2023 (3) TMI 793 - SC - Indian Laws

Supreme Court ruling on contract termination, security deposits, and interest rates under Arbitration Act

The Supreme Court upheld the Arbitral Tribunal's decision to reject the refund claims for two security deposits despite finding the contract termination ... Scope of arbitration award - Forfeiture of the security deposits - Arbitral Tribunal rejected the NBCC’s claim for refund of two security deposits - rescinding of contract due to abandonment of work by NBCC - Section 34 of the Arbitration and Conciliation Act, 1996 - HELD THAT:- The learned Arbitral Tribunal though observed that the IRCON was not justified in rescinding the contract under Clause 60.1, rescinding of the contract / termination of the contract was justified under Clause 17.4, and thereby has rejected the Claim Nos.33 and 34 of the NBCC which were with respect to forfeiture of the security deposits. The learned Single Judge as well as the Division Bench of the High Court have set aside the award passed by the learned Arbitral Tribunal rejecting Claim Nos.33 and 34 inter alia on the ground that once the Arbitral Tribunal gave the finding that the IRCON was not justified in invoking Clause 60.1, thereafter it was not open for the Arbitral Tribunal to take the help of Clause 17.4 and therefore, the learned Arbitral Tribunal was not justified in rejecting Claim Nos.33 and 34 which were with respect to forfeiture of security deposits, which could have been under Clause 17.4. However, it is required to be noted that as such the finding recorded by the Arbitral Tribunal on applicability of Clause 17.4 and/or rescinding of the contract under Clause 17.4 has not been set aside either by the learned Single Judge or by the Division Bench of the High Court and therefore, the findings recorded by the learned Arbitral Tribunal on applicability of Clause 17.4 has attained the finality. The learned Arbitral Tribunal as such was absolutely justified in considering whether IRCON was justified in rescinding the contract, may be either under Clause 60.1 or under Clause 17.4. Even otherwise, from the material on record and even the notice dated 21.02.1994 and the subsequent notice dated 07.03.1994, we are satisfied that the IRCON was satisfied that the work could not be completed by the contractor even within further extension of time. Both, under Clause 17.4 and 60.1, on failure of the contractor to complete the work, the IRCON is justified in rescinding the contract and forfeit the security deposit. At the cost of repetition it is observed that the learned Arbitral Tribunal on appreciation of entire evidence on record, had specifically observed that the contractor failed to complete the work even within the stipulated extended period of time and even abandoned the work and therefore, the IRCON was justified in rescinding the contract. The said finding as observed hereinabove has attained finality. Therefore, the IRCON was absolutely justified in forfeiting the security deposits and therefore, the learned Arbitral Tribunal was absolutely justified in rejecting Claim Nos.33 and 34, which were with respect to forfeiture of security deposits by the IRCON. Thus, the impugned judgment and order passed by the learned Single Judge as well as the Division Bench of the High Court quashing and setting aside the award passed by the learned Arbitral Tribunal rejecting Claim Nos.33 and 34 deserve to be quashed and set aside and the award passed by the learned Arbitral Tribunal rejecting Claim Nos.33 and 34 is required to be restored and upheld. Award passed by the Arbitral Tribunal awarding interest @ 18% on advance for the hypothecation of equipment - HELD THAT:- Once it was found that the advance amount was paid for hypothecation of equipment and thereafter when the Arbitral Tribunal awarded the interest on advance for hypothecation of equipment, the same was not required to be interfered with by the learned Single Judge in exercise of the powers under Section 34 of the Arbitration Act and even by the Division Bench of the High Court while exercising the powers under Section 37 of the Arbitration Act. However, at the same time to award the interest @ 18% can be said to be on a higher side. In the facts and circumstances of the case, if the interest is awarded @ 12% on advance for the hypothecation of equipment, the same can be said to be reasonable interest. The impugned judgment and order passed by the learned Single Judge as well as the Division Bench of the High Court quashing and setting aside the award passed by the Arbitral Tribunal rejecting Claim Nos. 33 and 34 are hereby quashed and set aside and the award passed by the Arbitral Tribunal rejecting the claim Nos. 33 and 34 is hereby restored - Appeal allowed. Issues Involved:1. Forfeiture of security deposits (Claim Nos. 33 and 34).2. Award of interest on advances, specifically on hypothecation of equipment (Counter Claim No. 3).Summary:Issue 1: Forfeiture of Security Deposits (Claim Nos. 33 and 34)The Arbitral Tribunal rejected NBCC's claims for the refund of two security deposits, despite finding that IRCON's termination of the contract under Clause 60.1 was unjustified. The Tribunal justified the termination under Clause 17.4. The Single Judge set aside this decision, arguing that once the Tribunal found Clause 60.1 termination unjustified, it could not rely on Clause 17.4 to justify forfeiture. The Division Bench of the High Court upheld the Single Judge's decision. The Supreme Court, however, noted that the Tribunal's finding on Clause 17.4 had attained finality and that both Clauses 17.4 and 60.1 justified IRCON's rescission of the contract and forfeiture of security deposits. Consequently, the Supreme Court quashed the High Court's decisions and restored the Tribunal's award rejecting Claim Nos. 33 and 34.Issue 2: Award of Interest on Advances (Counter Claim No. 3)The Arbitral Tribunal awarded IRCON interest at 18% per annum on advances, including those for hypothecation of equipment. The Single Judge and Division Bench set aside this award, citing the lack of a contractual stipulation for such interest. The Supreme Court noted that under Section 31(7)(a) of the Arbitration Act, arbitrators have the authority to award interest unless explicitly barred by the contract. Referencing the case of Raveechee and Company, the Court held that the Tribunal was justified in awarding interest. However, the Supreme Court found the 18% interest rate excessive and modified it to 12%.Conclusion:The Supreme Court allowed the appeal, restoring the Arbitral Tribunal's award rejecting Claim Nos. 33 and 34 and modifying the interest rate on advances for hypothecation of equipment to 12%. No order as to costs was made.