Andhra HC (Pre-Telangana)
Union Of India (Uoi) And Anr. vs G.G. Satyanarayana And Ors. on 23 August, 2002
Equivalent citations: 2002(5)ALD810, 2003(2)ARBLR391(AP)
JUDGMENT
Dr. G. Yethirajulu, J
1. The appellants filed O.P. No. 3 of 2001 against the respondents herein before the III Senior Civil Judge, City Civil Court, Secunderabad under Sections 30 and 33 of the Arbitration Act, 1940 ('the old Act' for brevity) requesting to set aside an award dated 23-10-2000 passed by the respondents 2 and 3 as arbitrators in respect of granting of interest @ 18% per annum from 14-8-1995 to 23-10-2000.
2. The petitioners contended that the respondent as a contractor entered into an agreement with the petitioners on 23-11-1993 for supply and stacking of hard stone ballast worth Rs. 18.48.300/-. He could not execute the work as stipulated and the agreement was terminated leading to a dispute between the petitioners and the 1st respondent. On a writ petition vide W.P.No. 26673 of 1995 filed by the 1st respondent, the respondents 2 and 3 were appointed as arbitrators by the then General Manager, South Central Railway. The respondents 2 and 3 passed an award on 23-10-2000 allowing several claims covered by S. Nos. 1, 4, 5, 7, 8, 10 and 12 with interest at 18% per annum by rejecting the other claims. In pursuance of the arbitration award the petitioners paid the principal amounts due and disputed the awarding of interest by contending that the arbitrators exceeded the jurisdiction by awarding interest under the Arbitration and Conciliation Act, 1996 ('the new Act' for brevity), which is not applicable to the above disputes referred to them. It was further contended by the petitioners that Clause 16(2) of the general conditions of the contract prohibits the arbitrators to award interest. Hence the application to set aside the award of the arbitrators regarding the awarding of interest to the 1st respondent.
3. The 1st respondent resisted the application contending that the petitioners paid of Rs. 21,572/- being the interest @ 18% P.A. from the date of award till the date of payment, but questioned the interest from the date of notice till the date of award. The 1st respondent is entitled to the interest as awarded by the arbitrators. Hence the application is liable to be dismissed with costs.
4. The lower Court took up the matter for consideration regarding the maintainability of the application under the old Act and award of interest at 18% per annum.
5. The lower Court after considering the material available on record and after hearing both parties held that the new Act is applicable to the case and the application filed by the petitioners under Sections 30 and 33 of the old Act is not maintainable.
The lower Court further held that Clause 16(2) of the general conditions of contract do not impose any restriction on the power of the arbitrators to award interest. Therefore, the arbitrators were right in awarding interest. Accordingly, the lower Court dismissed the petition through its order dated 5-2-2002.
6. The petitioners being aggrieved by the order of the lower Court preferred this appeal challenging its validity and legality.
7. The point for consideration is whether the Arbitration and Conciliation Act, 1996 applies to this case and whether the arbitrators have the required power to award interest in the arbitration award?
8. The learned Counsel for the appellants-petitioners contended that since the arbitrators took cognizance of the reference under the old Act, the provisions of the new Act do not apply. The learned Counsel drew the attention of this Court to certain decisions regarding the applicability of the Arbitration Act, 1940 by stating that there is no express provision under the old Act as to when the arbitration proceedings deemed to have commenced before the arbitrator.
9. Section 21 of the new Act reads as follows:
21. Commencement of arbitral proceedings:-- Unless otherwise agreed by the parties, the arbitral proceedings in respect of a particular dispute commence on the date on which a request for that dispute to be referred to arbitration is received by the respondent.
10. This section applies to such matters which are referred to Arbitrators after the commencement of the new Act and the proceedings commence from the date on which a request is made to refer the matter for Arbitration. This is not helpful to matters referred under the old Act.
11. There is a saving provision under the new Act. The saving provision incorporated under Section 85 of the new Act reads thus:
85. Repeal and saving:--(1) The Arbitration (Protocol and Convention) Act, 1937 (6 of 1937), the Arbitration Act, 1940 (10 of 1940) and the Foreign Awards (Recognition and Enforcement) Act, 1961 (45 of 1961) are hereby repealed.
