ASSAM STATE ELECTRICITY BOARD AND ORS. versus BUILDWORTH PVT. LTD.
[2017] 7 S.C.R. 123, Supreme Court of India, 2017
Outcome: Disposed off
Segment: Body
[2017) 7 S.C.R. 123 
ASSAM STATE ELECTRICITY BOARD AND ORS. 
A 
v. 
BUILDWORTH PVT. LTD. 
(Civil Appeal No. 484 of2008) 
JULY04, 2017 
[JAGDISH SINGH KHEHAR, CJI, 
DR. D. Y. CHANDRACHUD AND 
S~NJAY KISHAN KAUL, JJ.) 
Arbitration Act, 1940: 
Award - Price escalation - Work contract - Claimant was 
allowed to work beyond the formal extended time - Respondent-
Board cannot be allowed to take the stand that claimant is not entitled 
to escalation price for the period he worked even though there is 
no formal extension of time and taking refuge under the clause of 
contract wherein ceiling of contractual amount is fixed. 
Award - Idling charges - Arbitrator noted in the award the 
contributory delay on the part of claimant -
Once the aspect of 
contributory delay was present to the mind of the arbitrator, as is 
reflected in the reasons in the award, and taken into consideration 
B 
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in the assessment 'of damages, the award does not call for 
E 
interference. 
s.29 - Award of interest - Arbitrator has power to grant 
interest on damages u/s.3(/)(b) of the Interest Act, 1978, from the 
date mentioned in this regard in a written notice claiming such 
interest -
The contract in the instant case contains no bar or 
F 
prohibition against the award of interest - The claimant is entitled 
to interest on the sum awarded from the date ·of notice i.e. 20 April 
1987 to 31December1997 and thereafter from the date of the decree 
of the trial Court until payment or realisation -
The
rate of interest 
is, however, modified to 12 per cent per annum, in respect of both 
the above periods - Interest Act, 1978 - s.3(1)(b). 
G 
Disposing of the appeals (in favour of claimant), the Court 
HELD: 1. The arbitrator has taken the view that the 
provision for price escalation would not bind the claimant beyond 
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[2017) 7 S.C.R. 
A the scheduled date of completion. This view of the arbitrator is 
based on a construction of the provisions of the contract, the 
correspondence between the parties and the conduct of the Board 
in allowing the completion of the contract even beyond the formal 
extended dated of 6 September 1983 up to 31 January 1986. 
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Matters relating to the construction of a contract lie within the 
province of the arbitral tribunal. Moreover, in the present case 
the view which has been adopted by the arbitrator is based on 
confidential material which was relevant to the decision. There 
is no error apparent on the face of record which could have 
warranted the interference of the court within the parameters 
available under the Arbitration Act, 1940. The arbitrator has 
neither misconducted himself in the proceedings nor is the award 
otherwise invalid. The award does not suffer from any error 
apparent on the face of the record insofar as the aspect of price 
escalation is concerned. [Paras 12, 15][130-F-G; 132-F] 
P.MPaul v. Union of India (1989) Suppl. 1 SCC 368; 
Food Corporation of India v. A.M.Ahmed & Co. and 
Another (2006) 13 SCC 779 : [2006] 8 Suppl. SCR 
148; K.N.Sathyapalan (Dead) by Lrs. v. State of Kera/a 
and Another (2007) 13 SCC 43 : [2006) 9 Suppl. SCR 
864 - relied on. 
General Manager, Northern Railway v. Sarvesh Chopra 
(2002) 4 SCC 4:5 : (2002] 2 SCR 156 - referred to. 
2. On the aspect of idling charges for
machine and labour, 
the arbitrator noted that three additional items of work were . 
F 
required to be carried out by the claimant which did not form part 
of the original work. These items of work required the 
mobilization of labour and machinery separately from that which 
had already been mobilized. The arbitrator held that to some 
extent, the claimant contributed to the delay in the execution of 
the work and referred in that connection to· the letters addressed 
G by the Board to the claimant. The arbitrator also observed that 
the inability of the claimant to place the required number of 
supervisors at the site also contributed to the delay in the 
completion of the work. The point of the matter is that the 
arbitrator has duly borne in mind the circumstance that "the 
H claimant also contributed to a certain extent and must share
ASSAM STATE ELECTRICITY BOARD v. BUILDWORTH PVT. LTD. 
