M/S Oriental Structural Engineers Pvt. Ltd. vs State of Kerala

M/s. Oriental Structural Engineers Pvt. Ltd. ...Appellant(s)

Versus

State of Kerala …Respondent(s)

JUDGMENT

ANIRUDDHA BOSE, J.

The appellants were awarded a contract by the State of

Kerala for upgradation of a State Highway for two stretches, from

Muvattupuzha­Thodupuzha and Muvattupuzha–Angamaly. The

agreement in this regard was executed on 7 th November, 2002.

This appeal originates from disputes on certain issues arising

between the parties primarily relating to making payment to the

appellants under certain heads. In the present proceeding,

however, the only point of dispute on which arguments have been Signature Not Verified Digitally signed by DEEPAK SINGH Date: 2021.04.22

advanced before us is over entitlement of the appellants to receive 18:26:01 IST Reason:

interest on delayed payment on the subject­heads, which were to 1 be paid by the employer in local currency as per the stipulations

in the said agreement. The agreement had provision for resolution

of disputes by a Disputes Review Board (DRB) which was to make

recommendations at the first instance. If the recommendations

were not acceptable to any of the parties, such disagreeing party

was required to give notice to commence arbitration within a

specified time and thereafter the dispute was to be settled

through arbitration. So far as the controversies out of which this

appeal arises are concerned, disputes on three counts arose

between the parties, which could not be resolved at the stage of

DRB recommendations. Those disputes were referred to a three­

member Arbitral Tribunal (the ‘Tribunal’ in short). We have

already referred to the scope of controversy involved in this

appeal. This controversy shall be henceforth referred to in this

judgment as dispute on delayed payment. We shall address that

issue only in this judgment.

2. The Tribunal passed the award in favour of the appellants

on this point and interest was directed to be paid on delayed

payment in relation to local currency component payable under

the agreement. This was, however, a majority award and not a

unanimous one as one of the members of the Tribunal gave a 2 dissenting view. In the succeeding paragraphs of this judgment,

whenever we refer to the expression ‘award’, it shall mean the

majority award only. The award of the Tribunal was assailed by

the State of Kerala before the District Court at Ernakulam (the

Arbitration Court) by taking out an application under Section 34

of the Arbitration and Conciliation Act, 1996 (the1996 Act). This

application was allowed in part. Award of the Tribunal in favour

of the appellants on the point of interest on delayed payment was

set aside. The Arbitration Court also adjudicated upon two other

points, but as these points have not been urged before us, we do

not consider it necessary to deal with them here in this judgment.

The decision of the Arbitration Court was sustained in appeal by

a Division Bench of the Kerala High Court. This appeal is against

the said Bench decision of the High Court delivered on 17 th

September, 2009. The appellants want the award of the Tribunal

allowing their claim for interest on delayed payment to be

restored.

3. Entitlement of the contractor to interest was provided for in

sub­clause 60.8 of the agreement on delayed interim payment.

This clause has been reproduced in page 38 of the paperbook and

reads:­ 3 “ Time of Payment and Interest

(a) The amount due to the Contractor under any Interim Payment Certificate issued by the Engineer pursuant to this Clause or to any other term of the Contract shall subject to Clauses be paid by the Employer to the Contractor as follows.

(i) (A) In the case of Interim Payment Certificates within 42 days after the Contractor’s monthly statement has been submitted to the Engineer for certification pursuant to sub­clause 60.1. Provided that if the Engineer’s Interim Certificate has not yet been issued within said 42 days, the Employer shall pay the amount shown in the Contractor’s monthly statement and that any discrepancy shall be added to or deducted from the next payment to the Contractor and (B) in the case of any monthly statement submitted by the Contractor at a time when the Bank’s loan or credit (from which part of the payment to the Contractor are being made) is suspended within 14 days after such monthly statement is submitted. Provided that if the Engineer’s Interim Certificate has not yet been issued within said 14 days the Employer shall pay the amount shown in the Contractor’s monthly statement and that any discrepancy shall be added to or deducted from the next payment to the Contractor.

(ii) (A) In the case of the Final Payment Certificate pursuant to Sub­clause 60.13 within 84 days after the Final statement and written discharge have been submitted to the Engineer for certification and (B) In the case of the Final Statement submitted by the Contractor at a time when the Bank’s loan or credit from which part of the payments to the Contractor are being made is suspended or for which payment under (ii) (A) becomes due after 63 days of the date of notification of the suspension notice payment will be made within 63 days after the date of notification of the suspension pursuant to Sub Clause 69.6(d) provided that if the Engineer’s Final Payment Certificate has not been issued within

4 the said 63 days, the Employer shall pay the undisputed amounts shown in the Final Statement.

