Holding

The Supreme Court dismissed the appeal, affirming the arbitrator’s award and the High Court’s reduction of interest to 7%, finding no infirmity in the award or the court’s modifications.

Summary

The U.P. Cooperative Federation Ltd. entered into a contract with M/s Three Circles for constructing a cold storage. Disputes arose over balance steel, alleged bad workmanship, and interest on the award. An arbitrator awarded Rs.32,68,805.80 with interest at 15% and allowed various claims, which the appellant sought to set aside on grounds of error apparent on the face of the award, lack of jurisdiction over workmanship issues, and improper award of interest. The High Court dismissed the setting‑aside application, reduced the interest rate to 15% for pre‑reference period and later to 7% under Article 142. The Supreme Court held that the arbitrator’s findings on balance steel and workmanship were sound, that the arbitrator was empowered to award interest for all periods under the Arbitration Act, 1940 and the Interest Act, 1978, and that the High Court’s reduction of interest to 7% was justified. Consequently, the appeal was dismissed.

Issues considered

The arbitrator erred in finding on balance steel and the applicability of penal rates.
The arbitrator had jurisdiction to decide claims of bad workmanship and to make deductions.
The arbitrator could award interest for pre‑reference, pendente‑lite periods and interest on interest and costs under the Arbitration Act, 1940 and the Interest Act, 1978.
The High Court’s reduction of the interest rate to 7% under Article 142 of the Constitution was proper.

Legislation cited

Arbitration Act, 1940s. 16(1)(c), s. 30(c)
Constitution of Indias. Article 142
Interest Act, 1978s. 3

Subjects

ArbitrationAward setting asideBalance steelPenal ratesBad workmanshipInterest awardInterest on interestArticle 142JurisdictionContract interpretation

Judgment

(2009] 14 (ADDL.) S.C.R. 310
~-

A U.P. COOPERATIVE FEDERATION LTD. + .....
v.
M/S. THREE CIRCLES
(Civil Appeal No. 2732 of 2001)
SEPTEMBER 10, 2009
B
[TARUN CHATTERJEE AND HARJIT SINGH BEDI, JJ.]

ARBITRATION ACT, 1940:
~ ·-
,.
c Award passed by arbitrator - Application for setting it
aside - Employer claiming deduction of penal rates on the
balance steel remaining with contractor and towards ' bad
workmanship' - Claim rejected by arbitrator - High Court
dismissing employer's application - Held: The findings of
D arbitrator that in the absence of evfdence regarding the
balance steel, payment was to be made at the issue rates and
"' •
not at penal rates and that the bills presented by contractor
for use of materials having been passed by architect of
employer without any objection, employer was estopped from
raising issue of inferior quality of workmanship, do not suffer
E
from any infirmity - Besides, the relevant clauses of the
agreement did not include within their purview ' bad
workmanship' - High Court rightly rejected the argument that -t
'negligence or lack of proper care' was synonymous- to 'bad
workmanship' - There is no·ground for setting aside the award
F under the Act - Interest.

Interest:

Arbitration-Award - Interest for pre-reference period and
pendente lite - Interest on interest - Interest on cost - Held:
G
High Court rightly held that in the instant case, co·ntract being
1--
silent as to awarding of interest, arbitrator had power to award
· interest for pre-reference period, pendent elite interest ,
interest on cost and interest on interest - High Court rightly

H 310
u:P. COOPERATIVE FEDERATION LTD. v. THREE 311

"" '
~
CIRCLES

reduced interest on 'current rate' as per s.3 of Interest Act - A
However, keeping in view the long lapse of time from the date
Ii of award, for the ends of justice, interest reduced to 15% by
High court is further reduced to 7% in exercise of jurisdiction
under Article 142 of the Constitution - Interest Act, 1978 -
Constitution of India, 1950 - Article 142. B
WORDS AND PHRASES:
41 ~
Expression 'wqrkmanship' - Connotation of in the context
of construction contract.
c
A contract was entered into between the appellant
Co-operative Federation and the respondent for
construction of a cold storage. Disputes arose between
the parties. in respect of claims made by the respondent-

- • concern, which filed a suit for appointment of arbitrator. D
Ultimately, the High Court, appointed an arbitrator, who
passed an award directing the appellant to pay a sum of
Rs. 32,68,805.80 to the respondent along with interest till
the date of final payment. The application of the appellant
for setting aside the award was dismissed by the single E.
Judge of the High Court. The appeal filed by the appellant
was partly allowed by the Division Bench of the High
...,
~ Court limited to the rate of interest only.

In the instant appeal filed by the Co-operative
Federation, it was, inter alia, contended for the appellant F
'• that there was an error apparent on the face of the award
on the issue of 'balance steel recovery' as the
respondent was having steel balance with it which was
not consumed or returned and the respondent should,
therefore, pay penal rates in terms of Clause 15 (2) (6) of G
- t the contract; that there was inferior quality of
work_manship as a result of which the appellant was
entitled to make deduction from the bills.

H

"
312 SUPREME COURT REPORTS [2009] 14 (ADDL.) S.C.R. ~

A Dismissing the appeal, the Court i .....:: ..

