1. The Court This is an appeal from a judgment and order dated the 25th of November, 1997 whereby the Hon'ble Justice Amitava Lala refused to set aside an award of Rs. 6,00,000/- passed by the arbitrator S.S Ganguly, a retired Secretary of the Government of West Bengal.

2. The award is dated the 11th of December, 1996 and is for the said round sum.

3. Payment was directed to be made within three months but no interest from the date of the award was allowed. The counter claim of the appellants was rejected. No order was passed as to costs.

4. Mr. Roychowdhury, appearing for the appellant, has urged two points before us. He first submitted that the arbitrator was compelled to give reasons for his award and, though the award runs into several pages, and contains many sentences, yet it cannot be called a reasoned award. His argument was that on a substantial reading of the award no sufficient reasons for the award of the sum of Rs. 6,00,000/- can be found.

5. The second argument was about interest. In the award a sum of Rs. 1,90,545/- has been awarded by the arbitrator as interest by way of damages. Mr. Roychowdhury argued that because of an express clause contained in the agreement between the parties, the arbitrator could not award any interest and had no jurisdiction to make any award on that head.

6. The respondent disputed the correctness of both these above submissions. Parties argued for a number of days before us and cited several authorities. We take up the point of reasons in the award first.

I. Facts about reasons

7. The learned arbitrator has earlier passed an award, dated the 29 of March, 1995, for the very same sum of Rs. 6,00,000/-. By an order dated the 21st of December, 1995 the matter was remitted because the learned arbitrator had not given any reasons. The parties agreed, as is recorded in the said order, that the agreement compelled the arbitrator to give reasons in case of claims exceeding Rs. 50,000/-.

8. We have examined clause 25 of the agreement appearing amongst others at page 34 of the Paper Book and we find that it was indeed so agreed. The relevant portion of the said agreed clause as follows:—

“In all cases where the amount of the claim in dispute is Rs. 50,000/- and above, the arbitrator shall give reasons for the award”.

9. Therefore, it is the undisputed position before us that the arbitrator was compelled to give reasons for his award. The issue is whether the arbitrator has sufficiently discharged his duty.

II. History of reasons

10. Under the old Arbitration Act, 1940, the law was that the arbitrator was not in general compelled to give reasons. Some 30/40 years ago, in practice, arbitrators hardly, if ever, gave reasons for awards. Experienced arbitrators knew that the giving of reasons rendered the award liable to attack on various grounds, including error apparent. Even when I joined the bar in 1970, if an award fell for consideration in a case, and the arbitrator had given reasons, it never failed to cause a twich of the lips or a raising of the eyebrows of learned advocates experienced in the law of arbitration.

11. In those years, cases had not even started to come before the courts, where parties by agreement, were seeking to compel the arbitrators to give reasons. The time upto the decade of the 70's was the time of no reasons in awards.

12. Thereafter things changed a little. In the field of administrative law reasons for orders became compulsory. The administrative waves of demand for reasons hit the arbitral shores. Afterall, the same Judges were sitting on the bench. Parties also started thinking that if they agreed to have a reasoned award then they could compel arbitrators to make a reasoned award.

13. Cases then came before the Court, and the law developed into this, that if the parties expressly agreed that the arbitrator shall give reasons, then a breach of that obligation by the arbitrator might well amount to misconduct and cause the award to be upset.

14. In the stage of the law that we are now in, the situation has changed quite a lot. Under the new Arbitration & Conciliation Act of 1996 it is the law that the arbitrator shall ordinarily give reasons for awards, but it is open to the parties to agree otherwise. Section 31(3) of the new Act might be seen in this regard.

15. In our case, however, we are concerned with the position as under the 1940 Act, but that the arbitrator was here compelled to give reasons is beyond dispute.

III. What the award states

16. Before we deal with the law on the subject, we must set out what the award actually states. It is only thereafter that a conclusion can be reached whether such statements constitute sufficient reasons for the award in law. Including the cause title, the award occupies 9 pages in the Paper Book (61 to 69). The first two pages are the cause title, the next three pages are recitals. Thereafter the reasons and the award occupy 4 pages. Basically the arbitrator has stated the following things.

