Delhi High Court
Turner Morrison Ltd. vs Rani Parvati Devi & Anr. on 14 May, 2020
Equivalent citations: AIR 2020 (NOC) 789 (DEL.), AIRONLINE 2020 DEL 753
Author: Jyoti Singh
Bench: Jyoti Singh
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* IN THE HIGH COURT OF DELHI AT NEW DELHI
% Reserved on: 23.12.2019
Pronounced on: 14.05.2020
+ O.M.P. (COMM) 50/2018 and I.A. 1568/2018
TURNER MORRISON LTD. ..... Petitioner
Through Mr. Dayan Krishnan, Sr. Advocate
with Mr. Lalit Gupta, Mr. Rishi
Agrawala, Ms. Niyati Kohli, Ms.
Aarushi T. and Mr. Siddharth
Arora, Advocates.
versus
RANI PARVATI DEVI & ANR. ..... Respondents
Through Mr. M. Dutta and Mr. Aditya
Guha, Advocates
CORAM:
HON'BLE MS. JUSTICE JYOTI SINGH
JUDGEMENT
1. Present petition has been filed under Section 34 of the Arbitration and Conciliation Act, 1996 (hereinafter referred to as the „Act‟) challenging a common Award dated 31.10.2017 passed in two Arbitrations, i.e. Arbitration-I and Arbitration-II (hereinafter referred to as „A-I‟ and „A-II‟ respectively). A-I is with respect to the Construction Agreement dated 11.12.1995 and A-II is with respect to Facilities and Maintenance Agreement dated 15.10.1999. By a common Award, the Arbitrator has rejected the claim of the Petitioner for interest on delayed payments under the Construction Agreement and interest on outstanding electricity service and other maintenance charges with respect to the OMP(COMM) 50/2018 Page 1 of 41 Maintenance Agreement. For the sake of convenience, the common Award is being referred to as „Award‟ hereinafter. Case of Turner Morrison Ltd. (TML) for Arbitration-I(A-I)
2. On 22.11.1995 a Perpetual Lease Deed was executed and registered between the President of India as lessor and Namgayal Institute for Research on Ladhaki Art and Culture (hereinafter referred to as „NIRLAC‟) for a plot of Nazul Land measuring 5324.40 sq. mtrs. bearing No. B-25, Qutub Institutional Area, New Delhi. In terms of the Lease Deed, NIRLAC was to complete construction of the building on the said plot within a period of two years. However, due to paucity of funds, NIRLAC was not in a position to construct and accordingly approached the Petitioner for raising the construction of the building within the prescribed two years.
3. Consequently, Turner Morrison Ltd. (hereinafter referred to as „TML‟) and NIRLAC entered into a Construction Agreement dated 11.12.1995, which contemplated that TML would obtain necessary approvals and permissions for construction and recover the cost of construction with interest on delayed payments from NIRLAC. Two relevant clauses of the Construction Agreement being 3.2(a) and 3.2(b) are extracted herein under:-
" ... 3.2 (a) It will be the obligation of the First Party to make payments to the Contractor in accordance with the Schedule of payment annexed hereto and in the event delay in any payment, the First Party shall pay interest @ 36% per annum on the delayed payment.OMP(COMM) 50/2018 Page 2 of 41
(b) That till the entire construction cost is paid by the First Party to the Second Party. The Second Party shall have a lien over the said land alongwith constructions thereon and in that event shall have full authority and power to -appropriate all its construction cost, interest and expenses by sale, transfer or lease of such constructed area so as to meet the outstanding liabilities of the First Party and in that event the First Party shall not raise any objection in any manner whatsoever...."
4. On the date of signing the Construction Agreement, NIRLAC entered into 10 separate unregistered Agreements to lease in respect of various portions of the proposed building, totaling to 48,000 sq.ft. with 10 different entities, for an initial block of 9 years, subsequently renewable for successive blocks of 9 years, each.
5. As per the Petitioner, the said arrangement was entered into, to enable NIRLAC to raise finances to meet the construction costs and each lessee would have accordingly paid the then agreed cost of construction @ Rs. 1200 per sq. ft. to NIRLAC. However, NIRLAC was unable to generate sufficient funds, thereby causing delay in making payments to TML in terms of Annexure-A of the Agreement, towards construction charges, costs and expenses, incurred by the Petitioner. As per the Petitioner, in view of the default of NIRLAC to make payments, the Petitioner acquired leasehold rights qua these Leases.