(b) In the event of the failure of the Employer to make payments within the time stated the Employer shall pay to the Contractor interest compounded monthly at the rate(s) stated in the Appendix to Bid upon all sums unpaid from the date upon which the same should have been paid in the currencies in which the payment are due. The provisions of the Sub Clause are without prejudice to the Contractor’s entitlement under Clause 69 or otherwise.”

4. The relevant provision of the appendix to the bid, the content

of which came for interpretation before the Tribunal and

thereafter before the two judicial fora stipulated:­

“ANNEXURE- P-3 Kerala State Transport Project Volume III Section 6: Appendix to Bid Page 7.8

Origin of materials 60.3(a) (v) item Origin Currency And Plants 60.3 (d) Plant, USA Machinery & Germany, or Spares any other US Dollars

Bitumen & Iran, Thermoplastic Singapore or US Dollars Paint any other

Bidder to complete

Rates of Interest upon 60.8 ________ percent of payments in local Unpaid Sums currency. For other countries, refer to the table below.

Currency (as per Sub­Clause 60.1) London Inter­Bank On­ Lending Rate (LIBOR) Plus 2 percent

USS ­do­

The above of interest for foreign currencies shall be supplied by the ”

Bidder, and these rates are subject to clarification/negotiation before

5 formalizing the Contract.

5. In their bid document, the appellants had left the space for

recording the rate of interest for payment to be made in local

currency blank. The agreement contemplated payment to the

contractor in foreign currency as also in local currency. So far as

payment by foreign currency was concerned, as would be evident

from the appendix to the bid quoted in the preceding paragraph,

the London Interbank On­lending Rate (LIBOR) plus two per cent

was the specified norm. It was on this basis the State’s stand has

been that the rate of interest on delayed payment (as

contemplated in Clause 60.8) in local currency had to be treated

as “zero” or “nil”. It has also been the position of the State,

referring to certain communications made by the appellants that

there was waiver of the claim of interest by the appellants. In the

award, the Tribunal had repelled the argument of the State that

the words “zero” or “nil” could be read into the said column of the

“appendix to bid”. Relying on the Constitution Bench judgment of

this Court in the case of Secretary, Irrigation Department,

Government of Orissa & Ors. vs. G.C. Roy [(1992) 1 SCC 508],

6 the Tribunal held that a person deprived of the use of money to

which he is legitimately entitled has a right to be compensated

and such compensation may be called interest, compensation or

damages. Two documents originating from the appellants in the

form of written communications were relied upon by the State

before the Tribunal to contend that claim for interest, in any

event, stood waived by claimants on delayed payment of the sum

which was to be made in local currency. First of these two

documents was a letter of the appellant dated 14th July, 2004

(Exhibit R­1 before the Tribunal) and the next was another

written communication dated 3rd August, 2004 (Exhibit C­72

before the Tribunal). The first letter issued by the appellants

addressed to the Chief Executive Officer, Kerala State Transport

Project reads :­

“Dear Madam,

As discussed on the above subject we confirm that there is no provision of interest on delayed payment in the Contract and hence interest will not be claimed.” (quoted verbatim)

6. The next communication dated 3rd August, 2004 was

addressed to the same officer of the respondents. The text of this

communication is:­

7 “Dear Sir,

We wish to invite your kind attention to the issue of release of payment against IPC­1 General Items as recommended by DRB. As a pre­condition for release of the said payment, we were made to issue the above referred letter dated 14.7.2004. Our commitment not to claim any interest on the said amount released by you be treated purely as a goodwill gesture so that our future payments are released to us without any delay. The said letter is restricted to the subject claim/item only.” (quoted verbatim)

7. Before the Tribunal, the appellants had taken a point that

the said letter of 14th July, 2004 was issued under coercion or

duress. Their second plea on this count was that the content of

the first letter was restricted to release of withheld amount

recommended by the Review Board in respect of Interim Payment

Certificate­I (IPC­I). The Tribunal accepted the stand of the

appellants (claimants before it). It was, inter­alia, observed in the

award:­

“The essential element of waiver is intentional relinquishment of known right. The claimant has stated that the said letter was given by them under coercion. This holds goods in view of the fact and circumstances of the case. It is also noted that the said letter dated 14.7.04 (ext. R1) is not even mentioned in the defence statement dated 29.1.05. Nor has this issue been raised before the DRB. So the

8 argument of the respondent that the letter dated 14.7.04 (ext. R1) is a waiver of the rights of the claimant does not stand. The fact that this letter was issued at the time of receiving payment in respect of IPC. I suggests that this was given under coercion. The waiver does not apply to the instant case. This is corroborated by the fact that the claimant has been continually agitating for the payment of interest before and after the issuance of the said letter. As discussed earlier, payment of interest on unpaid sums was due under the terms of the contract and under the law. The recommendation of the DRB made after due deliberations and discussions with the parties has relevance in the matter.”