125 
responsibility for causing delay in completion of the project. The A 
award does indicate that the contributory delay on the part of the 
claimant was present to the mind of the arbitrator and has been 
duly taken into consideration in computing the extent of the claim 
under the award. This is not a case where the arbitrator has 
failed to take into account a relevant consideration or has taken B 
into account extraneous material or consideration. Once the 
aspect of contributory delay was present to the mind of the 
arbitrator, as is reflected in the reasons in the award, and this has 
been taken into consideration in the assessment of damages, the 
award does not fall for interference. [Paras 17, 18)(133-A-B, D-
F) 
c 
3. The next ·aspect of the matter relates to the award of 
interest for the period from 7 March 1986 to 31 December 1997. 
The arbitrator awarded a lumpsum of Rs 20 lacs for a period of 11 
years. The High Court set aside the award of interest on the 
ground that Section 29 of the Arbitration Act, 1940 contemplates D 
the award of interest only from the date of the decree. The 
arbitrator has power to grant interest on damages under Section 
3(1)(b) of the Interest Act, 1978, from the date mentioned in this 
regard in a written notice claiming such interest. The position 
which prevailed prior to the Interest Act, 1978 (to the effect that 
interest on damages would be payable only ascertained of E
damages) has undergone a change after the enactment of the 
Act. Interest on damages could be claimed from the date of the 
written notice as contemplated in the law. The contract in the 
present case contains no bar or prohibition against the award of 
interest. However, it has been submitted on behalf of the Board 
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that the claimant was paid a sum of Rs.9,16,825/- towards . 
escalation, which was the amount contemplated under Clause 
2.3.1 of the Contract. However, this provision in the contract 
was correctly held by the arbitrator to apply only during the 
scheduled term of the contract and not in respect of the extended 
period. The respondent in its initial demands made claims on 
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account of price escalation and submitted a consolidated bill on 9 
June 1986. On 20 April 1987 the claimant addressed a legal 
notice, claiming a sum of Rs 10,73,416/- together with interest 
@ 18% p.a. In the circumstances upon the issuance of the above 
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[2017) 7 S.C.R. 
A notice, claimant was clearly entitled to claim interest with effect 
from 20 April 1987. The claimant is entitled to interest on the 
sum awarded from 20 April 1987 to 31 December 1997 and 
thereafter from the date of the decree of the trial Court until 
payment or realisation. The rate of interest is, however, modified 
B to 12 % p.a. [Paras 19, 21, 23, 24][134-D-E; 135-D-E; 138-F-G; 
139-A-B] 
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Secretary, Irrigation Department, Government of Orissa 
and Others v. G.C.Roy (1992) 1 SCC 508 : [1991] 3 
Suppl. SCR 417; Executive Engineer, Dhenkanal Mino"r 
Irrigation Division, Orissa and Others v. N.C. Budharaj 
(Deceased) by LRs and Others (2001) 2 SCC 721 : 
[2001) 1 SCR 264; State of Rajasthan v. Ferro Concrete 
Construction Pvt. Ltd. (2009) 12 SCC 1 : [2009) 10 
SCR 31; Union of India v. Ambica Construction (2016) 
6 SCC 36 : [2016) 2 SCR 810 - relied on. 
Case Law Reference 
(1989) Suppl. 1 sec 368 
relied on 
Para 13 
[2006] 8 Suppl. SCR 148 
relied on 
Para 14 
[2006) 9 Suppl. SCR 864 
relied on 
Para 14 
[2002) 2 SCR 156 
referred to 
Para 16 
[1991] 3 Suppl. SCR 417 
relied on 
Para 19 
(2001) 1 SCR 264 
relied on 
Para 19 
[2009) 10 SCR 31 
relied on 
Para 21 
[2016) 2 SCR 810 
relied on 
Para 22 
CIVIL APPELLATE JURISDICTION: Civil Appeal No. 484 of 
2008. 
From the Judgment and Orderdated21.l l.2006 of the High Court 
ofGauhati in FAO No. 25 of2001 
WITH 
SLP (C) Nos. 6428-6429 of2008. 
Vijay Hansaria,
Sr. Adv., Ms. Sneha Kali ta, Avnish Pandey, Advs. 
for the Appellants.
ASSAM STATE ELECTRICITY BOARD v. BUILDWORTH PVT. LTD. 
127 
~ ·• .. 
P. K. Goswami, Sr. Adv., Parthiv K. Goswami, Sagar Yaish, Ms. -A 
Kanika Saran, Raj iv Mehta, Advs. for the Respondent. 
The Judgment of the Court was delivered by 
DR. D. Y. CHANDRACHUD, J. 1. An arbitral award was 
rendered on 31 December 1998.by a sole arbitratorunder the Arbitration 
Act, 1940. By the award an amount of Rs30,73,916/- was awarded to 
B 
Buildworth PvtLtd- the claimant in the proceedings together with future 
interest at 18 per cent per annum. 
