TaxTMI 
TaxTMI 
2025 (12) TMI 553
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....udgment is divided in the following parts:- Index A. FACTUAL MATRIX 2 B. ARBITRAL PROCEEDINGS 6 C. FIRST APPEAL UNDER SECTION 34 OF THE ACT, 1996 11 D. ORDER PASSED BY A LEARNED SINGLE JUDGE IN SECTION 34 PETITION DATED 18.12.2018 11 E. SUBMISSIONS ON BEHALF OF THE APPELLANT 20 F. SUBMISSIONS ON BEHALF OF THE RESPONDENT 23 G. ANALYSIS 27 H. NATURE OF THE COMMERCIAL CONTRACT BETWEEN THE PARTIES 35 I. SECTION 31(7)(a) AND (b) RESPECTIVELY OF THE ACT, 1996 37 J. IS PENAL INTEREST ON PENAL INTEREST OPPOSED TO PUBLIC POLICY? 50 i. Cavendish embraced in foreign jurisdictions 89 a. Australia 90 b. New Zealand 92 c. Malaysia 93 d. Germany 94 K. APPLICABILITY OF THE MAXIM 'VERBA CHARTARUM FORTIUS ACCIPIUNTUR CONTRA PROFERENTEM' IN THE PRESENT CASE 104 L. APPLICATION OF SECTION 74 OF THE CONTRACT ACT VIS-A-VIS SECTION 31(7)(a) of the ARBITRATION ACT, 1996 109 M. CASE LAW RELIED UPON BY THE APPELLANT 115 N. CONCLUSION 116 1. Leave granted. 2. Since the issues involved in both the captioned appeals are the same....
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.... * The bill discounting period was up to 150 days. § * As per the Sanction Letter dated 11.06.2003, one M/s Electronic Research Pvt. Ltd./ERPL stood surety for the repayment of Rs. 6,43,32,301/- in the event the Drawer and Drawee failed to repay the amount due in term of sanction letter dated 11.06.2003. In pursuance of the same, ERPL furnished a 'Comfort letter' along with PDCs guaranteeing repayment of the amounts due and payable to the respondent/claimant. 7. However, dispute between the parties arose when a sum of Rs. 25,79,91,096/- against particular Bills of Exchange became due and payable to the respondent/claimant by BPL and BDDL in 2004, which amount they defaulted in repaying despite several reminders on behalf of the respondent/claimant. It is stated that during the subsistence of the contract, BDDL along with ERPL had issued postdated cheques (PDCs) to discharge their respective partial contractual liabilities towards the respondent/claimant. However, BPL allegedly requested the claimant to not encash the said cheques and assured the respondent/claimant that given some more time, they would make arrangements for the payments. The respondent/claiman....
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....y damages. If so, to what amount? 3. Whether the claimant is entitled to interest. If so, at what rate and from which date? 4. Whether the claimant is entitled to cost? 5. Whether the claims have been validly instituted? OPR2 6. Whether, assuming the Respondent No. 2 is liable for payment under the Bill Discounting Facility Agreement dated 27.12.2002 and 11.06.2003, the claim is barred by time? OPR2 7. Whether the Claimant can claim any amount from Respondent No. 2 under the Bill Discounting Facility Agreement dated 27.12.2002 and 11.06.2002 in view of the Respondent No. 2 having tendered post-dated cheques towards payment of liability on the hundies discounted by the Claimant? OPR2 8. Whether the Respondent N.o.2 made any verbal representation to the Claimant not to present the post-dated cheques issued by the Respondent No. 2 as alleged by the Claimant? OPR2 9. If not, did the Claimant waive its right to the payment of the amounts of each cheque issued by Respondent No. 2 and under the Bill Discounting Agreement? OPR2 10. Reliefs." 12. As regards Issue No. 1, the learned Arbitrator outright rejected the co....
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....s reported in 2001 SCC OnLine SC 1266, rejected the contention of the appellant that the interest cannot be added to the principal amount and held that since the compounding of interest on monthly rest was provided in the mutually agreed upon terms of the contract entered into between the parties, therefore, the respondent/claimant was entitled to claim interest as per the terms of the contract i.e., @ 36% per annum with monthly rests. Accordingly, Issue No. 3 was decided in favour of the claimant/respondent herein. 15. Issue No. 5 was decided by the learned Arbitrator in favour of the claimant/respondent herein by observing that Section 64 of Negotiable Instruments Act, 1881 is not applicable to the facts of the present case and the surety ERPL (Respondent No. 3 therein) having admitted the existence of the arbitration agreement/sanction letter dated 11.06.2003, has rightly been impleaded to the arbitration proceedings. It was further held that BPL has also been rightly impleaded in view of the joint liability clause contained in the sanction letters dated 27.12.2002 and 11.06.2003. 16. As regards Issue No.6 qua the issue of limitation, the learned Arbitrator while observing....
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....spondent/claimant was not on the basis of the Bills of Exchange but on the basis of two Sanction Letters to which the appellant herein was admittedly a party. Section 80 of the NI Act, which prescribes a fixed rate of interest to be charged, has no application to the present case. (ii) As per Section 31(7) of the NI Act, the transaction in question does not fall within the ambit of the Usurious Loans Act, 1918 as amended by the Punjab Relief of Indebtedness Act, 1934 since the transaction in question was not in the nature of a loan or a debt, rather it pertained to discounting of Bills of Exchange which was simply a commercial transaction. (iii) The interest awarded by the learned sole Arbitrator, having been granted in accordance with the terms of the contract between the parties, cannot be set aside by invoking the general principles of fairness or equity. (iv) Since the respondent/claimant had stated on affidavit that it had adjusted the part payments made by the appellant against seven particular Bills of Exchange, the respondent cannot claim the benefit of extension of limitation for those Bills of Exchange for which it did not receive any payment. T....
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....udge except for a typographical error that the learned judge was referring to Section 31(7) of the A& C Act. The Usurious Loan Act, 1918 as followed by the Punjab Relief of Indebtedness Act, 1934, were promulgated in a different era and the power of the Court to adjudicate if the interest on a loan amount is excessive has to give way in view of the plenary powers of the Courts provided under the later enactment i.e., the Arbitration & Conciliation Act. Unhesitatingly, the transactions between the parties whereby payments were made for supply of goods to the appellant by the respondent/claimant were not in the nature of a loan or an advance. In essence, the respondent/claimant had been making payment to the appellant for the supply of goods to BDDL and such payments were purely in the nature of commercial transactions as amongst the parties. Both parties, the appellant herein/BPL and the respondent No. 2/BDDL evidently approached the respondent/ claimant for providing bill discounting facilities and agreed to their joint and several liabilities towards the discounting of the Bills of Exchanges." 25. The final order passed by the Division Bench dismissing the Section 37 appeal rea....
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....lication so as to invoke the review jurisdiction, is rather in the nature of almost placing a whole new interpretation with regard to the chart that was filed by the applicant/appellant vide annexure "B" as well annexure "A" relied upon by the respondent/claimant, referred to in our judgment vide paragraph (29). By all means, it amount to espousing a new assertion to the whole story that most of the bills of exchanges/hundis were discharged within nine months. It is borne out from the record that no plea was advanced to the effect that substantial payments had been made within a period of nine months. It is also a matter of record that neither the witness for the respondent/claimant was prodded about the payments done within nine months nor the Managing Director of the applicant/appellant stepped into the witness box to prove such aspect. The evidence led by the claimant proven in accordance with statement of claim forming Annexure "A" was not shaken or controverted in any manner. 20. Likewise, the plea that only seven payments were attributable to the applicant/appellant under the sanction letter dated 11.06.2003 and none under the first sanction letter dated 27.12.2002 i....
