
of procedure. Section 34 of Code of Civil Procedure
provides both for awarding of interest pendente lite as well
as for the post-decree period and the principle of Section H
232 SUPREME COURT REPORTS (2009] 16 (ADDL.) S.C.R.

A 34 has been held applicable to proceedings before the
arbitrator, though the section as such may not apply ....... "
43. Subsequently, in the case of State of Orissa v. B.N.
Agarwal/a - (1997) 2 SCC 469, before another three-Judge
Bent;h a similar question came up for consideration and this
B Bench following the ratio in G.C. Roy (supra) and Hindustan
Construction (supra) considered the question of payment of
interest. After discussing the ratio in Abhaduta Jena (supra)1
and G.C. Roy (supra) and various other cases, the learned
Judges in paragraph 18 at page 477 of the report came to the
C conclusion that; (a) it is well settled that the arbitrator has a
jurisdiction to award pre-reference interest in cases which
arose after the Interest Act, 1978 had become arplicable. It is
no doubt that in this case arbitration proceedings were initiated
after the 1978 Act became applicable; (b) for the period in
D which the arbitration proceedings are pending the arbitrator has
the power to award interest; (c) the Court also held that the-"*'
power of the arbitrator to award interest for the post-award
period also exists.
E 44. In G.C. Roy (supra) this Court made it clear that the
arbitration clause was silent on the payment of interest but in
B.N. Agarwal/a (supra) the Court considered Clause (4) which
had the following stipulation on interest:
"...... No interest is payable on amounts withheld under the~
F item of the agreement. ...... "
45. Considering the said Clause (4), the learned Juuges
held that the claim which was made before the arbitr:~or was
for non-payment of the full amount as per the final bill submitted
by the claimant and the arbitrator awarded interest on that. The
G interest so awarded, according to the learned Judges, is not
prohibited under Clause (4) of the Contract. Therefore, the three•
Judge Bench clearly held that just a stipulation in the contract
purporting to indicate non-payment of interest cannot denude
the arbitrator of his right to pay interest.
H
'

MADNANI CONSTRUCTION CORPORATION (P) LTD. 233
v. UNION OF INDIA [ASOK KUMAR GANGULY, J.]
46. In a subsequent decision of three-Judge Bench in the A
.{
case of State of U.P. v. Harish Chandra and Company -
( 1999) 1 sec 63, there was stipulation in the arbitration
agreement against grant of interest. The relevant clause namely
Clause 1.9 to the aforesaid effect is set out below:
~- B
"1.9 No claim for delayed payment due to dispute etc.-
No claim for interest or damages will be entertained by the
Government with respect to any moneys or balances which
)\ may be lying with the Government owing to any dispute,
difference; or misunderstanding between the Engineer-in-
Charge in marking periodical or final payments or in any c
other respect whatsoever."
47. Considering the said clause, the Court held that the
prohibition in the said clause does not prevent the contractor
from raising the claim of interest by way of damages before D
the arbitrator on the relevant items placed for adjudication. (see
piBragraph 10 page 67). In saying so, the learned Judges relied
on the ratio in the case of B.N. Agarwal/a (supra) and G.C. Roy
(supra).
48. In Board of Trustees for the Port of Calcutta v. E
Engineers-De-Space-Age, (1996) 1 SCC 516, a two-judge
Bench of this Court considered the same question. That was
a case under the 1940 Act. In Engineers (supra), the so-called
prohibition in the contract relating to payment of interest was
in Clause 13(g), which is set out below:- F
"13(g) 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
G
on the part of the Commissioners in making interim or final
payment or otherwise."
,.
'.
49. Relying on the said clause, the appellant in Engineers
(supra) argued that there was absolute prohibition against
payment of interest. The learned Judges however, relying on H
•

234 SUPREME COURT REPORTS (2009] 16 (ADDL.) S.C.R.

A the ratio in G.C. Roy (supra) held that Clause 13(g) merely
I
prohibits the Commissioner from entertaining any claim for
interest but it does not prohibit the arbitrator from awarding '
interest. The learned Judges held that such clauses must be
strictly construed in view of the ratio of the Constitution Bench
B in G.C. Roy(supra). The reasoning given by the learned Judges
in favour of strict construction runs as follows:- ..-..