2, The arbitrator filed his award. Assam State Electricity Board, 
against whom the claim was awarded" filed its objections. On 22 
December 2000 the Civil Judge, Senior Division, Kamrup made the award · C 
a Rule of the Court pursuant to the legislative regime which prevailed at 
the material time. An appeal was filed against the judgment of the Civil 
Judge. A Division Bench of the Gauhati High Court by its judgmerit 
dated 21 November 2006 upheld the award except for. the award of 
interest by the arbitrator between ?March 1986 and 31December1997. 
D 
The High Court found no grotind to interfere with the merits of the 
award on the claim·for idling charges and escalation.However, the 
Division Bench opined that Section 29 of the Arbitration Act, 1940 did . 
not confer jurisdiction on the arbitrator to award interest prior to the date 
of the reference. 
3. Assam State Electricity Board as well as Buildworth PvtLtd 
are before this Court. The
former seeks to impugn the correctness of 
the judgment of the Division Bench which found no reason to interfere 
with the award on merits. The latter has ·challenged that part of the 
order of the High Court by which the award of interest has be.en set 
aside. Leave was granted in the proceedings initiated by the ~oard under 
Article 136 on 15 January 2008: We grant leave in the Special Leave 
Petitions filed by the claimant and proceed to dispose of both sets of 
appeals. 
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4. For convenience of reference, Assam State Electricity Board 
would be referred to as 'the Board' while the Buildworth PvtLtd would 
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be referred to as 'the claimant' in this judgment. 
5. Pursuant to a purchase order dated 6 September 1982 an 
agreement was entered into between the Board and the claimant for the 
supply and installation of a circulating Water Piping System for the 
Bongaigaon Thermal Power Station. The purchase order conta~ns H
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[2017] 7 S.C.R. 
A 
provisions inter alia for the consideration payable, delivery, escalation, 
period for commissioning, penalty, disputes, terms of payment and 
arbitration. The total value of the contract was determined at Rs86.82 
lacs and the period for completion was 12 months from 25 June 1983, 
the date of the issue of the indent. The date for the completion of the 
B 
work was subsequently extended until 6 September 1983. The actual 
work was completed on 28 May 1985 while one portion of the work of 
TG-N was completed on 31 January 1986. 
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6. During the course of the arbitration the claimantraised several 
claims amounting to Rs 77.16 lacs including those on account of(i) 
price variation; (ii) idling charges of supervisory staff and Jabour; (iii) 
idling charges for machines, tools and tackles; (iv) compensation for 
extended stay for Civil work; (v) interest from 7 March 1986 (i.e. the 
date of.submissi'tin of bills) to 31December1997 at 18 per cent; (vi) 
escalation on account of gas; (vii) price variation of electrodes; (viii) 
legal expenses;and (ix) future interest at 18 per cent. 
7. The sole arbitrator awarded a sum of Rs 10,73,969/- on account 
of idling charges of labour andmachinery and towards price escalation. 
In addition, a lumpsum of Rs 20 lacs as interest was awarded between 
7 March 1986 and 31 December 1997. Future interest was awarded at 
the rate of 18 per cent per annum on the sum awarded, after a period of
three months from the date of the award. 
8. The award was made a Rule of the Court on 22 December 
2000 by the Civil Judge, Senior Division. The High Court partially allowed 
the appeal filed by the Board by setting aside the award of interest of Rs 
20 lacs by the arbitrator. 
F 
9. We will initially consider the submissions which have been urged 
on behalf of the Board to challenge the arbitral award. Two submis~ions 
have been urged by learned senior counsel. Firstly, it has been urged 
that the arbitrator committed an error in awarding the claim for price 
escalation because Clause 2.3(a)(i) of the purchase order had specifically 
G 
fixed aceiling of Rs 9, 16,825/- under this head. This amount, it was 
urged, had been paid to the claimant and hence no further amount could 
have been awarded by the arbitrator in the teeth of a contractual provision. 
Secondly, it was urged that the arbitrator erred in allowing the claim for 
idling charges oflabour and machinery once a finding of fac~ .was recorded 
by the arbitrator that the claimant had also contributed to the delay in the 
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. . :. "
ASSAM STATE ELECTRICITY BOARD. v. BUILDWORTH PVT. LTD. 
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[DR. D. Y. CHANDRACHUD, J.] 
completion of the project. 
A 
l 0. The first submission is based on the provisions of clause 
2.3(a)(i) of the purchase order which is extracted below: 
"PRICES: 2.3. 
a) Escalation. 
