Holding

An arbitrator can award pre‑reference interest only for disputes arising after the Interest Act, 1978, can award pendente lite and future interest, and the court may determine or modify interest under Section 29 when the award is filed in court.

Summary

The Supreme Court examined whether an arbitrator under the Arbitration Act, 1940 could award interest for three distinct periods – pre‑reference, pendente lite, and post‑award – in light of the Interest Act, 1978 and contractual terms. It held that an arbitrator may award pre‑reference interest only when the dispute arose after the Interest Act came into force, may award pendente lite interest, and may award future interest, with the court retaining power under Section 29 to determine or modify interest when the award is filed in court. The Court also clarified that a contractual clause stating "no interest payable on amounts withheld" did not bar interest on the balance due under the final bill. Consequently, the appeals challenging the arbitrator’s award of interest were dismissed.

Issues considered

The arbitrator's jurisdiction to award pre‑reference interest when the dispute arose after the Interest Act, 1978
The arbitrator's jurisdiction to award pendente lite interest
The arbitrator's jurisdiction to award future (post‑award) interest and the court's role under Section 29 of the Arbitration Act
The effect of a contractual stipulation that "no interest is payable on amounts withheld" on the arbitrator's power to award interest

Legislation cited

Arbitration Act, 1940s. 20, s. 29, s. 8
Interest Act, 1978s. 3

Subjects

arbitrationinterest awardpre‑reference interestpendente lite interestfuture interestSection 29Interest Act 1978contractual stipulationjurisdiction of arbitrator

Judgment

A STATE OF ORISSA
v.
B.N. AGARWALLA

JANUARY 29, 1997

B [AM. AHMADI, C.JI., S.P. BHARUCHA AND B:N. KIRPAL, JJ.]

Arbitration Act, 1940: Section 29.

Interest-Award of-Pre-reference period i.e., for the period commenc-
e ing from the date of dispute till the date arbitrator entered upon refer-
ence-Held: Arbitrator had jurisdiction to award Interest in cases which arose
after the Interest Act, 1978 came into force i.e., after 19-8-1981-ln regard to
cases pertaining to pe1iod prior to applicability of Interest Act, in absence of
any substantive law, contract or usage, arbitrator had no jurisdiction to award
interest-Decision in Abhaduta Jena's case 011 this aspect not overruled in
D G. C.Roy's case-Stipulation in the contract that "no interest was payable on
the amounts withheld under the item of the agreement" refe1red to the amount
of the cont•actor withheld by the principal towards retention money for defect '""
liability period and did not pertain to claim of contractor before arbitrator for
interest 011 balance amount payable out of final bill w.e.f date of completion
E of work till date of payment-Contractor entitled to interest w.e.f 19-8-1981
when Interest Act came into force-17ze said stipulation in the contract did
not relate to such interest-Interest Act, 1978..

Interest-Award of-Pendente lite - for period during which arbitration
proceedings were pending-Held: Arbitrator had jurisdiction to award interest.
F

Interest-Award of-Future interest - for post-award period-Held: Ar-
bitrator had jwisdiction to award future interest from date of passing of the
award--Wlzen award filed in court and decree passed in ·tenns thereof, court
G has to detennine whether interest could be awarded from date of decree and
what should be rate of interest.

The appellant, in Civil Appeal No. 9233 of 1994, had invited tenders ·
.-
for construction of certain quarters. The respondent had submitted his
tender, which was accepted. The respondent completed the work on 31-5-
H 1977. As certain differences had arisen between the parties, an arbitrator
704
STATE v. B.N. AGAR WALLA 705
was appointed and disputes between the parties were referred to the said A
arbitrator. The arbitrator made his award whereby the appellant was liable
to pay interest from 31-8-1977 till the date of payment on the principal sum
or the date of decree, whichever was later. The High Court, however,
restricted the grant of interest for the pre-reference period w.e.f. 19-8-1981,
on which date the Interest Act, 1978 came into force.
B
The appellant in Civil Appeal No. 9234 of 1994, entered into an
agreement with the respondent for improvement of a road. As disputes had
arisen between the parties an arbitrator was appointed. The arbitrator
awarded interest in respect of all the three periods, viz., pre-reference,
pendente lite and future interest. In the appeal filed before the High Court, C
the appellant challenged the decision of the arbitrator in allowingpendente
lite interest. The High Court dismissed the appeal on the ground that
pendente lite interest could be granted by the arbitrator under the Interest
Act, 1978.

The question before this Court was whether the Arbitrator had D
power to award interest.

On behalf of the appellants it was contended that as per the Special
Terms and Conditions of the contract neither pre-reference interest nor
pe11de11te lite interest could be awarded on the amount withheld under the E
item of agreement; and that under Section 29 of the Arbitration Act, 1940
the Arbitrator had no jurisdiction to award interest for the period after
the passing of the decree till the date of payment, i.e., future interest.