HELD: 1. The finding of the arbitrator was that there
was no clear evidence put forward by either of the parties
as to what happened to the balance steel; and, in the
"'
circumstances, the respondent-claimant was directed to
B
pay at the issue rates and not at the penal rates. However,
though this was the observation in the body of the award,
in Appendix 'C', the arbitrator had given certain i ~

deductions based on balance steel under three heads.
The High Court rightly held that Appendix 'C' did not
c mean to be a positive finding by the arbitrator that such
steel was unutilized and had been appropriated by the
respondent. There is no infirmity either in the award of
the arbitrator or in the findings of the Division Bench as
well as of the Single Judge of the High Court on this
D count. [Para 7] [323-B-D, G-H; 324-A]

2. The arbitrator has held that all the bills presented
y

- \

by the responden~ for use of the materi<iis were passed
by ,the architect of the ~!"Pellant without any objection
·E and, therefore, the appellant was estopped from raising
the issue of inferior quality of workmanship and no
recovery could be allowed. There is no infirmity in the "(

findings of the arbitrator as well as the findings arrived "
at by the High Court. The Single Judge as well as the
F Division Bench, after examining Clauses 1O[b], [c] and [f]
of Articles of Agreement, which enumerate the matters in ..
which the Managing Director would have the exclusive
authority to decide the dispute as per Clause 11 thereof,
held that these Clauses did not include within their
purview 'bad workmanship' and, therefore, it was beyond
G
the jurisdiction of the arbitrator to decide it. In respect of
f -·
Clause 1() [c], the High Court, has rightly rejected the
argument of the appellant that 'negligence or lack of
proper care' was synonymous to bad workmanship.

H

..,
U.P. COOPERATIVE FEDERATION LTD. v. THREE 313
CIRCLES

...... , Workmanship refers to skill or talent displayed in the
performance of a work and is not related to the care or
A

diligence showed in the work or choosing the materials.
In any view of the matter, when the arbitrator on a
consideration of the entire materials on record and the
rival submissions of the parties came to the conclusion B

.. ~
of fact, which was accepted by the courts below, it is not
open to this Court to interfere with such conclusions until
and unless it is manifest that such conclusions are
perverse or arbitrary. That apart, this would not be a
ground for setting aside the award under the Arbitration c
Act, 1940. [Para 8] [324-C-H; 325-A]

3.1. From the impugned judgment of the High Court
it is evident that both the parties had admitted before the

... " arbitrator that the format to be used for analysis of extra
items shall be the CPWD Format and that both the parties
had indicated to the arbitrator that there was no
D

difference between them as to the format used by them
in analyzing the extra items. However, the parties are not
at ad idem on the actual rates to be taken for labour and
material, referred to in the format. But, from a perusal of E
the rates claimed by the parties in respect of different

- ) items it can not be said that the arbitrator acted beyond
the terms and conditions of the contract while coming to
the findings of fact relating to the extra items on rates
other than the CPWD rates also. [Para 10] [325-G-H; 326· F.
A·B, E-F]

3.2. The arbitrator has passed the award on the basis
of the conditions of the clauses in the agreement and
nothing could be shown from which it could be held that
G
the court could interfere with the award if the same was
'- + passed upon an unsound proposition of law. [Para 23]
[334-B-C]

4.1. As regards the payment of interest, the arbitrator,
H
314 SUPREME COURT REPORTS [2009] 14 (ADDL.) S.C.R.

A who entered upon the reference on 1.3.1989 and passed j
the award on 20.10.1989, awarded interest with regard to "'"
some claims from January 1987. The High Court was
perfectly justified in holding that the arbitrator has power
to award pendente lite interest a_nd where the contract
B was silent as to the awarding of interest, the arbitrator
has the pqwer· to award interest for the pre-reference
period if there is a substantive law which empowers him
to do so or if there is a usage of trade for payment which • .....
has the force of law. The arbitration in question was
c governed by the provisions of Arbitration Act, 1940.
However, as this power emanates from s. 3 of the Interest
Act, 1978, the High Court noted that the rate of interest .
cannot be more than 'the current rate of interest' as

D
stipulated by the said Section. Accordingly, the High
Court reduced the rate of interest for pre-reference period
from 18% to 15%. It can not be said that the arbitrator was
not entitled to award interest on the pre-reference period
r ...
because there was no clause in the agreement
prohibiting such awarding of interest. However, the High
Court has reduced the ·~~e of interest to the 'current rate
E of interest' and, therefore, it is not open for this Court to
interfere with such rate of interest at this stage. [Para 11
and 14] [327-F-H; 328-A-B; 329-C-D] ·'(

Executive Enginenr, (Irrigation) Balimela & Ors. Vs.
F Abhaduta Jena & Ors. 1988(1) SCC 418; Secretary, Irrigation
Department, Government of Orissa & Ors. Vs. G. C. Roy
1992(1) sec 508 and State of Rajasthan and Anr. Vs. Ferro
Concrete Construction Pvt. Ltd. 2009(8) SCALE 753, referred
to
G
4.2. As regards plea of interest on interest, there is
i ...,.
no reason to set aside the judgment of the Division
Bench of the High Court while considering the ground
of 'interest on interest'. [Para 16] [330-A-B]
H McDermott International Inc. Vs. Bum Standard Co. Ltd.
U.P. COOPERATIVE FEDERATION LTD. v. THREE 315
CIRCLES
- • & Ors. 2006(11) SCC 181; Oil and Natural Gas Commission A
Vs. M/s. M.C. Clelland Engineers S.A. 1999 AIR SCW 1224,
referred to

4.3. So far as the ground relating to the power of the
arbitrator to award interest on the costs of arbitration is B
concerned, there is no infirmity in the said findings of the
High Court. Since the legislature by way of an
J
' amendment in the year 1956 deleted s. 35(3) of the Code
of Civil Procedure which empowered the court to award
interest, the arbitrator, on analogy, cannot have the power
to award interest on costs. Therefore, the High Court has
c
failed to justify in holding that the powers of the arbitrator
are not affected by changes made to the Code of Civil

-
' -~
Procedure. The power of the arbitrator, if any, shall be
located from the Act itself. A plain reading of paragraph
8 of the First Schedule to the Arbitration Act, 1940 would D
show that there is a provision in this clause which does
not permit or prohibit the imposition of interest on costs
of arbitration. [Para 16 and 17] [330-B-D; G]

Sir Mohd. Akbar Khan Vs. S. Attar Singh (deceased) AIR E
1945 PC 170, referred to
)

4.4. The High Court has also observed in the
impugned judgment that the principles in relation to
payment of interest on interest will apply in this context
F
as well and that there is no principle or precedent
prohibiting award of interest on cost. Interest, which is
damages for wrongful retention of money that rightfully
belonged to one, thus can be paid on costs as well. This
may also be considered that costs of arbitration are
., actually incurred by the respondent and are payable only G
with the award in its favour. Accordingly, there is no
infirmity in the judgment of the Division Bench except
that the rate of interest from 15% should be reduced to

H
316 SUPREME COURT REPORTS [2009] 14 (ADDL.) S.C.R.

