Karnataka Neeravari Nigam Ltd., vs M/S Shetty Construction on 4 April, 2017

[Cites 28, Cited by 0]

Karnataka High Court

Karnataka Neeravari Nigam Ltd., vs M/S Shetty Construction on 4 April, 2017

Equivalent citations: 2017 (3) AKR 146, 2017 (4) KCCR SN 525 (KAR)

The petitioners are a Government of Karnataka undertaking and its Executive Engineer. The respondent is a private limited company, incorporated under the Companies Act, 1956, engaged in construction activity. The petitioners had engaged the services 3 of the respondent for purposes of executing earth work and lining of a canal, under an agreement of the year 1990. The cost of the work was estimated at Rs.53 lakh. The period within which the work was to be completed was 12 months, excluding the monsoon season.

2. It transpires that the contract was terminated by the petitioners on the ground that the work was not completed within the stipulated period. This had prompted the respondent to institute proceedings under Section 8 of the Arbitration Act, 1940, in the Court of the Civil Judge (Senior Division) Gokak, as on 1.4.1993. Accordingly, a sole arbitrator having been appointed and he having entered the reference had passed an Award, dated 1.3.2000 allowing 7 out of 8 heads of claim. The Award included interest pertaining to the pre-reference period, interest pendente lite and interest was awarded from the date of decree till payment.

The Award was said to have been made an order of the civil court, as per order dated 11.10.2006. The Award is said to have been modified to the extent that the Civil court held that the 4 interest payable from the date of decree till the date of actual payment, shall be at 13% per annum, instead of 18%.

The said decree has attained finality in the petitioners having unsuccessfully challenged the decree by way of an appeal before this Court, in its appellate jurisdiction, and before the Apex Court by way of a Special Leave Petition. During the pendency of the appeal, in MFA 1383/ 2006, before this court, the petitioners are said to have deposited a sum of Rs.38.67 lakh, as on 31.5.2007. The said appeal was said to have been dismissed on 15.10.2011.

The respondent is said to have filed an Execution Petition in E.P.No.9/2012 seeking recovery of Rs.2.51 crore. The petitioners however, disputed the calculation of interest and other heads under which recovery was sought, and admitted the liability only to the extent of Rs.1,75,53,592/-. The said sum was said to have been deposited. The respondents claimed a balance amount of Rs.84.25 lakh. The executing court having negated the stand of the petitioners, the present petition is filed. 5

3. The learned counsel Shri Ramesh N. Misale, appearing for the petitioners contends that the Award has specified the distinct claim amount separately, and the interest component on each such claim amount awarded, separately. The rate of interest was fixed at 18 % payable till the date of decree or till the date of payment, whichever was earlier. The Civil Court had modified the Award only to reduce the rate of interest payable, from the date of decree till the date of payment, to 13% per annum from 18% awarded by the Arbitrator. It is hence contended that the interest, at 18%, which accrued on the compensation awarded up to the date of decree did not merge with the amount awarded on each claim and hence the interest payable from date of decree was only on the compensation separately awarded and not also on the interest payable up to the date of decree. Reliance is placed on Bharath Heavy Electricals Ltd., v. R.S. Avatar Singh & Co., (2013) 1 SCC 243, for the above proposition. 6

The learned counsel urges other contentions as regards certain other claims raised in the Execution petition which are dealt with hereinafter.

4. The counsel for the respondent has filed statement of objections to contend that the Award of the Arbitrator which is made an order of the Court and decreed and which has attained finality, in the same having been confirmed by the Apex court - no longer lends itself to any interpretation as sought to be canvassed by the petitioners. The learned counsel for the respondent would further contend that the law on the question whether the interest payable on the principal sum up to the date of decree would amalgamate with the principal and would constitute the principal sum on which future interest would be payable, post decree, is no longer res integra and is settled by a catena of decisions and places reliance on the following decisions.

1. Hyder Consulting (U.K.) Ltd. Vs. Governor, State of Orissa (2015) 2 SCC 189, 7

2. Central Bank of India vs. Ravindra and Others (2002) 1 SCC 367,

3. Oil and Natural Gas Commission vs. M/s. C. Clelland Engineers (AIR 1999 SC 1614),

4. Uttar Pradesh Cooperative Federation Ltd. Vs. Three Circles ((2009) 10 SCC 374).

5. In the light of the above contentions and on a perusal of the several other citations to which attention is drawn by the learned counsel, it is seen that the terms of the award of the arbitrator is as follows:

TERMS OF AWARD PASSED BY THE ARBITRATOR

1. To declare the order of I declare that the order of rescission of the contract termination dated: 6-1-1993 Issued by the Executive issued by the Executive Engineer Engineer in order dated as unjust and award payment to 6-1-1993 as unjust & illegal the claimants as under and and award. release.

i) Release of E.M.D. in the form i)E.M.D. in the form of Bank of Bank Guarantee Guarantee of Rs. 54,000/- Rs.54,000/-

ii) F.S.D. deducted in R.A. bills ii)Rs.1,49,861-00 towards F.S.D. in the form of cash deducted in R.A. Bills Rs.1,49,861-00

iii) Release of Bank Guarantee iii) Bank Guarantee Commission 8 Commission of Rs.15,120/- of Rs.15,120-00.

iv) Release of Penalty recovered

iv) Rs.3,390-00 recovered as Rs.3,390/- penalty.

v) Payment of interest at 24% v) I award payment of interest p.a. on the above sums tillcharges at 18% p.a. from date of payment. 1-4-1993 to date of payment or decree by Court which ever is earlier.