Dismissing the appeal, this Court
F
HELD: 1.1. Regarding Civil Appeal No. 9233 of.1994, the arbitrator
has jurisdiction to award pre-reference interest, i.e., for the period com-
mencing from the date of dispute till the date the arbitrator entered upon
reference, in cases which arose after the Interest Act, 1978 has become
applicable i.e., after 19-8-1981. With regard to those cases pertaining to G
- period prior to the applicability of the1 Interest Act, 1978, in the absence
of any substantive law, contract or usage, the arbitrator has no jurisdiction
to award interest. The decision in Abhaduta Jena's case on this aspect is
__. not overruled in G.C. Roy's case. [717-A-B]

1.2. The stipulation in the contract that "no interest is payable on H
706 SUPREME COURT REPORTS (1997] 1 S.C.R.

A amount withheld under the item of the agreement" refers to the amount.
withheld by the appellant towards. retention money for the defect liability
period and did not pertain to the claim of the respondent before the
arbitrator for interest on the balance amount payable out of the final bill
with effect from the date of completion of the work till the date of payment.
B The respondent is entitled to Interest with effect from 19-8-1981, when the
Interest Act, 1978 came into force . The aforesaid stipulation in the contract
did not relate to such interest. [718-A-D]

Secretary, Inigation Department, Govemment of Orissa & Ors. v. G.C.
Roy, [1992] 1 SCC 508, followed.
c Executive Engineer (Irrigation) v. Abhaduta Jena, [1988] 1 SCC 418;
Kishore Prabhatilal Shanna & Ors. v. Vijayendara Prabhatilal Shamia & Anr.,
[1993] l SCC 114; State of Orissa v. Lal Chand Kapani, [1994] Supp. 1 SCC
68 and Sudhir Brothers v. Delhi Development Aztlhority &Anr., [1996] 1 SCC
32, relied on.
D
Seth 17iawardas Phentmal v. Union of India, [1955] 2 SCR 48,
referred to.

2. For the period during which the arbitration proceedings were
pending i.e., for the period commencing from the date the arbitrator
E entered upon reference till the date of making the award (pendente lite t-
interest.), the arbitrator has jurisdiction to award interest. [722-G]

Secretmy, foigation Department, Govemment of Orissa & Ors. v.
G.C.Roy, [1992] 1 SCC 508, followed.
F Hindustan Construction Co. Ltd. v. State of J & K, [1992] 4 SCC 217,
relied on.

Executive Engineer (Inigation) v. Abhaduta Jena, [1988] 1 SCC 418,
overruled.

G 3.1. Regarding Civil Appeal No. 9234 of 1994, according to Section
29 of the Arbitration Act, 1940, where the award is for payment of money
the Court may in the decree order interest from the date of the decree to
the date of payment. This Section by its plain language expressly gives the
. Court the power to award interest from the date of the decree till the date
H of payment. When the arbitrator makes an award, it is not necessary that
STATEv. B.N.AGARWALLA 707
in every case the award has to be filed in a court and a decree, in terms A
thereof, is passed. It does happen that when an award is made, the party
against whom it is made may accept the award and comply with the same.
The correct procedure, which should be adopted by the arbitrator, is to
award future interest till the date of the decree or the date of payment,
whichever is earlier. The effect of this would be that if the award were
B
voluntarily accepted, which may not result in a decree being passed, then
payment of interest would be made from the date of award till the date of
payment. [723-F-H, 724-A-B]

Gujarat W.S. & S.B. v. Unique Erectors (Gujarat) (P) Ltd., AIR (1989)
SC 973, relied on. C

3.2. Where, however, as in the present case, the award is filed in the
court and a decree is passed in terms thereof, it is for the court to
determine under Section 29 of the Arbitration Act as to whether interest
' should be ordered to be paid and if so at what rate. Under Section 29, the
court can, even where the arbitrator has awarded interest from the date D
of the award till the date of payment, disallow interest from the date of the
decree or determi11e a different rate at which the interest is to be paid or
confirm the grant of interest as awarded in the award. When the Court
does not modify the award with regard to rate of interest from the date of

-· the award up to the date of payment, the effect would be as if the court E
itself has granted interest from the date of the decree till the date of
payment at the rate which was determined by the arbitrator. The future
interest should be regarded as having been ordered to be paid under
Section 29 of the Arbitration Act when the court does not modify the award
in this respect. [724-C-E]
F
3.3. In the instant case, the claim for interest even for the pre-refer-
ence period had arisen after the Interest Act, 1978 had come into force
and, therefore, the arbitrator could award interest for all the three periods,
viz., the pre-reference interest, the pendente lite interest and future interest.
[724-F] G
Secretary, Imgation Department, Govemment of Orissa & Ors. v. G.C.
Roy. [1992] 1 SCC 508, followed.

Hindustan Construction Co. Ltd. v. State of J & K, [1992] 4 SCC 217,
relied on. H
708 SUPREME COURT REPORTS [1997] 1 S.C.R.

A Sa11tokh Si11gh Arora v. U11io11 of llldia & Ors., [1992) 1 SCC 492,
referred to.

CIVIL APPELLATE JURISDICTION : Civil Appeal No. 471 of
1997 Etc.

B From the Jrldgment and Order dated 23.4.87 of the Orissa High
Court in Misc. A. No. 74 of 1982.

G.L. Sanghi, S.B. Sanyal, H.N. Salve, D.V. Sehgal, and R.N. Sach-
they, R.K. Mehta, S~B. Upadhyay, Anil K. Jha, C.D. Singh, H. Munshi, ~-
Anip Sachthey, M. Mishra, S. Mandal, Vinoo Bhagat, Jaydeep Gupta, Raja
c Chatterjee, Ms. Aruna Banerjee, G .S Chatterjee, Ejaz Maqbool and M.K.
Dua for the appearing parties.

The Judgment of the Court was delivered by

KIRPAL, J. The main question which arises for consideration in
D these cases relates to the power of the Arbitrator to award interest.