A · 7%. Considering the fact that the award was passed on
I
-
20.10.1989 and 20 years have passed since then, for the
ends of justice it would be appropriate that the judgment
of the Division Bench is modified in exercise of power
under Article 142 of the Constitution only to the extent
B that the rate of interest is reduced from 15% to 7%. [Para
18 and 19] [330-G-H; 331-C-D; 332-D-F]
~ r
McDermott International Inc. Vs. Bum Standard Co. Ltd.
& Ors. 2006(11) SCC 181, relied on
c Pure Helium India (P) Ltd. vs. ONGC (2003) 8 SCC 593;
Mukand Ltd. vs. Hindustan Petroleum Corpn. Ltd. (2006) 9
sec 383, referred to
T.N. Electricity Board vs. Bridge Tunnel Constructions & ~
.,,..
:

D Ors. (1997) 4 SCC 121 and Trustees of the Port of Madras
vs. Engineering Constructions CQrpn. Ltd. (1995) 5 SCC 531,
held inapplicable

Case Law Reference:

E 1988(1) sec 418 referred to para 11
1992(1) sec 508 referred to para 11 (

2009(8) SCALE 753 referred to para 13
2006(11) sec 181 referred to para 15
F
1999 AIR sew 1224 referred to para 16
AIR 1945 PC 170 referred to para 16
(2003) 8 sec 593 referred to para 20
G (2006) 9 sec 383 referred to para 20 -1- -,-

(1997) 4 sec 121 held inapplicable para 21

(1995) 5 sec 531 held inappUcable para 21

H
U.P. COOPERATIVE FEDERATION LTD. v. THREE 317
-·1 CIRCLES

- ~ CIVIL AP PELLATE JURISDICTION : Civil Appeal No.
2732 of 2001.
A

From the Judgment & Order dated 11.2.2000 of the High
Court of Judicature at Bombay in Appeal No. 956 of 1994 in
Arbitration Petition No. 219 of 1989 in Arbitration Award No.
B
166 of 1989.

.- J
Rakesh Dwivedi, Poonam Singh, R.B. Mishra, Rani
Chhabra for the Appellants.

V. Madhukar (for Manjula Gupta) for the Respondents. c
The Judgment of the Court was delivered by

TARUN CHATTERJEE, J. 1. On or about 14th of
December, 1983, a tender was floated by the U.P. Cooperative
.,,; "'!
FederatiQn Ltd. (hereinafter referred to as "the Federation") for D
construction of 4000 Metric Ton cold storage at Vashi, New
Mumbai. The tender document mentioned the time of
completion as twelve months. Mis Three Circles - the
respondent herein, submitted a tender to get the contract. In the
year 1984, a contract was executed with M/s Three Circles. E
Clause 1O[f] of the Contract Agreement reads as follows:

"It is further agreed that all disputes or differences
arising out of the provisions as contained in the
preceding paragraphs, [a] to [f] of Clause 10 shall be
F
referred to the Managing Director of Employer, whose
decision shall be final, conclusive and binding and shall
not be referred to arbitration or to any court of law."

Clause 11 of the contract reads as follows:
G
- i "All disputes and differences between the parties
regarding the construction or interpretation of any of the
terms and conditions herein contained or conditions of
contract being the integral part of this contract {except
those which are subject matter of the decision of H
318 SUPREME COURT REPORTS [2009] 14 (ADDL.) S.C.R. ..
t

A Managing Director of the Employer or/are expressly l -

forbidden and excluded from being referred to arbitrator
under any clause by the contract documents and such
decision shall be final, conclusive and binding upon the
parties hereto] or determination of and liability or any
B disputes of whatever nature whether during the course of
progress or work or thereafter or after recession of the
contract, shall be referred to the arbitration as provided
in the condition No.51 of the Heading "scope and
performance" in the Tender documents and shall be
c deemed to be reference within the relevant provisions of
the Indian Arbitration Act, 1940, and or any statutory
modification of enactment there under. n

Clause 51 of the General Conditions of contract provided
for arbitration. This clause reads as follows:
D
1
"51. The contractor will become nominal member of the
Federation and will abide by the rules and regulation laid I.,,
I
down from time to time. Except where otherwise provided
for in the contract all questions and disputes relating to the
E meaning of the sp~cifications, designs, drawings and
· instructions herein before mentioned and as to the quality
of workmanship or materials used on.the work or as to any
other questions, claim, right, matter or thing whatsoever in
any way arising out of or relating to the contract, designs,
F drawings, specifications, estimates, instructions, order or
these conditions or otherwise concerning the works, or the
execution or failure to execute the same whether arising
during the progress of the work or after the completion or
abandonment thereof shall be referred to the sole
arbitration of the Registrar Cooperative Societies Uttar
G
Pradesh and if the Registrar is unable to or unwilling to act,
to the sole arbitration of some other person appointed by
the Managing Director, willing to act as such arbitrator.
There will be no objection if the arbitrator so appointed is
an employee of Federation and that he had to deal with
H
U.P. COOPERATIVE FEDERATION LTD. v. THREE 319
CIRCLES [TARUN CHATTERJEE, J.J
...
• the matters to which the contract relates and that in the
course of his duties as such he had expressed views on
A

all or any of the matters in dispute or difference. The
arbitrator to whom the matter is originally referred being
transferred or vacating his office or being unable to act for
any reason, such Managing Director as aforesaid at the B
time of such transfer vacation of office or liability to act shall
appoint another person to act as arbitrator in accordance
h
.i with the terms of the contract. Such person shall be entitled
to proceed with the reference from the stage at which it
was left by his predecessor. It is also a term of this contract c
that no person other than a person appointed by such
Managing Director as aforesaid should act as arbitrator
and if for any reason, that is not possible the matter is not

