Holding

The arbitrator did not err; no counter‑claim was filed, the second reference was not maintainable under Order 2 Rule 2, and the interest clause was not raised before the arbitrator, so the award stands subject to modification of the interest rate.

Summary

The State of Rajasthan appealed against an arbitration award that granted the contractor, M/s Nav Bharat Construction Co., interest of 18% on delayed payments. The contractor had also obtained a district court award of 15% interest, both of which were confirmed by the Rajasthan High Court. The appellant argued that the arbitrator erred by not considering a counter‑claim, by entertaining a second reference in violation of Order 2 Rule 2 of the CPC, and by awarding interest contrary to Clause 23 of the parties' agreement. The Supreme Court held that no counter‑claim or set‑off was filed, so the arbitrator was correct in ignoring it; the second reference was indeed not maintainable under Order 2 Rule 2, but the lower courts had applied the law correctly; and the interest clause was never raised before the arbitrator, so it could not be entertained. Consequently, the Court modified the interest rate to 6% per annum, reducing both the arbitrator’s and the district court’s awards, and dismissed the appeal. The parties were each to bear their own costs.

Issues considered

Whether the arbitrator was required to consider a counter‑claim that was not pleaded before him.
Whether a second reference to the arbitrator after the final bill was prepared is maintainable under Order 2 Rule 2 of the CPC.
Whether the arbitrator could award interest on delayed payment despite Clause 23 of the contract prohibiting such interest.

Legislation cited

Code of Civil Procedure, 1908s. Order 2 Rule 2

Subjects

ArbitrationInterest on delayed paymentCounter‑claimSet‑offOrder 2 Rule 2 CPCAward modificationContract clause interpretation

Judgment

A STATE OF RAJASTHAN AND ANR.
v.
M/S. NAV BHARAT CONSTRUCTION CO.

NOVEMBER 27, 2001

B [M.B. SHAH AND B.N. AGRAWAL, JJ.]

Arbitration :

Arbirration Award-Interest on delayed payment-Claim for-Award
passed by arbitrator~Con.finned by High Court-On appeal, held, Arbitrator
c passed a reasoned av. 1ard-Non-consideration of counter clailn and grant o.f
interest of delayed payment by Arbitrator justified-Order 2 Rule 2 not appli-
cable to the second r~ference to the Arbitrator-Code o,f Civil P."ocedure, 1908
Order 2 Rule 2.

D Respondent-contractor claimed interest on delayed payment from
the appellants. Arbitrator passed an award and granted interest @ 18 %
on the principal amount claimed. District Court awarded interest at the
rate of 15% from the date of decree. High Court confirmed the award
made by the Arbitrator.
E In this appeal, it was contended that the Award made by the Arbitra-
tor was illegal because Arbitrator failed to consider counter-claim; and
that the second reference to Arbitrator was not maintainable under Order
2 Rule 2 of CPC and that the Arbitrator awarded interest despite the
.contrary condition in the agreement.
F
Disposing of the appeal, the Court
I
HELD 1. As no set off or any counter claim was filed by the appel-
lant for the alleged amount due and payable by the contractor on the

G
alleged ground that Accountant General's Officer has raised objection for
payment of labour charges at accelerated rate, Arbitrator has rightly not .
considered the same which was sought to be raised after lapse of 4 years of
reference. (352-G; H; 353-A]

2. With regard to subsequent claims arising after the first reference,
H that is after the bill was prepared, second reference to tbe Arbitrator was
350
STATE v. NA V BHARAT CONSTRUCTISJN CO. [SHAH. J.] 351
not maintainable under Order 2 Rule 2 CPC as rightly held by the Arbi· A
tration and the courts below. [353-B; C]

3. The appellant did not raise the contention before the arbitrator or
at any stage thereafter that under Clause 23 of the Agreement between the
parties, contractor was not entitled to recover any interest on delayed
B
payment. Thus, it cannot be held that arbitrator has committed any error
apparent on the face of the record or has misconducted himself in passing
the impugued award. Further as the contention was not raised before the
arbitrator or at any stage thereafter, it is not necessary to deal with or
decide the same in the present appeal. [353-C; F)
c
State of U.P. v. Harish Chandra and Co., [1999] l SCC 63, referred to.

4. The Award is modified qua the rate of interest considering the
dispute involved and overall circumstances of the case. Respondent-claim-
ant is entitled to recover the said amount with interest at the rate of 6%
D
only. [353-G; H; 354-A)

CIVIL APPELLATE JURISDICTION : Civil Appeal NO. 8115 of 200 !.

From the Judgment and Order dated 4.12.2000 of the Rajasthan High
Court in S.B.C.M.A. No. 6.59 of 1999. E

WITH

Special Leave Petition (C) No. 6172 of 2001.

Javed Mahmud Rao and V. Krishna Murthy for the appearing parties. F

In-person for the Petitioner in S.L.P. (C) No. 6172 of 2001.

The Judgment of the Court was delivered by
G
SHAH, J. CA. No. 8JJ5 of 2001 @ S.L.P. (C) No. 7192 of 2001.

