Case: Union Of India Vs. A.L. Rallia Ram

contractor not covered by the contract Rs. 67, 000/- were found due by the Railway Company to the contractor on the basis of fair and reasonable rates. The contractor claimed interest on that amount for the period prior to the date of the suit. The Judicial Committee held that interest on the amount awarded as compensation could not be awarded by way of damages, and there being no contract, nor statute, nor usage in support of such a claim, the claim for interest had to be disallowedIn dealing with the claim for interest on the principle incorporated in illustration (n) of s. 73 of the Indian Contract Act which is as follows(n) "A, contracts to pay a sum of money to B, on a day specified. A, dose not pay the money on that day; B, in consequence of not receiving the money on that day, is unable to pay his debts, and is totally ruined. A, is not liable to make good to B, anything except the principle sum he contracted to pay, together with interest up to the day of payment."16. The Judicial Committee observed at p. 72"The illustration, however, does not deal with the right of a creditor to recover interest from his debtor on a loan advanced to the latter by the former. It only shows that if any person breaks his contract to pay to another person a sum of money on a specific date, and in consequence of that breach the latter is unable to pay his debts and is ruined, the former is not liable to make good to the latter anything except the principal sum which he promised to pay, together with interest up to the date of payment. The illustration does not confer upon a creditor a right to recover interest upon a debt which is due to him, when he is not entitled to such interest under any provision of the law. Nor can an illustration have the effect of modifying the language of the section which alone forms the enactment."17. Illustration (n) therefore does not aid the respondent18. Mr. Pathak submitted that interest may be awarded on grounds of equity, and placed reliance upon the Interest Act, 32 of 1839. Under that Act the Court may allow interest to the plaintiff if the amount claimed is a sum certain which is payable at a certain time by virtue of a written instrument. The Act, however, contains a proviso that interest shall be payable in all cases in which it is now payable by law. This proviso applies to cases in which the Court of Equity exercises jurisdiction to allow interest. As observed by the Judicial Committee in Bengal Nagpur Railway Companys case (1937 L.R. 65 I.A. 66.) after referring to the observation made by Lord Tomlin in Maine and New Brunswick Electrical Power Company v. Hart (1929 A.C. 631, 640.), observed"In order to invoke a rule of equity it is necessary in the first instance to establish the existence of a state of circumstances which attracts the equitable jurisdiction, as, for example, the non- performance of a contract which equity can give specific performance. The present case does not, however, attract the equitable jurisdiction of the court and cannot come within the purview of the proviso19. The judgment of Their Lordships of the Privy Council in Bengal Nagpur Railway Companys case (1937 L.R. 65 I.A. 66.) was relied upon in Seth Thawerdas Pherumals case (1955 2 S.C.R. 48.) in negativing a claim for interest. In that case a contractor had entered into a contract with the Dominion of India for supply of bricks. Under a clause which required that all disputes between the parties to the contract should be referred to arbitration, dispute having arisen, the matter was referred to arbitration and the arbitrator gave award in the contractors favour. The Union of India which had succeeded to the rights and obligations of the Dominion contested the award on numerous grounds one of which was the liability to pay interest on the amount awarded. Bose, J. in delivering judgment of the Court observed that the interest awarded to the contractor could not in law be awarded. He pointed out that an arbitrator is not a court within the meaning of the Interest Act of 1839 : in any event interest could only be awarded if there was a debt or a sum certain, payable at a certain time or otherwise, by virtue of some written contract at a certain time and there must have been a demand in writing stating that interest will be claimed from the date of the demand. In the view of Bose, J. none of the elements was present and the arbitrator erred in law in thinking that he had the power to allow interest simply because he thought the demand was reasonableThe umpire has awarded interest to the respondent on the footing that for the purpose of carrying out his contract with the Government of India, the respondent was required to make arrangements by borrowing moneys from his bankers and he had to pay interest in that behalf, and when the contract was abandoned after it was partially performed, the Government of India became liable to make good the loss of interest which the respondent suffered. We know of no principle on which the Government of India could be rendered liable for payment of interest in the circumstances relied upon. In respect of that part of the contract which was abandoned, if any liability to pay interest had arisen it was for the respondent to claim it in settling the terms on which cancellation of the contract was to be made. In respect of the goods which had been returned by him, he could claim compensation for breach of warranty, but such compensation could not include interest as damages for detention of money. Interest was therefore allowed on a view of the law which appeared on the face of the award to be erroneous20.

Decision (1 = appeal accepted, 0 = rejected): 1

Explanation:
1[ds]Mr. Pathak submitted that interest may be awarded on grounds of equity, and placed reliance upon the Interest Act, 32 of 1839. Under that Act the Court may allow interest to the plaintiff if the amount claimed is a sum certain which is payable at a certain time by virtue of a written instrument. The Act, however, contains a proviso that interest shall be payable in all cases in which it is now payable by law. This proviso applies to cases in which the Court of Equity exercises jurisdiction to allow interest. As observed by the Judicial Committee in Bengal Nagpur Railway Companys case (1937 L.R. 65 I.A. 66.) after referring to the observation made by Lord Tomlin in Maine and New Brunswick Electrical Power Company v. Hart (1929 A.C. 631, 640.), observed"In order to invoke a rule of equity it is necessary in the first instance to establish the existence of a state of circumstances which attracts the equitable jurisdiction, as, for example, the non- performance of a contract which equity can give specific performance. The present case does not, however, attract the equitable jurisdiction of the court and cannot come within the purview of thejudgment of Their Lordships of the Privy Council in Bengal Nagpur Railway Companys case (1937 L.R. 65 I.A. 66.) was relied upon in Seth Thawerdas Pherumals case (1955 2 S.C.R. 48.) in negativing a claim for interest. In that case a contractor had entered into a contract with the Dominion of India for supply of bricks. Under a clause which required that all disputes between the parties to the contract should be referred to arbitration, dispute having arisen, the matter was referred to arbitration and the arbitrator gave award in the contractors favour. The Union of India which had succeeded to the rights and obligations of the Dominion contested the award on numerous grounds one of which was the liability to pay interest on the amount awarded. Bose, J. in delivering judgment of the Court observed that the interest awarded to the contractor could not in law be awarded. He pointed out that an arbitrator is not a court within the meaning of the Interest Act of 1839 : in any event interest could only be awarded if there was a debt or a sum certain, payable at a certain time or otherwise, by virtue of some written contract at a certain time and there must have been a demand in writing stating that interest will be claimed from the date of the demand. In the view of Bose, J. none of the elements was present and the arbitrator erred in law in thinking that he had the power to allow interest simply because he thought the demand was reasonableThe umpire has awarded interest to the respondent on the footing that for the purpose of carrying out his contract with the Government of India, the respondent was required to make arrangements by borrowing moneys from his bankers and he had to pay interest in that behalf, and when the contract was abandoned after it was partially performed, the Government of India became liable to make good the loss of interest which the respondent suffered. We know of no principle on which the Government of India could be rendered liable for payment of interest in the circumstances relied upon. In respect of that part of the contract which was abandoned, if any liability to pay interest had arisen it was for the respondent to claim it in settling the terms on which cancellation of the contract was to be made. In respect of the goods which had been returned by him, he could claim compensation for breach of warranty, but such compensation could not include interest as damages for detention of money. Interest was therefore allowed on a view of the law which appeared on the face of the award to be erroneous