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....act, and has acquiesced and acted upon the terms and conditions of the said contract, without ever having raised any objections of such nature, either before or immediately after entering into the contract. 24. Evidently, the applicant /appellant never took any steps to avoid the contract within the stipulated time and having reaped the benefits arising out the contract, now, at this belated stage, it does not lie in its mouth to avoid the said stipulation in the contract by alleging unfairness and unconscionability. It is on record that the applicant/appellant directly benefited from the two sanction letters. As noted in paragraph (34) of the judgment under review, the applicant/appellant acknowledged its liability via letter dated 02.02.2007, specifically referencing outstanding dues pertaining to the BDDL account and seeking additional time for payment. 25. Notably, the author of this letter did not testify before the Arbitrator, and consequently, no objection was raised regarding the interest clause in the sanction letters. It is axiomatic that the sanctity of a contract is a fundamental principle underlying the stability and predictability of legal and commer....
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....e learned Single Judge as also by us in the impugned judgment under review." 28. On the issue whether interest rate is against public policy, the High Court observed thus: "32. In the light of the aforesaid discussion, reverting back to the instant matter, on a plain and grammatical construction of clauses (ii) and (iii) of Explanation 1 to Section 34(2) of the A&C Act, it is doubtful if the imposition of an exorbitant interest in the background of contemporary commercial practices, would be against the fundamental policy of Indian Law, or against the basic notions of morality or justice. It is noteworthy that the applicant/appellant has consistently and brazenly denied its liability to honour the hundis, despite being confronted with overwhelming evidence. Furthermore, it has shown no willingness to settle accounts with the respondent/claimant. Consequently, the applicant/appellant cannot now dispute its substantial financial liability. Notably, the applicant/ appellant is a sophisticated entity, unaffected by illiteracy, ignorance, or economic disadvantage. 33. While exorbitant interest rates may be deemed unjust or immoral in certain circumstances, particula....
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.... the factors outlined therein to make a judicious and judicial determination of reasonable amount of interest which would be payable. In such a case too, the Arbitrator can consider the terms of the contract including any term which may prescribe interest as a relevant factor in consideration under Section 31(7)(a). 34. The third interpretation according to the learned Senior counsel is that "unless otherwise agreed between the parties" can control whole aspect of the matter covered under Section 31(7)(a). 35. In the last, the learned Senior counsel submitted that the observations contained in the DMRC v. Delhi Airport Metro Express Private Limited reported in (2024) 6 SCC 357 to the aforesaid extent were not apposite for the issue which fell for consideration. It was submitted that having regard to the nature of the arbitral functions to award interest both under Sections 31(7)(a) and 31(7)(b) being of an adjudicatory character which is a performative function of the arbitral tribunal, there can only be an exclusion of that function but not the ancillary execution of that function through an Agreement. 36. The gist of the broad submissions canvassed by Mr. Gopal Subramani....
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....Court be set aside. 39. In the last, the learned Senior counsel prayed that in so far as the rate of interest is concerned this Court may modify the same accordingly with a view to balance the equities between the parties. F. SUBMISSIONS ON BEHALF OF THE RESPONDENT 40. Mr. Shyam Divan the learned Senior Counsel appearing for the respondent broadly submitted the following: a. No error not to speak of any error of law could be said to have been committed by the High Court in passing the impugned judgment and order. b. The four sets of concurrent findings encompass various issues such as the enforceability of the contractual rate of interest, limitation, inapplicability of Section 80 of the Negotiable Instruments Act, 1881("NI Act"), Joint and Several Liability of Drawer and Drawee, inapplicability of Section 64 of the NI Act to the facts of the present case, inapplicability of the Usurious Loans Act, 1918 etc. c. It is a settled law that when an arbitral award has been affirmed by the Court under Section 34, and thereafter, by the Court in an appeal under Section 37 then this Court in exercise of its jurisdiction under Article 136 of the Constituti....
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....st. n. The arbitrator's jurisdiction to grant pendente lite/pre award interest is governed strictly by the contract between the parties. In this regard, reliance was placed on the decisions of this Court in the case of State of Haryana v. S.L. Arora reported in (2010) 3 SC 690 and in the case of Delhi Airport Metro Express (supra) para 20 respectively. o. The principle of unconscionability is inapplicable to voluntary commercial agreements between the parties of equal bargaining strength. p. Clauses providing for compounding of interest in commercial contracts voluntarily entered into between the parties are not violative of Public policy. In this regard, reliance was placed on the decision of this Court in the case of Renusagar Power Company Limited v. General Electric Company reported in 1994 Supp (1) SCC 644 at 693 para 93. 41. In such circumstances referred to above, it was prayed by the learned Senior counsel appearing for the respondent that there being no merit in this appeal, the same may be dismissed. G. ANALYSIS 42. Before adverting to the rival submissions canvassed on either side, we must look into few pieces of documentary evidence o....
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....verdue bill discounting charges/interest or any part thereof on its due date, the concessional rate will be withdrawn and the normal rate of bill discounting charges of 36% p.a. monthly rests, shall be payable by the Drawee/Drawer from its due date. Margin @3% p.m. for 3 days shall be deducted at the time of discounting, to be adjusted against delays in repayment, if any. 5. The repayment on the due date will be made to us by way of crossed cheque/Demand Draft payable at New Delhi of high value, clearing. Any amount paid under any Bill of Exchange by the Drawer and/ or Drawee shall be first adjusted towards overdue charges/interest, costs and expenses and other facilities, if any, and then towards the amount of Bill of Exchange. 6. In the event of any amount remaining overdue or any hundi/bill of exchange under this facility, neither of the Drawer and Drawee shall without the prior written permission of the Discounting Company pass any resolution for its winding up for its amalgamation/merger or otherwise or for amalgamation/merger of any other Company into the Drawer or Drawee: enter directly or indirectly into any new area/field of business/operation or dispose ....
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.... Arbitration of a Sole Arbitrator appointed by Chairman of Morgan Securities and Credits Private Limited, who would also have right to appoint alternate Arbitrator in place of the aforesaid Arbitrator, in case of his death or being incapable or refusal to act or in the event of termination of his mandate for any reason. The arbitration proceedings shall be held at New Delhi. The power of the Chairman to appoint a sole Arbitrator shall not be challenged by any party. Further, the parties agree that the Arbitrator be appointed may be an employee and/or professional retainer and/or a person who has a relation or interest in the company. The parties agree not to ask for any adjournment except under extra-ordinary reasons We reserve the right to modify, add or delete any of the terms and conditions mentioned in this letter at any time for which due notice will be given to you. Kindly furnish the above documents/papers at an early date with a letter of acceptance to the terms and conditions of this sanction letter by you and the drawee. We look forward to a continuous business relationship and assure you of our prompt services at all times. Thanking yo....
