Executive Engineer, Dhenkanal Minor Irrigation Division, Orissa & Ors. v. N.C. Budharaj (Dead) by LRs & Ors.

Decided on: 10 January 2001

The decision in Executive Engineer, Dhenkanal Minor Irrigation Division, Orissa & Ors. v. N.C. Budharaj (Dead) by LRs & Ors. is a significant judgement of the Supreme Court of India on the power of an arbitrator to award interest for the pre-reference period. The case arose in the context of arbitration proceedings initiated before the commencement of the Interest Act, 1978, when the Interest Act, 1839 was in force.

The central controversy before the Supreme Court was whether an arbitrator, appointed with or without the intervention of a court, had jurisdiction to award interest for the period prior to the date of reference to arbitration, in the absence of an express contractual provision permitting or prohibiting such interest. Due to conflicting judicial opinions, the matter was referred to a Constitution Bench for an authoritative pronouncement.

Background and Facts of Executive Engineer, Dhenkanal Minor Irrigation Division, Orissa & Ors. v. N.C. Budharaj (Dead) by LRs & Ors.

The dispute arose out of contractual works executed by the contractor, N.C. Budharaj, under the Dhenkanal Minor Irrigation Division in the State of Orissa. Differences arose between the contractor and the State authorities regarding payments due under the contract.

Upon the demand made by the contractor, arbitrators were appointed without the intervention of the court. During the arbitral proceedings, the contractor raised claims for certain amounts alleged to be due under the contract. The arbitrators examined the claims and passed awards sustaining part of the contractor’s claims.

In addition to awarding the principal amounts found due, the arbitrators also granted interest on those amounts from the due date till the date of the award. The award thus included interest for the pre-reference period, that is, the period prior to the arbitrator entering upon the reference.

After the awards were made, they were made the rule of the court by the Civil Court. The State of Orissa challenged the award of interest and pursued the matter before the High Court. The High Court, however, upheld the award and sustained the contractor’s entitlement to interest from the due date up to the date of the award.

Aggrieved by the decision of the High Court, the State preferred appeals before the Supreme Court. The dispute before the Supreme Court was confined to the jurisdiction of the arbitrator to award interest for the pre-reference period.

Reference to a Larger Bench

While hearing the appeal, a three-Judge Bench of the Supreme Court found that there existed divergent judicial opinions on the power of an arbitrator to award interest for the pre-reference period, especially in cases governed by the Interest Act, 1839.

In view of the importance of the issue and the conflicting precedents, the matter was referred to a larger Bench for an authoritative decision on the question of law.

Issues for Consideration

The principal issue in Executive Engineer, Dhenkanal Minor Irrigation Division, Orissa & Ors. v. N.C. Budharaj (Dead) by LRs & Ors. considered by the Constitution Bench was:

Whether an arbitrator has jurisdiction to award interest for the pre-reference period in cases arising prior to 19 August 1981, when the Interest Act, 1978 came into force, and when the Interest Act, 1839 was applicable.

Contentions of the Parties

Contentions of the Appellants (State of Orissa)

The appellants contended that the arbitrator lacked jurisdiction to award interest for the pre-reference period. It was argued that under the legal position prevailing prior to the Interest Act, 1978, an arbitrator could not grant interest for the period before reference unless specifically empowered by contract or statute.

Reliance was placed on earlier judicial precedents which, according to the appellants, clearly established that arbitrators had no authority to award interest for the pre-reference period in matters governed by the Interest Act, 1839.

Contentions of the Respondents (Contractor)

The respondents argued that the arbitrator possessed jurisdiction to award interest for the pre-reference period as long as there was no express prohibition in the contract restraining the grant of interest.

It was submitted that an implied term existed in the contract permitting the arbitrator to award interest, particularly in situations where a civil court could have awarded such interest.

The respondents further contended that when the parties referred all disputes, including disputes relating to interest, to arbitration, the arbitrator necessarily had the power to decide the same comprehensively, including the grant of interest for the pre-reference period.

Analysis and Majority Opinion in Executive Engineer, Dhenkanal Minor Irrigation Division, Orissa & Ors. v. N.C. Budharaj (Dead) by LRs & Ors.

Arbitrator Appointed With or Without Court Intervention

The majority held that an arbitrator, whether appointed with or without the intervention of the court, has jurisdiction to award interest for the pre-reference period, provided there is no specific contractual stipulation prohibiting such interest.

The Court reasoned that arbitration is resorted to only after disputes have arisen between the parties and have remained unresolved. If an arbitrator has the authority to decide disputes relating to periods prior to the reference, it would be illogical to deny the power to award interest for that same period, especially when interest is an accessory to the principal sum found due.