(1) The tender was for Rs. 14,69,936/-.

(2) Time for completion was extended up to 10.8.82

(3) The claimant had completed the said work on or before the said date.

(4) The respondent failed to prepare the final bill.

(5) On account of the balance sum payable for the work executed, the claimant is entitled to Rs. 3,94,842/-.

(6) The claimant is entitled to the balance security deposit of Rs. 14,613/-.

(7) As the claimant has been deprived of their money for about 12 years, according to equity and justice, Rs. 1,90,545/- should be paid to them as interest by way of damages.

(8) The sum total of Rs. 6,00,000/- being the awarded amount should be paid by the respondent to the claimant within three months.

IV. The law about reasons.

17. The authorities on this subject are very helpfully (with respect) set out in an unreported judgment delivered by the Hon'ble Justice Ruma Pal when sitting here and the Hon'ble Justice M.H.S Ansari in a judgment of the Division Bench dated the 25th of March, 1999 in A.P.O No. 473 of 1998 (Union Of India… v. Singh Verma & Ors.…).

18. One of the cases referred to therein was also referred to by Mr. Roychowdhury and that is the English case of Re: Royser reported at 1963 (1) A.E.R 612. The other cases are, inter alia, M.L Kapoor, AIR 1974 SC 87, Municipal Corporation of Delhi, AIR 1987 SC 2316, Gurdayal Singh, AIR 1979 SC 1622.

19. On behalf of the respondents two cases referred to in the above unreported judgment were also specifically placed before us. Those are the cases of Indian Oil Corporation, reported at AIR 1988 SC 1340 and of Gujrat Water Supply, reported at AIR 1989 SC 973. Both these judgments are of the same Bench consisting the Hon'ble Justice Sabyasachi Mukherjee as his Lordship then was and the Hon'ble Justice S. Ranganathan, as his Lordship then was.

20. The law as it appears from the above authorities and especially the two last ones referred to above is as follows:—

(1) To make a reasoned award the arbitrator has to make his mind known on the basis which he has acted.

(2) Statement of reasons is not the same thing as the giving of a detailed judgment.

(3) Reasons are short and intelligible indications of the arbitrator's mind, no more.

(4) The reasons must have such connection with the conclusions reached by the arbitrator as to show that the arbitrator has not acted irrelevantly, unreasonably or capriciously.

(5) The reasons should deal with the substantial points raised in the reference.

V. What has happened in our case

21. The law above is not difficult to determine but the real task for which the courts hear cases is to apply the law the facts and circumstances of the case in hand.

22. In attacking the award on the ground of lack of reasons Mr. Roychowdhury said amongst other things that the arbitrator has not stated why, according to him the work could be said to have been completed within 10.8.82 He also said that there is no explanation how the arbitrator found that the respondent could be said to have accepted without objection the 7th running account bill of the claimant for Rs. 4,02,902/-. In our opinion these are matters of detail. The arbitrator's award in this case, if read without reference to any other document, discloses a complete whole. The reason for the award of Rs. 6,00,000/- is plain and simple. There is some amount of money due for work done but not paid for; some amount is due for security deposit; a substantial amount is due by way of interest for 12 years. Nobody has any difficulty in understanding how the sum of Rs. 6,00,000/- has been arrived at. The award does not contain the details of calculation for arrival at these respective sums. But in our opinion, this is not necessary. When awards used to be made without reasons, the courts said that the courts have no duty or power to probe into the mental process of the arbitrator. Now that reasons are being given, the law becomes this, that the court shall examine only that part of the mind of the arbitrator which he chooses to lay bare before the court, but about the rest the court shall not exhibit an undue inquisitiveness.

23. If the arbitrator has failed to lay bare the essential parts of his mental reasoning, then he has failed to do his duty; if, on the other hand, even after a frank and fair statement made by the arbitrator on the award, the court sets it aside because it wants even more and even fuller reasons, then the court fails to do its duty.

