Judges: G.B. Pattanaik, S. Rajendra Babu, D.P. Mohapatra, Doraiswamy Raju and Shivaraj V. Patil, JJ.

Facts:

Appointment of the arbitrators in the present cases was made without the intervention of the Court on a demand made by the contractor concerned.

The Arbitrators concerned, while sustaining portions of the claim made in the Awards also allowed on those amounts interest from the due date of the amount till date of Award.

On the Awards being made the Rule of Court, as per the determination made by the Civil Court, the State pursued the matter before the High Court unsuccessfully. High Court sustained the claim of the contractor for interest from the due date up to the date of the Award.

Hence, appeal was filed before the Supreme Court on dispute relating to award of interest for the period prior to the date of the Award.

A bench of three judges of Supreme Court, while hearing said appeal, referred matter to a larger Bench for an authoritative pronouncement on jurisdiction of arbitrator to award interest for the prereference period.

Issues:

(i) Whether Arbitrator has got jurisdiction to award interest for the pre-reference period in cases which arose prior to the commencement into force on 19.8.1981 of the Interest Act, 1978, when the provisions of the Interest Act 1839 was holding the field?

Contentions:

Appellants

(i) Arbitrator will have no jurisdiction to award interest for the pre-reference period in a matter relating to the pre 1978 Act, period in view of established judicial precedents.

Respondents

(i) Arbitrator has jurisdiction to award interest for pre-reference period as long as there is no specific prohibition as such in the agreement/contract between parties restraining the claim/payment of interest.

(ii) On the principle of an implied term of the agreement between the parties, Arbitrator could award interest in a case where the Court could award it.

(iii) When the parties refer all their disputes/ or the dispute as to interest as such to the Arbitrator, he shall have the necessary power to award interest.

Analysis:

Arbitrator appointed with or without the intervention of the Court – Whether has jurisdiction to award interest

(i) The 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.

(ii) In every case, the appointment of an arbitrator or even resort to Court to vindicate rights could be only after disputes have cropped up between the parties and continue to subsist unresolved. If the Arbitrator has the power to deal with and decide disputes which cropped up at a point of time and for the period prior to the appointment of an Arbitrator, it is beyond comprehension as to why and for what reason the Arbitrator should be denied only the power to award interest for the prereference period when such interest becomes payable and has to be awarded as an accessory or incidental to the sum awarded as due and payable.

Interest for the pre-reference period – Whether matter of substantive law

(i) 'Substantive Law' is that part of the law which creates, defines and regulates rights in contrast to what is called adjective or remedial law which provides the method of enforcing rights.

(ii) The provisions of the Interest Act 1839, which prescribes the general law of interest and becomes applicable in the absence of any contractual or other statutory provision specially dealing with the subject, would answer the description of substantive law.

(iii) The Interest Act, 1839, only envisaged and enabled courts to grant or award interest. But on that ground alone it could not be reasonably postulated that the Act applied only to proceedings before Courts and not to proceedings before forums created in lieu of conventional Civil Courts.

(iv) When the method of redressal of disputes by an alternative forum of arbitration is agreed to, between the parties, with or without the intervention of Court, arbitration forum is only a substitute of the conventional Civil Courts.

(v) It is inevitably necessary that the parties must be deemed to have by implication also agreed that the arbitrator shall have power to award interest, the same way and in the same manner as courts do. There is nothing in the Interest Act, 1839 to confine its operation and applicability only to proceedings before ordinary and conventional Courts.

Arbitrator –Whether holds all powers as are necessary to do complete justice between the parties

(i) Arbitrator possess all the powers, as are necessary to do complete and full justice between the parties in the same manner in which the Civil Court, seized of the same dispute, could have done.

(ii) 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 he could have successfully asserted before Courts and obtained relief.

(iii) 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 his substantive rights under the various laws in force.

D.P.Mohapatra, J. (Dissenting)

Arbitrator –Whether competent to award interest for the pre reference period

(i) An arbitrator has no competence to award interest for the pre reference period unless any of the following conditions is satisfied –

1. If the agreement between the parties entitles the arbitrator to award interest,
2. If there is a usage of trade having the force of law for award of interest, and
3. If there are other provisions of the substantive law enabling the award of interest.

(ii) Claim for interest for pre-reference period can be made only if there is a firm basis giving the claimants a cause of action for claim of such interest and in the absence of such basis for such claim an arbitrator is not competent to award interest.

(iii) Though an arbitrator discharges the functions of a Court while adjudicating the dispute raised by the parties he cannot be said to be a substitute for the Court in all respects.

(iv) An arbitrator is not bound to follow the strict procedure applicable in a case before the Court. Therefore, it is necessary that in judging the claim of interest for pre-reference period, he should ascertain whether such claim is permitted under the terms of the contract between the parties or there is a usage of trade having force of law in support of such claim or there is any other provision of the substantive law enabling the award of such interest.

Pre-reference and Reference period – Difference of

(i) The two periods, the period during which the proceeding was pending before the arbitrator (pendente lite) and the period before the arbitrator entered upon the reference (pre-reference) stand on different footing.

(ii) While the former refers to a period when the arbitrator was ceased of the matter for adjudication, the latter refers to the period before the arbitrator came into picture.

(iii) During the period when the arbitrator is ceased of the proceeding, the parties are aware of the claims made by the applicant against the opposite party and the matter is pending adjudication.

(iv) However, during the pre-reference period, neither the claims are crystallized nor has the opposite party any notice that it may be required to pay certain amount to the claimant depending on the adjudication of the dispute by the Arbitrator.

G.B. Pattanaik(Dissenting)

Arbitrator does not possess power to award interest for pre reference period.

(i) It is unimaginable that an arbitrator does possess the power on the ground that otherwise it would lead to multiplicity of proceedings.

(ii) To hold that an arbitrator possesses the power to award interest even for the pre-reference period would tantamount to legislation in that respect.

(iii) The fact that the arbitrator has the power to deal with and decide disputes which cropped up at a point of time, would certainly not clothe the arbitrator with any power, which neither any law confers upon him nor is there any agreement between the parties conferring that power.

(iv) It is difficult to conceive that such power could be conferred upon an arbitrator for the prereference period on the supposition that he must be presumed to have the power to grant interest as an accessory or incidental to the sum awarded as due and payable.

Conclusions:

(i) The 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.

(ii) There is nothing in the Interest Act, 1839 to confine its operation and applicability only to proceedings before ordinary and conventional Courts.

Important Precedents:

(i) Executive Engineer (Irrigation), Balimela and Ors. Vs. Abhaduta Jena and Ors. MANU/SC/0004/1987

(ii) Jugal Kishore Prabhatilal Sharma v. Vijayender Prabhatilal Sharma, MANU/SC/0120/1993

(iii) State of Orissa v. B N Agarwala, MANU/SC/0393/1993

(iv) State of Orissa v. B N Agarwala, MANU/SC/0204/1997