(2) Notwithstanding such repeal,--
(a) the provisions of the said enactments shall apply in relation to arbitral proceedings which commenced before this Act came into force unless otherwise agreed by the parties but this Act shall apply in relation to arbitral proceedings which commenced on or after this Act comes into force;
(b) all rules made and notifications published, under the said enactments shall, to the extent to which they are not repugnant to this Act, be deemed respectively to have been made or issued under this Act.
12. Section 85 of the new Act is a saving clause which exempts the old Act from complete obliteration regarding the pending Arbitration proceedings. A combined reading of Sections 21 and 85 indicates that if a request was made prior to the new Act coming into force, such proceedings would be governed by the old Act. In support of the application of provisions of the above two sections for the period prior to the new Act coming into force, it may be essential to refer to an interesting development of case law on this aspect.
13. In Y. Parthasarathi v. General Manager, Railway Electrification, Allahabad, , a single Bench of this Court presided by Justice M.N. Rao while considering Sections 11(5). 21 and 85(2) of the Arbitration and Conciliation Act, 1996 held that invoking provisions of the Act of 1996 not barred if arbitral proceedings has not commenced under the old Act. Arbitral proceedings under the old Act cannot be said to have commenced on the date of service of notice requesting for appointment of an arbitrator. The arbitral proceedings under the old Act commences only when the Arbitrator indicates his willingness to act as such.
14. Another decision of this Court in Marshall Corporation Ltd., Visakhapatnam v. Union of India, , a Bench presided by Justice R. Bayapu Reddy while considering Sections 21 and 85 (2) of the new Act held that in view of Section 85(2) of the new Act, the provisions of the old Act shall continue to apply in relation to arbitral proceedings which commenced before the new Act came into force, unless otherwise agreed upon between the parties and the new Act will apply in relation to arbitral proceedings which commenced on or after the new Act came into force. The Court further held that the arbitral proceedings under the old Act commence only when the arbitrator indicates his willingness to act as such.
15. The above two judgments were rendered by the single Benches of this High Court by following the judgment of the Supreme Court in Secretary, Government of Orissa v. Sarbeswar Rout, , wherein a three Judge Bench of the Supreme Court held that in arbitration proceedings as soon as the arbitrator indicates his willingness to act as such, the proceedings must be held to have commenced.
16. There is another judgment of the Supreme Court in Thyssen Stahlunion GMPH v. Steel Authority of India Ltd, , a two Judge Bench of the Supreme Court held that once the arbitral proceedings commence under the old Act, it would be the old Act which would apply for enforcing the award as well.
17. In view of Section 85(2)(a) of the new Act the provisions of the old Act shall apply in relation to arbitral proceedings which commenced before the new Act came into force, unless otherwise agreed by the parties. In the light of the wording 'commencement of the arbitral proceedings' used in Section 85, firstly it has to be tested whether the proceedings were commenced before the new Act came into force and secondly as to when the arbitral proceedings deemed to have commenced. So far as the application of the old Act for the proceedings commenced before the new Act came into force is concerned, there is no dispute by either of the parties. Regarding the stage at which the arbitral proceedings are said to have commenced, the judgments of the A.P. High Court in Parthasarathi (supra) and Marshall Corporation (supra) and the three Judge Bench of the Supreme Court in Sarbeswar Rout (supra) laid down that the arbitral proceedings must be held to have commenced as soon as the arbitrator indicates his willingness to act as such.
18. In view of the wording "unless otherwise agreed by the parties" used in Section 21 of the new Act the Supreme Court in Thyssen (supra) held as follows:
9. In the case of M/s.Rani Constructions Pvt. Ltd., (CA No. 61 of 1999) under the contract which was for the construction of certain works of the Himachal Pradesh State Electricity Board, there was an arbitration agreement contained in Clause 25, in the relevant part is as under:
Subject to the provisions of the contract to the contrary as aforesaid, the provisions of the Indian Arbitration Act, 1940 or any statutory modification of re-enactment thereof and the rules made thereunder and for the time being in force shall apply to all the arbitration proceedings under this clause.