Nature of Interest as Substantive Law

The Court examined whether interest for the pre-reference period was governed by substantive law. It explained that substantive law is that part of law which creates, defines, and regulates rights, as opposed to procedural or remedial law.

The Interest Act, 1839 was held to represent the general law of interest applicable in the absence of contractual or statutory provisions dealing specifically with interest. As such, it constituted substantive law.

Although the Interest Act, 1839 referred to the power of courts to award interest, the Court held that this could not lead to the conclusion that its applicability was confined only to conventional civil courts. Arbitration, being a recognised alternative dispute resolution mechanism, acts as a substitute for civil courts.

Arbitrator as a Substitute for Civil Court

The majority observed that when parties agree to resolve disputes through arbitration, the arbitral forum functions as an alternative to civil courts. Consequently, it must be presumed that the arbitrator possesses the same power to award interest as a civil court, unless expressly restricted.

There was nothing in the Interest Act, 1839 to limit its application exclusively to courts. Therefore, by necessary implication, arbitrators could also apply the substantive law of interest while adjudicating disputes.

Power to Do Complete Justice

The Court emphasised that an arbitrator is required to do complete justice between the parties. When parties choose arbitration, they do not abandon their substantive rights. They merely select a different forum for adjudication that is less formal, less time-consuming, and less expensive.

By opting for arbitration, parties cannot be said to have given up claims that they could otherwise have successfully asserted before a civil court, including claims for interest.

Dissenting Opinion of D.P. Mohapatra, J.

Justice D.P. Mohapatra dissented from the majority view. It was held that an arbitrator is not competent to award interest for the pre-reference period unless certain specific conditions are satisfied.

According to the dissent, such power could exist only if:

• The contract between the parties expressly permitted the award of interest, or
• There was a usage of trade having the force of law supporting such award, or
• There existed a specific provision of substantive law enabling the grant of interest.

The dissenting judge emphasised that a claim for pre-reference interest must have a clear legal basis. In the absence of such a foundation, an arbitrator could not assume jurisdiction to award interest.

It was further observed that although an arbitrator discharges functions similar to a court, the arbitrator cannot be equated to a court in all respects. Since arbitrators are not bound by strict procedural laws, caution must be exercised in assuming powers not expressly conferred by law or contract.

Dissenting Opinion of G.B. Pattanaik, J.

Justice G.B. Pattanaik also dissented, holding that an arbitrator does not possess the power to award interest for the pre-reference period.

The dissent rejected the argument that such power could be inferred to avoid multiplicity of proceedings. It was observed that conferring such power on arbitrators would amount to judicial legislation, which is impermissible.

The fact that an arbitrator has the authority to decide disputes relating to past events does not automatically clothe the arbitrator with the power to award interest for the pre-reference period, especially when neither the contract nor the statute expressly provides for it.

Distinction Between Pre-Reference and Pendente Lite Period

The dissenting opinions drew a clear distinction between the pre-reference period and the pendente lite period.

The pendente lite period refers to the time during which proceedings are pending before the arbitrator, when both parties are aware of the claims and the matter is under adjudication. In contrast, the pre-reference period refers to the time before the arbitrator enters upon the reference, when claims are not crystallised and the opposite party may not even be aware of potential liability.

According to the dissent, these two periods stand on different legal footing and must be treated separately.

Final Conclusions of the Court in Executive Engineer, Dhenkanal Minor Irrigation Division, Orissa & Ors. v. N.C. Budharaj (Dead) by LRs & Ors.

By majority, the Supreme Court held that:

• An arbitrator appointed with or without the intervention of the court has jurisdiction to award interest for the pre-reference period on sums found due and payable, in the absence of any contractual prohibition.
• The Interest Act, 1839 is not confined in its operation to proceedings before conventional civil courts and can be applied by arbitral tribunals as well.

Conclusion

Executive Engineer, Dhenkanal Minor Irrigation Division, Orissa & Ors. v. N.C. Budharaj (Dead) by LRs & Ors. judgement settled an important controversy in Indian arbitration law by recognising the arbitrator’s power to award interest for the pre-reference period under the Interest Act, 1839. It reinforced the principle that arbitration is an effective substitute for civil courts and that parties do not lose substantive legal rights merely by choosing arbitration as their dispute resolution mechanism.

The decision has had a lasting impact on arbitral jurisprudence in India, particularly in relation to claims for interest in disputes arising prior to the enforcement of the Interest Act, 1978.