1. The increase in· price of steel labour valve, expansion joints, 
electrodes etc., shall be to Boards accounts, with the overall ceiling 
ofRs.9, 16;825/- on submission of documentary evidence." 
B 
. J L The contention of the claimant was that clause 2.3(a)(i) applied 
only for the specific period mentioned in the purchase order and not for 
C 
the extended period of the contract. According to the Board, a cap of Rs 
9 .16 lacs was imposed under the above provision and no price escalation 
was permissible beyond it. The arbitrator entered the following finding: 
" ... The contract is silent as to what will happen ifthe work agreed 
to be completed by 6.9.83 cannot be completed within 6.9.83. It 
D 
has not been disputed by the respondent that the Project Work 
was completed much beyond the extended date i.e. by 6.9.83. It 
is pertinent to point out here that the extension of time upto 6.9.83 
was formally granted by the respondent by a letter dated 27.3.85. 
There is no formal extension of time beyond 6.9.83 by the 
E 
Purchaser, but the claimant was allowed to carry out the work 
beyond 6.9.83. From the records it is found that during the period. 
from 6.9.83 to 27.3.85, there is no objection as to
delay nor any 
formal extension. Nor was the penalty clause (2.6.7) invoked. 
As a matter of fact, the work was carried out by the claimant 
with active co-operation of the respondent till 31.1.86 when the 
work on TG-IV was completed and necessary payment was made 
to the claimant. ·It appears, therefore, that though there is no 
formal extension of time beyond 6.9.83, the claimant was given 
informal extension of time upto 21.1.86 when the work was finally 
completed." 
Besides this, the arbitrator noted, that by a letter dated 5 June, 
1983 the claimant had specifically intimated to the Board that the 
escalation provision contained in clause 2.3(a)(i) wou\d not be applicable 
for the extended period. No objection was raised on behalf of the Board 
to the above letter and, on the contrary, the claimant was allowed to 
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. • . ~ ;:~:~"-/.i .).r. l 
. 
. ' ' . t ~-•• ' 
i. 
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carry on the work beyond 6 September 1983 which was the extended 
date, without any objection upto 31 August, 1986. The ultimate conclusion 
which was arrived at by the arbitrator was as follows : 
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"As discussed above, the clause of price being firm cannot be 
extended to cover the period beyond the formal extended date 
i.e. 6.9.83. Price escalation is a process which does not naturally 
confine itself between the date of purchase order and the extended 
date i.e. 6.9.83. On the contrary, generally market tendency is 
that it goes on increasing with every passiiig da,ys; Therefor~, it 
would b~nalve t? presume that there was no price escalation 
between the period 6.9.83 to 31.1.86. 
In view of the above, the responden.t :Board cannot deny the 
claimant the charge on account of price escalation takirig shelter 
. under clause 2.23( a) of the purchase order and clause 31 of the 
specification. Provision of both the clauses is applicable.only upto 
the formal extension date 6.9.83 and not beyprid. Having allowed 
the claimant to carry out the work much beyond the formal 
extended date i.e. from 6.9.83 upto 31.1.86, the respondent cannot 
now take the stand that the claimant is not entitled to escalation 
price for the period he worked even though there is no formal 
extension of time but for intents and purposes there was an 
extension oflime upto 31.1.86."
.... 
'·~······ ... _ ... 
12. The arbitrator has taken the view that the provision for price 
escalation would not bind the claimant beyond tpe scheduled date of 
completion. This view of the arbitrator is based on a construction of the 
provisions of the contract, the correspondence between the parties and 
p 
the conduct of the Board in allowing the completion of the contract even 
beyond the formal extended date of 6 September 1983 up to 31 January 
1986. Matters relatiqg to the i;onstruction of a contract lie within the 
province of the arbitral tribunal. Moreover, in the present case.the view 
.which has been adopted by the arbitrator is based on evidentiary material 
"which was relevant to the decision. There is no error apparent on the 
G face of the record which could have warranted the interference of the 
court within the parameters available under the Arbitration Act, 1940. 
The arbitrator has neither misconducted himself in the proceedings nor 
is the award otherwise invalid. 
13. The view which has been adopted by the arbitrator is in fact 
H
ASSAM STATE ELECTRICITY BOARD. v. BUJLDWORTH PVT. LTD. 
131 
[DR. D. Y. CHANDRACHUD, J.] 
in accord with the principles enunciated in the judgments of this Court. 