6. On 02.06.1997, TML and NIRLAC, also executed Supplemental Agreements agreeing that in the event of TML having to vacate the property due to action of NIRLAC or any Statutory body, NIRLAC will refund the Security Deposit and cost of construction with compound OMP(COMM) 50/2018 Page 3 of 41 interest. 10 Lease Agreements and separate Deeds of Assignment were also entered into, prior to the actual construction of the building. General Power of Attorneys dated 11.12.1995 and 04.03.1999 were executed by NIRLAC in favour of Petitioner‟s nominees to let out the constructed building and generate rental inflow which could be adjusted towards recovery of construction cost.
7. On completion of construction of the building, separate registered Tripartite Agreements to lease were entered into with different lessees with the knowledge and consent of NIRLAC. Petitioner was receiving the rent and adjusting the same towards construction cost from NIRLAC till 14.11.2006, on which date the property was sealed by the Municipal Corporation of Delhi (hereinafter referred to as „MCD‟).
8. In February, 1999, NIRLAC entered into two agreements dated 01.02.1999 and 15.02.1999 agreeing to forego Rs. 2.10 crores and Rs. 20 lacs respectively out of total security deposit payable by TML in regard to the 10 leases. Thus, NIRLAC received in all Rs. 3 crores as security deposit.
9. As per the Petitioner, construction of the buildings was completed by TML on 11.06.1999 and the MCD issued a completion certificate. The constructed area was 71,146 sq. ft. As per the Agreement, NIRLAC was thus liable to pay the construction cost @ Rs. 2000 sq. ft. i.e. Rs. 14.23 crores to TML along with interest on delayed payment. As per the Petitioner, as on 30.09.1999, NIRLAC owed a sum of Rs. 26.22 crores to TML.
10. On 01.05.2006, Delhi Development Authority cancelled the Perpetual Lease in favour of NIRLAC on the ground of alleged OMP(COMM) 50/2018 Page 4 of 41 unauthorized subletting to commercial organization and pursuant to this, the MCD sealed the property on 14.11.2006. This fact, according to the Petitioner, was concealed from it.
11. TML could no longer recover cost of construction etc. on account of leasing of the portions of the building and served a Demand Notice dated 20.01.2007 to pay the outstanding dues.
12. TML filed two separate petitions under Section 9 of the Act being OMP. Nos. 73/2007 and 117/2007 which were allowed by a common order dated 23.09.2009 and the order was upheld by the Division Bench in an appeal filed by NIRLAC. The Division Bench held that NIRLAC could not take undue advantage of the sealing action and upon de-sealing the physical possession of the property, except for the area which was to be in possession of NIRLAC, would have to be restored to TML. NIRLAC was restrained from occupying, encumbering and alienating the property.
Case of NIRLAC IN A-I
13. NIRLAC is a Registered Society engaged in providing social services to various Buddhist Tribes, in Ladakh, J&K and Himachal Pradesh. Rani Parvati Devi, the first Respondent is the erstwhile queen of the Royal family of Ladakh and President of NIRLAC. On the direction of Union of India, the Royal family transferred the Royal Palace of Ladakh, known as Khar Palace to UOI and presently the Palace houses a museum. As no compensation was paid for acquisition of Palace, a request was made to the Government to provide a plot in New Delhi and OMP(COMM) 50/2018 Page 5 of 41 this is how the plot in question was allotted to NIRLAC and a registered Perpetual Lease Deed was executed on 22.11.1995.
14. Paucity of funds led NIRLAC to approach TML for construction of the building at its cost. TML represented that NIRLAC need not pay the cost of construction and TML will incur the same and recover from the consideration received by leasing portions of the building constructed on the said plot. The proposal was accepted by NIRLAC and the parties executed a Construction Agreement, 10 Lease Agreements and 2 registered GPAs. On finding that the arrangement did not work out and the lessees did not pay the construction cost or the agreed security deposit, TMLL stepped into the shoes of TML, obtained assignment of the rights of the 10 Lessees in its favour and proceeded to construct the building at its own cost. It tendered part of the security deposit to NIRLAC, let out portions of the building and adjusted the rent towards construction cost.
