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State Of Orissa v. B.N Agarwala .
Factual and Procedural Background
The State of Orissa and the respondent, Shri B.N. Agarwala, entered into Agreement No. 8-F2/67-68 for construction of the Kukuteswar Minor Irrigation Project valued at Rs 3,84,690. Work was completed on 11 September 1969. On 8 August 1977 the contractor claimed compensation for extra work, leading to a reference to a sole arbitrator (Shri B.N. Das, Superintending Engineer). On 25 February 1980 the arbitrator made a reasoned award of Rs 1,59,298 (Rs 98,212.09 for extra work and Rs 61,086.61 as interest covering both pre-reference and pendente lite periods).
The State sought to set aside the award, while the contractor applied to make it a rule of court. The Subordinate Judge rejected the State’s objections and decreed the award, but mistakenly recorded post-award interest at 6 % instead of 9 %. The Orissa High Court (Single Judge) upheld the decree and corrected the interest rate, directing 9 % from 25 May 1980 to the date of the Subordinate Judge’s decree and 6 % thereafter until realisation. The present civil appeals to the Supreme Court challenge those determinations.
Legal Issues Presented
- Whether, in view of Clauses 11 and 23 of the contract, disputes regarding rates payable for additional work were excluded from arbitration.
- Whether the arbitrator had jurisdiction to award interest for the period prior to entering upon the reference (pre-reference interest) when the award preceded the Interest Act, 1978.
- Whether the arbitrator could award pendente lite interest (interest during the arbitration proceedings).
Arguments of the Parties
Appellant’s Arguments
- All claims related to additional work; under the proviso to Clause 11, the Superintending Engineer’s decision on such rates is final, barring arbitration.
- Relying on Executive Engineer (Irrigation) v. Abhaduta Jena (1988) 1 SCC 418, an arbitrator is not empowered to award pre-reference interest where the Interest Act, 1978 had not yet come into force.
Respondent’s Arguments
- The proviso to Clause 11 applies only to a narrow category of disputes where work is executed before rates are fixed; the present claims fall outside that proviso and are arbitrable.
- In light of the Constitution Bench ruling in Secretary, Irrigation Dept., Govt. of Orissa v. G.C. Roy (1992) 1 SCC 508, the arbitrator’s power to grant interest encompasses both pre-reference and pendente lite periods; alternatively, the matter should be referred to a larger Bench.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Executive Engineer (Irrigation) v. Abhaduta Jena (1988) 1 SCC 418 | Arbitrator lacks power to award interest for the pre-reference period when the award predates the Interest Act, 1978. | Followed to hold that the arbitrator could not grant pre-reference interest in the present case. |
| Secretary, Irrigation Dept., Govt. of Orissa v. G.C. Roy (1992) 1 SCC 508 | Arbitrator has power to award pendente lite interest. | Applied to uphold the arbitrator’s grant of pendente lite interest. |
| Jugal Kishore Prabhatilal Sharma v. Vijayendra Prabhatilal Sharma (1993) 1 SCC 114 | Clarified that G.C. Roy dealt only with pendente lite interest; pre-reference interest continues to be governed by Jena. | Cited for clarification to reinforce the inapplicability of G.C. Roy to pre-reference interest. |
Court's Reasoning and Analysis
Issue 1 – Arbitrability of extra-work claims: Clause 11 comprises three parts. The proviso, beginning “as lastly hereinbefore mentioned,” applies only to the second part that governs situations where a contractor executes extra work before rates are settled. Because the State did not establish that the present claims fell within that proviso, the arbitration clause (Clause 23) remained operative. Thus, disputes over additional-work rates were arbitrable.
Issue 2 – Pre-reference interest: The award preceded the Interest Act, 1978 (effective 19 August 1981). Applying Abhaduta Jena, the Court held the arbitrator had no authority to award interest for the period before he entered on the reference. The Constitution Bench ruling in G.C. Roy was distinguished as limited to pendente lite interest; the request to refer the matter to a larger Bench was declined.
Issue 3 – Pendente lite interest: Under G.C. Roy, the arbitrator could award interest accruing during the arbitration proceedings. That portion of the award was upheld.
Because the lump-sum interest included both periods and the record did not show the exact date the arbitrator entered the reference, the Court remitted the matter to the Subordinate Judge to ascertain and exclude pre-reference interest while retaining pendente lite interest. All other parts of the award were affirmed.
Holding and Implications
Appeals ALLOWED IN PART. The award is modified to disallow interest for the pre-reference period. The case is remitted to the Subordinate Judge to calculate the permissible interest component. No order as to costs.
Implications: The ruling reiterates the pre-existing distinction between pre-reference and pendente lite interest under Indian arbitration law when the award predates the Interest Act, 1978, and clarifies that G.C. Roy does not disturb Jena on this point. No new precedent was set regarding contractual arbitrability; the decision turns on contractual interpretation and existing Supreme Court authority.
