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Deputy Chief Engineer Construction v/s M/s. Saptagiri Engineering Works

    Civil Miscellaneous Appeal No. 728 of 2019
    Decided On, 15 February 2022
    At, High Court of for the State of Telangana
    By, THE HONOURABLE MR. JUSTICE A. RAJASHEKER REDDY & THE HONOURABLE MR. JUSTICE M. LAXMAN
    For the Petitioner: C.V. Rajeeva Reddy, Advocate. For the Respondent: P. Vinayaka Swamy, Advocate.


Judgment Text
A. Rajasheker Reddy, J.

This appeal is filed challenging the order dated 22nd October 2018 in A.O.P.No.1319 of 2010 passed by the XIII Additional Chief Judge (FTC), City Civil Court, Hyderabad, passed under Section 34 of the Arbitration and Conciliation Act, 1996 (hereinafter referred to as “the Arbitration Act”).

2. The learned Counsel for appellant Sri C.V.Rajeeva Reddy submits that the appellant is only aggrieved of the impugned order to the extent of granting pre-reference and pendente lite interest, as the grant of such interest is against Clause 16 (3) of the General Conditions of Contract entered into between the parties, which very specifically bars grant of such interest. It is further submitted that the Apex Court also, in Garg Builders v. Bharat Heavy Electricals Ltd. (Civil Appeal No.6216 of 2021, dt. 04.10.2021), in clear and categorical terms, held that when the terms which form part of the contract prohibit grant of pre-reference and pendente lite interest, it is beyond the authority of Arbitrator to grant such interest.

3. Learned counsel for respondents submits that Section 28(3) of the Arbitration Act provides that the Arbitrator apart from taking into account the terms of the contract, shall also take into account the usages of the trade applicable to the transaction. As such, the Arbitrator, by taking into consideration such factor, has granted simple interest at the rate of 12% though the respondents/claimants have claimed interest at the rate of 36%, as such, the Award passed by the Arbitrator is reasonable Award and it requires no interference.

4. In this case, it is to be seen that there is no dispute regarding passing of Award by the Arbitrator under Section 34 of the Arbitration Act, except to the extent of granting pre-reference and pendente lite interest. Clauses 16(3) and 64.5 of the General Conditions of Contract read as follows:

“16 (3) : No interest will be payable upon the Earnest Money and Security Deposit or amounts payable to the Contractor under the Contract, but Government Securities deposited in terms of Sub-Clause (1) of this clause will be payable with interest accrued thereon.

64.5 : Where the arbitral award is for the payment of the money, no interest shall be payable on whole or any part of the money for any period till the date on which the award is made.”

Thus, the aforesaid Clauses prohibit grant of pre-reference and pendente lite interest, but the Arbitrator in the present case, has granted such interest, which is not in consonance with the terms of agreement. It is well known principle that the Arbitrator is bound by the terms of agreement/contract and he cannot travel beyond the terms of such agreement.

5. Further, Section 31(7) of the Arbitration and Conciliation Act reads as follows:

“(7) (a) Unless otherwise agreed by the parties, where and in so far as an arbitral award is for the payment of money, the arbitral tribunal may include in the sum for which the award is made interest, at such rate as it deems reasonable, on the whole or any part of the money, for the whole or any part of the period between the date on which the cause of action arose and the date on which the award is made.

(b) A sum directed to be paid by an arbitral award shall, unless the award otherwise directs, carry interest at the rate of eighteen per centum per annum from the date of the award to the date of payment.”

A reading of the aforesaid provision goes to show that if the parties otherwise agree, the Arbitrator is bound by the same and even the Statute makes an exception for grant of interest where the parties have otherwise agreed. Thus, grant of interest at any rate, in the present case, is beyond the terms of agreement and as such, the same needs to be set aside. The said issue is also no longer res integra as the Apex Court has already dealt with the same in Garg Builders case (1 supra).

6. Insofar as the contention of the learned counsel for respondents is concerned, it is appropriate to refer to Section 28(3) of the Arbitration Act, which reads as follows:

“In all cases, the arbitral tribunal shall decide in accordance with the terms of the contract and shall take into account the usages of the trade applicable to the transaction.”

Even as per the aforesaid provision, the Arbitrator is bound by the terms of contract, but the Arbitrator in the present case has not granted interest basing on usages of the trade practices and even otherwise, that cannot go beyond the agreement entered between the parties. Even the Interest Act, 1978 pleaded by the learned counsel for respondents makes an exception for grant of interest if

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there is agreement between the parties to that effect. In the present case, the agreement prohibits grant of pre-reference and pendent lite interest, as such, the contention of the learned counsel for respondents has no locus to stand and the same cannot be accepted. 7. Accordingly, this appeal is allowed in part, setting aside the Award of the Arbitrator to the extent of granting pre-reference and pendente lite interest. No order as to costs. Pending miscellaneous applications, if any, shall stand closed.
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