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....py of the Board Resolution authorizing to draw documents/acceptance of Bill Discounting facility and authorization of persons to sign for and on behalf of Drawer & Drawee Company. viii) Certified true copy of the Resolution passed u/S. 293(1)(d) of the Companies Act, 1956 of the drawee company and an undertaking that the total borrowing has not exceeded. ix) Mode of Operation of Bank Account of Drawer & Drawee Company. x) Names and Residential addresses of Director of Drawer & Drawee Company. xi) Comfort letter along with PDC of Electronic Research Limited guaranteeing repayment of amount due. Kindly furnish the above documents/papers at an early date with a letter of your acceptance. The Drawee/Drawer agrees with the lender that normal rate for providing Bill Discounting facility is 36% p.a. however, as a special case the lender is providing this Bill Discounting facility at concessional rate of 22.5% p.a. payable upfront. In case of delay or default in making payment of principal or overdue bill discounting charges/interest or any party thereof on its due date, the concessional rate will be withdrawn and the normal rate of bill discoun....
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....ereof on its due date, the concessional rate will be withdrawn and the normal rate of bill discounting charges of 36% p.a. monthly rests, shall be payable by the Drawee/Drawer from its due date. Margin @3% p.m. for 3 days shall be deducted at the time of discounting, to be adjusted against delays in repayment, if any." (Emphasis supplied) 46. Clause 4 can be divided into three parts. First, the Drawer and Drawee agreed that the normal rate for providing Bill Discounting facility would be 36% p.a. The second part provides that as a special case the discounting company, i.e., the respondent herein would provide the Bill Discounting facility at the concessional rate of 22.5% p.a. payable upfront and the third part provides that in the event of delay or default, in making payment of amount of the Bill of Exchange or overdue bill discounting charges/interest or any part thereof on its due date, the concessional rate would be withdrawn and the normal rate of bill discounting charges of 36% p.a., monthly rest would be payable by the Drawer/Drawee from its due date. The margin at the rate of 3% per month for three days would be deducted at the time of discounting to be adjusted....
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....ave been very succinctly explained by this Court in a very recent pronouncement in the case of HLV Limited v. PBSAMP Projects Pvt. Limited : 2025 INSC 1148. We may clarify that in HLV Limited (supra) the court was concerned with pre-amended Section 31(7)(b) of the Act, 1996. However, in the case on hand, we are not concerned with Section 31(7)(b) but rather with sub clause (a) of the Act, 1996. 52. We must look into Section 31(7) of the Act, 1996 which reads thus: "31. Form and contents of arbitral award. **(7)(a) Unless otherwise agreed by the parties, where and insofar as an arbitral award is for the payment of money, the Arbitral Tribunal may include in the sum for which the award is made interest, at such rate as it deems reasonable, on the whole or any part of the money, for the whole or any part of the period between the date on which the cause of action arose and the date on which the award is made. (b) A sum directed to be paid by an arbitral award shall, unless the award otherwise directs, carry interest at the rate of two per cent. higher than the current rate of interest prevalent on the date of award, from the date of award to the date of payment." ....
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.... not grant interest; but if it grants interest, it would be included in the "sum" which is awarded by the Arbitral Tribunal." 55. Insofar clause (b), as it stood at the relevant time is concerned, i.e., pre-amended it provides for award of interest by the arbitral tribunal on the 'sum' adjudged under clause (a). It says that 'unless the award otherwise directs', a sum directed to be paid by an award shall carry interest at the rate of 18% per annum from the date of the award to the date of payment. In other words, clause (b) is subject to the interest that may be awarded by the arbitral tribunal. This provision was explained in S.A. Builders (supra) in the following manner: "36.4. This brings us to the second part i.e. clause (b) which deals with post-award interest. The "sum" directed to be paid by the Arbitral Tribunal shall, unless the award otherwise directs, carry interest @ 18% p.a. from the date of the award to the date of payment. Thus, what clause (b) provides for is that the Arbitral Tribunal may award interest on the "sum" adjudged under clause (a). But if no such interest is awarded, then there shall be interest @ 18% on the "sum" awarded by the Arbitral Tri....
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....t on interest from the date of the award? In the facts of that case, the consequential question formulated was as to whether the arbitral award granted future interest from the date of award, only on the principal amount found due to the respondent or on the aggregate of the principal and interest up to the date of the award? After an analysis of the aforesaid provision, the Bench observed that Section 31(7) makes no reference to payment of compound interest or payment of interest upon interest. It was held that in the absence of any provision for interest upon interest in the contract, arbitral tribunals do not have the power to award interest upon interest or compound interest either for the pre-award period or for the post-award period. It was held thus: "18. Section 31(7) makes no reference to payment of compound interest or payment of interest upon interest. Nor does it require the interest which accrues till the date of the award, to be treated as part of the principal from the date of award for calculating the post-award interest. The use of the words "where and insofar as an arbitral award is for the payment of money" and use of the words "the Arbitral Tribunal may....
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....ntitled to interest at 18% per annum on the principal amount awarded, from the date of award till the date of payment. The calculation that was made in the execution petition as originally filed was correct and the modification by the respondent increasing the amount due under the award was contrary to the award." 59. The correctness of the view taken in S.L. Arora (supra) came up for consideration before a three-Judge Bench of this Court in Hyder Consulting (UK) Limited v. Governor, State of Orrisa reported in (2015) 2 SCC 189. The majority held that the conclusion reached in S.L. Arora (supra) was not in consonance with the clear language of Section 31(7) of the Act, 1996. After extracting Section 31(7) of the Act, 1996 the Bench explained clause (a) of sub-section (7) of Section 31 in the following manner: "4. Clause (a) of sub-section (7) provides that where an award is made for the payment of money, the Arbitral Tribunal may include interest in the sum for which the award is made. In plain terms, this provision confers a power upon the Arbitral Tribunal while making an award for payment of money, to include interest in the sum for which the award is made on either ....
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...., it is apparent that vide clause (a) of sub-section (7) of Section 31 of the Act, Parliament intended that an award for payment of money may be inclusive of interest, and the "sum" of the principal amount plus interest may be directed to be paid by the Arbitral Tribunal for the pre-award period. Thereupon, the Arbitral Tribunal may direct interest to be paid on such "sum" for the post-award period vide clause (b) of subsection (7) of Section 31 of the Act, at which stage the amount would be the sum arrived at after the merging of interest with the principal; the two components having lost their separate identities." 62. The question as to whether the 'sum' awarded under clause (a) of sub-section (7) of Section 31 of the Act, 1996 would include interest pendente lite or not again came up for consideration before a two-Judge Bench of this Court in Delhi Airport Metro Express Private Limited (supra). The Bench analysed Hyder Consulting (supra) in the following manner: "15. It could thus be seen that the majority view of this Court in Hyder Consulting (UK) is that the sum awarded may include the principal amount and such interest as the Arbitral Tribunal deems fit. It is f....
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....st would operate if it is not otherwise agreed by the parties. If there is an agreement between the parties to the contrary, the arbitral tribunal would lose its discretion to award interest and will have to be guided by the agreement between the parties. Thus, the expression 'unless otherwise agreed by the parties' assumes significance and concluded as under: "20. If clause (a) of sub-section (7) of Section 31 of the 1996 Act is given a plain and literal meaning, the legislative intent would be clear that the discretion with regard to grant of interest would be available to the Arbitral Tribunal only when there is no agreement to the contrary between the parties. The phrase "unless otherwise agreed by the parties" clearly emphasises that when the parties have agreed with regard to any of the aspects covered under clause (a) of sub-section (7) of Section 31 of the 1996 Act, the Arbitral Tribunal would cease to have any discretion with regard to the aspects mentioned in the said provision. Only in the absence of such an agreement, the Arbitral Tribunal would have a discretion to exercise its powers under clause (a) of subsection (7) of Section 31 of the 1996 Act. The discre....