The contention on behalf of the appellants against whom interest has ""-~
been awarded by the arbitrators, is that this Court held in EXECUTIVE
ENGINEER (IRRIGATION) v.ABHADUTA JENA, [1988] 1SCC418 that
the arbitrator has no power to award interest in respect of pre reference
E
period in the absence of the claimant having a right under the contract or
a provision of snbstantive law, to get interest. On the other hand, it is the
submission on behalf of the claimants/respondents that the aforesaid
decision in the case of Abhaduta Jena (supra) has been overruled by a
Constitution Bench of this Court in the case of SECRETARY, IRRIGA-
F TION DEPARTMENT, GOVERNMENT OF OR/SSA AND OTHERS v. :;.....
G.C. ROY, [1992] l SCC 508 and it has been held that the arbitrator could
.....
award pre reference, pe11dente lite and future interest. (

Before dealing with the facts of each case it will be appropriate to
examine the relevant decisions of this Court in order to determine the
G correct legal position with regard to the jurisdiction of the arbitrator to
award interest in respect of the periods for which interest can be awarded
namely - (i) for the period commencing from the date of dispute till the
date Arbitrator entered upon the reference, or the pre-reference period; )..
-~
(ii) for the period commencing from the date the Arbitrator entered upon
H reference till the date of making the award (pe11dente lite interest) and :
STATEv. B.N.AGARWALLA[KIRPAL,J.) 709

(iii) for the period commencing from the date of making of the award till A
the date the award is made the rule of the court or till the date of
realisation, or the post award interest.

The question with regard to power of the Arbitrator to award interest
was considered at great length by this Court inABHADUTA JENA'S case
(supra). Two questions which arose for consideration of the Court in B
Abhaduta Jena's case (supra) were (i) the power of the Arbitrator to award
interest for the period prior to his entering upon reference and; (ii) the
power of the Arbitrator to award interest for the period the dispute
remained pending before him.
c
Chinnappa Reddy, J., speaking for the Court, considered all the
earlier decisions of this Court including that of SETH THAWARDAS
PHERUMAL v. UNION OF INDIA, [1955] 2 SCR 48 and, with regard to
pendente lite interest, concluded that as the arbitrator was not a court
within the meaning of Section 34 of Code of Civil Procedure, therefore, he D
could not award pendente lit.: interest. With regard to claim of interest for
the period before the reference, it was held that the arbitrator could not
award interest for pre-reference period in cases which arose prior to the
commencement of the Interest Act. 1978 unless the claimant had a sub-
stantive right to get interest under the terms of a contract or under a
o provision of any law. E

In coming to this conclusion with regard to interest for pre-reference
period, it was observed as follows :

./ "It is important to notice at this stage that both the Interest Act
of 1839 and the Interest Act of J.978 provide for the award of
F
interest up to the date of the institution of the proceedings. Neither
the Interest Act of 1839 nor the Interest Act of 1978 provides for
the award of pendente lite interest. We must look elsewhere for the
law relating to the award of interest pendente lite. This, we find,
provided for in Section 34 of the Civil Procedure Code in the case G
of courts. Section 34, however, applies to arbitrations in suit for

·-- the simple reason that where a matter is referred to arbitration in
a suit, the arbitrator will have all the powers of the court in deciding
the dispute. Section 34 does not otherwise apply to arbitrations as
arbitrators are not courts within the meaning of Section 34 Civil H
710 SUPREME COURT REPORTS [1997) 1 S.C.R.

A Procedure Code. Again, we must look elsewhere to discover the
right of the arbitrator to award interest before the institution of
the proceedings, in cases where the proceedings had concluded ,,
before the commencement of the Interest Act of 1978. While under
the Interest Act of 1978 the expression 'court' was defined to
B include an arbitrator, under the Interest Act of 1839 it was not so
defined. The result is that while in cases arising after the commen-
cement of Interest Act 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
c Act of 1839. It is; therefore, necessary, as we said, to look elsewhere
for the power of the arbitrator to award interest up to the date of
institution of the proceedings. Since the arbitrator is required to
conduct himself and make the award in accordance with law we
must look to the substantive law for the power of the arbitrator to
D award' interest before the commencement of the proceedings. If
the agreement between the parties entitles the arbitrator to award
interest no further question arises and the 'arbitrator may award
interest. Similarly if there is a usage of. trade having the force of
law the arbitrator may award interest. Again if there are any other •
E provisions for the substantive law enabling the award of interest
the arbitrator may award interest. By way of an illustration, we may
mention Section 80 of the Negotiable Instruments Act as a
provision of the substantive law under which the court may award
interest even in a case where no rate of interest is specified in the
F promissory note or bill of exchange. We may also refer Section
61(2) of the Sale of Goods Act which provides for the award of
interest to the seller or the buyer as the case may be under certain
circumstances in suits filed by them. We may further cite the
instance of the non-performance of a contract of which equity
G could give specific performance and to award interest. We may
also cite a case where one of the parties is forced to pay interest
to a third party, say on an overdraft, consequent on the failure of
the other party to the contract not fulfilling the obligation of paying
the amount due to them. In such a case also equity may compel
the payment of interest. Loss of interest in the place of the right
H
I

STATEv. B.N.AGARWALLA[KIRPAL,J.] 711
to remain in possession may be rightfully claimed in equity by the A
owner of a property who has been dispossessed from it."