- 'r
to be referred to arbitration at all. Cases where the amount
of the claim in dispute is Rs.25,000/- [Rupees twenty five
thousand] and above, the arbitrator shall give reasons for
the award. Subject as aforesaid the provisions of the
D

Arbitration Act, 1940 or any statutory modification or
reenactment thereof and the rules made there under and
for the time being in force shall apply to the arbitration
proceeding under this clause. E

~
It is a term of the contract that the party invoking
arbitration shall specify the dispute or disputes to be
referred to arbitration under this clause together with the
amount or amounts claimed in respect of each such F
dispute.

The arbitrator[s] may from time to time with consent
of the parties enlarge the time, for making and publishing
the award.
G
- -1
The work under the contract shall, if reasonably
possible, continue during the arbitration proceedings and
'\ no payment due or payable to the contractor shall be
withheld on account of such proceedings.
H
320 SUPREME COURT REPORTS [2009] 14 (ADDL.} S.C.R.

A The Arbitrator shall be deemed to have .entered on * ,.,
the reference on the date he issues notice to both the
parties fixing of the date of the first hearing.

The Arbitrator shall give a separate award in respect
of each dispute or difference referred to him. ~
B
The venue of arbitration shall be such place as may
be fixed by the Arbitrator in his sole discretion. i. ,

The award of the Arbitrator shall be final, conclusive
c and binding on all parties to this contract."

2. The respondent was given extension of time for •
l
execution and completion of the project pursuant to Clause 13
of the General Conditions of Contract. It may be kept on record
that Clause 32 clearly postulates that the extended time was
0 also to be the essence of the contract. After the expiry of
stipulated period of time, the respondent submitted certain
claims to the Managing Director of the appellant in terms of
Clause 10 of the Contract. A compensation of Rs.87,000/-was
awarded to the respondent. In this connection, it may be stated
E that the respondent had also suspended work for some time.

3. The respondent thereafter file~ a suit being Arbitration
\
Suit No.3212 of 1986 before the High Court of Bombay under
Section 20 of the Arbitration Act, 1940 [in short "the Act"]
F praying for appointment of an Arbitrator. By an order dated 7th
of January, 1988, the High Court appointed one Shri N.N.
Shrikhande as the sole Arbitrator to decide the disputes raised
by the parties. Subsequently, the appellant filed a notice of
motion praying for setting aside the order of appointment dated
G 7th of January, 1988 and also prayed for stay of the arbitration
proceedings. The said notice of motion was, however,
dismissed by the High Court. The appellant filed an appeal
which was also dismissed on the ground of delay.

4. The appellant, feeling aggrieved, filed a special leave
H petition being SLP [C] No.11703 of 1988 in which this Court
U.P. COOPERATIVE FEDERATION LTD. v. THREE 321
CIRCLES [TARUN CHATTERJEE, J.]
• granted leave, which came to be registered as Civil Appeal A
No.3585 of 1988. By an order dated 4th of October, 1988, this
--\
Court had set aside the order dated 7th of January, 1988 ·and
remanded the matter to the High Court for nominating another
Arbitrator. Again by an order dated 2nd of November, 1988,
the High Court appointed one Shri S.N. Mishra as the sole B
Arbitrator. On 1st of March, 1989 the learned Arbitrator entered
)
upon the reference. On 2nd of March, 1989, statement of claim
was filed by the respondent. Various claims were made, inter
alia, for escalation, purchase of additional material and
transport charges. Reply to show cause notice was filed on 16th c
-, of March, 1989 by the appellant and rejoinder to the same was
also filed by the respondent. The learned Arbitrator thereafter
by a reasoned award dated 20th of October, 1989 directed the
appellant to pay a sum of Rs.32,68,805.80 to the respondent
along with interest at the rate of 15% till the date of final
D
payment. On or about 14th of December, 1989, the appellant
filed an application for setting aside the said award before the
High Court. By a judgment and order dated 19th of October,
1994, a learned Judge of the High Court dismissed the said
petition of the appellant, inter alia, on the following findings:
E
[1] The claim of the appellant that they were entitled to
'11
deduct certain amounts from the final payment to the
respondent on account of his having consumed extra
cement was rejected.
F
[2] The Arbitrator did not have any jurisdiction in rejecting
the claim in view of Clause 10 of the agreement.

[3] The claim of the appellant that it was entitled to deduct
certain amount from the final bill on account of non

-- ~
utilization of steel was rejected.

[4] The Arbitrator awarded escalation price to the
G

respondent on account of increase in prices even after the
stipulated time of completion.
H
322 SUPREME COURT REPORTS [2009] 14 (ADDL.} S.C.R.

A [5] The Arbitrator disallowed the claim of the appellant for
deduction of amounts from the final bill on account of poor
workmanship.

[6] The claim towards purchase of surplus wood by the
respondent was allowed along with the claim for filling of
B
earth.

[7] The claim of the respondent towards transport charges
\
for carrying wood was allowed despite the fact that the
contract provided for local wood to be used.
c
[8] Expenses towards litigation and interest at the rate of
18% prior to the reference were also allowed. ""

5. Feeling aggrieved, an appeal was carried to the
I
Division Bench of the Bombay High Court and by a judgment ,___,
D
and order dated 11th of February, 2000, the Division Bench
partly allowed the appeal limited to the question of interest but "\ .,..-
rejected all other contentions of the appellant. Feeling aggrieved
by the aforesaid order of the Division Bench of the High Court,
a special leave petition was filed, which on grant of leave was
E heard in the presence of learned counsel for the parties.