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....he words 'unless the award otherwise directs' occurring in clause (b) only qualifies the rate of post-award interest. 68. In line with the Delhi Airport Metro Express Private Limited (supra) we have to our advantage one recent pronouncement of this Court in the case of PAM Developments Private Limited v. State of West Bengal and Another reported in (2024) 10 SCC 715 wherein this Court observed thus: "23.3. Under the 1996 Act, the power of the arbitrator to grant interest is governed by the statutory provision in Section 31(7). This provision has two parts. Under clause (a), the arbitrator can award interest for the period between the date of cause of action to the date of the award, unless otherwise agreed by the parties. Clause (b) provides that unless the award directs otherwise, the sum directed to be paid by an arbitral award shall carry interest @ 2% higher than the current rate of interest, from the date of the award to the date of payment. 23.4. The wording of Section 31(7)(a) marks a departure from the Arbitration Act, 1940 in two ways : first, it does not make an explicit distinction between pre-reference and pendente lite interest as both of them are ....
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.... interest once agreed and forms part of a written contract between the parties the borrower after availing the finance cannot turn around and question the rate on the ground of being unconscionable or opposed to Public policy. 71. The words of Justice Burrough aptly justify the unpredictability of the interpretation of the term 'public policy'. He says, "Public Policy is an unruly horse where once you stride on it you do not know where it's going to take you." 72. When Justice Burrough said in Richardson v. Mellish, a famous 1824 English case: "Public is an unruly horse," he gave us a definition both original and witty, but one which does not help us much to clearly understand the meaning of the term. "Public policy is in its nature so uncertain and fluctuating, varying with the habits and fashions of the day, with the growth of commerce and the usages of trade, that it is difficult to determine its limits with any degree of exactness. It has never been defined by the courts, but has been let loose and free from definition in the same manner as fraud. 73. Public policy is dictated by the law-making power the legislature, and is found in the general tenor of statutes, and i....
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....ally uphold a contractual remedy where the adverse impact of that remedy significantly exceeds the innocent party's legitimate interest. 79. Lords Neuberger and Sumption also described the penalty rule as "an ancient, haphazardly constructed edifice which has not weathered well" but maintained that the penalty rule should not be abolished in light of its endorsement by and application across all major systems of law in the western world. 80. The court went on to conclude that neither clause 5.1 nor clause 5.6 respectively were unenforceable penalty clauses. 81. The court construed clause 5.1 as a price adjustment clause. It went on to explain that the relevant clause was not a secondary provision but a primary obligation. The sellers earn consideration for their shares by (amongst other things) observing the restrictive covenants. Whilst clause 5.1 had no relationship with the measure of loss attributable to the breach, Cavendish also had a legitimate interest in the observance of the restrictive covenants, in order to protect the goodwill of the Group generally. The goodwill of the business was critical to Cavendish and the loyalty of Mr Makdessi was critical to the goodw....
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....is common law rule": Robophone Facilities Ltd v Blank [1966] 1 WLR 1428, 1446. The task is no easier today. But unless the rule is to be abolished or substantially extended, its application to any but the clearest cases requires some underlying principle to be identified. Equitable origins 4. The penalty rule originated in the equitable jurisdiction to relieve from defeasible bonds. These were promises under seal to pay a specified sum of money, subject to a proviso that they should cease to have effect on the satisfaction of a condition, usually performance of some other ("primary") obligation. By the beginning of the 16th century, the practice had grown up of taking defeasible bonds to secure the performance obligations sounding in damages. This enabled the holder of the bond to bring his action in debt, which made it unnecessary for him to prove his loss and made it possible to stipulate for substantially more than his loss. The common law enforced the bonds according to their letter. But equity regarded the real intention of the parties as being that the bond should stand as security only, and restrained its enforcement at common law on terms that the debtor p....
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....ed on the bond, but execution was stayed upon payment of the assessed damages. The Administration of Justice Act 1705 (4 & 5 Anne c 16) allowed the defendant in an action on the bond to pay the amount of the actual loss, together with interest and costs, into court, and rely on the payment as a defence. These statutes were originally framed as facilities for plaintiffs suing on bonds. But by the end of the 18th century the common law courts had begun to treat the statutory procedures as mandatory, requiring damages to be pleaded and proved and staying all further proceedings on the bond: see Roles v Rosewell (1794) 5 TR 538, Hardy v Bern (1794) 5 TR 636. The effect of this legislation was thus to make it unnecessary to proceed separately in chancery for relief from the penalty and in the courts of common law for the true loss. As a result, the equitable jurisdiction was rarely invoked, and the further development of the penalty rule was entirely the work of the courts of common law. 7. It developed, however, on wholly different lines. The equitable jurisdiction to relieve from penalties had been closely associated with the jurisdiction to relieve from forfeitures which dev....
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....ease" so that "if they have made an improvident bargain they must take the consequences". But Bramwell B (at p 511) appeared to have no such reservations. 9. The distinction between a clause providing for a genuine pre-estimate of damages and a penalty clause has remained fundamental to the modern law, as it is currently understood. The question whether a damages clause is a penalty falls to be decided as a matter of construction, therefore as at the time that it is agreed: Public Works Comr v Hills [1906] AC 368, 376; Webster v Bosanquet [1912] AC 394; Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd [1915] AC 79, at pp 86-87 (Lord Dunedin); and Cooden Engineering Co Ltd v Stanford [1953] 1 QB 86, 94 (Somervell LJ). This is because it depends on the character of the provision, not on the circumstances in which it falls to be enforced. It is a species of agreement which the common law considers to be by its nature contrary to the policy of the law. One consequence of this is that relief from the effects of a penalty is, as Hoffmann LJ put it in Else (1982) Ltd v Parkland Holdings Ltd [1994] 1 BCLC 130, 144, "mechanical in effect and involves no exercise of discre....
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....r by statute nor on general principles of equity is a lessor's right of re-entry or a mortgagee's right of sale or foreclosure treated as being by its nature contrary to the policy of the law. What equity (and, where it applies, statute) typically considers to be contrary to the policy of the law is the enforcement of such rights in circumstances where their purpose, namely the performance of the obligations in the lease or the mortgage, can be achieved in other ways - normally by late substantive compliance and payment of appropriate compensation. The forfeiture or foreclosure/power of sale is therefore enforceable, equity intervening only to impose terms. These will generally require the lessee or mortgagor to rectify the breach and make good any loss suffered by the lessor or mortgagee. If the lessee or mortgagee cannot or will not do so, the forfeiture will be unconditionally enforced - although perhaps not invariably (see per Lord Templeman in Associated British Ports v CH Bailey plc [1990] 2 AC 703, 707-708 in the context of section 146, and, more generally, the judgments in Cukurova Finance International Ltd v Alfa Telecom Turkey Ltd (No 3) [2013] UKPC 20, [2015] 2 WLR 875).....