A 
In P.M.Paul Vs. UnioII of India 1, a Bench of two learned Judges of 
this Court has held that : 
" ... escalation is a normal incident arising out of gap ~f time in 
this inflationary age in performing any contract. The arbitrator 
has held that there was delay, and he has further referred to this 
B 
aspect in his award ..... 
After discussing the evidence and the submission the arbitrator 
found that it was evident that there was escalation and, therefore, 
he came to the conclusion that it was reasonable to allow 20 per 
cent of the compensation under claim no.l, he has accordingly c 
allowed the same. This was a matter which. was within the 
jurisdiction of the arbitrator and, hence, the arbitrator had not 
misconducted himself in awarding the amount as he has done. 
This Court held that the contractor was justified in seeking price 
escalation on account of an extension of time for the completion of work. 
D 
Once the arbitrator was held to have the jurisdiction to determine whether 
there was a delay in the execution of the contract due to the respondent, 
the latter was liable for the consequence of the delay, namely,an increase 
in price. 
14. A similar principle finds expression in another judgment of E 
two learned Judges of this Court in Food Corporation of India Vs. A. 
M. Ahmed & Co. and Another2:
"32.Escalation, in our view, is normal and routine incident arising 
out of gap of time in this inflationary age in performing any contract 
of any type. In this case, the arbitrator has found that there was 
escalation by way of statutory wage revision and, therefore, he 
came to the conclusion that it was reasonable to allow escalation 
under the claim. Once it was found that the arbitrator had 
jurisdiction to find that there Was delay in execution of the contract 
due to the conduct of FCI, the Corporation was liable for the 
consequences of the delay, namely, increase in statutory wages. 
Therefore, the arbitrator, in our opinion, had jurisdiction to go into 
this question. He has gone into that question and has awarded as 
he did. The arbit·rator by awarding wage revision has not 
1 1989 Supp (I) sec 368 
2 (2006) 13 sec 119 
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[2017] 7 S.C.R. 
· 
misconducted himself. The award was, therefore, made rule of 
the High Court, rightly so in our opinion." 
· In K.N.Sathyapalan (Dead} by LRs Vs. State of Kerala and 
Another3,this Court has held that : 
"32. Ordinarily, the parties w~uld be bound by the terms agreed 
upon in the contract, but in the event one of the parties to the 
coptract is unable to fulfil its obligations under the contract which 
has a direct bearing on the· work to be executed by the other 
party, the arbitrator is vested with the authority to compensate the 
second party for the extra costs incurred by him as a result of the 
failure of the first party to live up to its obligations. That is the ·• 
distinguishing feature of cases of this nature and Alo pi Pars had 
case [(1960) 2 SCR 793 : AIR 1960 SC 588] and also Patel Engg. 
case[(2004) 10 SCC 566] . As was pointed out by Mr Dave, the 
said principle was recognised by this Court in P.M Paul [ 1989 
Supp (1) SCC 368] where a reference was made to.a retired 
Judge of this Court to fix responsibility for the delay in construction . 
of the building and the repe~cussions of such delay. Based on the 
.findings of the learned Judge, this Court gave its approval to the 
excess amount awarded by the arbitrator on account of incre~se 
in price of materials and costs of labour and transport during the 
extended period of the contract, even in the absence of any 
escalation clause. The said
'principle was reiterated by this Court 
in T.P. Geprge case [(2001)2 SCC 758]." 
15. The award comports with prineiples oflaw governing price 
escalation firmly established by decisions of this Court. For these reasons, 
we find merit in the contention ofleamed counsel appearing on behalf of 
the claimant that the award does not suffer from any error apparent on 
the face of the record insofar as the aspect of price escalation is 
concerned. 
. 
. , .... ,. 
16. _The High Court has also adverted to the decision of this Court 
G ·in General Manager, Northern Railway Vs . . Sarvesh Chopra4 in 
support of the p,rinciple that if a party to a contract.does not rescind it by 
invoking Sections 55 and 56 of the Contract Act, 1. 872 and accepts the 
belated performance of reciprocal obligations, the other party would be 
entitled to make a claim for damages. 
'(2007) 13 sec 43 
H 
• 2002 (4) sec 45
ASSAM STATE ELECTRICITY BOARD. v. BUILDWORTH PVT. LTD. 
[DR. D. Y. CHANDRACHUD, J.] 
17. On the aspect of idling charges for machinery and labour, the 
arbitrator noted that three additional items of work were required to be 
carried out by the claimant which did not form part of the original work. 