15. NIRLAC contested the claim of TML for Rs. 631,22,44,00/- towards construction cost and interest thereon. NIRLAC claimed that TML was entitled to construction cost in regard to an area of 65100 sq. ft. @ Rs. 1200 per sq. ft. i.e. 7,81,20,000/- and opposed its liability to pay any interest on the ground that as per the arrangement, TML was to recover the construction cost from the lessees. For the reasons best known to the lessees and TML, the lessees did not pay the construction cost but assigned their rights. TML leased several portions of the premises and recovered a sum of Rs. 20,11,57,000/- as rent which is an undisputed fact, till the date of sealing. Since TML has recovered more than the construction cost, NIRLAC is in fact entitled to refund of the excess OMP(COMM) 50/2018 Page 6 of 41 amount and made a counter claim. NIRLAC also sought return of the Title documents by TML. The counter claims of NIRLAC were as under:-
"(a) Award against TML to pay a sum of Rs.48,79,69,241 to NIRLAC.
(b) Award pendente lite and future interest on the said sum.
(c) Direction to TML to provide/return the title deeds relating to the plot and the building thereon, to NIRLAC.
(d) Award costs and litigation expenses."
16. The learned Arbitrator framed the following questions in A-I:-
"(i) What is the construction cost recoverable by TML under the Construction Agreement? -
(a) What is the constructed area for which the cost of construction has to be paid by NIRLAC?
(b) What is the cost of construction per Sq.ft. to which TML is entitled?
(ii) Whether the construction cost due to TML is secured?
(iii) What is the rate of interest payable by NIRLAC to TML in respect of the construction cost?
(iv) Whether NIRLAC is not liable to pay the construction cost and consequently, not liable to pay interest?"
17. Learned Arbitrator in A-I rejected all the claims of TML and directed it to deliver back to NIRLAC the original Title Deeds of the plot and the building constructed thereon. All counter claims of NIRLAC were also rejected.
18. Learned senior counsel for the Petitioner firstly contends that the Arbitrator despite admitting and acknowledging that the Petitioner was entitled to recovery of the amounts under several Heads from the OMP(COMM) 50/2018 Page 7 of 41 Respondent, did not grant the Contractual rate of interest at 36% per annum, on the unpaid cost of construction under the Construction Agreement dated 11.12.1995. The Arbitrator has awarded only simple interest @ 7.5% per annum, reckoned only from 20.01.2007, by applying Usurious Loans Act, 1918, as against the contractual rate of interest. Learned senior counsel submits that in terms of Clause 3.2(b) of the Construction Agreement, in the event of Respondent‟s failing or refusing to make due payments, Petitioner had a right to lease out various portions of the property to recover its construction cost and interest. It is argued that in para 56 of the Award, the Arbitrator concludes that it is not disputed that construction cost would not be payable on the basis of actual cost incurred as the present contract was not an item rate contract where measurements is the basis of payment. Reliance is placed on para 57 of the Award where the Arbitrator concludes that while calculating the construction cost with reference to actual expenditure incurred, NIRLAC failed to take into account and make provision for profits and overhead.
19. Learned senior counsel contends that Petitioner‟s entitlement to the contractual rate of interest would be reckoned from the date when the respective instalments fell due, partly adjusted through apportionment of rent from the lessees. The 10 Unregistered Agreements to lease and the separate Deeds of Assignment were entered prior to actual construction of building and were never acted upon between the parties. It is submitted that the Arbitrator in para 80 (b) of the Award has clearly observed that if the cost was to be recovered from the lessees, Respondents have not explained the method of recovery of construction cost of areas retained by it and have not even given any reason for non-payment of the cost for OMP(COMM) 50/2018 Page 8 of 41 the said areas. In para 80 (e) the Arbitrator observes that if the cost was recoverable from the lessees only, there would have been no reason for the Agreement to provide for payment of cost by NIRLAC in 8 instalments or provide for payment of interest in case of delay in payment. In paras 82 & 83, the Arbitrator has itself concluded that the claim made by the Petitioner for recovery of the balance cost with interest is authorized and in accordance with the Agreement.