The decision in Jena's case (supra) came up for consideration before
this Court in the case of GUJARAT WS. & S.B. v. UNIQUE ERECTORS
(GUJARAT) (P) LTD., AIR (1989) SC 973. In that case, the interest had B
been awarded in respect of all the three periods namely; (i) from 6.8.1981.
-l When the Interest Act, 1978 came into force, to 21.8.1984, the date when
reference was made to the arbitration; (ii) from 22.8.1984 to 19.7.1985
pendente lite; and (iii) 19.7.1985 to 17.6.1986 (date of award to date of
decree). Following Jena's case (supra), it was held that the interest pen-
dente lite could not be awarded but with regard to pre-reference interest, c
it was held that "since in this case the reference to arbitration was made
after the commencement of the Interest Act, 1978, the arbitrator under
Section 3(1)(a) of the said Act was entitled to award interest from 6.8.1981
till 21.8.1984 in view of this Court's decision in Abhaduta Jena's case". This
Court also held that even though inAbhaduta Jena's case (supra), granting D
of interest for the period from the date of award had not been considered
nevertheless interest should be allowed for that period on the principle that
this Court could, once proceedings under Sections 15 to 17 of the Arbitra-
tion Act are initiated, grant interest pending the litigation before it i.e. from
the date of award to the date of decree.
E

We may now consider the decision of the Constitution Bench in
SECRETARY, IRRIGATION DEPARTMENT, GOVERNMENT OF
OR/SSA AND OTHERS v. G.C. ROY, (1992] 1 SCC 508. The contention
of the counsels appearing on behalf of the respondents is that the decision F
in Abhaduta ·Jena's case (supra) was .overmled in its entirety and it was
held in G.C. Roy's case (supra) that the arbitrator could award interest for
all the above-mentioned three periods, namely; pre-reference, pendente lite
and post- award. On the other hand, it has been submitted by the learned
counsels on behalf of the appellants that G.C. Roy's case was not con-
cerned with the interest for the period prior to the making of the reference G

- and it overruled the decision in Jena's case (supra) only insofar as award
of pendente lite interest was concerned. It was submitted that the decision
of Abhaduta Jena's case (supra), of the arbitrator not having the jurisdic-
tion to award pre-reference interest, continues to hold the field and G.C.
Roy's case (supra) has not ruled to the contrary in this regard. H
712 SUPREME COURT REPORTS [1997] 1 S.C.R.
A A careful reading of G.C. Roy's case (supra) clearly shows that,
insofar as award of interest is concerned, this Court was only required to
consider whether the arbitrator had jurisdiction to award pendente lite
interest. This is so stated in the judgment at more places than one. Apart
from noting that the appellants had challenged the validity of the award on
B two grounds, one of which was that "arbitrator had no jurisdiction to award
pendente lite interest", it was noted that the case had been referred by order
dated 15.3.1991 by the Division Bench to the Constitution Bench as "the
learned Judges were of the view that the correctness of the view taken by '
this Court inAbhaduta Jena's case (supra), insofar as it held that arbitrator
has no power to award pendente lite interest, required consideration by a
C larger Bench". This Court, accordingly, considered the various decisions
which had been referred to by Chinnappa Reddy, J. in Abhaduta Jena's
case (supra) 'and also considered other decisions and at page 532 sum-
marised it's decision as follows :

"The question still remains whether arbitrator has the power to
D
award interest pendente lite, and if so on what principle. We must
reiterate that we are dealing with the situation where the agree- .
ment 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
E 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 depriva-
tion, call it by any name. It may be called interest, compensation
F or damages. This basic consideration is as valid for the period the
disputes 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 from (sic forum) for resolu-
tion 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 could have to approach the count
-
H for that purpose, even though he may have obtained satisfaction
f
:
STATEv. B.N.AGARWALLA[KIRPAL,J.] 713
,. y-· in respect of other claims from the arbitrator. This would lead to A
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 B
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 the Indian Courts have
c
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.

" ,_ y
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
D

unliquidated damages. It has been said repeatedly that observa-
tions 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 E
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 substantiate law, like
~ interest for the period anterior to reference (pre-reference
period). For doing complete justice between period). For doing F
complete justice between the parties, such power has always been
inferred."

Applying the aforesaid principles the conclusion arrived at was as
follows:
G
,... "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 of principal amount or independently) is
referred to the arbitrator, he shall have the power to award interest
pe11de11te lite..This is .for the reason that in such a case it must be H

-
'I
714 SUPREME COURT REPORTS [1997] 1 S.C.R.

A 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 pe11de11te lite. It is a matter within his discretion to be
B exercised in the light of all the facts and circumstances of the case,
keeping the ends of justice in view."

Finally it was observed that "for the reasons aforesaid we must hold
that the decision in Jena's case (supra), insofar as it runs counter to the
C above proposition, did not Jay down the correct law".

The perusal of the aforesaid passages clearly shows that Abhaduta
Jena's case (supra) was not overruled in its entirety by the decision in G.C.
Roy's case (supra). It is only with regard to the award of pendente lite
interest that the Constitution Bench· came to a conclusion which was
D contrary to the one arrived at inAbhaduta Jena's case (supra). The decision '--
in Abhaduta Jena's case (supra) with regard to award of interest for pre
refenmce period was not overruled in G.C. Roy's case (supra).

More recent decisions of this Court also indicate that G. C. Roy's case
E (supra) has been understood and followed as having overruled Abhduta
Jena's case (supra) only with regard to pe11dente lite interest and not with
regard to pre reference int<0rest. We may now refer to these decisions.