2. Payment towards hard rock 2. I award excavated including their i) Payment at Rs.160/- per Cu.m disposal with a lead up to for a quantity of 11.284.56 Cu.ms less payment made if any earlier.

1. K.M. at Rs. 160/- per Cu.m ii) Payment of interest charges at for a quantity of 11,384.56 18% p.a. from 1-04-1992 to date Cu.ms with interest thereon at of payment or decree by the 24% p.a. from 18-10-1990 till Court which ever happens date of payment. earlier.

3. (a) Payment of compensation 3.(a) I award payment of of Rs.22,99,870-00 towards compensation of Rs.20 Lakhs idling of men & Machinery. towards this claim.

(b) Payment of interest (b) I award payment of interest charges at 24% p.a. from the charges at 18% p.a. from date of claim till date of 1-4-1992 till date of payment or payment. decree by the Court whichever is earlier.

4. (a) Payment of compensation 4(a) I award payment of Rs.12 of Rs.21,00,000/- towards Lakh towards this claim. losses in productivity due to avoidable prolongation of the stay of the contractor on the work.

(b) Payment of interest at 24% (b) I award payment of interest at p.a. from the date of the claim 18% p.a. from 1-4-1993 till date till date of payment. of payment or decree by the Court whichever is earlier.

5. (a) Compensation of Rs.7.70 5(a) No Award. 9

        Lakhs     due     to     illegal
        termination of contract.
        (b) Payment of interest at 24%     (b) No Award.
        p.a. from the date of
        termination till date of
        payment.
 6.     Payment of final bill of       6) I award payment to the

Rs.2.00 Lakhs with interest at claimant as per final bill 24% p.a. including release of part rates and withheld amounts. I award payment of interest charges at 18% p.a. from 1-4-1993 till date of payment or decree by Court which ever is earlier.

7. (a) Payment of interest 7(a) I award payment of interest charges at 24% p.a. due to charges at 18% p.a. in respect of delays in payment of R.A. delayed payments.

        Bills Rs.81,271-00
        (b) Payment of interest
        charges on the above amounts                  --
        were due till date of payment.
 8.     Payment of arbitration cost by 8)     The     respondents   and
        the respondents                Claimants      shall    bear the
                                       arbitration costs equally.

The parties had filed their respective 'memo of calculation' before the executing court, which are extracted hereunder :

MEMO OF CALCULATION FILED BY DECREE HOLDER READS AS UNDER:

Claim Name of Claim Amount Rs. Amount Rs. No.

1. i) Release of E.M.D. in the form of Bank Guarantee Rs.54,000-00 10

ii) Bank F.S.D in Cash ... 1,49,861-00

iii) Refund of B.G. Commission. 15,120-00

iv) Refund of penalty recovered. 3,390-00 Rs.1,68,371-00

v) Add: Interest on Rs.1,68,371-

00 at 18% p.a. from 01-04-1993 to till date of decree i.e. up to Rs. 4,10,927-00 5,79,298-00 18-10-2006 (Total 4949 days) 1,68,371.00 x 18 x 4949 100 x 365

2. i) Payment towards hard rock excavation 11384.56 x Rs.160/cu.m = Rs. Rs.18,21,529-60 Less : Paid in R.A. Bills Under Item No.2 = Rs. 4,55,382-40 Rs.13,66,147.20

ii) Add: Interest on Rs.13,66,147.20 at 18% p.a. from 01-04-1992 to till date of decree i.e. up to 18-10-2006 (Total 5314 days) 13,66,147.20 x 18 x 5314 Rs. 35,80,129.00 49,46,276.20 100 x 365

3. i) Payment of compensation towards idling of men and Rs.20,00,000.00 machinery

ii) Add: Interest on Rs.20,00,000-00 at 18% p.a. from 01-04-1992 to till date of decree i.e. up to 18-10-2006 (Total 5314 days) 20,00,000.00 x 18 x 5314 Rs.52,41,205-00 72,41,205.00 100 x 365