6. We have heard the learned counsel for the parties and 'f
examined the impugned order of the High Court as well as the
application for setting aside the award passed by the Arbitrator
F filed at the instance of the appellant and other materials on
record. On behalf of the appellant, Mr. Rakesh Dwivedi, learned
senior counsel, contended at the first instance that there was
an error apparent on the face of the aw:::!rd on the issue of
'balance steel recovery'. Mr. Dwivedi contended that the
G respondent was having balance steel with it which was not
consumed or returned and the respondent should, therefore, pay
interest on it as per penal rates in terms of Clause 15[2][6] of +- - -
the Contract. At this stage we may refer to Clause 15 [2][6]
which runs as under:-
H "if on completion of work, the contractor fails to return
U.P. COOPERATIVE FEDERATION LTD. v. THREE 323
CIRCLES [TARUN CHATTERJEE, J.]
'- ~ surplus materials out of those supplied by the A
Federation, then, in addition to any other liability which
the contractor would incur, the Engineer In-charge may,
by a written notice to the contractor, require him to pay
within a fortnight of receipt of notice, for such unreturned
surplus materials at double the issue rates." B
7. On this score, the finding of the Arbitrator was that.there
was no clear evidence put forward by either of the parties as
to what happened to the balance steel and under that
circumstances the claimant, namely, the respondent was
directed to pay at the issue rates and not at the penal rates.
c
However, though this was tbe observation in the body of the
award, in Appendix 'C', the Arbitrator had given certain
deductions based on balance steel under three heads. Mr.
Dwivedi, therefore, contended that the appendices were part
"' ' of the award itself which is to be interpreted in conjunction with D
Appendix 'C' and, therefore, in the light of Appendix 'C' where
a finding of unutilized steel under three heads lying unutilized
the Arbitrator should have awarded the respondent to pay at
penal rates and by not doing so and directing the payment at
issue rates it was against the express terms of the contract and E
liable to be interfered with. In response to this argument, the
'li
learned counsel for the respondent, however, contended that
Appendix 'C' could not be construed to be a part of the award,
since, in the award the observation was that there was no clear
evidence as to the balance steel, payment at penal rates could F
not have been awarded. It was further contended by learned
counsel for the respondent that if anyone, it was the respondent
who should be aggrieved and at any rate, the appendix did not
give the appellant to contend that there was a finding of
unutilized balance steel. The Arbitrator in his award Clearly G
.. 1 stated that in the absence of a positive finding of the same, the
' penal rate cannot be awarded. The Court, therefore, rightly held
that Appendix 'C' did not mean to be a positive finding by the
Arbitrator that such steel was unutilized and had been
appropriated by the respondent. Accordingly, we do not find H
324 SUPREME COURT REPORTS [2009] 14 (ADDL.) S.C.R.

A any infinnity either in the award of the Arbitrator or in the findings
of the Division Bench as well as of the learned Single Judge ! -
on this ground.

8. It was next contended by the learned senior counsel for
the appellant that there was inferior quality of workmanship as
B
a result of which it was entitled to make deduction from the bills.
The learned Arbitrator had refused to accept this submission
from, the side of the appellant that under the contract the
~'
respondent was obliged to use local materials including local
bricks, that the bricks in the Bombay region were of inferior
c quality and further that all the bills presented had been passed
by the Architect of the appellant without any objection, therefore,
the appellant was estopped from raising the issue and no
recovery could be allowed. We do not find any infirmity in the
aforesaid findings of the Arbitrator as well as the findings
D arrived at by the High Court. Mr. Dwivedi had drawn our <' £'-

attention to the fact that under the contract this was an issue
which was left to the sole discretion of the Managing Director
of the appellant and, therefore, was not within the jurisdiction
of the Arbitrator to arbitrate upon. In this connection, Mr.
E Dwivedi placed reliance on Clause 10[b], [c] and [f] and Clause
11 of the Articles of Agreement. The learned Single Judge as
well as the Division Bench, after examining the Clauses, as ,..,
indicated hereinabove, held that these Clauses did not include
within their purview 'bad workmanship' and, therefore, it was
F beyond the jurisdiction of the Arbitrator to decide it. In respect
of Clause 10 [c], the Court, in our view, has rightly rejected the
argument of the appellant that 'negligence or lack of proper
care' was synonymous to bad workmanship. Accordingly, we
do not find any ground to interfere with the findings of the High
G Court in rejecting the submissions of the learned counsel for
the appellant on this ground. In any view of the matter, the
Arbitrator had considered the entire materials on record and r _...
the rival submissions of the parties and then came to the
conclusion of fact, which was accepted by the courts below, it
is not open to this Court to interfere with such conclusions until
H
U.P. COOPERATIVE FEDERATION LTD. v. THREE 325
CIRCLES [TARUN CHATIERJEE, J.]

- ~
and unless it is manifest that such conclusions are perverse or
arbitrary. That apart, we are of the view that this would not be
A

a ground for setting aside the award under the Arbitration Act,
1940.