In HINDUSTAN CONSTRUCTION CO. LTD. v. STATE OF J & K,
[1992] 4 sec 217, the question which arose for consideration was whether
F the arbitrator was competent lo award interest for the period from the date
of the award to the date of payment. It was in that connection that
reference was made to G.C. Roy's case (supra) and it was observed as
follows :

"The question of interest can be easily disposed of as it is
G covered by recent decisions of this Court. It is sufficient to refer
· to the latest decision of a five Judge Bench of this Court in
Secretary. Irrigation Department, Govt. of Orissa v. G.C. Roy. .
Though the said decision deals with the power of the arbitrator to
award interest pe11dente lite, the principle of the decision makes it
H clear that the arbitrator is competent to award interest for the
STATE v. B.N. AGAR WALLA [KIRP AL, J.) 715
,. y- period commencing with the date of award to the date of.decree A
or date of realisation, whichever is earlier. This is also quite logical
for, while award of interest for the period prior to an arbitrator
entering upon the reference is a matter of substantive law, the grant
of interest for the post-award period is a matter of procedure."

Claim for interest for pre'reference period <.gain came up for con-
B
sideration before this Court in!UGAL KISHORE PRABHATILAL SHAR-
-l MA AND OTHERS v. VIJAYENDRA PRABHATILAL SHARMA AND
ANOTHER, (1993] 1 SCC 114. It was contended in that case that the
arbitrator could not award interest for pre-reference period. While Ran-
ganathan, J.'with whom V. Ramaswamy, J. con«:;urred, only observed that C
"there is some force in this contention" but B.P. J eevan Reddy, J. who was
one of the Members of the Bench which decided G.C. Roy's case (supra),
in his concurring judgment dealt with this question at some length. After
referring to some of the observations in the judgment of the Constitution
Bench in G.C. Roy's case (supra), it was observed by B.P. Jeevan Reddy, D
J. at page 139 as follows :

"In the circumstances, it would not be correct to read the first
of the five principles set out in para 43 as overruling Jena insofar
as it dealt with the arbitrator's power to award interest for the
pre-reference period. Principle No. (i) should be read along with E
principle No. (v) wherein it is clearly stated that the interest for
the period anterior to the reference (pre-reference period) is a
matter of substantive law unlike interest pendente lite. The con-
. clusion in para 44 again deals only with the power of the arbitrator
to award interest pendente lite. It is; therefore, not right to read F
the said decision as overruling Jena insofar as it dealt with the
power of the arbitrator to award interest for the pre-reference
period." Again in STATE OF OR/SSA v. LAL CHAND KAPANI,
(1994] SUPP. 1 SCC 68 after referring to the decision in .Jena's
and G.C. Roy's cases (supra), it was observed at page 69 sunder:
G
"It is thus clear that before the 1978 interest Act came into
force there was no provision under which the interest for the
pre-reference period could be granted. In this case, the Supreme
Court also held that the interest pendente lite i.e. from the date of
reference to the date of the award, the claimants would not be H
716 SUPREME COURT REPORTS (1997) 1 S. C.R.

A entitled to the same for the reason that arbitrator is not a court
within the meaning of Section 34 CPC since the reference was not
by a court in a pending suit. This view regarding the interest
pendente lite however has been reversed in Secret01y, Inigation
Department, Government of Orissa v. G.C. Roy. Regarding the
interest during the pre-reference period, the view taken in Ab-
B haduta Jena case is not disturbed. Therefore, the interest during
the pre-reference period can be awarded provided on the date of
the award, 1978 Interest Act was in force."

In SUDHIR BROTHERS v. DELHI DEVELOPMENT AUTHORITY
C AND ANOTHER, [1996) 1 SCR 32, the question with regard to awarding
interest for pre-reference period, but in a case arising after the commen-
. cement of Interest Act, 1978, came up for consideration and the legal
position, emanating from earlier decisions of this Court including G. C.
Roy's case (supra) and Jena's case (supra), was stated to be as follows :
D
"The Constitution Bench in G. C. Roy case was dealing with the
question relating to the award of interest pendente lite and not with
the question of the award of interest for the pre-reference period
and it was in that context that the Constitution Bench held that
the view expressed in Jena case with regard to award of pe11dente
E lite interest could not be said to have laid down good law. The
Constitution Bench did not deal With the question of pre-reference
interest in cases coming after the enforcement of the Interest Act,
1978, which came in force from 19.8.1981. In G. C. Roy case itself,
it is stated that the reference to the Constitution Bench had been
F necessitated only for deciding the question whether the decision
in Jena case was correct insofar as it held that arbitrator had no
power to award interest pendente lite. On a doubt being raised
whether the Constitution Bench in G.C. Roy case had overruled
the law laid down in Jena case relating to the power of the
arbitrator to award interest for the pre-reference period in the ·
G post-Interest Act, 1978 era, the position was clarified by a three-
Judge Bench in fugal Kishore Prabhatilal Shanna v. Vijayendra
Prabhatilal Shanna, wherein it was specifically held that the
decision in G.C. Roy case was concerned only with the power of
arbitrator to award pendente lite and that it was not concerned with
H his power to award interest for the pre-reference period."
STATE v. B.N.AGARWALLA[KIRPAL,J.] 717
In view of the aforesaid decisions there can nm" be no doubt with A
regard to the jurisdiction of the arbitrator to grant interest. The principles
which ean now be said to be well-settled arc that the arbitrator has the

- jurisdiction to award pre-reference interest in cases which arose after the
Interest Act, 1978 has become applicable. With regard to those cases
pertaining to period prior to the applicability of the Interest Act, 1978, in
B
the absence of any substantive law, contract or usage, the arbitrator has no
jurisdiction to award interest. For the period during which the arbitration
proceedings were pending ~ view of the decision in G.C. Roy's case
(supra) and Hindustan Constructions Limited case (supra), the arbitrator
has the power to award interest. The power of the arbitrator to award
interest for the post award period also exists and this aspect has been C
considered in the discussion relating to Civil Appeal No. 9234 of 1994 in
the later part of this judgment.

