1987 (9) TMI 410 - SC - Companies Law

Whether the contractor was entitled to be paid interest on the amount which the Railway Company was liable to pay? Whether the court had authority to allow interest for the period prior to the institution of the suit? Held that - The award not being a speaking award, it was not permissible to speculate on the reasons for the award of interest and the court was not entitled to go behind the award and disallow the interest. It is difficult to agree with this submission. The arbitrator is bound to make his award in accordance with law. If the arbitrator could not possibly have awarded interest on any permissible ground because such ground did not exist, it would be open to the court to set aside the award relating to the award of interest on the ground of an error apparent on the record. On the other hand, if there was the slightest possibility of the entitlement of the claimant to interest on one or other of the legally permissible grounds, it may not be open to the court to go behind the award and decide whether the award of interest was justifiable. We do not want to enter into a discussion on the legality or properiety of a non-speaking award as we understand the question is now awaiting the decision of a Seven Judge Bench. In the light of what we have said above, Civil Appeal Nos. 120 and 121 of 1981 are dismissed, Civil Appeal Nos. 6019-22 of 1983 and A Civil Appeal No. 2257 of 1984 are allowed to this extent that interest during the pendency of the arbitration proceedings is disallowed and the rest of the civil appeals are allowed to the extent that both interest prior to the proceedings and interest during the pendency of the proceedings are disallowed.

Issues Involved:
1. Award of interest by an arbitrator for the period prior to the reference.
2. Award of interest during the pendency of the arbitration proceedings.
3. Applicability of the Interest Act, 1839 and 1978.
4. Arbitrator's powers under the Civil Procedure Code (CPC) and substantive law.

Detailed Analysis:

1. Award of Interest by an Arbitrator for the Period Prior to the Reference:
The court examined whether an arbitrator could award interest for the period before the arbitration reference. The judgment clarified that under the Interest Act, 1839, and the subsequent Interest Act, 1978, interest could be awarded up to the date of the institution of the proceedings. However, neither Act provided for the award of pendente lite interest. The judgment emphasized that an arbitrator is not considered a court under Section 34 of the CPC, which governs the award of pendente lite interest by courts. Therefore, for cases before the commencement of the Interest Act, 1978, the arbitrator could only award interest if there was an agreement between the parties, a trade usage having the force of law, or another provision of substantive law enabling the award of interest.

2. Award of Interest During the Pendency of the Arbitration Proceedings:
The judgment reviewed the arbitrator's authority to award interest during the pendency of arbitration proceedings. It was clarified that Section 34 of the CPC, which allows courts to award pendente lite interest, does not apply to arbitrators as they are not considered courts. The judgment referred to several case laws, including Seth Thawardas Pherumal v. Union of India and Union of India v. Bungo Steel Furniture Pvt. Ltd., to establish that an arbitrator could only award pendente lite interest if the reference to arbitration was made in the course of a suit, thereby granting the arbitrator the same powers as the court.

3. Applicability of the Interest Act, 1839 and 1978:
The court discussed the differences between the Interest Act of 1839 and the Interest Act of 1978. Under the 1839 Act, interest could be awarded by the court on debts or sums certain payable at a certain time by virtue of a written instrument. The 1978 Act expanded the definition of "court" to include an arbitrator, thereby allowing arbitrators to award interest in cases arising after the commencement of the 1978 Act. The judgment highlighted that while the 1978 Act allowed arbitrators to award interest up to the date of the institution of proceedings, the award of pendente lite interest remained governed by the same principles as before.

4. Arbitrator's Powers Under the Civil Procedure Code and Substantive Law:
The judgment explored the arbitrator's powers under the CPC and substantive law. It was established that an arbitrator must conduct proceedings and make awards in accordance with the substantive law. The court cited Bengal Nagpur Railway Company Limited v. Ruttanji Ramji, which held that interest for the period prior to the suit could be awarded if there was an agreement, trade usage, or provision of substantive law. The judgment also referenced State of Madhya Pradesh v. M/s. Saith & Skelton Pvt. Ltd., which allowed the award of interest under Section 61(2) of the Sale of Goods Act, 1930, and Section 80 of the Negotiable Instruments Act.

Conclusion:
The court concluded that in cases arising before the Interest Act, 1978, arbitrators could not award interest for the period prior to the reference or during the pendency of the arbitration proceedings unless there was an agreement, trade usage, or substantive law provision. For cases under the 1978 Act, arbitrators could award interest up to the date of the institution of proceedings. The judgment disallowed interest during the pendency of the arbitration proceedings in certain appeals and upheld the award of interest in others, based on the specific circumstances of each case.

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