Supreme Court Upholds Interest Entitlement on Delayed Payments in Highway Contract Dispute

The Supreme Court upheld the entitlement of the Appellants to receive interest on delayed payments under a contract for the upgradation of a State Highway. The Court determined that the blank space in the bid document did not negate the entitlement to interest but only left the rate unspecified. The Court modified the interest rate awarded by the Tribunal to 8% simple interest per annum, deeming the initial rate of 1% per month compounded monthly excessive. The appeal was allowed, and no order as to costs was made.

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Issues Involved:
1. Entitlement to interest on delayed payment.
2. Interpretation of contract terms regarding interest on delayed payment.
3. Waiver of interest claim by the Appellants.
4. Legality of the Arbitral Tribunal's award.
5. Reasonableness of the rate of interest awarded.

Detailed Analysis:

1. Entitlement to Interest on Delayed Payment:
The primary issue in this appeal was the entitlement of the Appellants to receive interest on delayed payments under the contract for upgradation of a State Highway. The Tribunal awarded interest on delayed payments, which was contested by the State of Kerala. The Tribunal's decision was based on Sub-clause 60.8 of the agreement, which stipulated the payment of interest on delayed interim payments.

2. Interpretation of Contract Terms Regarding Interest on Delayed Payment:
The contract provided for payment in both foreign and local currencies. For foreign currency, the interest rate was specified as LIBOR plus two percent. However, the space for the interest rate for local currency was left blank in the bid document. The State argued that this implied a zero or nil interest rate for local currency. The Tribunal, however, interpreted the contract to mean that the blank space did not negate the entitlement to interest but only left the rate unspecified. The Tribunal relied on the principle that a person deprived of money is entitled to compensation, which may be termed as interest, compensation, or damages.

3. Waiver of Interest Claim by the Appellants:
The State contended that the Appellants had waived their right to claim interest based on two communications dated 14th July 2004 and 3rd August 2004. The Tribunal found that the first letter was issued under coercion and was limited to a specific payment, and the second letter clarified that the waiver was a goodwill gesture limited to the specific payment. The Tribunal concluded that there was no intentional relinquishment of the right to claim interest.

4. Legality of the Arbitral Tribunal's Award:
The Arbitration Court and the High Court set aside the Tribunal's award, deeming it contrary to the contract terms. They held that the blank space in the bid document implied no interest on delayed payments in local currency. The Supreme Court, however, found that the Tribunal's interpretation was reasonable and that the contract did not explicitly exclude interest on delayed payments. The Court emphasized that the Tribunal's decision should not be interfered with unless it was perverse or unreasonable.

5. Reasonableness of the Rate of Interest Awarded:
The Tribunal awarded interest at the rate of 1% per month compounded monthly, which was deemed excessive by the Supreme Court. The Court held that, in the absence of a specified rate in the contract, the Tribunal should have awarded a reasonable rate of interest. The Court reduced the interest rate to 8% simple interest per annum, considering it just and equitable.

Conclusion:
The Supreme Court set aside the judgments of the Arbitration Court and the High Court, reinstating the Tribunal's award of interest on delayed payments but modifying the interest rate to 8% simple interest per annum. The appeal was allowed, and no order as to costs was made.

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