Keeping the aforesaid principles in mind, we may now refer to the
facts in each ease.
D
CIVIL APPEAL NO. 9233 OF 1994

In Civil Appeal No. 9233 of 1994, the appellant had invited tenders
for construction of certain quarters. The respondent Durga Parshad had
submitted his tender which was accepted. The work was completed by him E
on 31.5.1977. As certain differences had arisen between the parties, Durga
Parshad, the respondent herein, requested the appellant to make a refer-
ence of the disputes to an arbitrator as provided by the agreement. As no
reference was made, Durga Parshad filed an application under Section 20
of the Arbitration Act whereupon the Court appointed an arbitrator as per
the terms of the agreement and disputes between the parties were referred F
to the said arbitrator.

The arbitrator after hearing the parties and considering the evidence ·
adduced before him made his award whereby the appellant was held to be
liable to pay a sum of Rs. 2,73,136.82 to the respondent Durga Parshad. G
The arbitrator further held that the appellant was liable to pay simple
- interest @ 15% per annum from 31.8.1977 till the date of payment on the
aforesaid amount or the date of decree, whichever is later.

On the award being filed in the court, the appellant filed objections.
One of the objection was that the arbitrator had awarded interest but there H .
718 SUPREME COURT REI' ORTS [1997) 1 S.C.R.
~
A was a clear stipulation in the agreement that no interest was payable on
the amount withheld under the agreement. The objections were not ac-
cepted and with regard to the claim of interest, the trial court held that

B
this was not a case where interest was awarded on any amount having been
withheld. It was, however, found that the claim for interest was referred lo
the arbitrator and, therefore, the award of interest was held to be valid.
-
In the appeal before the High Court, with reference to the award of
interest, the contention which was raised on behalf of the appellant was
that the arbitrator had no jurisdiction to award interest for the pre-refer-
ence period and that the rate of interest granted was excessive. In suppcrt
C of this contention, reliance was placed on the decision of this Court in the
case of Abhaduta Jena's case (supra). The High Court, by its judgment
under appeal, relied upon the decision of this Court in the ca,c of Unique
Erectors case (supra) and came to the conclusion that interest for the
period prior to initiation of the proce.edings could be granted in cases in
which reference to arbitration was made after the commencement of the:
D Interest Act, 1978. The High Court, therdnre, restricted the grant of
interest for the pre-reference period only w.e.f. 19.8.1981, on which dale
the Interest Act, 1978 had come into force. The .Judgment and decn.:c of
trial court was, accordingly, modified with the result that the respondent
Durga Prashad instead of being awarded interest for pre-reference period
E w.e.f. 31.8.77, was as a result of judgment under appeal, awarded interest
w.e.f. 19.8.1981 till the date of payment.

It was contended by Mr. Salve, learned Senior Counsel appearing
for the appellant, that clause (4) of the Special Terms and Conditions of
the Contract did not allow the award of interest. He submitted that neither
F pre-reference interest nor pendente lite interest could be awarded be-
cause of the special stipulation in the agreement to the effect that no
interest woul.d be payable. Clause ( 4), on which reliance was placed, reads
as under :

"RATES. MATERIALS AND WORKMANSHIP
G
The rates quoted shall be for finished work inclusive of all
materials, labour, taxes, royalities, transportation etc.

The Engineer in charge will have full and final authority to reject
H any material or work done due to defect therein and the contrac-
STATEv. B.N.AGARWALLA[KIRPAL,J.] 719
tor/contractors shall forthwith remedy the defects at his/their own A
expense and no further work shall be done in connection with
particular work or portion of the work till s~ch time as the defect
is removed to the entire satisfaction of the Engineer in charge.

All materials, tools and plants brought to site by the contrac-
tor/contractors shall be deemed to be held in lien by the BCCL B
and the contractor/contractors shall not have the right to remove
the same from the site without the written permission of the
Engineer in charge. However, the BCCL shall not be liable for any
loss, theft or damage due to fire or other causes sustained during
this period of lien. c
No interest is payable on amounts with held under the item of
the agreement.

The BCCL shall be at liberty to deduct from the security
deposit or from any other sum due or to become due unc~r this D
contract or under any other. contract all sums that become due to
the ECCL. All bills shall be per-audited before amounts and will
be made by cheque only."

From the facts enumerated hcrcinabove it is clear that the reference E
in this case was made to the arbitrator by the court on an application having
been filed under Section 20 of the Arbitration Act. As interest was one of
the claims made by the respondent, the said dispute was referred to
arbitrator. The arbitrator, therefore, had the jurisdiction to decide this
issue. Inasmuch as reference to the arbitration was made after the Interest
F
Act, 1978 had come into force w.e.f. 19.8.1981, the High Court rightly came
to the conclusion that at least with effect from the <late, interest could be
11warded for the pre-reference period under Section 3 of the Interest Act,
L978. This conclusion of the High Court is in conformity with the decision
of this Court in the cases of Unique Erectors & Sudhir Bros. (supra). The
only question, therefore, is whether the aforesaid clause 4 of the Agree- G
ment negates any claim for interest being made. There can be no doubt
that if the terms of the Contract expressly stipulate that no interest would