(quoted verbatim)

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

judgment.

8. The majority view of the Tribunal was that the contract itself

provided for payment of interest with regard to local currency and

foreign currency. The plea of the appellants has been that there

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

9 Tribunal had also accepted the appellants/claimants’ stand that

there was no waiver on claim of interest in respect of all sums

due for which Interim Payment Certificates had been issued. The

Tribunal’s finding on that aspect was buttressed by the fact that

the appellants/claimants had continued to raise demand for

interest subsequent to the issue of those two communications.

These were essentially findings on facts.

9. The Arbitration Court and the Appellate Court in sustaining

the State’s application for setting aside the award were of the view

that the contract could not be construed to contain provisions for

interest on delay in payment with regard to the local currency

component contained in the agreement, as the appellants did not

fill up the blank space with the rate of interest. Opinion of the

Appellate Bench was that in the event it was intention of the

claimants to retain their entitlement to interest on delayed

payment under that head, they ought to have had filled in the

blank space in the “appendix to bid”. Another facet of the High

Court’s reasoning was that the respondents might have had been

persuaded to accept the appellants’ bid on the basis that the

appellants would claim no interest on delayed payment in such

10 situation, as this factor could have made their bid more

competitive.

10. This appeal, in substance, is an extension of a proceeding

under Section 34 of the 1996 Act. To go into the question of

legality of the decisions made by the two judicial fora, we need to

test first if the grounds of challenge to the award met the test laid

down by this Court in the case of Oil Natural Gas Corporation

Ltd. vs. Saw Pipes Ltd. [(2003) 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

judgment. This principle came under the broad heading of “Public

Policy” test, applying which an arbitral award could be set aside. What would constitute patent illegality has been elaborated by

this Court in a later judgment, Associate Builders vs. Delhi

Development Authority [(2015) 3 SCC 49]. An award would be

invalidated, as per this authority, if the same was in

contravention of substantive law of the country or contravention

of the “Arbitration Act itself”. In paragraph 42.3 of the Report (in

the case of Associate Builders), it has been held:­

11 “42.3 (c) Equally, the third subhead of patent illegality is really a contravention of Section 28(3) of the Arbitration Act, which reads as under:

“28. Rules applicable to substance of dispute.­(1)­(2)* * *

(3) In all cases, the Arbitral Tribunal shall decide in accordance with the terms of the contract and shall take into account the usages of the trade applicable to the transaction.” This last contravention must be understood with a caveat. An Arbitral Tribunal must decide in accordance with the terms of the contract, but if an arbitrator construes a term of the contract in a reasonable manner, it will not mean that the award can be set aside on this ground.

Construction of the terms of a contract is primarily for an arbitrator to decide unless the arbitrator construes the contract in such a way that it could be said to be something that no fair­minded or reasonable person could do.”

11. The High Court in the appeal concurred with the Arbitration

Court and concluded that omission to include the rate of interest

in the bid document, the “appendix to bid” to be specific, had

resulted in creation of contractual term that there would not be

any claim for interest on delayed payment (as per Clause 60.8) so

far as payment in local currency component contained in the

agreement is concerned. In our opinion, however, the

12 interference with the award by the Arbitration Court on this

ground was unwarranted. The underlying reasoning of the

Appellate Court and earlier, the Arbitration Court on this point is

that the Tribunal went beyond the contractual term in awarding

interest. The case of G.C. Roy (supra) and a later decision of this

Court, Reliance Cellulose Products Ltd. vs. ONGC Ltd. [(2018)

9 SCC 266], were relied upon before us by the appellants to

sustain the Tribunal’s findings. These decisions are sought to be

distinguished on behalf of the respondents on the ground that

the former decision related to interest pendente lite and both

these cases were under the Arbitration Act, 1940. Under the said

statute, an arbitrator had power or jurisdiction to grant pre­

reference interest under the Interest Act, 1978 as also pendente

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 (India) (P) Ltd. [(2015) 9 SCC 695], this Court

highlighted the position of law on grant of interest under Section

31(7) of the 1996 Act. In the case of Bright Power Projects

(supra), it has been opined by this Court that unless otherwise

13 agreed by the parties, the Arbitral Tribunal can award interest at

reasonable rate for a period commencing from that date when the

cause of action arises till the date of the award. In the dispute

which forms the subject­matter 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.