These items of work required the mobilization oflabour and machinery 
separately fr.om that which had already been mobilized. The finding 
which the arbitrator rendered was as follows : 
" ... .It is natural that for carrying out separate works involving 
different technology, separate machineries and labour with separate 
expertise are required to be engaged. In absence of any evidence 
that these 3 additional works were not separate requiring separate 
machineries and labour, it is reasonable to presume that the claimant 
mobilized separate machineries and Jabour for these 3 additional 
works. Therefore, the claimant cannot be denied the charges for 
these additional labour and machineries." 
18. The arbitrator held that to some extent, the claimant contributed 
to the delay jn. the execution of the work and referredin that connection 
to the letters addressed by the Board to the claimant.The arbitrator also 
observed that the inability of the claimant to place the required number 
of supervisors at the site also qmtributed to the delay in the completion 
133 
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of ttie work: The J:ioint ~t th~ matte~ is that the arbitrator has duly borne 
in mind the circumstance
that "the claimant also contributed to a certain 
extent and must share responsibility for causing delay in completion of E 
the project",· l'he award does indicate that the contributory delay on the 
part of the claimant was present to the mind of the arbitrator and has 
been duly taken into consideration in computing the extent of the claim 
under the award. This is not. a case where the arbitrator has failed to 
.take into account a relevant consideration or has taken into account 
extraneous material or consideration.Once the aspect of contributory 
delay was present to the mind of the arbitrator, as is reflected in the 
reasons in the award, and this has been taken into consideration in the 
assessment of damag~s, the award does not fall for interference. While 
noticing this, the High Court rejected the contention that the claimant 
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had failed to produce evidence that its men and machinery remained idle 
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at the work site. The finding of the High Court was as follows: 
" ... .In the present case, the above amount was awarded on the 
basis of admitted facts. We reiterate that initially the pericrd for 
execution of work was fixed for one year, which was expired on 
25.06.1983 and the work could be completed only in the month of H
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[2017) 7 S.C.R. 
February 1985. Not only this, some part of the work related to 
TG-IV was completed on 31.1.1986. During this period the 
respondent informed the A.S.E.B. vi de letter dated 5.6.1983 that 
work front was not handed over to them and as such, escalation 
clause order 2:6:4 would not be applicable to them. Identical 
remainders were given vide letters dated 07 .06.1983; 16.11.1983 
and 03.06.1984 and so on. Not only this, the officers of the 
A.S.E.B. also admitted the position about non-release of work · 
front clearly in their letter dated 08.03.1984. However~ at no point 
of time the A.S.E.B. refuted the contractor's objection nor refuted 
the claim of idle charges etc. At the same time the bills of the 
contractor on account of idle charges and escalation prices etc. 
were put up for consideration in a meeting held on 28.01.1986. 
This act of the A.S.E.B. clearly indicates that they had impliedly 
. admitted substance and justification in the claim of the contractor." 
The view of the High Court does not warrant interference. 
19. The next aspect of the matter relates to the award of interest 
for the period from 7 March 1986 to 31 December 1997. The arbitrator 
awarded a lumpsum of Rs 20 lacs for a period of 11 years. The High 
Court set aside the award of interest on the ground that Section 29 of 
· the Arbitration Act, 1940 contemplates the award of interest only from 
the date of the decree. The issue
as to whether interest could be awarded 
for the pre-reference period and pendente lite under the Act of 1 940 is . 
not res integra. In Secretary. Irrigation Department, Government 
of Orissa and Others Vs.G C.Roy5, a Constitution Bench of this 
Court held that : 
"44 ....... Whe_re the agreement between the parties does not 
prohibit grant of interest and where a party claims interest and 
that dispute (along with the claim for principal amount or 
independently) is referred to the arbitrator, he shall have the power 
to award interest pendente lite. This is for the reason that in such 
a case it must be 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. 
Tll.is does not mean that in every case the arbitrator should 
necessarily award interest pendente lite. It is a matter within his 
'(1992) 1 sec sos
ASSAM STATE ELECTRICITY BOARD. v. BUILDWORTH PVT. LTD. 
135 
[DR. D. Y. CHANDRACHUD, J.] 
discretion to be exercised in the light of all the facts and 
A 
circumstances of the case, keeping the ends ~f justjce in view." 
In another jµdgmeiit, the Co11stitution Be~ch in Executive 
Engineer, Dhenkanal Minor: Irrigation. Division; Orissa and 
Others Vs. N.C.Budharaj (Deceased) by LRs and Others6, 
affirmed the power of the arbitrator to award interest on sums found 
B 
due and payable for the pre-reference period, in the absence of a specific 
stipulation or prohibition in the contract to claim or grant such interest7. 
20. The basis on which the High Court set aside the award of 
interest is hence contrary to the decisions of the Constitution Bench. 