... be payable then, notwithstanding the provisions of the Interest Act, 1978,
an,arbitrator would not get the jurisdiction or right to award interest. In
the present case, however, no such cont~ntion based on clause 4 was raised H
7W SUPREME COURT REPORTS [1997] 1 S.C.R.
~'
A before the High Court. The judgment does not show that any argument
was raised before the High Court to the effect that the contract prohibited ~
...
the award of interest. It is no doubt true that reference to this clause was

B
made before the trial court but, in appeal, the only contention which was
raised before the High Court was that the arbitrator had no jurisdiction to
award interest for pre-reference period. This contention was accepted and
-
the judgment and decree was modified to the effect that interest was
awarded not from 31.5.1977, as had been granted by the award and the
decree of the trial court, but with effect from 19.8.1981 from which date
->:--
the Interest Act, 1978 came into force. The contention based on clause 4
c having been given up before the High Court the appellant would normally
not have been allowed to be agitated in this appeal but we find that there
is no merit in this contention and the same had been rightly rejected by
the trial court. According to clause 4, interest was not payable on the
amount which was withheld. The learned counsel for the respondent has
D rightly contended that the said clause refers to the amount withheld by the
appellant towards retention money for the defect liability period. It was
submitted that the appellant had received a sum of Rs. 30,000 as security
for the fulfilment of the contract to the satisfaction of the company and the
-'( "'
respondent Durga Parsad has not claimed any interest on this amount as
under aforesaid clause 4, no interest was payable on the amount so with-
E
held. The claim which was made by Durga Parsad before the arbitrator
was for the non-payment of the full amount as per final bill submitted by
him. The claim on this account before the arbitrator was for a sum of Rs.
5,86,381.50 being the balance amount payable out of the final bill and
interest thereon was claimed with effect from the date of completion of
F work (31.5.1977) till the date of payment. The claim of the respondent for )(.
a sum of Rs. 5,86,381.50 was upheld by the arbitrator only to the extent of
Rs. 2,73,136.82 and the respondent was awarded interest on this amount.
"""
The interest so awarded is clearly not covered by the aforesaid clause 4 of
the contract.
G
The decision of the High Court awarding pre-reference interest with
effect from the date when the Interest Act, 1978 had come into force i.e.
19.8.1981 and the award of pendente lite interest, therefore, calls for no

H
interference. In the result, the appeals of M/s. Bharat Coking Coal Ltd. are
liable to be dismissed, but with no order as to costs.
"" ...
STATEv. B.N.AGARWALLA[KIRPAL,J.) 721
CIVIL APPEAL NO. 472197 (ARISING OUT OF S.L.P. (C) NO. 3630 OF A
1987 & CIVIL APPEAL NO. 471/97 (ARISING OUT OF S.L.P. (C) NO.
15995/1987.

Leave granted.

The parties in both these cases are the same and the material facts B
are not very dissimilar. In appeal arising out of S.L.P. (C) No. 3630/87, the
respondent was entrusted with some civil work by the agreement made in
the year 1974-75. Some disputes had arisen and an arbitrator was ap-
pointed on 4.7.1979. The arbitrator on 11.3.1981 gave an award for Rs.
1,82,860 including interest. As is evident from the judgment of the High C
Court the arbitrator had awarded a sum of Rs. 99009 as principal and
interest of Rs. 68635 for the period 1.6.1975 to 10.3.1981 was also awarded.

This award of interest has been upheld by the trial court and the
High Court.
D
The present appeal is confined only to the award of interest by the
arbitrator. As far as pre-reference interest is concerned, in view of the
settled legal position, pre-reference interest could not be awarded for the
period prior to coming into force of the Interest Act, 1978 specially-when
the agreement between the parties did not provide for payment of inter~st.
In other words, neither by contract nor under law was the respondent E
entitled to receive pre-reference interest for the period 1.6.1975 to
10.3.1981 which had been awarded to him. As far as future interest is
concerned, it was within the jurisdiction of arbitrator to award the same.
The appeal is allowed to the extent that the award of pre-reference interest
to the sum of Rs. 68635 is set-aside and the decree will stand modified F
accordingly. In appeal arising out of S.L.P. (C) No. 15995 of 1987, an
agreement between the parties was entered sometime in the year 1966-67.
Work was completed on 31.12.1970 and thereafter the respondent gave
notice to the Chief Engineer raising some claims. On 19.10.1976, the Chief
Engineer appointed a sole arbitrator. The arbitrator entered upon the G
reference and thereafter on 12.5.1981 gave an award of Rs. 1,56,073.74 plus
interest @7% from 1.4.1971 till the date of payment of decree. The award
was made the rule of the Court and the High Court dismissed the appeal
filed by the appellant. It is dear from the principle enunciated hereinabove
that pre-reference interest could not have been awarded in favour of the
respondent in the present case because the Interest Act, 1978 was not H
722 SUPREME COURT REPORTS (1997] 1 S.C.R.

