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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 Hon’ble Supreme Court concluded by holding, “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.”

Click here for the Judgment. 

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