21. Learned counsel appearing on behalf of the Board, however, 
submitted that a claim for damages gets quantified upon an adjudication 
by the arbitrator. Hence, it was submitted that no interest could be 
awarded prior to the date of the award. Even. this aspect of the matter 
is, in our view, no longer res inteir~. Tli~ arbitrator has power to grant 
interest on ·damages tinder Sedion 3{l)(b) of the Interest Act, 1978, 
fromthe date mentioried ih this regard in a written notice claiming such 
interest: The p\)sition whiCh ptevailed:priofto ihe InterestAct;t978 (to 
the effect that interest· on damages would be payable only .after 
ascertainment of damages )has undergone a change after the enactment 
of the Act. Interest on
damages could be claimed from the date of the 
written notice as contemplated in the law. This aspect of the matter has 
been set at rest in a decision of this Court in State of Rajasthan Vs. 
Ferro Concrete Construction Pvt. Ltd.8 • The· appellant in that case 
raised a similar contention that in regard to claims in the nature of 
damages (as contrasted with ascertained sums due) interest would 
becgme payable only on quantification and.hence the award of interest 
prior to t.h,e date of the arbitral award was ,con.tr11ry to law. Answering 
this submissic}n, this Court held as follows : . 
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"62; It is no doubt true1hat the position of law earlierwas that in 
t~ard Jo award of d&mages; interest ·was not payable before 
quantificati?n by a court. This was on the assumption that insofar 
'(2001) 2sec121 
7 26 .. for all the reasons stated above, we answer· the reference by holding that tJie 
arbitrator appointed with or without the intervention of the court, has jurisdiction to 
award interest, on the sums found due and payable, for the pre-reference period; in the 
absence of any specific stipulation or prohibition in the contract to claim or grant any 
such interest. 
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as damages are concerned, there is no liability till determination 
of the quantum of damages. We may refer to a decision of the 
Bombay HigH Court in iron & Hardware (India) 
Co. v. FirmShamlal& Bros. [AIR 1954 Bom423], where Chagla, 
C.J., speaking for the Bench, stated the principle thus: (AIR pp. 
425-26, para 7) 
~" 
"7 . ... In my opinion it would not be tnre to say that a person who 
coI\)lllits a breach of.the contract incurs any pecuniai;y liability, 
.. nor would it be true to say that the other party to the contract who 
complains of the breach has any amount due to him from the 
other party. 
As already stated, the only right which he has is the right to go to 
a court of law and recover damages. Now, damages are the 
compensation which a court oflaw gives to a party for the injury 
which he has sustained. But, and t.his is most important to note, he 
does not get damages or compensation by reason of any existing 
obligation on the part of the person who has committed the breach. 
He gets compensation as a resuli of the fi~tofthe"court. lherefore, 
no pecuniary liability arises till the court has determined that the 
party complaining of the breach is entitled to dan'lages. Therefore, 
when damages are assessed; it would not be true to say that what 
the court is doing is ascertaining a pecuniary liability which akeady 
existed. The Court in the first place must decide that the defendant 
is
liable and then it proceeds to assess what that liability is. But till 
that determination there is no liability at all upon the defendant." 
63. The legal positiQn, however, underwent a change after the 
enactment of the Interest Act, 1978. Sub-section (I) of Section 3 
of the said Act provided that a court (as also an arbitrator) can in 
any proceedings for recovery of any debt or damages, if it thinks 
fit, allow interest to the person entitled to the debt or damages at 
a rate not exceeding the current rate of interest, for the whole 
or part of the' following period, that is to say,-, 
"3. (l)(a) ifthe proceedings relate to a debt payable by virtue of 
a written instrument at a certain time, then, from the date when 
the debt is payable to the date ofinsti.tution of the proceedings; 
(b) if the proceedings do not relate to any such debt, then, from 
the date mentioned in this .regard in a written notice given by the
ASSAM STATE ELECTRICITY BOARD. v. BU!LDWORTH PVT. LTD. 
137 
[DR. D. Y. CHANDRACHUD,J.] 
person entitled or the person making the claim to the person liable 
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that interest will be claimed," to the date of institution of the 
proceedings:''. • .· ... 
64. Sub-section (3) of Section 3 made it clear that nothing in that 
section shall apply to any debt ot damages upon which interest is 
payaqleas;ofright,.by.virtue 0£ any agreement; or to any debt or B 
damages upon which payment of interest is barred, by virtue of 
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an e<'press. ,~gre~mep1. J:he sJiid ~ub-se!!ti 0n also made it clear 
that nothing in .. that section shall empower tl~e court to award 
interest upon interest, Section? of the sai.d Act provides that nothing 
in the said Act shall affect the provisions of Section 34 of the · 
Code of Civil Procedure, 1908. 
