2021 (4) TMI 1329 - SC - Indian Laws

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 ... 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 - HELD THAT:- 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. The underlying principle guiding award of interest is that interest payment is essentially compensatory in nature. But as it is already observed, 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 - 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. There are no material from which such a conclusion could be reached. No material has been shown 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. The simple interest at the rate of 8% would be just and equitable on the sum left unpaid - appeal allowed. 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.