4. i) Payment of compensation towards losses in productivity Rs.12,00,000-00

ii) Add: Interest on Rs.12,00,000-00 at 18% p.a. 11 from 01-04-1993 to till date of decree i.e. up to 18-10-2006 (Total 4949 days) 12,00,000.00 x 18 x 4949 Rs.29,28,723-00 41,28,723.00 100 x 365

5. Compensation due to illegal termination of Contract.

6. i) Payment of final bill Rs.02,00,000-00

ii) Add: Interest on Rs.2,00,000- 00 at 18% p.a. from 01-04-1993 to till date of decree i.e. upto 18-10-2006 (Total 4949 days) 2,00,000.00 x 18 x 4949 Rs.04,88,120-00 6,88,120.00 100 x 365

7. i) Payment of interest on delayed payment of R.A. Bills at 18% Rs. 60,953-00 p.a. (Rs.81,271.00 x 18/24)

ii) Add: Interest on Rs.60,953.00 at 18% from 01-03-2000 to till date of decree i.e. up to 18-10-2006 (Total 2423 days) 60,953.00 x 18 x 2423 Rs. 72,833-00 1,33,786.00 100 x 365 Amount due and payable Per Decree Rs. 1,77,17,408.00 Add: Future interest on Rs.1,77,17,408.20 at 13% p.a. From 19-10-2006 (date of decree 18-10-2006) To till date of payment of Rs.38,67,770-00 as per Direction by Hon'ble High Court of Karnataka.

Calculated up to 31-05-2007 (i.e. paid on 31-05-2007) (Total 225 days) = Rs.1,77,17,408.20 x 13 x 225 Rs.14,19,820.00 100 x 365 Total amount due & Payable Rs. 1,91,37,228.20 12 Less: Amount paid by J.Drs through High Court on 31-05-2007 Balance amount due & payable Rs.38,67,770.00 As on 01-06-2007 by J.Drs Rs.1,52,69,458.20 Add: Future interest at 13% p.a. from 01-06-2007 till 30-09-2012 on the balance amount due & payable of Rs.1,52,69,458.20 (Total 1949 days) Rs.1,05,99,514.00 = Rs.1,52,69,458.20 x 13 x 1949 100 x 365 Balance amount payable Rs. 2,58,68,972.20 Less: Amount paid by Judgment Debtors on 01-10-2012 in part Rs. 1,75,53,592.00 Balance Amount due & payable by J.Drs on 01-10-2012 83,15,380.20 Add: Interest at 13% on Rs.83,15,380.20 from 01-10-2012 to till the date of 15-11-2013 (411 days) = Rs.83,15,380.20 x 13 x 411 Rs.12,17,235.00 100 x 365 Balance amount due and payable by JDrs as on 16-11-2013 Rs.95,32,615.20 Memo of calculation filed by the Judgment Debtor reads as under:

Claim Name of the claim Original Interest up Total up Interest Total up to No. Claim to 18-10- to up to 31-05-07 06 i.e. 18-10-06 31-05- including date of 07 at interest for decree at 13% 18-10-06 18% Original 13 claim

1. i) Release of EMD in the form of Bank Guarantee Rs.54,000

ii) Release of FSD in 149861 365751 515612 12009 527621 the form of cash

iii) Refund of B.G. 15120 36902 52022 1212 53234

iv) Refund of penalty 3390 8274 11664 272 11936 recovered No. of days from 01-04-1993 to till date of 4949 18% 13% 168371 410927 579298 13493 592791

2. Payment towards hard rock excavation 11384.56xRs.160/cu. 1821530 m Less: paid in R.A. 455382 bills under item No.2 1366147 3580129 4946276.2 109479 5055755.2 No. of days from 01.04.1993 to till date of decree up to 18-10-06 4949 18% 13%

3. Payment of 2000000 5241205 7241205 160274 7401479 compensation towards idling of men & machinery 18% 13%

4. Payment of 1200000 2928723 4128723 96164 4224887 compensation towards losses in productivity 18% 14 13%

5. Compensation due to illegal termination of contract

6. Payment of final bill 200000 488121 688121 16027 704148 18% 13%

7. Payment of interest on delayed payment of R.A. bills at 18% p.a. 81271 x 18/24 60953 72833 133786 4885 138671 18% 13% 4995471 18117731.2 Total decreed amount 18117731.2 + total interest up to the deposit made in the High Court Less amount 3867770 deposited in the High Court Total Due 14249961.2 Interest on original 3303991 claim amount @ 13% for the period from 1-06-07 to 30-06-12 Total Principal and 17553952.2 interest The dispute is with regard to the calculation of future interest at the rate of 13% whether should be on the consolidated sum of compensation and interest awarded or should be confined 15 to the compensation amount, which is indicated separately in the award.

The learned counsel for the petitioners has placed reliance on the decision of the Apex Court in BHEL v. R.S. Avatar Singh, supra.