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....eatment of penal defeasible bonds as secondary obligations or, as Lord Thurlow LC put it in 1783 in Sloman as "collateral" or "accessional" to the primary obligation. And it provided the whole basis of the classic distinction made at law between a penalty and a genuine pre-estimate of loss, the former being essentially a way of punishing the contract-breaker rather than compensating the innocent party for his breach. We shall return to that distinction below. 14. This means that in some cases the application of the penalty rule may depend on how the relevant obligation is framed in the instrument, i.e., whether as a conditional primary obligation or a secondary obligation providing a contractual alternative to damages at law. Thus, where a contract contains an obligation on one party to perform an act, and also provides that, if he does not perform it, he will pay the other party a specified sum of money, the obligation to pay the specified sum is a secondary obligation which is capable of being a penalty; but if the contract does not impose (expressly or impliedly) an obligation to perform the act, but simply provides that, if one party does not perform, he will pay the o....
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....o become the absolute property of the vendor does not fall within the penalty rule", although, he added that it was "subject ... to the jurisdiction for relief against forfeiture". 17. The relationship between penalty clauses and forfeiture clauses is not entirely easy. Given that they had the same origin in equity, but that the law on penalties was then developed through common law while the law on forfeitures was not, this is unsurprising. Some things appear to be clear. Where a proprietary interest or a "proprietary or possessory right" (such as a patent or a lease) is granted or transferred subject to revocation or determination on breach, the clause providing for determination or revocation is a forfeiture and cannot be a penalty, and, while it is enforceable, relief from forfeiture may be granted: see BICC plc v Burndy Corpn [1985] Ch 232, 246-247 and 252 (Dillon LJ) and The "Scaptrade", pp 701-703, (Lord Diplock). But this does not mean that relief from forfeiture is unavailable in cases not involving land - see Cukurova Finance International Ltd v Alfa Telecom Turkey Ltd (No 2) [2013] UKPC 2, [2015] 2 WLR 875, especially at paras 92-97, and the cases cited there. ....
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.... damage, are in intention and effect what Professor Bell calls 'instruments of restraint', and in that sense penal. But the clear presence of this does not in the least degree invalidate the stipulation. The question remains, had the respondents no interest to protect by that clause, or was that interest palpably incommensurate with the sums agreed on? It seems to me that to put this question, in the present instance, is to answer it." 21. Dunlop arose out of a contract for the supply of tyres, covers and tubes by a manufacturer to a garage. The contract contained a number of terms designed to protect the manufacturer's brand, including prohibitions on tampering with the marks, restrictions on the unauthorised export or exhibition of the goods, and on resales to unapproved persons. There was also a resale price maintenance clause, which would now be unlawful but was a legitimate restriction of competition according to the notions prevailing in 1914. It was this clause which the purchaser had broken. The contract provided for the payment of GBP5 for every tyre, cover or tube sold in breach of any provision of the agreement. Once again, the provision was held to be a valid l....
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....tituted a penalty than did Lord Dunedin. More generally, the other members of the Appellate Committee gave their own reasons for concurring in the result, and they also repay consideration. For present purposes, the most instructive is that of Lord Atkinson, who approached the matter on an altogether broader basis. 23. Lord Atkinson pointed (pp 90-91) to the critical importance to Dunlop of the protection of their brand, reputation and goodwill, and their authorised distribution network. Against this background, he observed (pp 91-92): "It has been urged that as the sum of GBP5 becomes payable on the sale of even one tube at a shilling less than the listed price, and as it was impossible that the appellant company should lose that sum on such a transaction, the sum fixed must be a penalty. In the sense of direct and immediate loss the appellants lose nothing by such a sale. It is the agent or dealer who loses by selling at a price less than that at which he buys, but the appellants have to look at their trade in globo, and to prevent the setting up, in reference to all their goods anywhere and everywhere, a system of injurious undercutting. The object of the appel....
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....p a wider interest in enforcing the damages clause than pecuniary compensation. GBP5 per item was not incommensurate with that interest even if it was incommensurate with the loss occasioned by the wrongful sale of a single item. 24. Although the other members of the Appellate Committee did not express themselves in the same terms as Lord Atkinson, their approach was entirely consistent with his. Lord Parker at p 97 said that "whether the sum agreed to be paid on the breach is really a penalty must depend on the circumstances of each particular case", and at p 99, echoing Lord Atkinson's fuller treatment of the point, as just set out, he described the damage which would result from any breach as "consisting in the disturbance or derangement of the system of distribution by means of which [Dunlop's] goods reach the ultimate consumer". In their speeches, Lord Dunedin (p 87), Lord Parker (p 98) and Lord Parmoor (p 103) ultimately were content to rest their decision that the GBP5 was not a penalty on the ground that an exact pre-estimate of loss was impossible, whereas, in the passages quoted above, Lord Atkinson analysed why that was so. It seems clear that the actual result ....
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....fiable, provided always that its dominant purpose was not to deter the other party from breach." 27. Colman J's approach was approved by Mance LJ, delivering the leading judgment in the Court of Appeal in Cine Bes Filmcilik ve Yapimcilik v United International Pictures [2004] 1 CLC 401, para 13. A similar view was taken by Arden LJ in Murray v Leisureplay plc [2005] IRLR 946, para 54, where she posed the question "Has the party who seeks to establish that the clause is a penalty shown that the amount payable under the clause was imposed in terrorem, or that it does not constitute a genuine pre-estimate of loss for the purposes of the Dunlop case, and, if he has shown the latter, is there some other reason which justifies the Page 14 discrepancy between [the amount payable under the clause and the amount payable by way of damages in common law]?" (emphasis added). She considered that the clause in question had advantages for both sides, and pointed out that no evidence had been adduced to show that the clause lacked commercial justification: see paras 70-76. But Buxton LJ put the matter on a wider basis for which Clarke LJ (para 105) expressed a preference....
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....ord Hoffmann). However, while we have misgivings about some aspects of their reasoning, these aspects are peripheral to the essential point which Colman J and Buxton LJ were making, and we consider that their emphasis on justification provides a valuable insight into the real basis of the penalty rule. It is the same insight as that of Lord Robertson in Clydebank and Lord Atkinson in Dunlop. A damages clause may properly be justified by some other consideration than the desire to recover compensation for a breach. This must depend on whether the innocent party has a legitimate interest in performance extending beyond the prospect of pecuniary compensation flowing directly from the breach in question. 29. The availability of remedies for a breach of duty is not simply a question of providing a financial substitute for performance. It engages broader social and economic considerations, one of which is that the law will not generally make a remedy available to a party, the adverse impact of which on the defaulter significantly exceeds any legitimate interest of the innocent party. In the famous case of White & Carter (Councils) Ltd v McGregor [1962] AC 413, Lord Reid observed....
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....ctations of the party entitled to performance": Co-operative Insurance Society Ltd v Argyll Stores (Holdings) Ltd [1998] AC 1, 15. 31. In our opinion, the law relating to penalties has become the prisoner of artificial categorisation, itself the result of unsatisfactory distinctions: between a penalty and genuine pre-estimate of loss, and between a genuine pre-estimate of loss and a deterrent. These distinctions originate in an over-literal reading of Lord Dunedin's four tests and a tendency to treat them as almost immutable rules of general application which exhaust the field. In Legione v Hateley (1983) 152 CLR 406, 445, Mason and Deane JJ defined a penalty as follows: "A penalty, as its name suggests, is in the nature of a punishment for non-observance of a contractual stipulation; it consists of the imposition of an additional or different liability upon breach of the contractual stipulation ..." All definition is treacherous as applied to such a protean concept. This one can fairly be said to be too wide in the sense that it appears to be apt to cover many provisions which would not be penalties (for example most, if not all, forfeiture clauses). How....
