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Arbitral tribunal’s award of interest is valid if the contract is silent about the rate of interest.
Introduction: In Oriental Structural Engineers Pvt. Ltd. v. State of Kerala[1], a division bench of the Supreme Court held that an arbitral tribunal's award of interest to a party in a contract (under the terms of which the rate of payment of interest is not expressly provided for) is valid unless the contract expressly excludes it. As a result, a tribunal's interest award cannot be overturned by the courts on the basis of "patent illegality."
Facts: The State of Kerala granted Oriental Structural Engineers Pvt. Ltd. (OSEPL) the contract for improving state roads (Contract) (Respondent). The contractor would be entitled to interest on late interim payments, according to the contract. OSEPL, on the other hand, left a slot blank to enter the actual amount of interest to be paid. The parties had a disagreement about the Respondent's late payment, which was finally submitted to arbitration. The arbitral panel ruled in favor of OSEPL by a majority decision, ordering the Respondent to pay interest calculated based on other terms in the Contract.
The Respondent's argument that the interest due on late payments had to be regarded as 'zero' or 'nil' in the lack of an actual number in the Contract was rejected by the tribunal. The tribunal based its judgment on the case of Secretary, Irrigation Department, Government of Orissa v. G.C. Roy, which found that a person who is deprived of money to which they are legally entitled must be paid, which might be in the form of interest or damages. Under Section 34 of the Arbitration and Conciliation Act of 1996, the State contested the arbitral judgment (Arbitration Act) on the grounds of patent illegality.
Decision: The Contract does not expressly prohibit the payment of interest on late payments, according to the Hon'ble Supreme Court. The Contract, on the other hand, allowed for the payment of interest on late payments. As a consequence, the Hon'ble Apex Court concluded that the parties had simply failed to agree on a particular rate of interest that would be charged if the debt was not paid on time. It was further noted that the High Court's judgment that OSPEL putting a blank at the spot for interest indicated that the interest would be nil or zero was not only faulty but also contradictory to the Contract itself. Such an interpretation would be tantamount to rewriting the Contract by depriving OSPEL of its entitlement to interest. If the parties had meant for no interest to be paid on the late payments, it would have been stated clearly in the Contract.
The Supreme Court ruled that the basic principle that controls interest payments is that they are primarily compensatory in character. As a consequence, since the Contract did not contain a provision barring interest payment on late payments, the tribunal was justified in awarding interest as a compensatory or equitable measure.
Conclusion: The Supreme Court has made it plain in the Oriental judgment that judicial authorities cannot intervene with a tribunal's award of interest when the contract does not clearly preclude payment of interest. Moving ahead, the scope of "patent illegality" has been considerably reduced in conflicts where the 2015 changes are inapplicable, promoting a pro-enforcement regime. Any interest award made by an arbitrator or arbitral tribunals shall be legal as long as the contract does not expressly prohibit payment of interest.
Links Referred:
[1] 2021 SCC OnLine SC 337.
(This Article Does Not Intend To Hurt The Sentiments Of Any Individual Community, Sect, or Religion, Etcetera. This Article Is Based Purely On The Authors Personal Views And Opinions In The Exercise Of The Fundamental Right Guaranteed Under Article 19(1)(A) And Other Related Laws Being Force In India, For The Time Being. Further, despite all efforts made to ensure the accuracy and correctness of the information published, White Code VIA Mediation and Arbitration Centre Foundation shall not be responsible for any errors caused due to human error or otherwise.)
- Facts
- Decision
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