(1) THIS appeal came up before a bench of two learned Judges on 7/11/1994 when it passed the following order:

"THE question for decision in the present case relates to the award of interest pendente lite by the arbitrator. The effect of the decision in Secy., Irrigation Deptt., Govt. of orissa v. G.C. Roy is stated to be pending before a three-Judge bench on a reference being made to this effect. Accordingly, special leave is granted in the present matter."

Mr K.K. Venugopal, the learned Senior Counsel for the respondent, pointed out that the aforesaid order was passed on the premise that the question regarding award of interest pendente lite by the arbitrator was referred to three-Judge bench. He pointed out that the question which was in fact referred to the three-Judge bench was in regard to the award of interest in pendente lite but prior to the arbitrator entering upon the reference. He, therefore, submitted that the aforesaid order and special leave had been granted because it was not correctly represented that the reference to the three-Judge bench was in relation to interest accruing prior to the reference to arbitration. That being so, after hearing counsel for the appellant, we have thought it proper to recall that part of the order and dispose of the case on merits.

(2) THE short question which arises for consideration in this case and which was canvassed before us by Mr Salve, the learned Senior Counsel for the appellant, was that the arbitrator had awarded interest pendente lite notwithstanding the prohibition contained in the contract against the payment of interest on delayed payments. Clause l3(g) of the contract was relied upon in this behalf and that clause reads as under:

"NO claim for interest will be entertained by the Commissioners with respect to any money or balance which may be in their hands owing to any dispute between themselves and the Contractor or with respect to any delay on the part of the Commissioners in making interim or final payment or otherwise."

The contention urged by the learned counsel for the appellant was that this clause contained an absolute prohibition against the payment of interest on account of any delay on the part of the Commissioner in making interim or final payment or otherwise. In support of this contention he also invited our attention to a decision of this court rendered by two learned Judges in Associated Engineering Co. v. Govf. of A.P. His emphasis, placing reliance on this decision was that the arbitrator has to function in terins of the contract and not dehors the contract and he has no power to travel beyond the contract and if he does so he would be acting without jurisdiction. He invited our attention to the observation in paragraphs 26 and 29 of that decision which we have noticed.

(3) ACONSTITUTION bench of this court in Secy., Irrigation Deptt., Govf. of orissa v. G.C. Roy was called upon to consider whether the decision of this court in Executive Engineer (Irrigation) v. Ahhaduta Jena correctly laid down the rule in regard to arbitrators power to grant interest pendente lite. Dealing with this question the Constitution bench summed up the legal position in regard to grant of interest pendente lite in the following terms:

"THE question still remains whether arbitrator has the power to award interest pendente lite, and if so, on what principle. We must reiterate that we are dealing with the situation where the agreement does not provide for grant of such interest nor does it prohibit such grant. In other words, we are dealing with a case where the agreement is silent as to award of interest. On a conspectus of aforementioned decisions, the following principles emerge:

(I) A person deprived of the use of money to which he is legitimately entitled has a right to be compensated for the deprivation, call it by any name. It may be called interest, compensation or damages. This basic consideration is as valid for the period th