Supreme Court Upholds Interest on Delayed Payments in Construction Contract: M/s. Oriental Structural Engineers Pvt. Ltd. vs. State of Kerala (22 April 2021)

Date of the Judgment: 22 April 2021

Citation: (2021) INSC 229

Judges: Surya Kant, J., Aniruddha Bose, J.

Can a contractor claim interest on delayed payments when their contract includes an interest clause but leaves the specific rate blank? The Supreme Court of India addressed this question in a dispute between M/s. Oriental Structural Engineers Pvt. Ltd. and the State of Kerala. The core issue revolved around whether the contractor was entitled to interest on delayed payments, specifically for the local currency component of their contract, when the interest rate was not explicitly specified in the agreement. The judgment was delivered by a two-judge bench comprising Justice Surya Kant and Justice Aniruddha Bose, with the opinion authored by Justice Aniruddha Bose.

Case Background

The State of Kerala awarded a contract to M/s. Oriental Structural Engineers Pvt. Ltd. for upgrading two stretches of a State Highway. The agreement was executed on 7th November 2002. Disputes arose concerning payments, particularly regarding interest on delayed payments in local currency. The contract included a mechanism for dispute resolution, beginning with a Disputes Review Board (DRB), and if unresolved, progressing to arbitration. Three specific disputes were referred to a three-member Arbitral Tribunal after failing resolution at DRB level. This appeal specifically concerns the dispute over interest on delayed payments in local currency.

Timeline

Course of Proceedings

The Arbitral Tribunal ruled in favor of the appellants, directing the payment of interest on delayed payments related to the local currency component. This was a majority decision, with one member dissenting. The State of Kerala challenged this award at the District Court at Ernakulam (Arbitration Court) under Section 34 of the Arbitration and Conciliation Act, 1996. The Arbitration Court partly allowed the State’s application, setting aside the Tribunal’s award on interest for delayed payments. The Kerala High Court’s Division Bench upheld the Arbitration Court’s decision. M/s. Oriental Structural Engineers Pvt. Ltd. then appealed to the Supreme Court.

Legal Framework

The core of the legal framework involves the interpretation of Clause 60.8 of the agreement, which addresses payment timelines and interest on delayed payments. Specifically, sub-clause 60.8(b) states, “In the event of the failure of the Employer to make payments within the time stated the Employer shall pay to the Contractor interest compounded monthly at the rate(s) stated in the Appendix to Bid upon all sums unpaid from the date upon which the same should have been paid in the currencies in which the payment are due.” The appendix to the bid included a section for specifying interest rates for local currency payments, which was left blank by the contractor. The Arbitration and Conciliation Act, 1996, particularly Section 34, which allows for setting aside arbitral awards under certain conditions, and Section 31(7)(a), which deals with the power of the Arbitral Tribunal to award interest, also form part of the legal framework.

Arguments

Appellant’s Arguments (M/s. Oriental Structural Engineers Pvt. Ltd.):

• The contract explicitly provided for interest on delayed payments, for both local and foreign currency components.
• The blank space in the “appendix to bid” for local currency interest rate cannot be interpreted as a waiver of interest.
• The letters dated 14th July 2004 and 3rd August 2004, where the appellant allegedly waived interest, were issued under coercion and were specific to Interim Payment Certificate I (IPC-I) only, and not a general waiver.
• The Tribunal correctly applied the principle that a person deprived of the use of money is entitled to compensation (interest), as established in Secretary, Irrigation Department, Government of Orissa & Ors. vs. G.C. Roy [(1992) 1 SCC 508].
• The Tribunal’s decision was based on factual findings and should not have been overturned by the lower courts.

Respondent’s Arguments (State of Kerala):

• The absence of a specified interest rate in the “appendix to bid” for local currency implied a “zero” or “nil” interest rate.
• The letters dated 14th July 2004 and 3rd August 2004 constituted a waiver of the contractor’s right to claim interest on delayed payments.
• The Tribunal’s award was in contravention of the terms of the contract, thereby falling under the “patent illegality” principle as per Oil Natural Gas Corporation Ltd. vs. Saw Pipes Ltd. [(2003) 5 SCC 705] and Associate Builders vs. Delhi Development Authority [(2015) 3 SCC 49].
• The State argued that the contractor’s bid might have been accepted due to the understanding that no interest would be claimed on delayed local currency payments, thus making their bid more competitive.

Submissions Table:

Issues Framed by the Supreme Court

The Supreme Court addressed the following issues:

1. Whether the Arbitral Tribunal’s award of interest on delayed payments for the local currency component was justified when the contract provided for interest but left the rate blank in the ‘appendix to bid’.
2. Whether the lower courts were correct in setting aside the Arbitral Tribunal’s award on the grounds of ‘patent illegality’ by misinterpreting the contract and the facts.

Treatment of the Issue by the Court

The following table demonstrates as to how the Court decided the issues

Authorities

The Supreme Court considered the following authorities:

Cases:

Legal Provisions:

• Section 34 of the Arbitration and Conciliation Act, 1996: This section deals with the grounds for setting aside an arbitral award.
• Section 31(7)(a) of the Arbitration and Conciliation Act, 1996: This provision allows the Arbitral Tribunal to award interest at a reasonable rate unless otherwise agreed by the parties.

Judgment

How each submission made by the Parties was treated by the Court?

How each authority was viewed by the Court?