B.P Jeevan Reddy, J.— Civil Appeal No. 3096 of 1981 arises from the judgment of a learned Single Judge of Orissa High Court in Miscellaneous Appeal No. 253 of 1980. Civil Appeal No. 3097 of 1981 arises from Miscellaneous Appeal No. 254 of 1980. The appeals pertain to two identical contracts entered into between the State of Orissa and the respondent, Shri B.N Agarwala. All the relevant facts and contentions are identical in both the appeals. It would, therefore, be sufficient if we refer to the facts in Civil Appeal No. 3096 of 1981.
2. An agreement No. 8-F2/67-68 was entered into between the State of Orissa (appellant) and the respondent for construction of Kukuteswar Minor Irrigation Project. The value of the agreement was Rs 3,84,690. The work was completed on September 11, 1969. On August 8, 1977, the respondent claimed certain amount on account of extra work done by him, which dispute was referred to Shri B.N Das, Superintending Engineer, as the sole arbitrator. He made a reasoned award on February 25, 1980 granting a total sum of Rs 1,59,298. This amount comprised of Rs 61,086.61p towards interest and Rs 98,212.09p towards the extra work done by the respondent. The interest amount Rs 61,086.61p represented interest for the period October 10, 1969 to February 24, 1980. In other words this sum represented interest both for the pre-reference period as well as for the period the arbitration proceedings were pending (pendente lite interest). The arbitrator directed that the said sum of Rs 1,59,298 should be paid within a period of three months, in default whereof it shall carry interest at the rate of 9 per cent per annum till the payment is made or till the passing of the decree by the civil court, whichever is earlier.
3. The appellant applied for setting aside the award while the respondent applied for making it the rule of the court. The learned Subordinate Judge overruled the objections raised by the appellant and made the award a rule of the court. So far as interest is concerned, he directed, evidently under a mistake, that the amount awarded by the arbitrator shall carry “interest at the rate of 6 per cent per annum as per the award”. (As stated hereinbefore the arbitrator awarded interest at the rate of 9 per cent and not 6 per cent. For the period subsequent to the award, however, he awarded interest at the rate of 6 per cent).
4. On appeal, the learned Single Judge of the Orissa High Court affirmed the judgment of the learned Subordinate Judge. He corrected the aforesaid error relating to rate of interest. He directed that the sum of Rs 1,59,298 shall carry interest at the rate of 9 per cent per annum from May 25, 1980 till the date of decree and at the rate of 6 per cent per annum from the date of the decree of the learned Subordinate Judge till the date of realisation.
5. The first contention urged by the learned counsel for the appellant before us relates to the very maintainability of the arbitration dispute with respect to the claims made by the respondent. The contention is that all the claims made by the respondent pertained to additional work. So far as additional work is concerned, the decision of the Superintending Engineer is final with respect to the amount payable therefor. A claim with respect to additional work done cannot be the subject matter of arbitration. This contention is based upon Clause 11 of the agreement read with Clause 23. For a proper appreciation of the said contention it is necessary to set out Clause 11 in its entirety. It reads as follows:
“Clause 11:
The Engineer-in-Charge shall have power to make any alterations or addition to the original specifications, drawings, designs and instructions that may appear to him to be necessary or advisable during the progress of the work, and the contractor shall be bound to carry out the work, in accordance with any instructions which may be given to him in writing signed by the Engineer-in-Charge, and such alteration shall not invalidate the contract and any additional work which the contractor may be directed to do in the manner above specified as part of the work, shall be carried out by the contractor on the same conditions in all respects on which he agreed to do the main work, and at the same rates as are specified in the tender for the main work. The time for the completion of the work shall be extended in the proportion that the additional work bears to the original contract work and the certificate of the Engineer-in-Charge shall be conclusive as to such proportion and if the additional work includes any class of work, for which no rate is specified in this contract then such class of work shall be carried out at the rates entered in the sanctioned schedule of rates of the locality during the period when the work is being carried on and if such last mentioned class of work is not entered in the schedule of rates of the district then the contractor shall within seven days of the date of his receipt of his order to carry out the work inform the Engineer-in-Charge of the rate which it is his intention to charge for such class of work and if the Engineer-in-Charge does not agree to this rate he shall by notice in writing be at liberty to cancel his order to carry out such class of work and arrange to carry it out in such manner as he may consider advisable.
No deviations from the specification stipulated in the contract or additional items of works shall ordinarily be carried out by the contractor, nor shall any altered, additional or substituted work be carried out by him, unless the rates of the substituted, altered or additional items have been approved and fixed in writing by the Engineer-in-Charge. The contractor shall be bound to submit his claim for any additional work done during any month on or before the 15th day of the following month accompanied by a copy of the order in writing of the Engineer-in-Charge, for the additional work and that the contractor shall not be entitled to any payment in respect of such additional work if he fails to submit his claim within the aforesaid period.
Provided always that if the contractor shall commence work and incur any expenditure in regard thereof before the rates shall have been determined as lastly hereinbefore mentioned, then and in such case he shall only be entitled to be paid in respect of the work carried out or expenditure incurred by him prior to the date of the determination of the rate as aforesaid according to such rate or rates as shall be fixed by the Engineer-in-Charge. In the event of a dispute, the decision of the Superintendent Engineer of the Circle will be final.”