9. That apart, in our view, the High Cou·rt was justified in 8
holding that the poor workmanship did not fall under any of the
sub-clauses of Clause 10 of the Articles of Agreement, which
enumerates the matters in which the Managing Director will
have the exclusive authority to decide the dispute as per Clause
11 of the Agreement. Clause 1O(b) provides that all special · C
losses and damages suffered by the Employer, as certified by
the certificate of the Engineer-in-charge, shall be final,
conclusive and binding. Clause 10(c) of the agreement makes
"losses suffered by the employer or da'mages due to

-" negligence or lack of proper care" on the part of the contractor
shall be liable to be reimbursed and the certificate of the D
Engineer-in-charge as to the extent of damage and its value is
declared toI be final, conclusive and binding upon the contractor.
Clause 11 provides that all disputes and differences arising out
of the contract as contained in the proceedings in paragraphs
(a) to (f) of Clause 10 shall be referred to the Managing Director E
of Employe·r whose decisi_on shall be final, conclusive and
., binding and shall not be referred to arbitration or to any Court
of law. In this connection, as noted herein earlier, the High Court
was fully justified in holding that "lack of proper care or
negligence" appearing in Clause 10(c), was not synonymous F.
to bad workmanship by which the respondent had based its
claim. Workmanship refers to skill or talent displayed in the
performance of a work and is not related to the care or
diligence showed in the work or choosing the materials.
Accordingly, this submission of Mr.Dwivedi, learned senior G
_ i counsel appearing for the appellants is not worthy of
consideration and, therefore, it is rejected.

10. We also find from the impugned judgment of the High
Court that both the parties had admitted before the Arbitrator
H
-i
326 SUPREME COURT REPORTS [2009] 14 (ADDL.) S.C.R.

A that the format to be used for analysis of extra items shall be ,. -
the CPWD Format and that both the parties had indicated to
the Arbitrator that there was no difference between them as to
the format used by them in analyzing the extra items. However,
the parties are not at ad idem on the actual rates to be taken
B for labour and material, referred to in the format. It also appears
from the judgment of the High Court that while the appellant
insisted that the rates prescribed by CPWD in respect of the
labour and material had to be used, the respondent insisted that
local rates would have to be used. Considering the resolution
c approved in a meeting on 6th of March, 1986, where the
Architect approved extra items 1 to 6 at the rates that were put
forward by the respondent and with regard to extra items 7 and
..
8 the rates analysis put forward by the appellant was not even
contested by the respondent. With regard to the analysis of item
D
No.9 pertaining to transportation and wages, the Arbitrator
denied the claim of the respondent. With regard to item No.10,
f'
-
the rate put forward by the appellant was accepted by the
Arbitrator. In these circumstances, it is no longer open to hold
the contention that there was any requirement that the CPWD
rates must be accepted and that no deviation therefrom was
E
permissible under the Contract. In this view of the matter, it is
difficult to agree that the Arbitrator had acted beyond the terms
and conditions of the contract while coming to the findings of
fact relating to the extra items on rates other than the CPWD
rates also.
F
11. The ·next ground of attack of the impugned judgment
rests on payment of interest. From the impugned judgment, it
appears that three limbs of the argument of the parties were
dealt with by the Division Bench of the High Court. It is not in
G dispute that the learned Arbitrator entered upon the reference
. on 1st of March, 1989. The Arbitrator having fou.nd that the t ~
appellant was liable to pay a total sum of Rs.32,68,805.80 p.
directed that ·if the said amount is not paid by the appellant to
the respondent on or before 15th of December, 1989, the same
H would carry interest @ 15% per annum till the payment was
.,
U.P. COOPERATIVE FEDERATION LTD. v. THREE 327
' CIRCLES [TARUN CHATTERJEE, J.]
made. The total sum of Rs.32,68,805.80 as found by the 'A
~
learned Arbitrator included the following three claims :-

Claim No.1 : Rs.17,36,994.97

Claim No.2 : Rs.2,40,615.96
B
Claim No.8 : Rs.2,68,000.000

So far as Claim No.1 was concerned, the Arbitrator found
that what was due was Rs.13,62,349/- to which he added
interest from January 1987 to October, 1989 @ 15% which
worked out to Rs.3,74,645.97. ThusJhe total amount in respect
c
of Claim No.1 as mentioned above worked out to
Rs.17,36,645.97 (there is an apparent inconsistency in the
figures of claim No.1 reproduced with this figure), but the thing
remains that the learned Arbitrator calculated interest @ 15%
.,
" for the period from January 1987 to October, 1989 and added D
it to make up the claim No.1. Similar was the exercise carried
out by the learned Arbitrator in regard to claim No.2 in which
the Arbitrator having found that a total sum of Rs.1,88, 718.40
p. was due, added interest for the period from January 1987
to October, 1989 again @ 15% which amounted to E
Rs.51,897.56 making the total under the head of CPWD as
~
., Rs.2,40,615.96 p. So far as Claim No.8 as mentioned by the
learned Arbitrator is concerned, it appears that the learned
Arbitrator re-calculated the amount of interest and awarded
Rs.2,68,000/- as interest on delayed payment. It is not in dispute F
that the learned Arbitrator in his final analysis had allowed
interest@ 15% per annum. So far as the payment of interest
is concerned, the Division Bench of the High Court after
analyzing the decisions of this Court, namely, Executive
Engineer, (Irrigation) Balimela & Ors. vs. Abhaduta Jena & G
Ors. [1988 (1) SCC 418], Secretary, Irrigation Department,
- i
Government of Orissa & Ors. vs. G. C. Roy [1992 (1) SCC
508] came to the conclusion of law which was that the Arbitrator
has power to award pendente lite interest and where the
contract was silent as to the awarding of interest, the Arbitrator H

"'
328 SUPREME COURT REPORTS [2009) 14 (ADDL.) S.C.R.

A has the power to award interest for the pre-reference period if ~ -
there is a substantive law which empowers him to do so or if
there is a usage of trade for payment which has the force of
law. In our view, the High Court was perfectly justified in holding
that the Arbitrator has the power to award interest for the pre-
B reference period. It needs to be repeated at this juncture that
the arbitration in question was governed not by the present Act
of 1996 but by the provisions of Arbitration Act, 1940. However,
as this power emanates from Section 3 of the Interest Act, '-
1978, the High Court noted that the rate of interest cannot be
c more than 'the current rate of interest' as stipulated by the said
Section. Accordingly the High Court had reduced the rate of
interest for pre-reference period from 18% to 15%. It was,
however, argued on behalf of the appellant that the High Court
was not justified in awarding interest for pre-reference period
in view of Section 3 of the Interest Act, 1978 which was < _,
D pursuant to a special clause in the Contract. As in the present
case there was no such clause in the agreement and hence it
was not within the power of the Arbitrator to make an award
with respect to interest.