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....was reflected in the result in Dunlop. And it is recognised in the more recent decisions about commercial justification. And, as Lord Hodge shows, it is the principle underlying the Scottish authorities. 33. The penalty rule is an interference with freedom of contract. It undermines the certainty which parties are entitled to expect of the law. Diplock LJ was neither the first nor the last to observe that "The court should not be astute to descry a 'penalty clause'": Robophone at p 1447. As Lord Woolf said, speaking for the Privy Council in Philips Hong Kong Ltd v Attorney General of Hong Kong (1993) 61 BLR 41, 59, "the court has to be careful not to set too stringent a standard and bear in mind that what the parties have agreed should normally be upheld", not least because "any other approach will lead to undesirable uncertainty especially in commercial contracts". 34. Although the penalty rule originates in the concern of the courts to prevent exploitation in an age when credit was scarce and borrowers were particularly vulnerable, the modern rule is substantive, not procedural. It does not normally depend for its operation on a finding that advantage was taken ....
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....deposit has been 10%" and "[a] vendor who seeks to obtain a larger amount by way of forfeitable deposit must show special circumstances which justify such a deposit", which the appellant vendor in that case failed to do. Should the penalty rule be abrogated? 36. The primary case of Miss Smith QC, who appeared for Cavendish in the first appeal, was that the penalty rule should now be regarded as antiquated, anomalous and unnecessary, especially in the light of the growing importance of statutory regulation in this field. It is the creation of the judges, and, she argued, the judges should now take the opportunity to abolish it. There is a case to be made for taking this course. It was expounded with considerable forensic skill by Miss Smith, and has some powerful academic support: see Sarah Worthington, Common Law Values: the Role of Party Autonomy in Private Law, in The Common Law of Obligations: Divergence and Unity (ed A Robertson and M Tilbury (2015)), pp 18-26. We rather doubt that the courts would have invented the rule today if their predecessors had not done so three centuries ago. But this is not the way in which English law develops, and we do not conside....
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....and the control of unfair terms under regulations 3 and 5 is limited to those which have not been individually negotiated. There are major areas, notably non-consumer contracts, which are not regulated by statute. Some of those who enter into such contracts, for example professionals and small businesses, may share many of the characteristics of consumers which are thought to make the latter worthy of legal protection. The English Law Commission considered penalty clauses in 1975 (Working Paper No 61, Penalty Clauses and Forfeiture of Monies Paid, April 1975), at a time when there was no relevant statutory regulation, and the Scottish Law Commission reported on them in May 1999 (Report No 171). Neither of these Reports recommended abolition of the rule. On the contrary, both recommended legislation which would have expanded its scope. 39. Further, although there are justified criticisms that can be made of the penalty rule, it is consistent with other well-established principles which have been developed by judges (albeit mostly in the Chancery courts) and which involve the court in declining to give full force to contractual provisions, such as relief from forfeiture, the....
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....oint was not appealed). In Andrews, the High Court of Australia disagreed. They engaged in a detailed historical examination of the equitable origin of the rule and concluded that there subsisted, independently of the common law rule, an equitable jurisdiction to relieve against any sufficiently onerous provision which was conditional upon a failure to observe some other provision, whether or not that failure was a breach of contract. At para 10, they defined a penalty as follows: "In general terms, a stipulation prima facie imposes a penalty on a party (the first party) if, as a matter of substance, it is collateral (or accessory) to a primary stipulation in favour of a second party and this collateral stipulation, upon the failure of the primary stipulation, imposes upon the first party an additional detriment, the penalty, to the benefit of the second party. In that sense, the collateral or accessory stipulation is described as being in the nature of a security for and in terrorem of the satisfaction of the primary stipulation. If compensation can be made to the second party for the prejudice suffered by failure of the primary stipulation, the collateral stipulation and....
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....ing with a rather different point (namely that discussed by Lord Atkin in the passage that follows). The third exception is the unsatisfactory decision in Jobson v Johnson [1989] 1 WLR 1026, to which we shall return in paras 84-87 below. It is relevant to add in this connection that the law of penalties has been held to be the same in England and Scotland: Stair Memorial Encyclopaedia of the Laws of Scotland, vol 15, paras 783-801, and see Clydebank. Yet equity, although influential, has never been a distinct branch of Scots law. In the modern law of both countries, the penalty rule is an aspect of the law of contract. Thirdly, the High Court's redefinition of a penalty is, with respect, difficult to apply to the case to which it is supposedly directed, namely where there is no breach of contract. It treats as a potential penalty any clause which is "in the nature of a security for and in terrorem of the satisfaction of the primary stipulation." By a "security" it means a provision to secure "compensation... for the prejudice suffered by the failure of the primary stipulation". This analysis assumes that the "primary stipulation" is some kind of promise, in which case its failure i....
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.... payment of money stipulated as in terrorem of the offending party" (Dunlop Pneumatic Tyre Co. Ltd. v. New Garage & Motor Co. Ltd. (1915) AC 79) or, if the clause's contractual nature is "deterrent rather than compensatory". On the other hand, a clause is said to be one of liquidated damages if it is a genuine endeavour by the parties to stipulate the loss arising out of the breach in advance. The nature of the clause would also depend on its construction and the encompassing circumstances during the time of entering into the contract or at the time of doing the material variation in the contract. 85. In the UK, the principles enunciated by Lord Dunedin in Dunlop (supra) were the guiding test for deciding whether a clause is in the nature of the penalty or not. It focused on the question of "whether the clause represents the genuine pre-estimate of loss or not". Over a period of time, the contracts have evolved and have become more complex, which questions the relevancy of the test. Cavendish Square (supra) emphasised that where a clause does not represent the genuine pre-estimate of loss, it cannot be regarded as penalty if there is "commercial justification" for it. The wo....
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....e paid at a greater rate during any period in which the borrower was in default. The learned Judge observed that simply because the provision for the payment of a sum in case of breach was not a "genuine pre-estimate of damages", it cannot be said to be a penalty clause. He further observed, ... no reason in principle why a contractual provision the effect of which was to increase the consideration payable under an executory contract upon the happening of a default should be struck down as a penalty if the increase could in the circumstances be explained as commercially justifiable, provided its dominant purpose was not to deter the other party from breach. 90. The UKSC in Cavendish (supra) unanimously felt the need for further refinement in the pre-Cavendish position. While rejecting the suggestion of total abolition of the pre-Cavendish position, it provided a reformed test applicable to the clauses which amount to the secondary obligation imposed on the contract breacher. It provided the test in two limbs: (a) Whether any "legitimate business interest" is protected by the clause (first limb)? (b) If so, is the provision made in the clause "exorbitant, extrav....