Reliance was also placed on the case of Secretary, Chennai Central Co-operative Bank v. S. Kamalaveni Sundaram, (2011) 1 SCC 790. The question involved was whether the appellant therein was liable to pay interest on arrears of rent from a certain date to the date of decree. It was held as follows :

"11. Section 34 of the Code of Civil Procedure, 1908 (CPC) empowers the court to award interest for the period from the date of the suit to the date of the decree and from the date of the decree to the date of payment where the decree is for payment of money. Section 34 of the Code of Civil Procedure does not empower the court to award pre-suit interest. The pre-suit interest would ordinarily depend on the contract (express or implied) between the parties or some statutory provisions or the mercantile usage. Be that as it may, we do not find that 16 on equitable considerations the landlady is entitled to interest for the period January 20, 2000 to July 20, 2005."

6. On the other hand, the learned counsel for the respondent has placed reliance on the decision by a Constitution Bench of the Apex Court in Central Bank of India v. Ravindra, supra, among other decisions. The Constitution Bench in Central Bank of India, was dealing with a reference by a three Judge Bench of the Apex Court as to the meaning to be assigned to the phrases "the principal sum adjudged" and "such principal sum" as occuring in Section 34 of the Code of Civil Procedure, 1908 as amended by the Code of Civil Procedure (Amendment) Act (66 of 1956) w.e.f. 1.1.1957, a question of frequent recurrence and having far reaching implications in suits for recovery of money, specially those filed by banking institutions against their borrowers.

Upon consideration of the case law and other authorities that was extensively brought to the attention of the Court, the 17 conclusion that followed on the interpretation of Section 34 (1) CPC was expressed thus :

"40. Let us paraphrase the relevant part of Section 34(1) as under and then deal with the question posed before us:

"Where and in so far as a decree is for the payment of money, the Court may, in the decree, order interest at such rate as the Court deems reasonable to be paid on the principal sum adjudged, from the date of the suit to the date of the decree, in addition to any interest adjudged on such principal sum for any period prior to the institution of the suit, with further interest at such rate not exceeding six per cent per annum, as the Court deems reasonable on such principal sum, from the date of the decree to the date of payment, or to such earlier date as the Court thinks fit."

41. A few points are clear from a bare reading of the provision. While decreeing a suit if the decree be for payment of money, the Court would adjudge the 18 principal sum on the date of the suit. The Court may also be called upon to adjudge interest due and payable by the defendant to the plaintiff for the pre-suit period which interest would, on the findings arrived at and noted by us hereinabove, obviously be other than such interest as has already stood capitalised and having shed its character as interest, has acquired the colour of the principal and having stood amalgamated in the principal sum would be adjudged so. The principal sum adjudged would be the sum actually loaned plus the amount of interest on periodical rests which according to the contract between the parties or the established banking parties has stood capitalised. Interest pendente lite and future interest (i.e. interest post-decree not exceeding 6 per cent per annum) shall be awarded on such principal sum i.e. the principal sum adjudged on the date of the suit. It is well settled that the use of the word 'may' in Section 34 confers a discretion on the Court to award or not to award interest or to award interest at such rate as it deems fit. Such interest, so far as future interest is concerned may commence from the date of the decree and may be made to stop running either with payment or with such earlier date as the Court thinks fit. Shortly hereinafter we propose to give an indication of the circumstances in which the Court may decline award of interest or 19 may award interest at a rate lesser than the permissible rate.

42. It was submitted by the learned amicus and other counsel for the borrowers, that the expression "on such principal sum" as occurring twice in the latter part of Section 34(1), which refers to interest pendente lite and post-decree, should be interpreted to mean principal sum arrived at by excluding the interest even if it has stood capitalised. This would be consistent with the legislative intent as reflected in the report of Joint Committee and sought to be fulfilled by 1956 Amendment. For two reasons this contention has to be rejected. Firstly, entertaining such a plea amounts to begging the question. As we have already held that the interest once capitalised ceases to be interest and becomes a part of principal sum or capital. That being so the interest forming amalgam with the principal, in view of having been capitalized, is principal sum and therefore the question of awarding interest on interest does not arise at all."

The reference was answered in the following terms :

"58. Subject to the above we answer the reference in following terms :

(1) Subject to a binding stipulation contained in a voluntary contract between the parties and/or an established practice or usage interest on loans and ad-

vances may be charged on periodical rests and also capitalised on remaining unpaid. The principal sum actually advanced coupled with the interest on periodical rests so capitalised is capable of being adjudged as principal sum on the date of the suit.

(2) The principal sum so adjudged is 'such principal sum' within the meaning of Section 34 of the Code of Civil Procedure Code, 1908 on which interest pendente lite and future interest i.e. post-decree interest, at such rate and for such period which the Court may deem fit, may be awarded by the Court.

(3) Corporation Bank v. D.S. Gowda and Anr., [1994] 5 SCC 213 and Bank of Baroda vs. Jagannath Pigment & Chem (1996) 5 SCC 280 have been correctly decided."