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65. The position regarding award of int~r.est after the Interest 
Act, 1978 came into force, can be stated.thus: 
(a) Where a provision has been made in any contract, for interest· 
on any debt or damages, interest shall be paid in accordance with o 
. such contract. 
· 
(b) Where payment of interest ori any debt or damages is expressly 
barred by ~e contract, no interest shall be awarded. 
(c) Where there is nil express bar in the contract and where there 
is also no provision' for payment of interest then the prinCiples of E 
Section 3 of the Interest Act will apply in regard to the pre-suit or 
pre-reference period and consequently interest will
be payable: 
(i) where the proceedings relate to a debt (ascertained sum) 
payable by virtue. of a Written instrument at a certain' tirrie;· then 
from the date when the debt is payable to the date of institution of F 
the proceedings; 
(ii) when; the proce.edings is for recovery of damages o~ for 
.. recovery of a debt which is not payable at ·a certain time, then. 
· · . fro!ll the d~te 'mentioned in a written notice given by the person 
· l)i!i~ing a Claim to the person liable for the claim that interest will 
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be' claimed, to date of institution of proc~edings . 
Cd) Payrrient of interest pendentelite (date of i~stitution of 
proceedings to date of decree) and future interest (from the date 
of decree to date of payt,nent) shail not be governed by. the 
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provisions of the Interest Act, 1978 bttfbytheprovisions ofSection 
34 of the Code of C_ivil Procedure, 1908 or the provisions of the 
law governing _arbitration as the case may be. 
66. Therefore, even in regard to the claims for damages, interest 
can be awarded for a (sic period) pnor to the date of ascertainment 
or quantification thereof if (a) the contract specifically provides 
for such payment from the date provided in the contract; or (b) a 
written demand had been made for payment of interest on the 
amount claimed as damages before initiation of action, from the 
date mentioned in the notice of demand (that is from the date of 
demand or any future date mentioned therein). In regard to claims 
for ascertained sums due, interest will be due from the date when 
they became due. In the present case, interest has been awarded 
only from 3-9-1990, the date of th~ petition under Section 20 of 
the Act for appoi~tment of arbitrator. We find no reason to alter 
the date of commencement of interest." 
. 
. 
22. The judgments on the point have been considered in a decision 
of three Judges of this Court in Union of India Vs.Ambica 
Construction9 in the conte.xt of a -bar of jurisdi<!tion to award interest 
for the peri6d of the pendency of the arbitration under the 1940 Act if 
there is an express bar under the contract.The decision notes and affirms 
the powers of the arbitrator to award interest in the a,Psence
of a specific .· 
power or prohibition contained in the contract. 
23. The·contract in the present case contains no bar or prohibition 
against the award of interest. However, it has been submitted on behalf 
oftheBoai:d.that the claimant was paid a sum of Rs 9, 16,825/- towards 
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escalation; which was the amount c<;>ntemplated under Clause 2.3 .1 of 
the Contract.. However, .as we have noted; this. provision in the contract 
was correctly held by the .. &,bifrator to apply only during the scheduled 
tercri of the contract and not in respect of the extended period. The 
responde,ntin its in_itial demands dated 7 M11rch 1986 and 23 Apnl 1986 
made d11ims On accotiiit'M prb:"escalatioti arid submitted a consolidated 
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bill on 9 .h,in¢'.:J98o; '·Ort 40 A'jJtil 1987 the Claimant addressed a legal 
notice, claiming a sulTI of Rs 10,73,416/- together with interest at the 
rate of 18 per cent per annum. In the circumstances upon the issuance 
of the above notice; the claimant was clearly entitled to claim interest 
with effect from 20April 1987. The High Court was hence in error in 
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ASSAM STATE ELECTRICITY BOARD. v. BUILD WORTH PVT. LTD. . 139 
[DR. D. Y. CHANDRACHUI), J.] · 
setting aside the award of interest. 
24. In our view, having regard to what is stated above, claimant is 
entitled to interest on the sum awarded from 20April 1987 to 31 December 
1997 and thereafter from the date of the decree of the trial Court until 
payment or realisation. The rate ofinterest is, however, modified to 12 
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per cent per annum, in respect of both the above periods. 
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25. The appeal filed by the claimant shall accordingly stand allowed 
in the above terms. The appeal filed by the Board shall stand dismissed. 
26. Howeyer, there shall be no order as to costs. 
Devika Gujral 
Appeals disposed of. c