Interest: Interest on delayed payment – Dispute between parties as regards entitlement of the contractor to receive interest on delayed payment in relation to local currency component – Award by the Arbitral tribunal that the interest be paid on delayed payment in relation to local currency component payable under the agreement since the contract did not prohibit award of interest – However, the said order set aside by the Arbitration court as also the High Court – On appeal, held: In the agreement between the parties, there was no specific exclusion of payment of interest on delayed payment in relation to the local currency component – Specific term of the agreement provided for payment of interest on delayed payment as terms of the contract – Rate at which such interest would be paid was not specifically agreed upon – Blank space in the “appendix to the bid” cannot be construed as cancellation of the clause providing for payment of interest of delayed release of funds – The principle guiding award of interest is that interest payment is essentially compensatory in nature – On facts, interest on delayed payment formed part of the contract itself – Furthermore, it cannot be inferred that ommission to fill in the blank space gave the contractor some kind of competitive edge in the bid process – Reasoning of the Arbitral Tribunal is correct and the contrary view by the Arbitration Court and the High Court breaches the permissible boundaries for encroaching upon an award – Thus, the view taken by the Tribunal is sustained, however the rate at which interest is to be paid would be simple interest at the rate of 8% pa.
Allowing the appeal, the Court
HELD:1.1 In the dispute which forms the subject matter of this appeal, being the agreement, there was no specific exclusion of payment of interest on delayed payment in relation to the local currency component. On the other hand, the specific term of the agreement entered into by and between the parties provided for payment of interest on delayed payment as terms of the contract. What was not specifically agreed upon was the rate at which such interest would be paid. The blank space in the “appendix to the bid” cannot be construed as cancellation of the clause providing for payment of interest of delayed release of funds. The Appellate Court or the Arbitration Court were not right in adopting the approach. To come to such an inference, active exclusion of payment of interest under that head was necessary to have been incorporated in the agreement. [Paras 11, 12][148-G-H; 149-A-C]
Reliance Cellulose Products Ltd. vs. ONGC Ltd. [(2018)
9 SCC 266 : [2018] 6 SCR 618; Union of India vs. Bright Power Projects (India) (P) Ltd. (2015) 9 SCC
695 : [2015] 6 SCR 488 - referred to
1.2 The underlying principle guiding award of interest is that interest payment is essentially compensatory in nature. In the instant case, interest on delayed payment formed part of the contract itself. The agreement did not contain any express exclusion clause on payment of interest on delayed payment whether on component of payment in foreign currency or local currency. The reasoning of the Tribunal on the basis of which it rejected the respondents’ plea of waiver is accepted. This was a finding of fact on appreciation of materials placed before the Tribunal. One of the reasons behind the decisions of the Appellate Court and Arbitration Court was that the appellants, while bidding, had given up their claims for interest. In substance, the respondents’ assertion is that the Tribunal went beyond the contractual terms, and the said two fora sought to invoke the principle of law contained in the third subhead of the “patent illegality” principle. [Para 13][149-G-H; 150-A-C] Associate Builders vs. Delhi Development Authority [(2015) 3 SCC 49 : [2014] 13 SCR 895 – referred to.
1.3 The Appellate Court accepted reasoning of the Arbitration Court that the blank portion in the appendix to the bid would imply “zero” or “nil”. This reasoning is flawed and such an interpretation of the agreement would actually be contrary to and beyond the terms of the contract. The Tribunal had already come to a factual finding on appreciation of evidence that there was no such implication. Such an exercise on the part of the Arbitration Court and the Appellate Court would constitute rewriting the contract, which is impermissible. The Tribunal rejected the plea of waiver. The reasoning cannot be held to be perverse or improbable in the factual background of the instant case. The Tribunal could have awarded interest as a compensatory or equitable measure, as there was no clause providing for exclusion or ouster of interest payment on delayed payment. The Tribunal determined the rate thereof in sub paragraphs 1.6 to
1.8 of the award. [Para 14][150-C-F]
1.4 The Appellate Court’s rationale that such blank interest column might have had resulted in acceptance of the bid of the appellants as their bid could have been more competitive on the assumption that the other bidders might have had pressed for interest in that column is not acceptable. No material has been shown from which it can be inferred that omission to fill in the blank space gave the appellants some kind of competitive edge in the bid process. It is also not known if other bidders had left the space blank or filled the same with specified rate. The Arbitration Court’s view, sustained by the High Court is tainted with an element of speculation on this point. [Para 15][151-E-G]
1.5 The reasoning of the Arbitral Tribunal that the contract did not prohibit the award of interest in respect of delayed payment in local currency component specified therein is correct. The contrary view expressed by the Arbitration Court in a proceeding under Section 34 of the Act, which view was upheld by the Appellate forum, breaches the permissible boundaries for encroaching upon an award. [Para 16][151-G-H; 152-A]
Oil Natural Gas Corporation Ltd. vs. Saw Pipes Ltd. [(2003) 5 SCC 705 : [2003] 3 SCR 691 - relied on.
1.6 The view taken by the Tribunal on consideration of the contract was both reasonable and possible view. However, the rate at which interest has been directed to be paid as contained in paragraphs 1.6 and 1.8 of the award are rather excessive. As the agreement is silent on the point of rate of interest but provides for payment of interest on delayed payment, the Tribunal’s exercise of fixing the rate should have been on the basis of applying the principle laid down in G. C. Roy’s case. The said principle is applicable in a proceeding under the Arbitration and Conciliation Act, 1996 as well. This principle has been broadly incorporated in Section 31(7) (a) of the 1996 Act. The only difference between the situation contemplated in the said provision and the facts of the instant case is that the agreement involved is not silent on interest entitlement of the appellants on delayed payment but the agreement contains provision for such payment. Only the rate at which interest would be payable remained unspecified. Simple interest at the rate of 8% would be just and equitable on the sum left unpaid, calculated otherwise on the basis of sub-paragraphs 1.6. to 1.8 of the award. The judgment of the Division Bench of the High Court is set aside. As a consequence, judgment of the Additional District Judge, also stands invalidated. The award of the Tribunal is sustained so far as direction to pay interest on delayed payment of the local currency component of the agreement is concerned, but the rate of interest on the sum would be computed in the manner prescribed in paragraphs 1.6, 1.7 and 1.8 and would be at 8% simple interest per annum. [Para 17][152-A-F] Secretary, Irrigation Department, Government of Orissa & Ors. vs. G.C. Roy (1992) 1 SCC 508 : [1991] 3 Suppl. SCR 417 – relied on.
As published in the Supreme Court Reports, Supreme Court of India. Text from the Indian Supreme Court Judgments open data set (Dattam Labs), CC BY 4.0.
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