(emphasis added)
6. Clause 23 is the Arbitration Clause in the agreement. According to this clause all disputes and claims arising out of or relating to the agreement shall be referred to the arbitration of the Superintending Engineer of the State Public Works Department connected with the work nominated by the concerned Chief Engineer. For the present purpose only the opening words of Clause 23 are relevant. The opening words are “Except where otherwise provided in the contract all questions and disputes ….”
7. The contention of the learned counsel for the appellant is that by virtue of the proviso contained in Clause 11, the decision of the Superintending Engineer of the Circle is final on any dispute relating to the rates payable for the extra work done by the Contractor. It is not possible to agree. Clause 11 is in three parts. The first part says that a contractor is bound to carry out such extra work as he may be called upon to do by the Engineer-in-Charge. The extra work shall have to be carried out subject to the same conditions in all respects as are applicable to the main work and at the same rates. If, however, the agreement does not contain rates for such work, the rates entered in the sanctioned schedule of the rates of the locality during the relevant period shall be applicable. If, however, the schedule of rates also does not provide for such work the contractor should, within seven days of the order to do such additional work, inform the Engineer-in-Charge of the rates which he proposes to charge. If the Engineer-in-Charge does not agree thereto, it is open to the Engineer-in-Charge to get the said extra work done through some other agency.
8. The second part of Clause 11 says that no deviations from the specifications stipulated in the contract or additional items of work shall ordinarily be carried out by the contractor unless the rates therefor are approved and fixed in writing by the Engineer-in-Charge. The contractor must submit his claim for the additional work done during any month on or before the 15th of the following month accompanied by a copy of the order in writing of the Engineer-in-Chief for doing additional work. If he does not so submit the claim, he is not entitled to any payment.
9. The third part of Clause 11 contains the proviso relied upon by the counsel for the appellant before us. It says that if the contractor shall commence work and incur any expenditure before the rates shall have been determined “as lastly hereinbefore mentioned” he shall only be entitled to be paid for such work at such rate as may be determined by the Engineer-in-Charge. In the event of dispute, the decision of the Superintending Engineer is made final. It is evident from the use of the words “as lastly hereinbefore mentioned” that the proviso applies to second part of Clause 11 but not to the first part. The proviso contemplates a situation where additional work is done by the contractor before the rates are determined. It is only in respect of the rates payable for such work that the decision of Superintending Engineer is made final. It is not the case of the appellant/State that the items for which the arbitrator has awarded the aforesaid amount was a work of the nature contemplated by the proviso. If so we see no bar to the dispute relating to rates for the additional work being referred to arbitration. The first contention is accordingly rejected.
10. The next contention of learned counsel for the appellant/State relates to the power of the arbitrator to award interest for the pre-reference period. Reliance is placed upon the decision of this Court in Executive Engineer (Irrigation) v. Abhaduta Jena (1988) 1 SCC 418. Shri Bhagat, learned counsel appearing for the respondent, however, submits that the said decision is no longer good law in view of the Constitution Bench decision in Secretary, Irrigation Department, Govt. of Orissa v. G.C Roy (1992) 1 SCC 508. We cannot agree with Shri Bhagat. Both of us were members of the Constitution Bench which decided G.C Roy (1992) 1 SCC 508. It was confined to the power of the arbitrator to award interest pendente lite. It did not pertain to nor did it pronounce upon the power of the Arbitrator to award interest for the period prior to his entering upon the reference (pre-reference period). This very aspect has been clarified by one of us (B.P Jeevan Reddy, J.) in his concurring order in Jugal Kishore Prabhatilal Sharma v. Vijayendra Prabhatilal Sharma (1993) 1 SCC 114. Accordingly, we hold following the decision in Jena (1988) 1 SCC 418 that the arbitrator had no power to award interest for the pre-reference period in this case inasmuch as the award was made prior to coming into force of the Interest Act, 1978. (The Interest Act, 1978 came into force with effect from August 19, 1981). So far as interest for the period during which the arbitration proceedings were pending (pendente lite interest) is concerned, the arbitrator does have the power to award the same as held in G.C Roy (1992) 1 SCC 508. A request is made by Shri Bhagat to refer the matter to a larger Bench to decide the question relating to the power of the arbitrator to award interest for the pre-reference period even in cases where the award is made before the coming into force of the Interest Act, 1978. Jena (1988) 1 SCC 418 was decided by a Bench of three Judges. We do not also feel persuaded to refer the matter to a larger Bench.
11. The interest awarded by the arbitrator (Rs 61,086.61) pertains both to the pre-reference period as well as period during which the arbitration proceedings were pending (pendente lite). It is not clear from the material placed before us when did the arbitrator enter upon the reference. In the circumstances the matter has to go back to the learned Subordinate Judge for ascertaining the interest for the period prior to the arbitrator entering upon the reference (pre-reference period). The respondent shall not be entitled to interest for the pre-reference period as stated above. The award shall stand modified to the above extent. In all other respects, the award is affirmed.
12. The appeals are accordingly allowed in part. The matter is remitted to the learned Subordinate Judge for working out the direction contained in the preceding paragraph. No orders to costs.
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