E 12. In our view, this argument lacks substance. The
position of law, as found by the High Court in its impugned .
judgment on consideration of various other judgments of this ¥ ~

Court, would clearly show that in those judgments the High Court
relied on also did not stipulate any express agreement with
F respect to interest as a precondition to the authority of the
Arbitrator to award interest for the pre-reference period. The
matter would have a different issue altogether if there had been
a specific provision prohibiting grant of interest which was, of
course, not the case of the appellant.
G 13. In the case of State of Rajasthan and Anr v. Ferro
Concrete Construction Pvt. Ltd, [2009 (8) SCALE 753], the ~ -
same work was advanced in which this Court observed:

"But this Court has held that in the absence of an express
H bar, the arbitrator has the jurisdiction and authority to

/.'
U.P. COOPERATIVE FEDERATION LTD. v. THREE 329
CIRCLES [TARUN CHATTERJEE, J.]
j

'
-r- ... award interest for all the three periods - pre reference, A
pendente lite and future (vide decisions of Constitution
Bench in Secretary, Irrigation Department, Government
of Orissa vs. G. C. Roy - 1992 (1) SCC 508, Executive
Engineer, Dhenkanal Minor Irrigation Division vs. N. C.
Budharaj - 2001 (2) SCC 721 and the subsequent B
decision in Bhagawati Oxygen vs. Hindustan Copper Ltd
-2005 (6) sec 462). In this case as there was no express
.) bar in the contract in regard to interest, the Arbitrator could
award interest."
c
14. In view of the above decision in law now settled by this
Court, we are unable to hold that the Arbitrator was not entitled
to award interest on the pre-reference period because there
was no clause in the agreement prohibiting such awarding of
interest. However, the High Court had reduced the rate of
D
"·
' interest to the 'current rate of interest' and, therefore, it is not
open for us to interfere with such rate of interest at this stage
in this appeal. Therefore, there is no substance in this
argument, accordingly it is rejected.

15. Now the question comes which is related to awarding E
of 'interest on interest'. According to the appellant, they have
to pay interest on an amount which was lncll-lSive of interest and
·- 'f
the principal amount and, therefore, this amounts to a liability
to pay 'interest on interest. This question is no longer res integra
at the present point of time. This Court in McDermott F
International Inc. v. Bum Standard Co. Ltd, & Ors. [2006 (11)
sec 181] has settled this question jn which it had observed
as follows:

"The Arbitrator has awarded the principal amount and
interest thereon upto the date of award and future interest
G
- -{ thereupon which do not amount to award on interest on
interest as interest awarded on the principal amount upto
the date of award became the principal amount which is
permissible in law."
H
330 SUPREME COURT REPORTS [2009) 14 (ADDL.} $.C.R. .

A 16. The High Court on this question has also rightly relied Ir ""'c-
on a decision of this Court in the case of_Oil and Natural Gas
Commission vs. Mis. M . C. Clelland Engineers S.A. [1999 "
AIR SCW 1224). That being the position, we are unable to find
any ground to set aside the judgment of the Division Bench of
B the High Court while considering the ground of 'interest on
interest'. So far as the ground relating to the power of the
Arbitrator to award interest on the cost of arbitration is
concerned, we are of the view that we do not find any infirmity '
in the said findings of the High Court relating to that ground.
c Since the legislature by way of an amendment in the year 1956
deleted Section 35(3) of the Code of Civil Procedure which
empowered the court to award interest, the Arbitrator, on
analogy, cannot have the power to award interest on costs.
Therefore, the High Court has failed to justify in holding that the
{ _....
powers of the Arbitrator are not effected by changes made to
D
the Code of Civil Procedure. The power of the Arbitrator, if any,
shall be located from the act itself. VVe may note that awarding
costs is a matter of discretion of the Arbitrator under the 1940
Act. Sir Mohd. Akbar Khan vs. S.Attar Singh (deceased) [AIR
1945 PC 170] is an answer to the aforesaid ground. Paragraph
E 8 of the First Schedule to the Arbitration Act, 1940 which
contains "Implied Conditions of Arbitration Agreements" lays
y
down that- ~

"the costs of the reference and award shall be in the
F discretion of the arbitrators or umpire who may direct to,
and by, whom, and in what manner, such costs or any part
thereof shall be paid, and may tax or settle the amount of
costs to be so paid or any part thereof and may award
costs to be paid as between l~gal practitioner and client."
G
17. A plain reading of this paragraph would show that there .>- -
is a provision in this clause which does not permit or prohibit
the imposition of interest on costs of arbitration.

18. The High Court has also observed in the impugned
H judgment that the principles in relation to payment of interest \
....
U.P. COOPERATIVE FEDERATION LTD. v. THREE 331
CIRCLES [TARUN CHATTERJEE, J.]

- ~ on interest will apply in this context as well and that there is no A
principle or precedent prohibiting award of interest on cost. It
may be noted that the Law Commission of India in its 55th
Report submitted in 1973 discussed the rationale behind grant
of interest on interest and on costs. Though the Commission
found it fit not to disturb the position of law that emerged after B
the deletion of Section 35(3) of the Code of Civil Procedure,
but Law Commission had expressed its opinion in favour of
)
grant of interest on costs. The logic behind it was that the cost
incurred in the litigation were actually and rightfully incurred by
the successful litigant which he would have invested but for the c
lengthy litigation proceedings. Interest, which is damages for
wrongful retention of money that rightfully belonged to one, thus
can be paid on costs as well. This may also be considered that
costs of arbitration are actually incurred by the respondent and
... '
)
it is only that it becomes payable only with the award in its
D
favour. Accordingly, we do not find any infirmity in the judgment
of the Division Bench except in that we are of the view that the
rate of interest from 15% should be reduced to 7%. In
McDermott International vs. Bum Standards (supra), it had
summarized the practice of this Court on this issue in the
following words :- E

.. "The 1996 Act provides for award of 18% interest. The
arbitrator in his wisdom has granted 10% interest both for
the principal amount as also for the interim. By reason of
the award, interest was awarded on the principal amount. F
An interest thereon was upto the date of award as also the
future interest at the rate of 18% per annum.

