Case: M/S. Madnani Construction Corpn.(P)Ltd Vs. Union Of India

2. The appellant, a private limited company, is carrying on, inter alia, various construction works for both the State and Central Government and their undertakings. The appellants case is that an agreement dated 03.11.1981 was entered between the appellant and the North Eastern Railway for the construction of bridge island nos. 13 and 14 over the Kosi river. There were certain special conditions of the contract (hereinafter, SCC) and they stipulate that the General Conditions of Contract (hereinafter, GCC) and standard specifications of the North Eastern Railways shall form part of the aforesaid contract. In terms of the contract, the construction was to be completed by 15.02.1982. Certain payments were made to the appellant after completion of the contract but they were received by them "under protest". Thus, disputes cropped-up between the parties. The appellant is said to have served a notice dated 16.11.1983 for the appointment of an arbitrator to settle the disputes. The General Manager of the respondent-Railways by an order dated 24.03.1986 rejected the appellants prayer for appointment of an arbitrator on the ground that the disputes were not arbitrable, as they fell under `expected matter in the contract.  3. On or about 18.08.1987, the appellant filed an application under Section 20 of the Arbitration Act, 1940 (hereinafter, the Act) before the Court of Addl. Civil Judge, Gorakhpur for appointment of an arbitrator which was transferred on 21st February, 1990, to the Court of Judge of Small Causes /Additional Civil Judge (hereinafter, the Court below). The Court below passed an order on 2.3.1990 that `file received, put up on the date fixed. Then by an order dated 31.05.1991 the learned Civil Judge appointed one Mr. B. N. Shukla, the Sole Arbitrator, to adjudicate the disputes arising out of the agreement dated 03.11.1981. Against the order of appointment of arbitrator the responder approached the High Court by filing F.A.F.O. No. 534 of 1991 (the earlier F.A.F.O.), but the same was dismissed vide order dated 27.08.1991.  4. The learned Arbitrator gave his award on 13.4.1992 holding that the Railways should pay an amount of Rs.4,48,873.22 along with compoundable bank interest prevalent at that time from 16.11.1983 to 21.3.1992. In passing the award the Arbitrator relied on the Level book No. I, the Graph Sheets, the Log Book No. IA and the Log Book No. 4. The Arbitrator found that there were subsequent alterations and over writing in the entries made in the Log Book No.IA and the same were without any initials by the concerned authority on behalf of the respondent Railways. From such materials the Arbitrator held that all the manipulations/alterations/overwritings had resulted in reducing the quantities of the work done by the appellant. It was further observed that clause 21 (iv) of the special conditions was not followed by the respondent Railways at all. Moreover in utter violation of the Railway rules and orders on the subject, the measurements were hardly entered in the measurement book directly and mostly entries in the measurement books were copied down from subsidiary records or note books. After recording such findings, the Arbitrator gave the aforesaid award.  5. Thereafter on 08.05.1992 the appellant filed an application under Section 17 of the Act for pronouncing judgment and making decree according to the award.  6. On 20.5.1992 the respondent Railways filed application under Section 30 read with Section 33 (Section 30/33) of the Act before the Civil Judge for setting aside the award. Then on 24.08.1992 they also filed their objections against the application filed by the contractor under Section 17 of the Act. The following facts were recorded in the judgment of the High Court"The Railways filed an application before the District Judge for transfer of the application filed by the contractor under Section 20 of the Act and under Section 24 of the Civil Procedure Code. It was dismissed on 13th November, 1992. The Railways filed an application on 23rd November, 1992, before the court below for summoning their application and under Section 30/33 of the Act from the Court where it was filed. This was objected to by the Contractor on the same date. However, the Court below summoned it and not only rejected it but also rejected their objections against the application under Section 17 of the Act. The Court below by its order dated 1.12.1992 also pronounced judgment according to the award and decreed interest at the rate given by the Bank from the date of the award till actual payment"7. On 1st December 1992, the Senior Civil Judge, Gorakhpur of the Court of Judge, Small Causes Gorakhpur made the award a Rule of Court and directed that a decree be prepared accordingly and directed that from the date of the award to the date of payment the rate of interest on the Bank loan is to be paid.  8. Challenging the aforesaid order of the Civil Judge, the Railways filed an appeal before the High Court.  9. Before the High Court, 7 issues were framed. The appeal was partly allowed by the High Court and in doing so the High Court came to the conclusion that the court below had the jurisdiction to entertain the application under Section 17 of the Act.  10. On the application of the Railways under Section 30/33 of the Act, the High Court held that the case is not required to be remanded as the court below decided the case correctly on merits.  11. Referring to the decision of the General Manager dated 24.03.1986 rejecting request for appointment of Arbitrator on the ground that dispute fell under excepted matters, the High Court concluded that there is difference of opinion between the parties whether the dispute falls under excepted matters or not and the decision of the General Manager regarding excepted matters is not final between the parties. The General Manager by wrongly deciding this question could not exclude the jurisdiction of the Court.  