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....mber of damages remain unpaid, such as loss of productivity, lost opportunity, internal cost and non-monetary losses like emotional distress [Larry A. DiMatteo, Civil-Common Law Divergence on Penalties: Is it a Thing of the Past? (2022) 43 Liverpool Law Review 426]. 94. Critics have contended that the Dunlop test's endurance stems from the court's reluctance to cede its authority to make decisions [Mattei, Ugo, "The Comparative Law and Economic of Penalty Clauses in contract", (1995) 43 American Journal of comparative Law 427]. Having said that, the circumstances surrounding the contract's establishment are not completely meaningless. When parties are fairly informed, well-informed, and possess comparable or nearly equal bargaining power in a contract, a strong initial presumption should be that the parties are the best arbiters of what would be reasonable in the event of a breach of the agreement. The core ideas of contract law, "freedom of contract" and "pacta sunt servanda", are essential to the laissez-faire approach taken by the majority of common law jurisdictions worldwide. In order to ensure surety and certainty, this flexibility includes the right of the con....
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....ow a delivery schedule. In this case also, the Court again referred to Cavendish (supra) but ultimately relied on "the genuine pre-estimate of loss test" for deciding the nature of the clause. Lastly, in LIC Housing Finance Ltd. v. CST reported in 2019 SCC Online CESTAT 8290, the Customs Excise and Service Tax Appellate Tribunal again referred to Cavendish (supra) however did not discuss its implication on the case. Therefore, though the Indian courts have cited Cavendish (supra) but abstained from relying on the test. i. Cavendish embraced in foreign jurisdictions a. Australia 98. In Paciocco v. Australia and New Zealand Banking Group Ltd. reported in 2016 HCA 28, the High Court was asked to decide whether a bank's credit card late fees qualified as penalties under the applicable Act. The Court determined that the motive for the imposition of late payment fees was to make up for any potential loss that could arise from the failure to pay. Despite the fact that the fee did not accurately estimate the potential loss resulting from a specific violation due to the relatively small amount of late payment, the court determined that the charge did not qualify as a penalty. T....
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....r reasonable, is an attempt by the National Commission to constitute a new contract, which is impermissible in law. It is a settled canon of law, that a "contract, being a creature of an agreement between two or more parties, has to be interpreted giving literal meanings unless, there is some ambiguity therein. The contract is to be interpreted giving the actual meaning to the words contained in the contract and it is not permissible for the Court to make a new contract, however reasonable, if the parties have not made it themselves." [Rajasthan Sidic v. Diamond & Gem Development Corpn. Ltd., (2013) 5 SCC 470 : (2013) 3 SCC (Civ) 153] (Diamond & Gem Development Corpn. case [Rajasthan Sidic v. Diamond & Gem Development Corpn. Ltd., (2013) 5 SCC 470 : (2013) 3 SCC (Civ) 153], SCC p. 483, para 23) 73. In the present context, the preconditions of "deceptive practice" and "unfair method" are manifestly absent. The Banks have in no manner made any misrepresentation, to deceive the credit card holders. Upon availing the facility of the credit cards, the customers, are made aware of "the most important terms and conditions", including the rate of interest, that shall be c....
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....ntractual penalties are distinguished by the German legislation, known as the German Civil Code (BGB). In situations where the prescribed amount is "disproportionate and excessively high", Article 343 of the BGB requires a judicial reduction; nevertheless, it also states that the evaluation must take "every legitimate interest of the obligee, not merely his financial interest" into account. This evaluation follows the logic presented in Cavendish (supra). 104. The Cavendish rule gives greater autonomy to parties to define their relationship in comparison to Dunlop (supra) & party autonomy is one of the cardinal principles behind the evolution of the law of arbitration. In cases where the parties are of equal or comparable bargaining power, the interference by the arbitrator or Judges by declaring any clause of penalty merely on the basis of a reasonable pre-estimate of loss goes against the fundamental principle of party autonomy. The Scottish Law Commission Report has observed, "the Cavendish test is well-received by commercial law firms and professional bodies for being highly flexible and workable in terms of providing clear guidance as to future contract drafting" [Scottish ....
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....retated in such a way so as to save the clause rather than to render it invalid on the ground of being opposed to Public policy. 107. It is well settled that a contract is a commercial document between the parties, and it must be interpretated in such a manner so as to give efficacy to the contract rather than to invalidate it in the name of public policy, unconscionability etc. It is equally well settled principle that the terms of the contract executed between two parties, are not open to judicial scrutiny unless the same is arbitrary, discriminatory, mala fide or actuated by bias. The courts should not strike down the terms of a contract because it feels that some other terms would have been fair, wiser or logical. 108. The argument of the learned senior counsel for the appellant that the rate of interest or in other words, the clause providing for penalty on penalty is unconscionable, ex-proprietary and contrary to law also merits rejection because at no stage the appellant had questioned the terms on which the bill discounting facility was extended by the respondent. That apart, having enjoyed those facilities for a long time the appellant cannot turn around and raise an....
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....to pay a sum of money by a particular date with a condition that if the money is not paid on that date a larger sum shall be paid, that condition is in the nature of a penalty against which a Court of equity can grant relief and award to the party seeking payment only such damage as he has suffered by the non-performance of the contract. But if, on the other hand, there is an agreement to pay a particular sum followed by a condition allowing to the debtor a concession, for example, the payment of a lesser sum, or payment by instalments, by a particular date or dates, then the party seeking to take advantage of that concession must carry out strictly the conditions on which it was granted, and there is no power in the Court to relieve him from the obligation of so doing." (Emphasis supplied) 111. The Calcutta High Court in the case of Kulada Prosad Chowdhury v. Ramananda Pattanaik reported in AIR 1921 Cal 109 speaking through Justice Mookerjee exposited the legal position in the following words: "As regards the merits of the appeal, the contention is that the agreement for payment of interest is a penalty and should not have been enforced. The mortgage executed on the....
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.... Stanley, C.J., in Kutubuddin v. Bashiruddin [(1910) I.L.R. 32 All. 448.] and by White, C.J., in Abdul v. Rangiah [(1913) 1 Mad. L.W. 181.], the effect of a clause of this description is to encourage punctuality on the part of the debtor and there is no reason why the Courts in such circumstances should be astute to nullify the contract between the parties. We do not overlook that in the case of Shampeary Dassya v. Eastern Mortgage and Agency Co., Ltd. [(1917) 22 C.W.N. 226, 241-245.] the rule, though recognised and approved, was not applied but the decision in that case has, upon this point, been reversed by the Judicial Committee, Mati Lal v. The Eastern Mortgage and Agency Co.[(1920) 25 C.W.N. 265.]. The position then is that the rule as enunciated in Willing ford v. Mutual Society [(1880) 5 App. Cas. 685.] has now been adopted by the Judicial Committee. We hold accordingly that the agreement to accept interest at a reduced rate, on punctual payment, does not make the original rate of interest a penalty. We may add that reference was made to the decision of the Judicial Committee in the case of Sunder Koer v. Rai Sham Krishen [(1906) I.L.R. 34 Calc. 150.], but that was clearly a....