24. Different arbitrators are differently mentally constituted, and they are also differently trained. The award of a lawyer arbitrator will be different from the award of an engineer arbitrator. All fair and frank thought processes are permitted in the award irrespective of the style of thought. What is not permitted is a reasoning or a mental link which is forbidden by the law. If the arbitrator discloses such a false step, then and then only the award can be set aside for error apparent. But if on the basis of a sufficiently well reasoned award no such error is apparent on the face, the court cannot say that further detailed reasons are necessary, because in such detail, there appears to be a possibility of there having been an application of an erroneous principle of law. If the award is good on its face, if the face is fair, frank and open, then that is all that is needed. That is the requirement of a reasoned award. We are of the clear and firm opinion that the award in our cases posses all these tests with flying colours.

VI. The point of interest

25. The second argument of Mr. Roychowdhury on the award of interest proceeded on a portion of the said same agreed clause 25 between the parties. The relevant portion reads as follows:—

“…….it is also a term of the contract that the claim, if any, of the contractor shall not bear any interest and the arbitrator making the award shall not award in favour of the contractor any interest pendente lite from the date of the award or any other type or nature of interest on the amount if any awarded.”

26. Mr. Roychowdhury submitted that the arbitrator had no jurisdiction to disregard this clause. According to him, all the authorities upto date (excepting one, a judgment delivered by us, which we shall mention later) have made this provision, that the arbitrator's power to grant interest arises unless there is something to the contrary in the agreement between the parties.

27. Mr. Roychowdhury argued that such a provision of the agreement not otherwise specifying is to be found in the Interest Act of 1978; he said that to the same fact is sub-section (7)(a) of section 31 of the Arbitration & Conciliation Act, 1996. He said that in G.C Roy's case, reported at AIR 1992 SC 732, the Bench of Five Judges of the Supreme Court made it abundantly clear that in the case before their Lordships there was no contract against payment of interest. He said that in the recent case N.C Budhraj also, reported at AIR 2001 S.C 626 where the Bench was divided 3:2, the contract did not contain a clause prohibiting payment of interest. He showed us that the reference answered in Budhraj's case was made in the same case reported at AIR 2000 SC 221 (the same case of N.C Budhraj by legal representatives), the referred question being set out at page 226 of the reports, starts by saying that there is an absence of a prohibition against claiming or grant of interest under the arbitration agreement.

28. In the face of statutory law and in the face of the authoritative decisions of the Supreme Court, according to Mr. Roychowdhury it was not open to us to allow interest even though the parties have agreed otherwise.

29. He also said, that the grant of interest in this case is not a matter of mere error of law apparent on the face of the award, but is a matter of the arbitrator's jurisdiction. He relied on several cases including the recent case of Grid Corporation, reported at AIR 1999 SC 2262, to support the proposition that an arbitrator awarding against the express contract between the parties makes a jurisdictional error, because he is a creature of the contract.

VII. Is award of interest, contrary to the terms of an agreed clause, an error going to jurisdiction?

30. To find out whether the arbitrator has made only an error, or has travelled outside the very scope of his authority, one has to look at the clause upon which the argument of challenge by the party is based. If the said clause shows that the arbitrator has pronounced upon a matter which was not agreed to be referred at all, then the arbitrator has travelled outside his jurisdiction. If, for example, it is agreed that one contract shall be the subject of reference but not another one, then an award made in respect of the second excepted contract is an error going to the root of the arbitrator's jurisdiction.

31. It might, however, also be, that the award is merely not apparently consistent with another part of the contract, not the arbitration part of the contract, which sets out the rights and substantive commercial liabilities of the parties. An award, in this case, cannot be said to be without jurisdiction; it can at best be said to be an erroneous award. If the arbitrator has authority to decide on the dispute but his decision goes against this or that clause of the contract, then and in that event, the arbitrator's jurisdiction to pronounce is not in issue at all.