In Oil and Natural Gas Commission v. M/s M.C. Clelland Engineers, AIR 1999 SC 1614, the facts were - In arbitration proceedings under the Arbitration Act, 1940, the arbitrators had, 21 by their award directed the appellant to pay the respondent the following amounts :

"(i) US $ 1004.50 being interest on US $ 40, 102.97 at 12% p.a. from 10.12.1985 to 16.04.1986.

(ii) US $ 59,583 being interest on US $ 3,12,011.00 at 12% p.a. from 3.5.1983 to 5.11.1984."

The same had been affirmed by the Civil court which made the award an order of the court. This had been unsuccessfully challenged before the High Court and the matter was before the Apex Court.

It was contended that what was awarded by the Arbitrators in respect of the two claims referred to earlier in the course of the order was itself interest for different periods. It was therefore, contended that the Arbitrators could not have further awarded interest on the claims awarded at 12% per annum from the date of award till realisation. It was not disputed that the Arbitrators did have the power to grant interest on the amount claimed in the 22 arbitration and the power of the Arbitrators was very characteristically described as 'before, during and after' of the arbitration proceedings. The point urged was that there could not be interest upon interest when the claim itself is one of interest. And interest upon that amount could not have been granted by the Arbitrators and reliance was placed upon Section 3 of the Interest Act.

The Apex Court held thus :

"4. There cannot be any doubt that the Arbitrators have powers to grant interest akin to Section 34 of the CPC which is the power of the court in view of Section 29 of the Arbitration Act, 1940. It is clear that interest is not granted upon interest awarded but upon the claim made. The claim made in the proceedings is under two heads - one is the balance of amount claimed under invoices and letter dated February 10, 1981 and the amount certified and paid by the appellant and the second is the interest on delayed payment. That is how the claim for interest on delayed payment stood crystallized by the time the claim was filed before the Arbitrators. Therefore, the power of the Arbitrators to grant interest on the 23 amount of interest which may, in other words, be termed as interest on damages or compensation for delayed payment which would also become part of the principal. If that is the correct position in law, we do not think that Section 3 of the Interest Act has any relevance in the context of the matter which we are dealing with in the present case. Therefore, the first contention raised by Shri Datta, though interesting, deserves to be and is rejected.

In Hyder Consulting (UK) Ltd. vs. Governor, State of Orissa, (2015) 2 SCC 189, a three Judge Bench of the Apex court was addressing a reference by a two Judge Bench, as to whether the decision in State of Haryana v. S.L. Arora, (2010) 3 SCC 690 was incorrectly decided on an assumption that the cases in McDermott International Inc., v. Burn Standard Co. Ltd. (2006) 11 SCC 181 and Uttar Pradesh Co-operative Federation Limited v. Three Circles Engineers (2009) 10 SCC 374, were rendered per incuriam. And to determine whether Sub-section (7) of Section 31 of the Arbitration & Conciliation Act, 1996, could be interpreted to include interest pendente lite within the sum payable 24 as per the arbitral award, for the purposes of awarding post-award interest.

It was held that the finding in S.L.Arora's case that the Three Circles case was incorrectly founded upon the decision in McDermott and that such reliance was not in consonance with the doctrine of precedent. That McDermott case was not an authority on the question whether the Arbitrator may award compound interest nor did that decision sanction post-award interest on the aggregate sum and interest pendente lite. The Arbitral Tribunal's authority to award "interest on interest" was not discussed therein.

Hence it was held that both McDermott case and the Three Circles case were wrongly decided. Further that the decisions in ONGC v.

M.C. Clelland Engineers as well as the Three Circles case pertain to an Award under the Arbitration Act, 1940, which did not contain a specific provision dealing with the arbitrator's power to grant interest.

But by a majority view it was held that S.L. Arora's case was wrongly decided , in so far as it held that a sum directed to be 25 paid by an Arbitral Tribunal and the reference to the Award on the substantive claim does not refer to interest pendente lite awarded on the "sum directed to be paid upon Award" and that in the absence of any provision for payment of interest upon interest, in the contract, the Arbitral Tribunal does not have the power to award interest upon interest or compound interest either for the pre-award period or for the post award period.

On the other hand, it was held that the Parliament has the undoubted power to legislate on the subject and provide that the Arbitral Tribunal may award interest on the sum directed to be paid by the Award, meaning a sum inclusive of principal sum adjudged and the interest, and that this had been done by Parliament in plain language. In that, the language of Sub-section (7) clause (a) and (b) of Section 31 of the Arbitration & Conciliation Act , 1996, is so plain and unambiguous that no question of construction of a statutory provision arises . That the language itself provides that in the sum for which an award is made, interest may be included for the pre-award period and that 26 for the post-award period interest up to the rate of 18% per annum may be awarded on such sum, namely, the principal amount plus interest.