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.... the loan facilities. 25. In the case of Blue Jaggers Estates (supra), the Supreme Court had rejected the arguments raised by the respondents therein that the rate of interest was unconscionable, expropriatory and contrary to law since they had, at no stage, questioned the terms on which the loans/financial facilities were extended by the appellant bank (Indian Bank). The respondents therein had enjoyed the facilities for more than a decade and, therefore, the Court held that it was not open for them to raise such contentions at that stage. 26. The ratio decidendi of the said decision would, a fortiori, apply to the facts of the present case. In the present case, the arbitral tribunal had noted that the Society/Guarantors/affiliated companies, had entered into 42 loan transactions (other than the subject transactions) over a period of approximately 12 years and had discharged the liability in terms of the loan agreements (SEIL claims that the number is even larger and the Society/Guarantors/affiliated companies had availed of and repaid 47 loans between the year 2000 and 2012). The Society/Guarantors could not be permitted to challenge the terms of the loan agreem....
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.... 31. The cost of funds available to NBFCs engaged in lending high risk finance is also significantly higher and would in most cases also include significant component of proprietary funds." (Emphasis supplied) 114. As discussed above, the appellant was in need of finance and on its own will and volition approached the respondent for the same and knowingly entered into the bill discounting facility agreement. Had the appellant abided by the terms and conditions of repayment it could have availed facility of concessional rate as provided in the agreement, however, the appellant just shut its eyes and declined to make the payment for years together. In such circumstances the conditions stipulated in the agreement of compound interest at the rate of 36% monthly rest cannot be termed as burdensome or oppressive in any manner. 115. The grant of pendente lite interest depends upon the phraseology used in the agreement, clauses conferring power relating to arbitration, the nature of claim and dispute referred to the arbitrator, and on what items the power to award interest has been taken away and for which period. Also, the position under Section 31(7) of the 1996 Act,....
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....f the insured has created any ambiguity. This rule, however, only becomes operative where the words are truly ambiguous; it is a rule for resolving ambiguity and it cannot be invoked with a view to creating a doubt. Therefore, where the words used are free from ambiguity in the sense that, fairly and reasonably construed, they admit of only one meaning, the rule has no application." (Emphasis supplied) 121. The rule of contra proferentem thus protects the insured from the vagaries of an unfavourable interpretation of an ambiguous term to which it did not agree. The rule assumes special significance in standard form insurance policies, called contract d' adhesion or boilerplate contracts, in which the insured has little to no countervailing bargaining power. 122. As to what amounts to "ambiguity" is clarified in P Ramanatha Aiyar's Advanced Law Lexicon, which defines the term "ambiguous" as doubtful or uncertain, particularly in respect of signification; equivocal; indeterminate; indefinite; unsettled; indistinct. 123. Haris Marine (supra) arose out of an appeal against an order passed by the National Consumer Disputes Redressal Commission (NCDRC) dismissing a comp....
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....act is bilateral and has mutually been agreed upon as held in a number of judgments, including in Rashtriya Ispat Nigam Ltd. v. Dewan Chand Ram Saran reported in (2012) 5 SCC 306. 128. The true construction of a commercial contract must depend upon the import of the words used and not upon what the parties choose to say afterwards. Nor does subsequent conduct of the parties in the performance of the contract affect the true effect of the clear and unambiguous words used in the contract. The intention of the parties must be ascertained from the language they have used, considered in the light of the surrounding circumstances and the object of the contract. The nature and purpose of the contract is an important guide in ascertaining the intention of the parties. 129. In Ottoman Bank of Nicosia v. Ohanes Chakarian reported in AIR 1938 PC 26. Lord Wright made these weighty observations: (AIR p. 29) "... that if the contract is clear and unambiguous, its true effect cannot be changed merely by the course of conduct adopted by the parties in acting under it." (Emphasis supplied) 130. In Ganga Saran v. Ram Charan Ram Gopal (Firm) reported in 1951 SCC 1053 a four....
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....the due payment, by instalments, of a sum due, making the whole amount recoverable in the event of default in payment of any instalment was a stipulation by way of penalty. Rejecting the contention of the appellant that the provision was penal in nature Lord Selborne, L.C. observed thus at page 696: "The real matter seems to stand thus. These mortgage bonds were given to secure the GBP 6000, which sum was treated as advanced, although money did not pass, and also the premiums, which would become due by instalments according to the rules of the society; and the payment of which under those rules was liable to be accelerated, if any of the instalments were not punctually paid. I cannot think that such an acceleration of payments has anything in common with a penalty. It was a contract for certain payments which were debits in praesenti although solvenda in future; and, being such, it is consistent both with principle and with authority to hold, that if the party who ought to have paid them, or any of them, at the proper time failed to do so, the default was his own, and the time might lawfully be accelerated for the other payments which were originally deferred. I think, the....
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....ate of interest, is to be regarded as a stipulation for a penalty, to which s. 74 of the Indian Contract Act, 1872, is to be applied. It has also been held in India, and so far as we are aware, has been seldom doubted, that an agreement to pay a higher rate of interest from the date of the default in payment of a lower rate is a contract to be performed, and not a stipulation for a penalty to be relieved against, and that s. 74 of the Indian Contract Act, 1872, does not apply to such an agreement. The two propositions are clearly and concisely put in the judgment in Nanjappa v. Nanjappa reported in [12 M. 161 at pp. 166 and 167.]. Although the cases there put, like many of those in which this question has arisen, were cases in which a borrower had agreed to pay the principal money with certain interest on a given day, with a stipulation that a higher rate of interest should be paid if default were made, there cannot, as it appears to us, be any difference in principle between such cases and that which we are putting by way of illustration. In each case it is the stipulation as to a higher rate of interest, if it could be enforced, which would impose on the borrower the obl....
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....cified date to a man who lends his capital or part of it, was apparently overlooked by those who were responsible for the evolution of this doctrine of a penalty. The borrower might not have had notice when the contract was made of the loss or damage which might result to the lender by reason of the non-performance of the contract to pay at the due date, and consequently the damages for the breach of contract which could in such a case be legally awarded might prove to be an utterly inadequate compensation. A money-lender cannot now-a-days be regarded in the eye of the law, as formerly he may have been, as hostis humani generis, and as long as his contract is not unconscionable or tainted with fraud, we fail to see why the other contracting party should not be bound by it." (Emphasis supplied) 138. The dictum as laid in Banke Behari (supra) should be understood and applied, keeping in mind the nature of the transaction of bill discounting facility provided by the respondents to the appellant. M. CASE LAW RELIED UPON BY THE APPELLANT: 139. We looked into the decision of this Court in the case of Central Bank of India (supra) on which strong reliance has been placed....
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....y agreed terms of the contract entered into between the parties, the respondent herein was entitled to claim interest as per the terms of the contract, i.e., at the rate of 36% p.a. with monthly rest. iii. There is no merit worth the name in the contention raised on behalf of the appellant that no specific notice was issued to it by the respondent for withdrawal of the concessional rate of 22.50% p.a. No such plea had been taken either before the arbitrator or in the proceedings before the High Court under Section 34 and Section 37 of the Act, 1996 respectively. This aspect does not find mention even in any of the responses to the notice of arbitration dated 28.06.2007, issued by the respondent herein or even in the statement of defence before the arbitrator or in the pleadings under Section 34 and Section 37 of the Act, 1996 respectively wherein, the rate of interest at the rate of 36% p.a. with monthly rest stood firmly embedded in the claim amount/award amount. Even if, we have to accept the contention, the same deserves to be rejected as no prejudice could be said to have been caused to the appellant due to lack of such notice. iv. The discretion to grant inte....