12. On the issue as to whether the respondent Railways are entitled to raise objections regarding the excepted matters at the stage of Section 20, the High Court concluded that the trial Court did not say a word about it and the High Court merely affirmed the order passed by the trial court. As such the issue was left to be decided by the Arbitrator who has held that none of the claims of the contractor were excepted matters. It was held that as the question was not decided in the earlier litigation, it cannot be said that the Railways are precluded from raising this question in these proceedings.  13. On the issue of excepted matters the High Court held that Item Nos. 1 to 3 and 5 to 8 were excepted matters and were non-arbitrable and the Arbitrator committed an illegality in allowing them. For the remaining items viz. item No. 9 (a)& (d) relating to supply of boats, 11 (b) relating to cost of wastage of labour, it was held that these were not covered by Clause 22 (5) or 45 (a) of the GCC, as such they do not fall in the category of non-arbitrable matters and are arbitrable.  14. On the award of interest it was contended that clause 16 (1) read with 16 (2) of GCC prohibits payment of interest on amounts payable to the appellant under the contract except the Government securities mentioned therein. In this regard, the High Court considered Clause 30 of SCC and Clause 52 of GCC and found them to be similar and these clauses, according to High Court, bar interest and damages in respect of withholding or retention under the lien. Further by placing reliance on the case of Executive Engineer, D.M.I. Division v. N. C. Budhraj, AIR 2001 SC 628 High Court held that interest could not be awarded since there was specific prohibition in the contract regarding awarding of interest.  15. On the award of interest High Courts specific conclusions are:"(f) The contract prohibited payment of interest. Item 10 is award for interest; it could not be awarded. Similarly no interest could be awarded under clause 3 of the Award.  (g) There is no illegality in awarding interest payable at the bank rate, but it could only be awarded from the date of decree and not from the date of award."16. Appellant also filed a review petition before the High Court but the same was dismissed vide order dated 15.05.2003.

Reasoning: 50. It was argued before us by the learned counsel for the respondent that a subsequent Division Bench of this Court in the case of Union of India v. Saraswat Trading Agency & others, JT 2009 (9) SC 648 , has taken a view different from the ratio in Engineers (supra). We do not think so51. In Saraswat Trading (supra) the Clause which was construed by the Court as clamping a prohibition on the grant of interest was Clause 31 and which is quoted in paragraph 15 of the judgment at page 656 of the report and runs as follows:-"31. No interest or damage for delay in payment - No interest or damage shall be paid to the Contractor for delay in payment of the bill or any other amount due to the contractor for any reason whatsoever. The Railway Administration will, however, make every endeavour for payment of the bills or other amount due to the contractor within a reasonable time."52. The learned Judges in Saraswat Trading (supra) in paragraph 16 held that Clause 31 is different from Clause 13(g) which was considered in Engineers (supra). The ratio in Engineers (supra) was not questioned53. In the instant case also the relevant clauses, which have been quoted above, namely, Clause 16(2) of GCC and Clause 30 of the SCC do not contain any prohibition on the arbitrator to grant interest. Therefore, the High Court was not right in interfering with the arbitrators award on the matter of interest on the basis of the aforesaid clauses. We therefore, on a strict construction of those clauses and relying on the ratio in Engineers (supra), find that the said clauses do not impose any bar on the arbitrator in granting interest54. Reference in this connection may be made to another Constitution Bench judgment of this Court in the case of Executive Engineer, Dhenkanal Minor Irrigation Division, Orissa and others v. N.C. Budharaj (deceased) by Lrs. and others, (2001) 2 SCC 721 55. In N.C. Budharaj (supra), Justice Raju, speaking for the majority, considered the question of the arbitrators jurisdiction and authority to grant interest in great detail and also considered both Indian and English cases and the ratio of the Constitution Bench of this Court in G.C. Roy (supra)56. In paragraph 25 of the judgment the learned Judge summed up the position as follows:-"...By agreeing to settle all the disputes and claims arising out of or relating to the contract between the parties through arbitration instead of having recourse to civil court to vindicate their rights the party concerned cannot be considered to have frittered away and given up any claim which otherwise it could have successfully asserted before courts and obtained relief. By agreeing to have settlement of disputes through arbitration, the party concerned must be understood to have only opted for a different forum of adjudication with less cumbersome procedure, delay and expense and not to abandon all or any of its substantive rights under the various laws in force, according to which only even the arbitrator is obliged to adjudicate the claims referred to him. As long as there is nothing in the arbitration agreement to exclude the jurisdiction of the arbitrator to entertain a claim for interest on the amounts due under the contract, or any prohibition to claim interest on the amounts due and become payable under the contract, the jurisdiction of the arbitrator to consider and award interest in respect of all periods subject only to Section 29 of the Arbitration Act, 1940 and that too the powers of the court thereunder, has to be upheld."57. We are constrained to note that Honble High Court unfortunately erred in appreciating the ratio of N.C. Budharaj (supra) in passing the impugned judgment and order