2014 (3) TMI 1143 - SC - Indian Laws

Demand of interest - interest between the date when the cause of action arose to the date of award - arbitral award - whether the contractors are entitled to interest for the amount withheld and if so at what rate? - Held that - Section 37(1) of the new Act by using the words unless otherwise agreed by the parties categorically clarifies that the arbitrator is bound by the terms of the contract insofar as the award of interest from the date of cause of action to the date of award. Therefore where the parties had agreed that no interest shall be payable the Arbitral Tribunal cannot award interest between the date when the cause of action arose to the date of award. The arbitrator could not have awarded any interest from the date when the recovery was made till the award was made. However interest would have been payable from the date when the award was made till the money was deposited in the High Court and thereafter converted to fixed deposit receipts. Upon the amount being deposited in the High Court no further interest could be paid to the Respondents. It is directed that the Respondents shall not be entitled to any interest on the amount which was recovered by the Appellant till the date of award and thereafter till the date when the amount awarded was deposited in the High Court i.e. from 12th July 1997 - appeal allowed.

Summary

Issues Involved:
1. Validity of the recovery of excess payments made under the escalation clause.
2. Maintainability of the writ petitions and the necessity of arbitration.
3. Authority of the arbitrator to award interest.
4. Applicability of Clause 2401 and 2403 of the Indian Railways Standard Conditions of Contract regarding lien and interest.

Detailed Analysis:

1. Validity of the Recovery of Excess Payments:
The Union of India entered into agreements with the Respondents for the supply of mono block concrete sleepers, with provisions for price escalation based on the cost of raw materials. The Railway Board later determined that excess payments had been made under the escalation clause for HTS wires between 1989 and November 1994, amounting to Rs. 1,80,92,462/- and Rs. 1,78,09,789/-. The Respondents challenged this recovery, leading to multiple rounds of litigation, including writ petitions and appeals.

2. Maintainability of the Writ Petitions and Necessity of Arbitration:
The Respondents initially filed writ petitions challenging the recovery. The Railway administration objected, arguing that the dispute should be referred to arbitration as per the contract terms. The High Court appointed an arbitrator, but this decision was overturned on appeal, remanding the matter back to the Single Judge. Eventually, the Supreme Court referred the dispute to an Arbitration Tribunal, which rendered an award in favor of the Respondents, directing the Railway administration to refund the amounts with interest.

3. Authority of the Arbitrator to Award Interest:
The Railway administration challenged the arbitration award, particularly the interest component, arguing that the arbitrator had no authority to award interest due to the prohibition under Section 31(7) of the Arbitration Act, 1996 and specific contract clauses. The High Court upheld the arbitrator's award, but the Supreme Court found that the arbitrator and the High Court failed to consider the contractual provisions barring interest.

4. Applicability of Clause 2401 and 2403 of the Indian Railways Standard Conditions of Contract:
Clause 2401 allows the Railway to withhold and retain sums from the contractor's security deposit or payments due under the contract pending finalization of any claims. Clause 2403 extends this lien to amounts due under any other contract with the Railway. Both clauses explicitly prohibit the contractor from claiming interest on withheld amounts. The Supreme Court concluded that the arbitrator erred in awarding interest, as these clauses barred such payments.

Conclusion:
The Supreme Court allowed the appeals, holding that the Respondents were not entitled to interest on the amounts recovered by the Railway administration from the date of recovery until the date of the arbitration award. Interest would only be payable from the date of the award until the amount was deposited in the High Court. The appeals were allowed in these terms, emphasizing the binding nature of the contractual clauses prohibiting interest on withheld amounts.