7. In the light of the rival contentions and the legal position as enunciated in the afore said authorities it is to be kept in view at the outset that the arbitration proceedings in the present case on hand is governed by the Arbitration Act , 1940 and not the Arbitration & Conciliation Act, 1996. This will make a significant difference in referring to and relying upon the observations and the law interpreted in the aforesaid decisions.

In the Arbitration Act , 1940 there is no provision dealing with the power of Arbitral Tribunals to award interest. Section 29 of the said Act merely provides for post -decree interest and authorizes the court to direct in the decree, where the award was for payment of money, payment of interest from the date of decree at such rate as the court deemed reasonable, to be paid on the principal sum adjudged by the award and confirmed by the decree. The power of Arbitral Tribunals to award interest is governed by 27 the provisions of the Interest Act, 1978 and the law enunciated by courts.

It is held in Oil & Natural Gas Commission v. M. C. Clelland Engineers S. A., supra, that there cannot be any doubt that the Arbitrators have powers to grant interest akin to Section 34 of the CPC which confers such power on a civil court. In view of Section 29 of the Arbitration Act, 1940, when interest on delayed payments stand crystallized by the time the claim is filed before the Arbitrators, the power of the Arbitrators to grant interest on the amount of interest which may, in other words , be termed as interest on damages or compensation for delayed payment , would also become part of the principal. This would answer one of the other grounds raised in the petition.

So far as the payment of future interest is concerned, the law is well settled in the light of the following decisions of the Apex Court, in Irrigation Department, Govt. Of Orissa v. G.C. Roy, (1992) 1 SCC 508; Dhenkanal Minor Irrigation Division v. N.C. Budharaj , (2001) 2 SCC 721; Bhagawathi Oxygen Ltd. V. 28 Hindustan Copper Ltd. , (2005) 6 SCC 462 and State of Rajasthan v. Ferro Concrete Construction (P) Ltd., (2009) 12 SCC 1. It is laid down that in the absence of an express bar, the arbitrator has the jurisdiction and authority to award interest for all the three periods - pre-reference, pendente lite and future. There was apparently no such bar in the present case on hand.

In so far as the contention that the petitioners would not be liable to pay future interest on the award amount may only be with regard to the rule of appropriation as contained in the provisions of the Code of Civil Procedure, 1908.

The opinion expressed by the Constitution Bench of the Apex Court in Central Bank of India v. Ravindra, supra, was with reference to Section 34 of the Code of Civil Procedure and would not throw light on the controversy as to award of interest under the Arbitration Act, 1940.

As regards the rule of appropriation, we may usefully refer to the facts of the case in BHEL v. R.S. Avatar Singh, supra, as well as the exposition of law therein. The discussion on the 29 controversy that arose in that case is extracted below for ready reference :

"19. With that view when we examine the said part of the Rule of the Court, we wish to specifically note that the Court made a conscious direction to the specific effect that the entitlement of the respondent for future interest at the rate of 12 per cent per annum from the date of decree, namely, 31.05.1985 till the date of realization would be on the award amount if it was not paid within two months from 31.05.1985. Therefore, the calculation of interest payable up to the date of the decree as well as the time granted therein, namely, two months from 31.05.1985 and what is interest payable subsequent thereto has been clearly set out in the said part of the Rule. If the said Rule is to be understood in the manner in which the Court had directed the calculation of interest to be made it can be only in the following manner, namely, that the interest from 12.03.1981 up to 31.05.1985 at the rate of 12 per cent per annum would be on the award amount, namely, Rs.1,41,68,474/-. If the award amount was not paid, namely, the sum of Rs.1,41,68,474/- on or before 31.05.1985, the future interest again at the rate of 12 per cent per annum can be claimed. In our considered 30 opinion, it should be on the award amount which was in a sum of Rs.1,41,68,474/-. We say so because both the award of the learned Arbitrator as well as the Rule of the Court makes a clear distinction between the award amount and the interest payable. The award having become the Rule of the Court and while making the said Rule it was clearly made known that the award contained an amount which was payable to the respondent quantifying the said amount in a sum of Rs.1,41,68,474/-. After quantification of the said amount, the learned Arbitrator dealt with the grant of interest independent of the said payment and fixed the rate of such interest at 12 per cent per annum. When such a clear distinction was consciously made by the learned Arbitrator while passing the award no one can even attempt to state that the award amount and the interest mentioned in the award dated 15.03.1982 should be merged together and state that the award amount would comprise of a sum of Rs.1,41,68,474/- and the interest worked out thereon became payable when once it was made the Rule of the Court and thereby became the decretal amount. Such a construction of the said award cannot be made having regard to the specific terms of the decree dated 31.05.1985.

20. Once we steer clear of the said position as regards the decree passed by the learned Single Judge, we are posed with the next question as to while applying Order XXI Rule 1 when payments were made towards the satisfaction of the said decree as provided under Order XXI Rule 1(1) (a), (b) and (c) what would be the implication of sub-rules 4 and 5 of Order XXI.