32. We have dealt with this aspect of the matter at length, in a judgment delivered on 14.6.2001 in APO No. 19 of 2000, APD No. 65 of 2000 (Port of Calcutta v. Mahalakshmi Constructions). The case might be referred to, if necessary.

33. In our case we find that the words “the claim, if any, of the contractor shall not bear any interest” is a prohibition, not on the arbitrator to consider the dispute of interest, but that it is a prohibition against the claimant enforcing his right of interest.

34. Similarly the words “………the award shall not award…….any interest” presupposes that the arbitrator has jurisdiction to consider the dispute regarding award of interest. The submission of the appellant in reality is, and can only be, that the arbitrator shall consider the claim for interest so as only to reject it. This is not the same thing as saying that the arbitrator has no jurisdiction to consider the claim for interest. On this aspect of error of jurisdiction, therefore, in our opinion, Mr. Roychowdhury's submissions fail. That the interest clause is within the same lengthy clause 25, which also contains the arbitration clause, does not make it, by its mere placement, a clause of jurisdiction.

VIII. What the interest clause means

35. We find from a fair reading of the interest prohibition clause that one part of it, that the claim of the contractor shall not bear any interest, prohibits claim for interest for any period whatsoever by the contractor, either pre-reference or pendente lite or post-reference.

36. However, the other part of the clause prohibiting award of interest “pendente lite from the date of award” or “interest on the amount, if any, awarded” are clauses which prohibit interest on the awarded sum from the date of the award. The phrase “pendente lite from the date of award” means that the writer of the clause and the persons who signed it either did not know the meaning of the words “pendente lite” or did not pay attention to this particular part of the contract. Interest pendente lite from the date of the award is a phrase without meaning. This cannot be construed to prohibit the power of the arbitrator to grant interest pendente lite.

37. Although the latter part of the clause prohibits only interest on award, yet the first part of the clause prohibits grant of all interest. The arbitrator's award clearly shows that the period of 12 years covers both the pre-reference period and the time during which the reference was on. The arbitrator has carefully avoided granting of any interest from the date of the award.

IX. The arbitrator's award (on facts)

38. The amount of interest, awarded by the arbitrator, we are quite convinced, is a result of back calculation. The arbitrator awarded the same sum of Rs. 6,00,000/- as he had awarded earlier. He calculated the sums payable on account of unpaid work and unpaid security deposit; he deducted these from Rs. 6,00,000/- and he awarded this difference as interest.

39. The arbitrator did not seek to hide this mental process. This an additional reason for supporting the award as being open, and therefore, reasoned. It is also our opinion that because the sum on the head of interest has been arrived at by way of back calculation, it is not necessarily bad or liable to be set aside.

40. The arbitrator has arrived at the sum of Rs. 6,00,000/- on the basis of justice and equity and, in order to arrive at that sum, he finds that a particular amount of interest has to be added. He also finds that the said sum by way of interest is not unreasonable, considering the span of 12 years. In our opinion, on this reasoning, nothing stops him from awarding the very said sum as interest, which is back calculated.

41. We are aware that a criticism might be levelled against us that we are probing, at lest partly, into the undisclosed mental process of the arbitrator, by finding that he has made a back calculation. Our opinion is, that though the undisclosed part of the arbitrator's mind cannot be probed into, yet, as regards the disclosed part of the mind, the court is entitled to focus on it its full light of scrutiny reason and commonsense. We are of the opinion that, though a back calculation might be absolutely forbidden in a science laboratory, yet, in a court of law, if the result of the back calculation is honest and reasonable, it is not necessarily bad. It is not bad here.

X. Can interest be awarded against an agreed clause?

42. The more important point is, can we sustain the award in the face of the prohibitory clause in the contract? According to our judgment in exception, was delivered by us in G.A No. 3694 of 2000 on 8.8.2001 in the case of Union of India v. Lovely Construction.