Leave granted.

Learned Senior Counsel Mr. Ashwani Kumar appearing for the appellant
contended that the judgment and decree passed by the High Court confirming H
352 SUPREME COURT REPORTS (2001] SUPP. 5 S.C.R.
A the award made by the arbitrator is on the face of it illegal because :

(a) Arbitrator has failed to consider counter-claim.

(b) second reference to arbitrator was not maintainable under Order
2 Rule 2 CPC, and
B
(c) the arbitrator has awarded interest despite the contrary condition
in the agreement.

As against this, Mr. G.L. Sanghi learned senior counsel for the respond-
ent as well as the respondent who is appearing in person submitted that in the
c written statement, counter-claim or set off was neither pleaded nor proved by
the appellant before the arbitrator. He also contended that in case of claims
raised by the respondent after preparation of final bill, there is no question of
application of Order 2 Rule 2 CPC as rightly held by the arbitrator and the
Courts below. For the contention based on clause 23 of the Agreement, it is
D submitted that the appellant never contended before the arbitrator that clause
23 provides for non-payment of interest in such cases. It is pointed out that
neither befcre the arbitrator nor before the courts below, it was contended that
arbitrator had no authority to grant interest in view of clause 23. Only conten-
tion which was raised with regard to grant of interest pendente lite for which
E reliance was placed on various decisions of this Court.

We would state that the respondent who is appearing in person has in the
alternative referred to the decision rendered by this Court in State qf U.P. v.
Harish Chandra & Co., [1999] l SCC 63 and submitted that similar clause is
interpreted by this Court and it is held that there is no such prohibition on
F granting interest. He further pointed out that if such plea was raised, he would
have produced the necessary documentary evidence or the letters written by the
concerned officers and proved that interest was payable for wrongfully with-
holding the amount due and payable.

G In our view, it has been rightly pointed out that in the written statement,
appellants have not claimed any set off or title counter claim for the alleged
amount due and payable by the contractor on the alleged ground that Account-
ant General's Office has raised objection for payment of labour charges at
accelerated rate. In our view as no such set off or claim nor any counter claim
was filed by the appellant, arbitrator has rightly not considered the same which
H
STATE v. NA V BHARAT CONSTRUCTION CO. [SHAH, J.] 353
was sought to be raised after lapse of 4 years of reference. Further the High A
',
Court has noted that the learned Additional Advocate General was unable to
point out any legal basis to support the contention that arbitrator was required
to go into the counter-claim in the circumstances of the present case.

There is also no substance in the contention raised by Mr. Ashwani
B
Kumar, learned senior counsel for the appellant that the second reference was
• barred by Order 2 Rule 2 CPC. As such the contention was not raised before
the High Court. In any case, the dispute with regard to the subsequent claims
arose after the first reference, that is, after the final bill was prepared and this
aspect is rightly dealt with by the Additional District Judge.
. c
Lastly, in the present case, the award passed by the arbitrator is reasoned
one. The contention raised by the learned counsel for the appellant that under
Clause 23 of the Agreement between the parties, contractor was not entitled
to recover any interest on delayed payment was neither raised before the
arbitrator, the District Court or before the High Court. This question depends D
upon the evidence which may be led by the parties as well as interpretation of
clause 23 by the parties and the arbitrator. The parties have understood that
there is no bar on granting interest on delayed payments. It appears that no such
contention was raised on behalf on behalf of the State of Rajasthan. In this view
of the matter, it cannot be held that arbitrator has committed any error apparent E
on the face of the record or has misconducted himself in passing the impugned
award. It is settled law that scope for setting aside the award is limited to the
grounds available under the Arbitration Act which have been well defined by
long line of decided cases. In this view of the manner, it is not necessary for
us to consider the contention of the contractor that similar clause is interpreted
by this Court in Harsish Chandra and Company's case (supra) and it is held
F
that there is no bar on granting iilterest. In our view as the contention was not
raised before the arbitrator or at any stage thereafter, it is not necessary for us
to deal with or <lecide the same in this appeal.

However, considering the dispute involved and overall circumstances of G
the case. we modify the award qua the rate of interest and reduce the same at
the rate of 6% per annum. The arbitrator in paragraph 2 l.8.1. of the award has
granted interest on the principal amount of claims no 1 to 8 from l.7.1990 to
30.4.1998 and 10 to 18 from 29.4.1991 to 30.4.1998 at the rate of 18% and
the District Court has awarded interest at the rate of 15% from the date of H
354 SUPREME COURT REPORTS [2001] SUPP. 5 S.C.R.
A decree. That part of the award and decree is modified and it is held that
respondent-claimant is entitled to recover the said amount with interest at the
rate of 6% only. The appeal is disposed of accordingly. Parties to bear their
own cost of litigation all throughout.

S.L.P. (C) No. 6172 of 2001
B
In view of the aforesaid order, the S.L.P. filed by the contractor for
enhancement of interest rate from 15% to 18% would not survive and is
dismissed.

N.J. Appeal disp?sed of.