38. ... In this view of the matter, if the parties have agreed that at the relevant time provisions of law as existing at that time would apply, there cannot be any objection to that. Thus construing the Clause 25, in Rani Construction (CA 61/99) New Act will apply.
19. Clause 64(3)(f) of the General Conditions of contract in the present case is similar to Clause 25 of the contract in Rani Construction case. Therefore, as there was an agreement between the parties that they will abide by the statutory modifications, the provisions of the Arbitration and Conciliation Act, 1996 are applicable to this case. The learned Counsel for the 1st respondent therefore submitted that in the light of the above position of law and the agreement between the parties under Clause 64(3)(f) of the general conditions of contract, the application filed by the appellant under Sections 30 and 33 of the old Act is not maintainable. Therefore, he requested to dismiss the appeal with costs.
20. The learned Counsel for the appellant drew the attention of this Court to another set of judgments to the effect that the arbitral proceedings commences on the date on which the request for referring the dispute for arbitration is received by the opposite party.
21. In Shelly's Constructions Co. (P) Ltd. v. Konkan Rly. Construction, , a two Judge Bench of the Supreme Court held as follows:
4. A mere look at Sub-section (2)(a) of Section 85 shows that despite the repeal of Arbitration Act, 1940, the provisions of the said enactment shall be applicable in relation to arbitration proceedings which have commenced prior to the coming into force of the new Act. The new Act came into force on 26-1-1996. The question therefore, arises whether on that date the arbitration proceedings in the present four suits had commenced or not. For resolving this controversy we may turn to Section 21 of the new Act which lays down that unless otherwise agreed to between the parties, the arbitration suit in respect of arbitration dispute for arbitration is received by the respondents. Therefore, it must be found out whether the requests by the petitioner for referring the disputes for arbitration were moved for consideration of the respondents on and after 26-1-1996 or prior thereto. If such requests were made prior to that date, then on a conjoint reading of Section 21 and Section 85(2)(a) of the new Act, it must be held that these proceedings will be governed by the old Act....
22. In Chairman and Managing Director, National Thermal Power Corporation v. V. Subba Rao and Co., , a Division Bench of this High Court while following the judgment of the Supreme Court in Shetty Construction (supra) held that Section 85(2Xa) of the new Act saves the right accrued in favour of a party under the old Act and the applicability of the new Act would be barred only when a proceeding has already been initiated under the old Act. This decision did not lay down any principle regarding the stage at which the arbitral proceedings under the old Act deemed to have commenced and simply observed as follows:
Keeping in view the facts and circumstances of the case we are of the opinion that having regard to the fact that as proceedings under the 1940 Act having earlier been initiated, the 1996 Act would not be applicable in the instant case.
23. The learned Counsel for the appellant drew the attention of this Court to the findings of me Supreme Court in Thyssen's case (supra) at paragraphs 28 and 29, which read as follows:
28. Section 85 (2)(a) is the saving clause. It exempts the old Act from complete obliteration so far as pending arbitration proceedings are concerned. That would include saving of whole of the old Act up till the time of the enforcement of the award. This Section 85(2)(a) prevents the accrued right under the old Act from being affected. Saving provision preserves the existing right accrued under the old Act. There is a presumption that Legislature does not intend to limit or take away vested rights unless the language clearly points to the contrary. It is correct that the new Act is a remedial statute and, therefore. Section 85(2)(a) calls for strict construction, it being a repealing provision. But then as stated above where one interpretation would procedure an unjust or an inconvenient result and another would not have those effects, there is then also a presumption in favour of the latter.
29. Enforcement of the award, therefore, has to be examined on the touchstone of the proceedings held under the old Act.
24. He further submitted that in view of the judgments of the Supreme Court in Shetty Construction (supra) and Thyssen (supra) the old Act applies to the present case and the procedure prescribed under the old Act has to be followed.
25. With due respect regarding the principles laid down by the Supreme Court in Shetty Construction and Thyssen's case, though they are the latest judgments of the Supreme Court on this aspect, we are inclined to apply the ratio laid down by the three Judge Bench of the Supreme Court in Sarbeswar Rout's case, which holds the field and not referred in the above two cases.