20. Per contra, learned counsel for the Respondents argues, at the outset, that the present Award is a well-reasoned and detailed Award requiring no interference by this Court under Section 34 of the Act. The jurisprudence pertaining to scope of judicial review under Section 34 of the Act is well settled. This Court does not enjoy powers of an Appellate Court while applying the Public Policy test. Reliance is placed on the judgments in the case of Associate Builders v. Delhi Development Authority (2015 3 SCC 49) and J.G. Engineers Private Limited v. Union of India & Anr. (2011 5 SCC 758). It is further argued that Arbitrator is the ultimate master of quantity and quality of evidence and a possible view by the Arbitrator has necessarily to pass muster. Counsel also relies on National Highways Authority of India v. JSC Centrodorstroy,[2016 12 SCC 592]. It is argued that the Arbitrator is entitled to take a view which he holds to be correct after considering the material before him and this has to be accepted as final and binding as held in Sumitomo Heavy Industries Limited v. ONGC Ltd. [2010 11 SCC 296]. It is further submitted that recently the Supreme Court in Chand Devi Daga and Ors. v. Manju K. Humatani and Ors. [2018 1 SCC 718] has reiterated that Public Policy ground means that the Award OMP(COMM) 50/2018 Page 9 of 41 should shock the conscience of the Court and not when the Court thinks it is unjust on the facts to substitute its view for that of the Arbitrator‟s view.
21. Without prejudice to the above, learned counsel for the Respondents submits that the challenge of the Petitioner to the Award under A-I is for interest for the period 01.10.1996 to 2007 along with the rate of interest on delayed payments. The Arbitrator after framing a question on this aspect proceeded to answer it by holding that the parties had simultaneously made an alternative arrangement for payment of construction cost, instead of NIRLAC having to pay. It was agreed that the 10 lessees would directly pay to TML. The plethora of documents placed on record as per the Arbitrator, demonstrated that from 11.12.1995 to 01.10.1999 both parties proceeded on the basis that Petitioner would recover the cost from the prospective lessees. In none of the Annual reports or balance sheets of TMLL or TML, NIRLAC was shown as a debtor for the construction cost. For the first time, after the sealing of the premises, the Petitioner raised a demand for payment of Rs. 217.95 crores, as due on 31.03.2006. The Arbitrator has, thus rendered a categorical finding that the Petitioner was liable to pay the cost and entitled to recover the same by use, occupation or rent. The change of stance by the Petitioner was noted by the Arbitrator and a host of other reasons indicated in para 80 of the Award, led the Arbitrator to come to a finding that there was no liability of NIRLAC. Likewise, it is argued that the execution of Power of Attorney indicated that the Petitioner kept the option of recovering the cost mentioned in Clause 3.2(b) open.
OMP(COMM) 50/2018 Page 10 of 4122. In so far as the rate of interest is concerned, it is argued that the Arbitrator has dealt with this aspect in detail. After analyzing the arguments and the Statutory provisions, the Arbitrator held that the Petitioner was not entitled to interest @ 36% per annum and the claim would be hit by Usurious Loans Act, 1918. Even though clause 3.2(a) provides for interest @ 36% per annum, the rate of interest will have to be reduced to 7.5% per annum.
23. Insofar as the question of the total constructed area for which TML is entitled to payment under the construction agreement is concerned, the Arbitrator agreed with the Petitioner and held that the area is 71,146 sq. feet. There is no challenge to this by the Respondent. Insofar as the question of cost of the construction on the said area is concerned, while the Petitioner claimed Rs. 2,000/- per sq. ft., NIRLAC contended that as per the contract, TML was entitled to only Rs. 1200/- per sq. ft. The Arbitrator concluded that the Petitioner would be entitled to Rs. 2,000/- per sq. ft. as cost of construction. There is no challenge to this part of the Award by the Respondent. In answer to the question posed by the Arbitrator as to what was the construction cost recoverable by the Petitioner, the Arbitrator held that the Petitioner was entitled to recover Rs.14,22,91,000/- as total cost of construction.
24. The controversy involved in the present case in A-I is with respect to the period and rate of interest payable by NIRLAC to TML in respect of the construction cost. In order to answer this question, the Arbitrator framed another question, i.e. whether the construction cost due to TML was secured. The Arbitrator relied on clause 3.2(c) of the construction agreement which reads as under :
OMP(COMM) 50/2018 Page 11 of 41"Clauses 3.2(c) of the Construction Agreement provides:
3.2(c). That further to secure the payments to be made to the Second Party the First Party shall deposit the original title deeds of the said property with the Second Party who shall retain the same as a security till the entire payment and entire construction cost and all the dues and expenses payable by the First Party to the Second Party is paid fully."