• Secretary, Irrigation Department, Government of Orissa & Ors. vs. G.C. Roy [(1992) 1 SCC 508]: The Supreme Court followed this case, reiterating that a person deprived of the use of money is entitled to compensation, which may be termed as interest.
• Oil Natural Gas Corporation Ltd. vs. Saw Pipes Ltd. [(2003) 5 SCC 705]: The Court distinguished this case, stating that the Tribunal’s award did not fall under the “patent illegality” principle as defined in this case.
• Associate Builders vs. Delhi Development Authority [(2015) 3 SCC 49]: The Court distinguished this case, stating that the Tribunal’s award was not in contravention of the terms of the contract and therefore, not “patently illegal.”
• Union of India vs. Bright Power Projects (India) (P) Ltd. [(2015) 9 SCC 695]: The Court referred to this case to highlight that unless otherwise agreed, an Arbitral Tribunal can award interest at a reasonable rate.
• Reliance Cellulose Products Ltd. vs. ONGC Ltd. [(2018) 9 SCC 266]: The Court referred to this case to support the principle of awarding interest in arbitration matters.

What weighed in the mind of the Court?

The Supreme Court emphasized that the contract explicitly provided for interest on delayed payments, and the blank space for the interest rate could not be interpreted as a waiver or cancellation of this right. The Court also noted that the Tribunal’s interpretation of the contract was reasonable and that the lower courts had erred in setting aside the award. The principle that a person deprived of the use of money is entitled to compensation was a key factor. The Court also considered that the letters relied upon by the State did not constitute a general waiver of the right to interest.

Sentiment Analysis of Reasons Given by the Supreme Court:

Fact:Law Ratio:

Logical Reasoning:

The Court considered alternative interpretations, such as the argument that the blank space implied a zero-interest rate, but rejected this view as it was not supported by the contract’s overall intent. The Court also considered the argument that the contractor had waived their right to interest but found this argument unconvincing. The final decision was reached by upholding the Tribunal’s award, albeit with a modification on the interest rate.

The court held that the lower courts had erred in setting aside the Tribunal’s award. The Supreme Court stated that the Tribunal’s decision was based on a reasonable interpretation of the contract and the facts. The court also emphasized that the lower courts had effectively rewritten the contract by implying a zero-interest rate, which is impermissible.

The majority opinion was delivered by Justice Aniruddha Bose. There was no minority or dissenting opinion.

The Court’s reasoning was based on a careful analysis of the contract, the factual matrix, and the legal principles involved. The Court emphasized that the contract provided for interest on delayed payments and that the blank space for the interest rate did not negate this right. The Court also noted that the Tribunal’s interpretation was reasonable and that the lower courts had erred in overturning the award. The court also emphasized that the principle of compensation for deprivation of money was a key factor in its decision.

The implications of this judgment are that it clarifies the interpretation of contracts with missing details. It also reinforces the principle that a person deprived of the use of money is entitled to compensation, and that courts should not rewrite contracts. This judgment will likely influence future cases involving similar contractual disputes.

The Court did not introduce any new doctrines or legal principles but reiterated the existing principles on contract interpretation and the award of interest in arbitration matters. The Court analyzed the arguments for and against the Tribunal’s decision, ultimately concluding that the Tribunal’s award was correct, except for the rate of interest, which was modified.

The Court quoted the following from the judgment:

• “In the event of the failure of the Employer to make payments within the time stated the Employer shall pay to the Contractor interest compounded monthly at the rate(s) stated in the Appendix to Bid upon all sums unpaid from the date upon which the same should have been paid in the currencies in which the payment are due.”
• “A person deprived of the use of money to which he is legitimately entitled has a right to be compensated for the deprivation, call it by any name. It may be called interest, compensation or damages.”
• “An Arbitral Tribunal must decide in accordance with the terms of the contract, but if an arbitrator construes a term of the contract in a reasonable manner, it will not mean that the award can be set aside on this ground.”

Key Takeaways

• Contracts should be interpreted based on their explicit terms and intent.
• A blank space in a contract does not automatically imply a waiver of rights.
• Courts should not rewrite contracts or impose their own interpretations.
• A person deprived of the use of money is entitled to compensation (interest).
• Arbitral awards should be interfered with only in cases of clear illegality or perversity.
• This judgment reinforces the principle that interest is a form of compensation for the deprivation of the use of money.

Directions

The Supreme Court set aside the judgment of the Division Bench of the High Court of Kerala and the judgment of the Sixth Additional District Judge, Ernakulam. The Court sustained the Tribunal’s award regarding the payment of interest on delayed payments for the local currency component of the contract, but modified the rate of interest to 8% simple interest per annum.

Development of Law

The ratio decidendi of this case is that when a contract provides for interest on delayed payments but leaves the interest rate blank, it does not imply a waiver of interest. The contractor is entitled to a reasonable rate of interest on delayed payments. This judgment clarifies the interpretation of contract terms and reinforces the principle of compensation for deprivation of money. There is no change in the previous positions of law but it does clarify on the interpretation of contracts.

Conclusion

The Supreme Court’s judgment in M/s. Oriental Structural Engineers Pvt. Ltd. vs. State of Kerala upholds the principle that contractors are entitled to interest on delayed payments, even when the contract leaves the interest rate blank. The Court emphasized that a specific exclusion of interest is necessary to deny it and that lower courts should not rewrite contracts. The decision reinforces the compensatory nature of interest and the importance of adhering to contractual terms.