21. In order to understand the said legal implication of Order XXI Rule 1 read along with sub- rules 4 and 5, in the foremost it will be necessary to understand what is contemplated under Order XXI Rule 1, in particular, the opening set of expressions, namely:

"all money, payable under a decree shall be paid as follows, namely:-..."

It will be necessary to keep in mind that the said provision does not state the decretal amount. The expression used is all money payable under a decree.

22. Tersely stated, as pointed out by us in the earlier paragraph, the decree dated 31.05.1985 affirms the award amount, the interest payable at the rate of 12 per cent per annum from 12.03.1981 till the date of its realization if not paid within two months from the date of the decree, namely, 32 31.05.1985. Therefore, the said decree dated 31.05.1985 consisted of the award amount plus interest payable thereon from 12.03.1981 up to the date of the decree, namely, 31.05.1985 to be payable within two months from that date and in the event of non- payment of the said amount within two months from 31.05.1985 to calculate future interest at the very same rate of 12 per cent per annum from the date of the decree till the realization of the award amount. In our considered opinion, a reading of the opening set of expressions of Order XXI Rule 1 is clear to the above effect. In the case on hand the payment effected by the appellant after 31.05.1985 was once on 18.10.1985 and thereafter on 13.12.2000 when the issue was dealt with by the Court in the order dated 12.07.2002. It is not in dispute that the award amount of Rs.1,41,68,474/- earned interest at the rate of 12 per cent per annum up to the date of first payment, namely, 18.10.1985 which worked out to a sum of Rs.78,30,314/- i.e. for the period from 12.03.1981 to 18.10.1985. The total amount payable as on that date under the decree, both the award amount along with the interest, worked out to Rs.2,19,61,134/-. The said figure, as calculated by the appellant, was not disputed by the respondent. On 18.10.1985, the appellant paid a sum of Rs.1 crore by way of deposit 33 pursuant to the order of the Division Bench dated 13.09.1985 when the appellant challenged the decree dated 31.05.1985. The respondent was also permitted to withdraw the said sum of Rs.1 crore in the said order dated 13.09.1985. (Emphasis supplied)

23. Keeping the above factual position in mind when we examine Order XXI Rule 4 CPC, the said sub-rule states that on any amount paid under Clause

(a) or Clause (c) of sub-rule 1, interest, if any, shall cease to run from the date of service of the notice referred to in sub-rule (2). In the case on hand since the deposit of the amount pursuant to the order of the Division Bench dated 13.09.1985 came to be made and was also withdrawn by the respondent from the date of service of notice as contemplated in sub-rule 2 the same was deemed to have been effected. Therefore, applying sub-rule 4 to the case on hand in so far as the cessation of interest is concerned, the same should operate upon the sum of Rs.1 crore deposited by the appellant and withdrawn by the respondent. There can be no dispute and in fact it is not disputed by the parties that on and after the deposit of Rs.1 crore, no interest was payable on the said sum. The only other consideration to be made is in which component the said sum of Rs.1 crore is to be taken. In other words, 34 whether the said sum of Rs.1 crore paid by the appellant should be accounted towards the award amount of Rs.1,41,68,474/- or to the total figure of Rs.2,19,61,134/- as was sought to be applied by the respondent."

The Apex Court has then referred to the following legal position as summed up in an earlier Constitution Bench decision in Gurupreet Singh v. Union of India, (2006) 8 SCC 457 :

"49. Though, a decree-holder may have the right to appropriate the payments made by the judgment-debtor, it could only be as provided in the decree if there is provision in that behalf in the decree or, as contemplated by Order 21 Rule 1 of the Code as explained by us above. The Code or the general rules do not contemplate payment of further interest by a judgment-debtor on the portion of the principal he has already paid. His obligation is only to pay interest on the balance principal remaining unpaid as adjudged either by the court of first instance or in the court of appeal. On the pretext that the amount adjudged by the appellate court is the real amount due, the decree- holder cannot claim interest on that part of the 35 principal already paid to him. Of course, as indicated, out of what is paid he can adjust the interest and costs first and the balance towards the principal, if there is a shortfall in deposit. But, beyond that, the decree-holder cannot seek to reopen the entire transaction and proceed to recalculate the interest on the whole amount and seek a reappropriation as a whole in the light of the appellate decree."

(Emphasis supplied) The principles that emerge from the decision in Gurupreet Singh are then culled out as being thus :

31.1. The general rule of appropriation towards a decretal amount was that such an amount was to be adjusted strictly in accordance with the directions contained in the decree and in the absence of such directions adjustments be made firstly towards payment of interest and cost and thereafter towards payment of the principal amount subject, of course, to any agreement between the parties.