"... Clause has to be strictly construed for the simple reason
that as pointed out by the Constitution Bench, ordinarily, a
person who has a legitimate claim is entitled to payment '
c within a reasonable time and if the payment has been
delayed beyond reasonable time he can legitimately claim
to be compensated for that delay whatever nomenclature
one may give to his claim in that behalf. If that be so, we
would be justified in placing a strict construction on the term
D of the contract on which reliance has been placed. Strictly
construed the term of the contract merely prohibits the
Commissioner from paying interest to the contractor for •
delayed payment but once the matter goes to arbitration
the discretion of the arbitrator is not, in any manner, stifled
E by this term of the contract and the arbitrator would be
entitled to consider the question of grant of interest
pendente lite and award interest if he finds the claim to be
justified." (Para 4, page 520)
50. It was argued before us by the learned counsel for the
F
respondent that a subsequent Division Bench of this Court in I

the case of Union of India v. Saraswat Trading Agency &
others, JT 2009 (9) SC 648, has taken a view different from
the ratio in Engineers (supra). We do not think so.

G 51. In Saraswat Trading (supra) the Clause which was
construed by the Court as clamping a prohibition on the grant
of interest was Clause 31 and which is quoted in paragraph
15 of the judgment at page 656 of the report and runs as •
follows:-
H "31. No interest or damage for delay in payment - No
MADNANI CONSTRUCTION CORPORATION (P) LTD. 235
v. UNION OF iNDIA [ASOK KUMAR GANGULY, J.]
interest or damage shall be paid to the Contractor for A

- 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 the bills or other amount due to the contractor
wi~hin a reasonable time." B
52. The learned Judges in Saraswat Trading (supra) in
paragraph 16 held that Clause 31 is different from Clause
13(g) which was considered in Engineers (supra). The ratio in
> Engineers (supra) was .not questioned.
c
53. In the instant case also the relevant clauses, which have
been quoted above, namely, Clause 16(2) of GCC and Clause
30 of the sec do not contain any prohibition on the arbitrator
to grant interest. Therefore, the High Court was not right in
Iii interfering with the arbitrator's award on the matter of interest D
on the basis of the aforesaid clauses. We therefore, on a strict
construction of those clauses and relying on the ratio in
Engineers (supra), find that the said clauses do not impose any
., bar on the arbitrator in granting interest.
54. Reference in this connection may be made to another E
Constitution Bench judgment of this Court in the case of
Executive Engineer, Dhenkanal Minor Irrigation Division,
Orissa and others v. N.C. Budharaj (deceased) by Lrs. and
others, (2001) 2 sec 721.
F
55. In N.C. Budharaj (supra), Justice Raju, speaking for
the majority, considered the question of the arbitrator's
jurisdiction and authority to grant interest in great detail and also
considered both Indian and English cases and the ratio of the
Constitution Bench of this Court in G.C. Roy (supra).
G
56. In paragraph 25 of the judgment the learned Judge
summed up the position as follows:-
"... By agreeing to settle all the disputes and claims arising
out of or relating to the contract between the parties through
H
236 SUPREME COURT REPORTS [2009] 16 (ADDL.) S.C.R.

A arbitration instead of having recourse to civil court to
vindicate their rights the party concerned cannot be
considered to have frittered away and given up any claim
which otherwise it could have successfully asserted before
courts and obtained relief. By agreeing to have settlement
B of disputes through arbitration, the party concerned must
be understood to have only opted for a different forum of
adjudication with less cumbersome procedure, delay and
expense and not to abandon all or any of its substantive
rights under the various laws in force, according to which
c only even the arbitrator is obliged to adjudicate the claims
referred to him. As long as there is nothing in the
arbitration agreement to exclude the jurisdiction of the
arbitrator to entertain a claim for interest on the amounts
due under the contract, or any prohibition to claim interest
on the amounts due and become payable under the
D
contract, the jurisdiction of the arbitrator to consider and
award interest in respect of all periods subject only to
Section 29 of the Arbitration Act, 1940 and that too the
powers of the court thereunder, has to be upheld."
E (Emphasis supplied)
57. We are constrained to note that Hon'ble High Court
unfortunately erred in appreciating the ratio of N. C. Budharaj
(supra) in passing the impugned judgment and order.
F 58. In view of such consistent views taken by both the
Constitution Bench judgments, in G.C. Roy (supra) and N.C.
Budharaj (supra), we are of the view that in the facts of this
case, no interference is called for with the award passed by
the arbitrator. The judgment of the High Court is, therefore, set
G aside and the award is upheld. The appeal is allowed.
59. There will be no order as to costs.
D.G. Appeal allowed.