26. In the light of the judgment of the Supreme Court in Sarbeswar Rout's case (supra) and the judgments of this High Court in Parthasarathi and Marshall's case (supra), it has to be considered whether the arbitration proceedings in this case commenced prior or subsequent to the new Act coming into force.
27. The 1st respondent issued a letter to the appellants on 14-8-1995 demanding to refer the claims for arbitration under Clause 64 of the general conditions of contract. The appellants did not refer the claims for arbitration. The 1st respondent therefore filed WP No. 26673 of 1995 praying to direct the appellants to appoint arbitrators. On 28-11-1995 the High Court allowed the writ petition directing the 1st appellant to appoint arbitrators and refer the claims to them. On 16-12-1996 the 1st appellant appointed respondents 2 and 3 as arbitrators and referred the claims for arbitration. On 24-4-1997 the respondents 2 and 3 have given their willingness to act as arbitrators and to adjudicate the disputes. On 23-10-2000 the respondents 2 and 3 passed the award.
28. The new Act came into force on 26-1-1996. The sequence of events clearly indicate that though the application was made by the 1st respondent on 14-8-1995 the reference was made by the appellants only on 16-12-1996 i.e., after the new Act came into force and the respondents 2 and 3 gave their willingness to adjudicate the matters on 24-4-1997, which is more than one year after the new Act came into force. The decisions rendered under the old Act are making it very clear that the arbitration proceedings shall be deemed to have commenced from the date on which the arbitrators expressed their willingness to adjudicate the dispute. Since the arbitrators in the present case expressed their willingness only on 24-4-1997, there is no scope for the commencement of the proceedings prior to the commencement of the new Act. Though there is an express provision under Section 21 of the new Act that the arbitration proceedings shall commence from the date of the request made by one of the parties and the letter received by the other party, this provision is applicable only to the cases where the applications are filed subsequent to the new Act came into force. So far as Section 85(2)(a) is concerned, it applies only in such cases where the proceedings have already been commenced by the date the new Act came into force.
29. The learned Counsel for the 1st respondent submitted that under Clause 64(3)(f) of general conditions of contract between the parties, they agreed to abide by the modifications to the statute on a future date and as the new Act was introduced with certain modifications to the old Act, the provisions of the new Act are binding on them. Therefore, on this count also the provisions of the new Act are applicable to the present arbitration proceedings.
30. The lower Court accepted the said plea of the 1st respondent and we find sufficient force in it.
31. In view of the above factual matrix and the legal position we hold that the proceedings in this case commenced on 24-4-1997, the date on which the respondents 2 and 3 have given their willingness to act as arbitrators and to adjudicate the dispute, much later to the date of the new Act coming into force. We therefore hold that the provisions of the new Act are applicable to this case, but not the provisions of the old Act.
32. On the aspect relating to interest, the learned Counsel for the appellants-petitioners drew the attention of this Court to Clause 16(2) of the Standard General Conditions of Contract and submitted that in view of the bar imposed under the said clause, the arbitrators are not empowered to award interest in the matter.
33. Clause 16(2) of the Standard General Conditions of Contract reads follows:
No interest will be payable upon the money or the 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 repayable (with) interest accrued thereon.
34. The learned Counsel for the 1st respondent submitted that Clause 16 (2) of the general conditions of contract was amended in August, 1997. Therefore, it cannot be made applicable to the present case. He further submitted that since this issue was not raised by the appellants before the joint arbitrators or before the civil Court, they cannot raise the said plea before this Court. He also submitted that Clause 16(2) is only a restriction on the railways to grant interest and not a restriction on the arbitrators. In support of the said contention, the learned Counsel relied on a judgment a Division Bench of this Court in N.G. Gunani v. Union of India Rep. By Its Chief Engineer (Constructions), South Central Railway, Secunderabad, , wherein a Division Bench of this High Court held that Clause 16(2) of the standard general conditions of contract forms part of the contract. A close analysis of the said provision does not lead to the conclusion that the power of the arbitrator has been taken away to grant interest upon the determination of the amount or amounts payable to the contractor, but are not paid in time by the department and are released after lapse of time, the department would not pay interest for the delayed payment. It is a restriction on the power of the departmental officials to allow interest because of late payment. But such a provision does not restrict the power of the adjudicator to determine and direct payment of interest. The power of the arbitrator cannot be denied to grant interest as the arbitrator is to go into entire question of the disputes between the parties, weigh all aspects of it, find out the respective rights and liabilities and determine the amount that was actually payable to the contractor and hence may find the necessity also of awarding interest as the amount having remained unpaid inspite of the efforts of the contractor.