25. The Arbitrator notes that it was undisputed between the parties that pursuant to the said provision NIRLAC deposited the original Title Deeds relating to the plot with TML to secure the recovery of dues by TML. In fact, NIRLAC had made a counter claim for delivery of the said original documents back to NIRLAC. The Arbitrator extracts and relies upon Section 58A of the Transfer of Property Act, 1882 for the definition of „mortgage‟ and Section 58F which defines „mortgage by deposit of Title Deeds‟. The Arbitrator concludes that the equitable mortgage has the same legal effect as other mortgages even in the absence of a Registered Instrument evidencing such mortgage. The Arbitrator then concludes that the admitted facts and the provision of clause 3.2(c) clearly show that all essentials of a mortgage of deposit of Title Deeds were satisfied by NIRLAC and the intent was to create a security with regard to the construction cost. Relevant paras read as under:
"63. It is well settled that an equitable mortgage has the same legal effect and stands on the same footing as other mortgages even though there is no registered instrument evidencing such mortgage (vide United Bank of India Ltd. Vs. Lekharan Sonaram & Co. - AIR 1965 SC 1591). The OMP(COMM) 50/2018 Page 12 of 41 three essentials of a mortgage of deposit of title deeds are (vide KJ. Nathan Vs. S. V. Maruthi Rao & Ors. - AIR 1965 SC 430): (i) There must be a delivery of documents of title of immovable property; (ii) such delivery must be made to a creditor or his agent; and (iii) such delivery must be made with intent to create a security thereon. For the purpose of creating a mortgage, it makes no difference whether the amount secured is advanced by way of a loan, or is an existing or future debt, or performance of an engagement which may give raise to a pecuniary liability.
64. In this case, the admitted facts in the pleadings of both parties, and provisions of clause 3.2(c) of the Construction Agreement, clearly show that all the essentials of a mortgage of deposit of title deeds are satisfied by reason of NIRLAC depositing the original title deed with TML, with intent to create a security thereon in regard to the construction cost. Thus, the construction cost due to TML is not an unsecured debt, but is a debt secured by mortgage by deposit of title deeds by NIRLAC."
26. The Arbitrator also concludes that in addition to this mortgage, the construction agreement created a lien over the plot and the building constructed thereupon vide clause 3.2(b) of the Agreement, which has already been extracted above.
27. Finally, the conclusion arrived at is that the construction cost due to the TML was a secured debt enabling it to collect the rent and appropriate towards the amounts due to it. Relevant para reads as under:
"66. Thus, the construction cost due to TML was a secured debt, secured by (i) mortgage of deposit of title deeds and
(ii) lien over the premises enabling it to collect the rents and appropriate them towards the amounts due to it."OMP(COMM) 50/2018 Page 13 of 41
28. Having answered this question, the Arbitrator then proceeds to discuss the issue of the liability of NIRLAC to pay interest and the period for which the same was payable. The Tribunal finds that under the Construction Agreement, NIRLAC was to pay the construction cost in eight installments, as per the Schedule annexed thereto, as also to pay interest @ 36% per annum on delayed payments which is stipulated in Clause 3.2(a). In addition to the mortgage by deposit of Title Deeds as security and a lien over the plot, an option was given to the Petitioner to recover the cost, interest and expenses by leasing the building under 10 lease agreements for receiving and appropriating the rents. Through a simultaneous alternate arrangement for payment of construction cost, instead of NIRLAC having to pay the cost, at the instance of the Petitioner, NIRLAC executed 10 Agreements to lease on 11.12.1995 in favour of 10 nominees who were TML‟s Group Companies/Subsidiaries. Under the Agreement, NIRLAC agreed to grant a lease in respect of 4800 sq. ft of constructed area with proportionate area in the basement at a certain rent for a period of 9 years, subject to the condition, that each of the intending lessees would directly pay to TML, the cost of construction. The Arbitrator notes that this arrangement was carefully entered into between the parties and could not be disputed.