A applicable and tllere was no term in the contract and nor was it established
that under any law or usage any interest was payable. Applying the ratio
of decisions of tllis Court in Abhaduta Jena's case (supra) and other cases,
the appeal is allowed to the extent that the award of the arbitrator, insofar
as it awards interest for the pre-reference period, is set aside. The decree
would stand modified accordingly. Parties to bear their own costs.
B
CIVIL APPEAL NO. 9234 OF 1994

On 27.5.1979, an agreement was entered into between the State
Government, the appellant herein, and the respondent for improvement of
C Salai-Manoharpur Road. This was followed by a supplementary agreement
dated 30.4.1982 for carting earth. The respondent made claims against the
appellant in respect of above work allegedly done under the said agree-
ments. On 19.5.1987, the respondent filed an application in the trial court
for appointment of an arbitrator under Section 8 of tlle said Act. This
application was allowed by the Court on 19.5.1987 and an arbitrator was
D appointrd who entered upon the reference on 10.6.1987. The arbitrat,ir
gave an award on 28.2.1988 and directed the payment of Rs. 30.21.047
towards the principal claim and interest @6% from 2.1.1984 to 25.2.1988
amounting to Rs. 8,26,811 and future interest @ 13% from the date of the
award till the date of realisation. In this way, the arbitrator awarded
E interest in respect of all the three periods, namely; pre- reference, pendentc
lite and future interest.

W\len the award was filed in the court, the appellant herein, filed
objections to the same. With regard to interest in the objection which was
filed, the appellant only challenged the decision of the arbitrator in allow-
F ing pendente lite interest. The trial court came to the conclusion that
reference to the arbitration had been made in the course of a suit and the
arbitrator was justified in allowing pendente lite interest.

In appeal filed before the High Court it was contended that the claim
of the respondent in respect of escalation of price had not been referred
G to arbitrator and therefore, he could not have given the award in respect
of the said claim. The second contention which was raised, with which we
are concerned in the present case, was that the arbitrator had no power to
grant pendente lite interest. While upholding the decision of the trial court,
in making the award the rule of the Court and passing the decree in term
H thereof, with regard to pendente lite interest the High Court referred to the
STATE v. B.N.AGARWALLA[KIRPAL,J.] T23
decisions of this Court in the cases of SANTOKJI SINGH ARORA v. A
UNTON OF INDIA AND OTHERS, (1992] 1 SCC 492 and LALCHAND
KAPANI'S case (supra) and came to the conclusion that pendente lite
interest could be granted by the arbitrator under the interest Act, 1978.

Mr. Sanval, the learned counsel for the appellant, contended that
pre-reference interest could not be granted. He further submitted that the B
arbitrator had awarded the interest also from the date of award till the date
of payment. It was submitted that this had the effect of awarding interest
even for the period after the court passes a decree, making the award the
rule of the court. Referring to Section 29 of the Arbitration Act the learned
counsel submitted that the arbitrator had no jurisdiction to award interest c
for the period after the passing of the decree till the date of payment and,
therefore, the award to that extent, at least, was liable to be set-aside.

From the facts enumerated hereinabove, it is clear that though the
arbitrator had awarded interest in respect of all the three periods, the
objections which were filed, ·1nd the contentions raised before the trial D
court as well as the High Court, related only to the award of pendente lite
interest. Jn fact, the decision of the High Court upholding the award of
pendcnte lite interest was not seriously challenged by Mr. Sanyal, obviously
in view of the decision of the Constitution Bench of this Court in G.C. Roy's
case (supra). Ordinarily, we would not be inclined to allow the appellant E
to raise a new point relating to the grant of post award interest for the first
time in this Court, put as this is a pure question of law and in order to
finally decide this issue we allowed the learned counsel to raise the same.
We, however, do not find any merit in this submission.

According to Section 29 of the Arbitration Act, where the award is F
for payment of money the Court may in the decree order interest from the
date of the decree to the date of payment. This Section by it's plain
language expressly gives the Court the power to award interest from the
date of the decree till the date of payment but would this imply thal the
arbitrator when making the award, has no jurisdiction to award interest G
from the date of the award till the date of payment.

When the arbitrator makes an award, it is not necessary that in every
case the award has to be filed in a court and a decree, in terms thereof, is
passed, it docs happen that when a award is made, the party against whom
it is made, may accept the award and comply with the same. It is rightly H
724 SUPREME COURT REPORTS [1997) 1 S.C.R.

A not disputed that from the date of passing of the award, future interest can
be awarded by the arbitrator as held by this Court in the cases of Unique .
Erectors Gujarat (P) Ltd. (supra) and Hindustan Construction Co. Ltd.
(supra). The correct procedure which should be adopted by the arbitrator
is to award future interest till the date of the decree or the date of payment,
B whichever is earlier. The effect of this would be that if the award is
voluntarily accepted, which may not result in a decree being passed, then
payment of interest would be made from the date of award till the date of
payment. Where, however, as in the present case, the award is filed in the
court and a decree is passed in terms thereof, then Mr. Sanyal has rightly
contended that it is for the Court to determine under Section 29 of the
C Arbitration Act as to whether interest should be ordered to be paid and if
so at what rate.

Under Section 29 of the Arbitration Act, the Court can, even where
the arbitrator has awarded interest from the date of the award till the date
of payment, disallow interest from the date of the decree or determine a
D different rate at which the interest is to be paid or .~onfirm the grant of
interest as awarded in the award. When the Court does not modify the
award with regard to grant of interest from the date of the award upto the
date of payment, the effect would be as if the court itself has granted
interest from the date of the decree till the date of payment at the rate
E which was determined by the arbitrator. The future interest would be
regarded as having been ordered to be paid under Section 29 of the
Arbitration Act when the Court does not modify the award in this respect.

In the instant case, the claim for interest even for the pre-reference
period had arisen after the Interest Act, 1978 had came into force and,
F therefore, the arbitrator could award interest for all the three periods. C.A.
No. 9234 of 1994 is accordingly dismissed, but with no order as to costs.

v.s.s. Appeals dismissed.