35. In the light of the wording of Clause 16(2) of the general conditions of contract and in the light of the Division Bench judgment of this Court in N.G. Gunani (supra) and the latest legal position, we conclude that Clause 16(2) is not a bar for the arbitrators to award interest on the amounts awarded by them.
36. So far as the rate of interest is concerned, the learned Counsel for the appellants submitted that under the new Act the interest @ 18% per annum is prescribed only from the date of award till the date of payment and there is no rate of interest prescribed under the new Act for the period from the date of commencement of the proceedings to the date of award. He therefore requested the Court to exercise the discretion, keeping in view the present rate of interest being charged by the Banks and other financial institutions, and reduce the rate of interest for the period from the date of commencement of the proceedings till the date of award to a reasonable extent.
37. The learned Counsel for the 1st respondent submitted that since this is a commercial transaction and, the rate of interest awarded by the arbitrators is not arbitrary, and it is not liable to be reduced.
38. Section 31(7)(b) of the Arbitration and Conciliation Act, 1996 contemplates as follows:
A sum directed to paid by an arbitral award, shall, unless the award otherwise directs, carry interest @ 18% per annum from the date of award to the date of payment.
39. This section is silent about the rate of interest from the date of commencement of the arbitration proceedings till the date of award.
40. In Goutam Constructions and Fisheries Ltd. v. National Bank for Agriculture and Rural Development, , the Supreme Court held that so far as the interest is concerned, no exception could be taken to the award @. 12% per annum. The grant of interest at 18% per annum is directly apposite to the specific terms in the contract and it is not permissible for the arbitrator or the Court dealing with the validity of the award to award a higher rate than mutually agreed rate which is binding on the parties.
41. In Om Prakash Gita Devi & Co. v. Food Corporation of India, 2001 (2) Recent Arbitration Judgments (Raj) 559 (SC), the Supreme Court of India while considering the provisions of the Interest Act, 1978, held that since the agreement of lease between the parties cannot be held to be a commercial transaction, the ends of justice would be met if the rate of interest is fixed at 12% per annum. The Supreme Court further observed that under Section 3 of the Interest Act, 1978, arbitrator has power to award interest on the amount awarded by him in view of the definition of Section 2(a) of the said Act. It was further observed that the person in whose favour the award was passed has to bear the burden of interest @ 18% being charged by the Bank on the amount of loan obtained by him. By making the above observations the Supreme Court awarded interest at 12% per annum, in the facts and circumstances of the said case.
42. The trend of the above judgments indicate that insofar as the interest for the period from the date of commencement of the proceedings till the date of the award, the arbitrators can exercise then-discretion by taking into consideration the facts and circumstances of the case and the prevailing rate of interest being charged by the Banks and other financial institutions while fixing the rate of interest, but the arbitrators did not twelve upon this aspect in the award and awarded the maximum rate of interest.
43. Keeping in view the nature of the amounts that were directed to be paid and the current rate of interest, we are of the view that the rate of interest at 18% per annum is on higher side and it would meet the ends of justice if it is reduced to 12% per annum from the date of the notice given by the 1st respondent requesting to refer the matter for arbitration till the date of the award i.e., 23-10-2000.
44. In the result, the appeal is allowed in part by modifying the award of the Arbitrators as confirmed by the civil Court to the extent of reducing the rate of interest payable by the appellants to the 1st respondent from 18% to 12%. In the light of the facts and circumstances of the case, each party to bear its own costs. The advocate fee is fixed at Rs. 2,000/- each.