2015 (11) TMI 1751 - HC - Indian Laws

Invalidity of Contract Clause 16(2) under Indian Contract Act

Union of India Versus N.K. Garg & Co.

The court held that Clause 16(2) of the General Conditions of Contract (GCC) was invalid and void under Section 23 of the Indian Contract Act, 1872, as it ... Liability of Interest on the amounts awarded by the Arbitrator to the respondent/contractor - Clause 16(2) of the General Conditions of Contract (GCC) - scope of word 'immoral' - it is argued that even if the petitioner/UOI is found liable to pay any amount to the contractor, whether in a civil suit or any arbitration proceedings by an award, petitioner because of Clause 16(2) of the GCC cannot be called upon to pay interest for the pre-reference/present period or the post reference period including pendente lite period and till passing of the Award/decree. Held that:- The entire concept of rule of law and existence of relevant legislations in any country in this age (or in any age for that matter) is to prevent dishonesty. This principle that dishonesty is not promoted is as absolute and inviolable as the rising of the sun in the east. It can never ever be argued that a legislation or a contract can be so interpreted by courts, or that they be so applied by courts, which will result in promoting of dishonesty. Dishonesty is an anathema to the rule of law. Illegal holding on to the principal amounts by one person clearly leads to dishonesty on his part as such person wrongly benefits from the moneys illegally/wrongfully retained by him - In today's date and age to say that moneys can be retained for years and years and decades is clearly immoral and has to be held against public policy otherwise there will be gross injustice to the existence of the commercial world which cannot survive without payment of moneys in time. The four Sub-clauses of sub-Section (2) of Section 4 of the Interest Act do not restrict immorality to instances of sexual immorality as the only immorality, and hence in today's age and date the expression 'immoral' will have to be interpreted to include immorality arising in commercial transactions especially because a whiff of the same surely exists in the first Sub-clause (a) of sub-Section (2) of Section 4 of the Interest Act, 1978 which deals with payment of interest on a deposit, and deposit of moneys is generally and ordinarily a commercial transaction - Once Section 5 of the Interest Act, again with a non obstante clause, allows overriding effect and power of Section 34 CPC for grant of pendente lite interest, clearly, the post reference interest till the passing of the award is clearly payable to a person and it cannot be argued that pendente lite period would stand exempted because of the language of a clause such as the Clause 16(2) of the GCC in the present case. Non-payment of interest can under no circumstances be justified in today's world and it is clear that illegal retention of moneys for a long period of time will clearly amount to immorality and violation of the public policy. Therefore there is not even an iota of doubt that illegal retention of principal amounts of moneys which are to be paid by a person to another person at an appropriate point of time, on account of a contractual clause, such as Clause 16(2) of the GCC, results in an immoral action which is violative of public policy and hence such a clause having the language of Clause 16(2) of the GCC in the present case, is liable to be and is accordingly struck down in view of Section 23 of the Indian Contract Act. There is no merit in the objection petition that interest has been wrongly granted by the Arbitrator because of the bar of Clause 16(2) of the General Conditions of Contract in question, as this Clause 16(2) is invalid and void as the same is hit by Section 23 of the Indian Contract Act, 1872 - petition dismissed. Issues Involved:1. Validity of Clause 16(2) of the General Conditions of Contract (GCC) under Section 23 of the Indian Contract Act, 1872.2. Entitlement of the respondent to interest on amounts awarded by the Arbitrator despite Clause 16(2) of the GCC.3. Application of public policy and immorality in the context of Clause 16(2) of the GCC.Issue-wise Detailed Analysis:1. Validity of Clause 16(2) of the General Conditions of Contract (GCC) under Section 23 of the Indian Contract Act, 1872:The petitioner argued that Clause 16(2) of the GCC, which prohibits the payment of interest on amounts payable to the contractor, is valid and should prevent the respondent from receiving interest. The petitioner relied on several Supreme Court judgments and a Full Bench judgment of the Delhi High Court, which upheld similar clauses.The respondent countered that Clause 16(2) is invalid under Section 23 of the Indian Contract Act, 1872, arguing that the clause is against public policy and thus void. The respondent cited the Constitution Bench judgment in Secy., Irrigation Deptt., Govt. of Orissa v. G.C. Roy, which supports the entitlement to interest when there is wrongful retention of money.The court examined Clause 16(2) and Section 23 of the Indian Contract Act, which states that any agreement is void if its object or consideration is unlawful, including being opposed to public policy or immoral.2. Entitlement of the respondent to interest on amounts awarded by the Arbitrator despite Clause 16(2) of the GCC:The court noted that the Arbitrator had awarded interest to the respondent, and the respondent had not previously challenged Clause 16(2) as being void under Section 23. The court permitted the respondent to argue that Clause 16(2) is hit by Section 23, which would entitle the respondent to interest.The court referred to the judgment in G.C. Roy's case, which emphasizes that a person deprived of money to which they are legitimately entitled has a right to be compensated, whether it is called interest, compensation, or damages.3. Application of public policy and immorality in the context of Clause 16(2) of the GCC:The court discussed the concept of public policy, citing the Supreme Court judgment in India Financial Assn., Seventh Day Adventists v. M.A. Unneerikutty and Anr., which defines public policy as a principle that evolves with the needs of the community. The court emphasized that public policy is dynamic and courts can interpret it to promote public interest, equity, justice, and good conscience.The court also examined the term 'immoral' as used in Section 23, referencing the Supreme Court judgment in Gherulal Parakh v. Mahadeodas Maiya and Others, which initially restricted immorality to sexual immorality. However, the court argued that immorality should be interpreted more broadly to include wrongful retention of money, which is against good conscience and public policy.The court concluded that Clause 16(2) of the GCC, which allows for the retention of money without interest, is both immoral and against public policy. It noted that the long delay in litigation often results in significant financial loss to the aggrieved party, which is unjust and promotes dishonesty.Conclusion:The court held that Clause 16(2) of the GCC is invalid and void under Section 23 of the Indian Contract Act, 1872, as it is immoral and against public policy. Consequently, the respondent is entitled to interest on the amounts awarded by the Arbitrator. The petition was dismissed, and the parties were left to bear their own costs.