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Oriental Structural Engineers Pvt. Ltd. Vs. State of Kerala - (Supreme Court) (22 Apr 2021)

Unless otherwise agreed by parties, Arbitral Tribunal can award interest at reasonable rate for a period commencing from the date when the cause of action arises till the date of the award



The Appellants were awarded a contract by the State of Kerala for upgradation of a State Highway for two stretches, from Muvattupuzha-Thodupuzha and Muvattupuzha-Angamaly. The agreement in this regard was executed on 7th November, 2002. Present 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 advanced before present Court is over entitlement of the Appellants to receive interest on delayed payment on the subject-heads, which were to 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 present 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').

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. The award of the Tribunal was assailed by the State of Kerala before the District Court (the Arbitration Court) by taking out an application under Section 34 of the Arbitration and Conciliation Act, 1996 (the 1996 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 decision of the Arbitration Court was sustained in appeal by a Division Bench of the Kerala High Court.

The Union of India v. Bright Power Projects (India) (P) Ltd., 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, it has been opined by this Court that, unless otherwise 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 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.

The underlying principle guiding award of interest is that interest payment is essentially compensatory in nature. In present 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.

There is no 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, 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 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 the case of Secretary, Irrigation Department, Government of Orissa and Ors. v. G.C. Roy and Ors. 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. Simple interest at the rate of 8% would be just and equitable. The judgment of the Division Bench of the High Court is set aside. Appeal allowed.


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