12. 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”, in

our opinion, cannot be construed as cancellation of the clause

providing for payment of interest of delayed release of funds. We

do not think the Appellate Court or the Arbitration Court was

right in adopting the approach that by not specifying the blank

space provided for filling in the interest rate. We are of the view

that to come to such an inference, active exclusion of payment of

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

14 applicable, the Constitution Bench of this Court has laid down

certain general proposition or principle on the aspect of grant of

interest. This general proposition was referred to by the Tribunal.

It has been held in paragraph 43.1 of the Report (in the case of

G.C. Roy):­

“43. The question still remains whether arbitrator has the power to award interest pendent 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 the dispute is pending before the arbitrator as it is for the period prior to the arbitrator entering upon the reference. This is the principle of Section 34, Civil Procedure Code and there is no reason or principle to hold otherwise in the case of arbitrator.....”

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

15 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. We accept the

reasoning of the Tribunal on the basis of which it rejected the

respondents’ plea of waiver. 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

elaborated in the case of Associate Builders (supra).

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

and such an interpretation of the agreement would actually be

contrary to and beyond the terms of the contract. The Tribunal in

this case 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 16 constitute rewriting the contract, which is impermissible. The

Tribunal rejected the plea of waiver and we have reproduced its

reasoning on that point. We cannot hold such reasoning to be

perverse or improbable in the factual background of the present

case. The Tribunal in this case could have had 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. This part of the award

specifies:­

“1.6 It is, therefore, held that the Claimants are entitled to interest on the amount as due under any IPCs issued by the Engineer or failing which, on the amounts as shown in the Claimants monthly statements submitted to the Engineer for certification and when were not paid or had been withheld by the Respondents and such interest shall be paid by the Respondents for the period as 42 days after the claimants’ respective monthly statements had been submitted to the Engineer for certification to the date of payment thereof in full. The arbitral tribunal further holds that on the unpaid sums and for the period of delay in the payment thereof as stated hereinabove, the Respondents shall pay to the claimants interest at the rate of 1% per month compounded monthly such rate being representative of the prevalent rate of access to money that the claimants were deprived of.

1.7 The Arbitral Tribunal therefore directs that the Respondents shall pay to the claimants interest on the unpaid sum of Rs.

17 2,15,72,150/­ for the period of the due dates of payment till the actual dates of full payment of such amount at the rate stated in para 1.6 above in respect of IPCs No. 2 & IPC No. 4.

1.8 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 monthly statements submitted to the Engineer for certification for the period from the due dates of payment till the actual dates of full payment at the rate as stated in hereinabove.

The respondents are also directed to pay further interest at the rate of 12% per annum on the interest amount determined pursuant to para 1.7 and 1.8 hereinabove from such dates of payment of the principal amount to the date of award.”

15. 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 to us. We do not find

any material from which such a conclusion could be reached. No

material has been shown to us 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. We also do not know if

other bidders had left the space blank or filled the same with

18 specified rate. The Arbitration Court’s view, sustained by the High

Court is tainted with an element of speculation on this point.

16. We do not find any flaw in 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. This being the position, in our opinion, 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 as laid down in Saw Pipes case

(supra).

17. In our opinion, the view taken by the Tribunal on

consideration of the contract was both reasonable and possible

view. We, however, are of the opinion that the rate at which

interest has been directed to be paid as contained in paragraphs

1.6 and 1.8 of the award, which we have reproduced above, 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 19 paragraph 43.1. in the case of G.C. Roy (supra). The said

principle is applicable in a proceeding under the 1996 Act 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 aforesaid provision and the facts of this 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. In our view, simple

interest at the rate of 8% would be just and equitable on the sum

left unpaid, calculated otherwise on the basis of sub­paragraphs

1.6. to 1.8 of the award. We, accordingly, set aside the judgment

of the Division Bench of the High Court of Kerala impugned in

this appeal on the point of entitlement of the appellants to receive

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

invalidated. The award of the Tribunal shall stand 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 shall be computed in the manner

20 prescribed in paragraphs 1.6, 1.7 and 1.8 and shall be at 8%

simple interest per annum.

18. The appeal is allowed in the above terms.

19. There shall be no order as to costs.

.................................J. (SURYA KANT)

...............................J. (ANIRUDDHA BOSE)

NEW DELHI APRIL 22, 2021

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