However, in some cases, this Court was resorted to
exercise its jurisdiction under Article 142 in order to do
G
complete justice between the parties .
·- ..
In pure Helium India (P) Ltd. (2003 8 SCC 593] this Court
upheld the arbitration award for payment of money with
interest at the rate of 18% p.a. by the respondent to
appellant. However, having regard to long lapse of time, if H
332 SUPREME COURT REPORTS [2009] 14 (ADDL.) S.C.R.

A award is satisfied in entirety, respondent would have to pay ... -
a huge amount by way of interest. With a view· to do
complete justice to the parties, in exercise of jurisdiction
under Article 142 of the Constitution of India, it was
directed that award shall carry interest at the rate of 6%
B p.a. instead and in place of 18% p.a.

Similarly in Mukand Ltd. vs. Hindustan Petroleum Corpn.
~-
[2006 (4) SCALE 453], while this Court confirmed the
decision of the division bench upholding the modified
award made by the learned single Judge, the court
c reduced the interest awarded by the learned single judge
subsequent to the decree from 11 % per annum to 7% per
annum observing that 7% per annum would be the
reasonable rate of interest that could be directed to be
paid by the appellant to the respondent for the period f , ..
D subsequent to the decree.
I

In this case, given the long lapse of time, it will be in
furtherance of justice to reduce the rate of interest to 7%."

19. Following the aforesaid decision and considering the
E
fact that there was a long lapse of time and for the ends of
justice, we are, therefore, of the view that the judgment of the
Division Bench can be modified only to the extent that the rate
•
of interest should be reduced from 15% to 7%. As we also find
in this case that such reduction of interest is warranted
F ..
because the award was passed on 20th of October, 1989, now
20 years have passed since then.

20. This Comt in Mcdermott International Inc. vs. Burn
Standard Co.Ltd. & Ors. (supra) S.B.Sinha,J., (as His Lordship
G then was), following the two earlier decisions of this Court in
the case of Pure Helium India (P) Ltd. vs. ONGC [(2003) 8 )- -·
SCC 593]_and Mukand Ltd. vs. Hindustan Petroleum Corpn.
Ltd. [(2006) 9 sec 383] and considering the fact that due to
long lapse of time if the entire award is satisfied, the appellant
H would have to pay a huge sum of money by way of interest.
U.P. COOPERATIVE FEDERATION LTD. v. THREE 333
CIRCLES [TARUN CHATTERJEE, J.]
\. ... Therefore, in that decision, this court directed reduction of rate A
of interest in order to do complete justice between the parties
in the exercise of its jurisdiction under Article 142 of the
Constitution of India and that is the reason we also reduce the
rate of interest from 15% to 7%.
B
21. Before parting with this judgment, we may refer to two
decisions of this Court which were cited at the bar in the case
-(
.J of T.N. Electricity Board vs. Bridge Tunnel Constructions &
I Ors. [1997 4 SCC 121) and Trustees of the Port of Madras
vs. Engineering Constructions Corpn. Ltd. [1995 5 SCC 531).
So far as the case of T.N. Electricity Board is concerned, we
c
have no quarrel with the principle laid down in the aforesaid
decision. In that decision, it was held that one of the question
that was decided was that the Arbitrator cannot clothe himself
~ ) conclusively with the jurisdiction to decide or omit to decide the
arbitrability of a particular item or the claim made by the parties. D
It was held that when a specific reference has been made to
the Arbitrator and the parties raise the dispute of arbitrability,
with the leave of the court/by a direction of the court in a
proceeding under Section 33, hejs to decide the arbitrability
of the dispute and make a decision while giving reasons in E
support thereof. It was further held that the decision of the
~
Arbitrator in granting a particular sum by a non-speaking award,
therefore, hinges upon the arbitrability of a dispute arising under
the contract or upon a particular item claimed thereunder. It was
further observed that he was required to give the decision F
thereon. Therefore, it was held that the question of decision by
implication does not arise since his jurisdiction to decide the
dispute on merits hinges upon his jurisdiction to decide the
arbitrability of the dispute.
G
'-.. .. 22. The aforesaid decision of this Court, therefore, in our
view cannot come to help the appellant.

... 23. So far as the decision in the case of Trustees of the
Port of Madras vs. Engineering Constructions Corpn. Ltd.
(supra) is concerned, this case also has no application in the H

•
334 SUPREME COURT REPORTS [2009] 14 (ADDL.) S.C.R.

A facts of this case. In that case, the principles have been laid
down in the case of a reasoned award and the court can
interfere if the award is passed upon a proposition of law which
is unsound in law. The error apparent on the face of the award
contemplated by Section 16(1)( c) as well as Section 30 (c)
B of the Arbitration Act is an error of law apparent on the face of
the award and not an error of fact. Therefore, this decision, in
our view, is also of no help. The Arbitrator has passed his award
on the basis of the conditions of the clauses in the agreement
and passed an award and nothing could be shown from which
c it could be held that the court could interfere with the award if
the same was passed upon the proposition of law which is
unsound in law.

24. For the reasons aforesaid and subject to the
modification as noted he refnabove, this appeal has no merit .r ,
D and the same is hereby dismissed. There will be no order as
to costs.

R.P. Appeal dismissed.

r -