Case: Union Of India Vs. M/S.Krafters Engineering &amp; Leasing P.Ltd

(a) On 16.05.1988, the respondent was awarded with a contract for the work of Provision of Signaling Arrangements at "C" Class Stations on Igatpuri-Bhusawal Section and 2 "C" Stations on Bhusawal-Badnera Section of Bhusawal Division of Central Railway at the cost of Rs.18,10,400/-. On completion of the contract, the respondent raised certain disputes/claims by filing Suit No. 2822 of 1993 before the High Court and demanded for adjudication through arbitration. The High Court directed the General Manager of the Central Railway to appoint an arbitrator and refer the disputes for adjudication. Since the Arbitrator appointed could not deliberate the matter within the time limit, the respondent invoked the jurisdiction of the Umpire. The Umpire, by order dated 26.04.2005, gave award for Claim Nos. 1, 3, 6, 8, 9, 10, 11, 12 & 13 and rejected Claim Nos. 2, 5, 7 & 14 and mentioned that a bank guarantee towards security deposit against claim No. 4 is to be returned.(b) Challenging the award given by the Umpire for Claim Nos. 11 & 13, the appellant herein filed Arbitration Petition No. 274 of 2005 before the High Court. The learned Single Judge of the High Court, vide order dated 06.12.2005 dismissed their petition.(c) Aggrieved by the order passed by the learned single Judge, the appellant herein filed an appeal being Arbitration Appeal No. 219 of 2006 before the Division Bench of the High Court. The Division Bench, by impugned order dated 24.04.2006, dismissed the appeal. Challenging the said order, the Union of India preferred this appeal by way of special leave before this Court.

Court's reasoning:
13) Inasmuch as we have already expressed similar view as mentioned above and conveyed our inability to apply the reasoning in Madnani Construction Corporation Private Limited (supra), we fully endorse the view expressed in Sree Kamatchi Amman Constructions (supra).14) In the light of the above discussion, following conclusion emerge:Reliance based on the ratio in Board of Trustees for the Port of Calcutta (supra) is unacceptable since the said view has been overruled in Sayeed Ahmed and Company (supra) and insofar as the ratio in Madnani Construction Corporation Private Limited (supra) which is also unacceptable for the reasons mentioned in the earlier paras, we reject the stand taken by the counsel for the respondent. On the other hand, we fully accept the stand of the Union of India as rightly projected by Mr. A.S. Chandhiok, learned ASG. We reiterate that where the parties had agreed that no interest shall be payable, the arbitrator cannot award interest for the amounts payable to the contractor under the contract. Where the agreement between the parties does not prohibit grant of interest and where a party claims interest and the said dispute is referred to the arbitrator, he shall have the power to award interest pendent elite. As observed by the Constitution Bench in G.C. Roys case (supra), in such a case, it must be presumed that interest was an implied term of the agreement between the parties. However, this does not mean that in every case, the arbitrator should necessarily award interest pendente lite. In the subsequent decision of the Constitution Bench, i.e., N.C. Budharajs case (supra), it has been reiterated that in the absence of any specific stipulation or prohibition in the contract to claim or grant any such interest, the arbitrator is free to award interest.15) In the light of the above principle and in view of the specific prohibition of contract contained in Clause 1.15, the arbitrator ceases to have the power to grant interest. We also clarify that the Arbitration Act, 1940 does not contain any specific provision relating to the power of arbitrator to award interest. However, in the Arbitration & Conciliation Act, 1996, there is a specific provision with regard to award of interest by the arbitrator. The bar under clause 1.15 is absolute and interest cannot be awarded without rewriting the contract.