43. In that case we were considering clause 16(2) of the General Conditions of Contract of the railways which also contained a prohibitory clause against the claim of the contractor bearing any interest. The main point on which we decided the above case was this—that although the judicial authorities and the statutes say, that unless there is an agreement to the contrary, the arbitrator can award interest, those do not also say, that if there is such a contract to the contrary, the arbitrator cannot. We opined on the above basis, that we were free to decide the matter of grant of interest, a prohibition in the agreement notwithstanding. In formulating the law, our opinion was very largely moulded by this fact, that in the modern days, obtaining money without interest in any commercial situation is impossible. The arbitration Court is the quintessence of the commercial Court. Therefore, we look the view, that a clause in the agreement prohibiting grant of interest, is like a clause in the nature of a penalty. The same principles are applicable to such a penal prohibitory clause, as are to be found applicable in situations ruled by section 74 of the Indian Contract Act. The first explanation to that section shows that interest clauses might well become stipulations by way of penalty. We therefore concluded, that clauses prohibiting grant of interest are not absolutely enforceable in terms; those have to be shows to be either a genuine pre-determination of exclusion of liability under the head of interest, or, relief against grant of interest might be shows to be due to the respondent, on the basis of justice and equity, even up to the point of total extinction.

We held in that case, that a printed term in a Government contract cannot, in general, be held to be a deliberate predetermined stipulation of extinction of liability by way of interest. We opined that, because the Government delays in making payment, and because the Government contracts are specially rich in no interest clauses, the court would perpetrate injustice, were it to enforce mechanically the combination of these two factors, without realising that non-payment of interest, even if it is justly due, is a penal provision. As we held in the case of Loverly Construction, so do we hold here also. The clause forbidding payment of interest is no more than a general insertion. The arbitrator has specifically found that justice and equity demand the payment of interest by way of compensation. The prohibitory clause by way of penalty cannot rob the arbitrator's power in law to make such an award of interest.

XI. Conclusion as to interest

44. We have a long way since the days when it was thought that interest, like a right of appeal, is statutory, unless it is agreed upon by the parties, or is payable by reason of custom or usage. See, as an example, the statement of the old law; in the excellent diction (with respect) Vivian Bose, J., in the case of Thawardas, AIR 1955 SC 468, specially at paragraph 30 at pages 477 and 478 of the report. Times have changed, and what was good law then is not good law now. Thwardas has been disapproved even in the case of G.C Roy, AIR 1992 SC 732, inter alia at paragraph 43(iv). In the said same case at paragraph 43(i) there is a clear indication that interest by way of compensation and deprivation is now payable. The law therefore today is, that interest might be payable by reason of contract, by reason of statute, by reason of custom or usage and also by reason of justice, equity and good conscience. The fourth item of grant of interest by way of compensation, because such grant should justly be made, ordinarily supervenes a provision in the contract against such grant. If it appears that the enforcement of such a penal provision of prohibition against grant of interest would be and against equity and good conscience, and it also appears that the clause was not inserted, with the eyes of both the parties wide open, as a genuine pre-determination of the extinction of liability to pay interest, notwithstanding that its might cause great financial hardship, the court and the arbitrator both have power to award interest, even pre-reference or pre-suit, the prohibitory clause in the contract notwithstanding.

XII. The final result

45. Both the arguments of Mr. Roychowdhury therefore fail. The appeal is accordingly dismissed with costs. The award and the judgment under appeal are both upheld. Any moneys lying as security of the respondent's claim to the credit of this appeal be paid over immediately. The State Bank of India, Farakka Barrage Branch, its Manager and all his subordinates shall forthwith make a release on the basis of a copy of today's judgment. Release be made within a week of intimation. Mr. Roychowdhury appearing for the appellant asks for stay of operation of this judgment and order but such prayer is turned down. Mr. Roychowdhury also asks for certificate to appeal under Articles 133 and 134A of the Constitution of India. Such certificate is refused. Authenticated copy of the judgment may issue forthwith without the necessity of formal certification.

46. All parties and others concerned are to act a signed xerox copy of this judgment on the usual undertakings.

Ajoy Nath Ray, J.

S.N Bhattacharjee, J.:

Appeal dismissed with costs.

Stay of operation turned down.

S.K.P