When payment of Interest clause present in the contract but interest rate is blank parties are obligated to pay the same: Supreme Court
When a contract between the parties stipulate for the payment of interest on delayed payment but the rate of interest is left blank, in the absence of an exclusionary clause the parties are obligated to pay the same and the Tribunal or Court concerned can decide the rate of interest. This judgment was passed in the case of M/s Oriental structural Engineers Pvt. Ltd. vs. State of Kerala [C.A.No. 3454/2011] by a Single Bench consisting of Hon’ble Justice Aniruddha Bose.  The present appeal arose from a no. of disputes relating to making of payments to the appellants. This appeal was specific towards the entitlement of the appellant to receive interest over the delayed payment in local currency. The agreement has clause to resolve disputes  by the Disputes Review board which would give recommendations. If the same was not acceptable to the parties, then they would have to file a notice for arbitration proceedings. Under this appeal the disputes could not be settled by the DRB and was then referred to the Arbitral tribunal. The tribunal passed the majority award in favour of the appellants and a unanimous one. Based on this the State of Kerala preferred an appeal before the district court under section 34 of the Arbitration and Conciliation Act (The Act). The decision was in favour of the State and the same was upheld by the Division Bench of High Court. The present Appeal is to set aside the order of High Court and restore the award rendered by the tribunal. The agreement stated that the payment to the contractor could be in foreign and local currency. The foreign currency payment was to be made at LIBOR plus 2% which was the specified norm. on this premise the State contended that the local currency would be nil. Further there were communications made by the appellant to the State, stating that there is no interest on delayed payment. However, to rebut the same the appellant contended that the second communication was made under duress and the first communication was in relation to release of withheld amount. The majority award of the tribunal stated that there was an interest payment clause in the contract  The Supreme Court considered the present appeal an extension of the proceeding under section 34 of the Act. Respondents argued that the tribunal’s order was vitiated by the Patent illegality principle as laid down in the judgment of Oil Natural Gas Corporation Ltd. vs. Saw Pipes Lt.[(2003) 5 SCC 705]. Under the above principle the award would be invalid in case if it was in contravention to the arbitration act itself. In the case of Union of India vs. Bright Power Projects ltd. [(2015) 9 SCC 695], the SC had stated the provision of 31(7) of the Act for grant of Interest. The Supreme court held that because the Interest rate was not mentioned, does not mean that there is no payment of interest on delayed payments. Since in the present case interest on delayed payment formed part of the contract itself with an absence of any exclusionary clause, the reasoning by the Tribunal was accepted.  The SC went on to hold, the Tribunal could have awarded the interest as a compensatory or equitable measure due to the absence of an exclusion clause. While addressing the question of if the Tribunal can assign such interest, the Supreme Court want back to the G.C. Roy case, where Interest payment was held to be essentially compensatory in nature. It went on to hold that the same was broadly incorporated under section 31(7)(a) of the Act. Thus, the Supreme Court restored the award of the tribunal, setting aside orders of other Courts. 
The appellants were awarded a contract by the State of Muvattupuzha­Thodupuzha and MuvattupuzhaAngamaly. The agreement in this regard was executed on 7th November 2002 This appeal originates from disputes on certain issues arising appellants under certain heads. In the present proceeding recommendations at the first instance. If the recommendations was required to give notice to commence arbitration within a specified time and thereafter the dispute was to be settled appeal arises are concerned disputes on three counts arose member Arbitral Tribunal The amount due to the Contractor under any Contract shall subject to Clauses be paid by the within 42 days after the Contractor’s monthly statement has been submitted to the Engineer for to or deducted from the next payment to the credit In the event of the failure of the Employer to shall pay to the Contractor interest compounded same should have been paid in the currencies in which the payment are due. The provisions of the 4. The relevant provision of the appendix to the bid the content of which came for interpretation before the Tribunal and “ANNEXURE P 3 The above of interest for foreign currencies shall be supplied by the recording the rate of interest for payment to be made in local currency blank. The agreement contemplated payment to the been that the rate of interest on delayed payment and the next was another written communication dated 3rd August 2004 is a waiver of the rights of the claimant does not stand. The receiving payment in respect of IPC. I The waiver does not apply to the instant case. This is corroborated by the fact that was due under the terms of the contract the DRB made after due deliberations and discussions with the parties has relevance The Tribunal directed interest on delayed payment in paragraphs 1.6 to 1.8 of the award. Extract from the award containing these paragraphs would appear later in this was no waiver and in any event the communication of 14 th July 2004 followed by that of 3rd August 2004 related to IPC­I only This stand had been broadly accepted by the Tribunal. The the appellants claimants had continued to raise demand for interest subsequent to the issue of those two communications interest on delay in payment with regard to the local currency Appellate Bench was that in the event it was intention of the claimants to retain their entitlement to interest on delayed persuaded