31.2. The legislative intent in enacting sub-rules (4) and (5) is clear to the pointer that interest should cease to run on the deposit made by the judgment 36 debtor and notice given or on the amount being tendered outside the Court in the manner provided in Order XXI Rule 1(1) (b).

31.3. If the payment made by the judgment debtor falls short of the decreed amount, the decree holder will be entitled to apply the general rule of appropriation by appropriating the amount deposited towards the interest, then towards cost and finally towards the principal amount due under the decree.

31.4. Thereafter, no further interest would run on the sum appropriated towards the principal. In other words if a part of the principal amount has been paid along with interest due thereon as on the date of issuance of notice of deposit interest on that part of the principal sum will cease to run thereafter.

31.5. In cases where there is a shortfall in deposit of the principal amount, the decree holder would be entitled to adjust interest and cost first and the balance towards the principal and beyond that the decree holder cannot seek to reopen the entire transaction and proceed to recalculate the interest on the whole of the principal amount and seek for re- appropriation.

The Apex court while affirming the judgment under appeal, in BHEL vs. Avatar Singh, has held thus :

"33. In fact in the calculation which was sought to be made by the respondent in its statement filed before the learned Single Judge, interest was calculated for the period subsequent to 06.03.2001 that was the date when the last payment was made by the appellant wherein the calculation of interest for the period from 04.01.2001 to 04.03.2002 was claimed on the entire sum of Rs.1,42,96,318/- instead of calculating the same on the balance principal of Rs.1,19,61,134/-. In the penultimate paragraph of the order dated 12.07.2002, the learned Single Judge rightly rejected such a wrong claim made on behalf of the respondent while dismissing the objections filed by the appellant."

The rule of appropriation in respect of amounts deposited in court or in respect of payment into court, is contained in Order XXIV of the Code at the pre-decretal stage and in Order XXI Rule 1 at the post-decretal stage. Special provisions relating to mortgages are found in Order XXXIV of the Code. Under Order 38 XXIV Rule 1, a defendant in a suit for recovery of a debt may at any stage of the suit deposit in court such sum of money as he considers a satisfaction in full of the claim in the plaint. Rule 2 thereof provides for issue of notice of deposit to the plaintiff through the court and for payment out of the amounts to the plaintiff if he applies for the same. Rule 3 specifically states that no interest shall be allowed to the plaintiff on any sum deposited by the defendant from the date of such deposit, whether the sum deposited is in full discharge of the claim or it falls short thereof. Rule 4 enables the plaintiff to accept the deposit as satisfaction in part and allows him to pursue his suit for what he claims to be the balance due, subject to the consequences provided for therein regarding costs. It also deals with the procedure when the plaintiff accepts the payment in full satisfaction of his claim. The general rule of appropriation towards a decretal amount is that such an amount is to be adjusted strictly in accordance with the directions contained in the decree and in the absence of such direction, adjustments be made firstly in payment of interest and costs and 39 thereafter in payment of the principal amount, subject of course, to any agreement between the parties.

The general rule of appropriation in cases where there is shortfall in paying the decree amount in cases of execution of money decrees or award decrees, or rather, decrees other than mortgage decrees, interest ceases to run on the amount deposited, to the extent of the deposit. It is true that if the amount falls short, the decree-holder may be entitled to apply the rule of appropriation by appropriating the amount first towards the interest, then towards the costs and then towards the principal amount due under the decree. No further interest would run on the sum appropriated towards the principal.

8. Applying the rule of appropriation to the present case on hand, it would be seen that the interest component on the claim awarded, at 18% per annum up to the date of decree on the claim amount was Rs.1,27,21,937/-.

The total sum due under the decree was Rs.1,77,17,408/- (Rs.49,95,471 - Claim awarded + Rs.1,27,21,937/- - interest at 18% up to the date of decree = Rs.1,77,17,408/-). Add to this the interest at 13% from date of decree, up to the date of payment of Rs. 38.67 lakh by the petitioners, the interest component alone stood at Rs.1,41,41,757/-.

The above said amount of Rs.38.67 lakh had been paid, during the pendency of the appeal before this court. Keeping the rule of appropriation in view, it is apparently adjusted towards a part of the interest component and interest is claimed after giving a deduction to the amount so received, namely, only on a sum of Rs.1,52,69,458/-, on which interest did continue to accrue at 13% per annum and stood at Rs.2,08,73,501/-, when, a further sum of Rs.1,75,53,592/- has been paid in the execution proceedings, credit has been given to the same and it was the balance amount of Rs.83,15,380/- that was claimed with interest. It should be kept in view that the principal amount was only Rs.49,95,471/-. Therefore, all payments made have only been adjusted firstly 41 towards the interest component, which has not been completely satisfied.

The amount claimed by the respondent is in accordance with law and hence the present petition is without merit and is dismissed.

Sd/-

JUDGE KS*

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Karnataka High Court