to accept the appellants’ bid on the basis that the situation as this factor could have made their bid more 10. This appeal in substance is an extension of a proceeding under Section 34 of the 1996 Act. To go into the question of Ltd. vs. Saw Pipes Ltd. 5 SCC 705]. Contention of the respondents has been that the Arbitral Tribunal’s order stood vitiated under the “patent illegality” principle spelt out in that What would constitute patent illegality has been elaborated by this Court in a later judgment Associate Builders vs. Delhi invalidated as per this authority if the same was in “42.3Equally the third subhead of patent “28. Rules applicable to substance of decide in accordance with the terms of the contract and shall take into account the usages of the trade applicable to the This last contravention must be understood with a caveat. An Arbitral terms of the contract but if an arbitrator construes a term of the contract in a award can be set aside on this ground Construction of the terms of a contract is primarily for an arbitrator to decide unless that no fair­minded or reasonable person in the bid document the “appendix to bid” to be specific had far as payment in local currency component contained in the agreement is concerned. In our opinion however the interference with the award by the Arbitration Court on this ground was unwarranted. The underlying reasoning of the 9 SCC 266] were relied upon before us by the appellants to distinguished on behalf of the respondents on the ground that the former decision related to interest pendente lite and both statute an arbitrator had power or jurisdiction to grant pre­ lite and future interest. Such jurisdiction stood curbed only if express terms of the contract precluded payment of interest Referring to another authority the Union of India vs. Bright Power Projects(P) Ltd. 9 SCC 695] this Court 31(7) of the 1996 Act. In the case of Bright Power Projects agreed by the parties the Arbitral Tribunal can award interest at which forms the subject­matter of this appeal being the 12. On the other hand the specific term of the agreement our opinion cannot be construed as cancellation of the clause do not think the Appellate Court or the Arbitration Court was interest under that head was necessary to have been incorporated in the agreement. Though the case of G.C. Roy supra) was delivered in a dispute to which the 1940 Act was applicable the Constitution Bench of this Court has laid down “43. The question still remains whether arbitrator has the power to award interest must reiterate that we are dealing with the situation where the agreement does not prohibit such grant. In other words we are dealing with a case where the agreement is of aforementioned decisions the following any name. It may be called interest compensation or damages. This basic consideration is as valid for the period the upon the reference. This is the principle of 13. The underlying principle guiding award of interest is that interest payment is essentially compensatory in nature. But as we have already observed in the case before us interest on delayed payment formed part of the contract itself. The agreement did not contain any express exclusion clause on reasoning of the Tribunal on the basis of which it rejected the respondents’ plea of waiver. This was a finding of fact on reasons behind the decisions of the Appellate Court and Arbitration Court was that the appellants while bidding had and the said two fora sought to invoke the principle of law 14. The Appeal Court accepted reasoning of the Arbitration Court that the blank portion in the appendix to the bid would imply “zero” or “nil”. This reasoning in our opinion is flawed constitute rewriting the contract which is impermissible. The payment. The Tribunal determined the rate thereof in sub­ paragraphs 1.6 to 1.8 of the award. This part of the award It is therefore held that the Claimants under any IPCs issued by the Engineer or Claimants monthly statements submitted to the Engineer for certification and when were not paid or had been withheld by the after the claimants’ respective monthly statements had been submitted to the Engineer for certification to the date of The Arbitral Tribunal therefore directs that the Respondents shall pay to the 2 15 72 150 ­ for the period of the due dates of payment till the actual dates of full The Respondents shall further pay to the claimants such interest on the unpaid sums in respect of other IPCs No. 5 to 14 issued by the Engineer or the Claimants for certification for the period from the due dates of payment till the actual dates of full to para 1.7 and 1.8 hereinabove from such dates of payment of the principal amount to 15. The Appellate Court’s rationale that such blank interest assumption that the other bidders might have had pressed for other bidders had left the space blank or filled the same with specified rate. The Arbitration Court’s view sustained by the High 16. We do not find any flaw in the reasoning of the Arbitral in respect of delayed payment in local currency component specified therein. This being the position in our opinion the under Section 34 of the Act which view was upheld by the Appellate forum breaches the permissible boundaries for encroaching upon an award as laid down in Saw Pipes case In our opinion the view taken by the Tribunal on view. We however are of the opinion that the rate at which 1.6 and 1.8 of the award which we have reproduced above are 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 paragraph 43.1. in the case of G.C. Roy (supra). The said of the 1996 Act. The only difference between the situation provision for such payment. Only the rate at which interest would be payable remained unspecified. In our view simple 1.6. to 1.8 of the award. We accordingly set aside the judgment interest on delayed payment in relation to local currency component of the contract. As a consequence judgment of the Sixth Additional District Judge Ernakulam shall also stand of interest on the sum shall be computed in the manner prescribed in paragraphs 1.6 1.7 and 1.8 and shall be at 8