29. The Arbitrator records the contention of the Petitioner that NIRLAC was liable to pay the contractual interest from the date of the construction agreement and also records the contentions of NIRLAC more particularly, the reliance by NIRLAC on the Annual reports including Balance Sheets of TML for accounting years 1997-1998 to OMP(COMM) 50/2018 Page 14 of 41 2008-2009 and the Annual Reports of TML for the years 2009-2010 to 2014-2015 that the Annual Reports did not treat NIRLAC as a debtor, either towards the cost of construction or interest. The Arbitrator has referred to these reports in great detail in paras 74 to 77.
30. The Arbitrator also addressed itself to the question whether NIRLAC was absolved of its liability to pay the construction cost and answers it in favour of the Petitioner. However, having concluded so, the Arbitrator then analyses the 3 options by which the recovery of the cost was to be secured. The 3 options referred to by the Arbitrator are as under:
(i) To recover the construction cost (secured by mortgage by deposit of title deeds) with interest and expenses from NIRLAC. [NOTE: This is without exercising the lien to receive the rents and adjust the same towards the construction cost.]
(ii) To recover the construction cost with interest and expenses by letting out the premises and recovering the rents and adjusting the same towards the construction cost, interest and expenses (by exercising the lien over the land and building with power to lease/sell/transfer the premises created under the construction agreement). For this purpose, claimant had obtained registered general powers of attorney in favour of its nominees authorising them to let out and recover rents.
(iii) To recover the construction cost from the prospective lessees of the premises nominated by TML (who were either the subsidiaries or group companies of TML), in whose favour NIRLAC had executed agreements to lease dated 11.12.1995 (simultaneously with the execution of the construction agreement), thereby relieving NIRLAC from the liability to pay the construction cost."OMP(COMM) 50/2018 Page 15 of 41
31. The Arbitrator gives a finding that the Petitioner had created an anomalous and amorphous position by keeping the three options open. The Arbitrator also concludes that only after the premises were sealed on 14.11.2006 and the rental income ceased, the Petitioner by issuing a notice dated 20.01.2007 chose the third option of seeking to recover the balance from NIRLAC. But for the sealing, Petitioner would have proceeded to receive the rent, at least till 30.09.2008, when the lease was expiring, subject to renewal. In this background, the Arbitrator posed a question as to whether the Petitioner could change the option as late as in 2007. The answer was again in favour of the Petitioner. The Arbitrator also held that NIRLAC was certainly liable to pay interest on the construction cost, but subject to a condition. The Arbitrator was of the view that the evidence revealed that till 20.01.2007, both parties had proceeded on the basis that Petitioner was the lessee and would bear the construction cost and enjoy the portions of the premises delivered, without any obligation to account for the rents. Therefore, according to the Arbitrator, till this period, there was no liability of NIRLAC to pay the cost and it was only from 20.01.2007 when the Petitioner changed the option, it could be entitled to interest and not for any earlier period. Relevant part of the Award is as under:
"83. The claim made by claimant for recovery of the balance of the construction cost with interest and expenses after adjusting rents/revenue received from the premises (the second option referred to above) is authorised by and is in accordance with the provisions of the construction agreement, namely clause 3.2(b). The provisions of ·unregistered agreements to lease providing for an OMP(COMM) 50/2018 Page 16 of 41 alternative method of recovery absolving NIRLAC of the liability to pay the construction cost cannot be enforced, as admittedly, the crucial term of the said agreements providing for payment of the construction cost by the agreement holders was never given effect; and NIRLAC did not seek enforcement/specific performance of the terms of the agreements of lease by insisting that the construction cost should be recovered only from the agreement holders, absolving it from liability. Therefore, contention of NIRLAC that it is not liable to pay the construction cost and consequently not liable to pay interest, cannot be accepted.
84. But, the above is subject to one condition/clarification. Even if claimant is entitled to recover the construction cost and expenses, by receiving the rents on behalf of NIRLAC and appropriating the rents towards the dues (by exercising the second option), the evidence clearly shows that till 20.1.2007, both parties had proceeded on the basis that claimant was the 'lessee' which would bear the construction cost in terms of the agreements to lease and enjoy the portions of the premises delivered to it on 1.10.2009 as lessee without any obligation to account for the rents and consequently, there was no liability on the part of NIRLAC to pay the construction cost or any interest on the construction cost. It was only on 20.01.2007, for the first time, claimant indicated its intention to claim the construction cost, expenses and interest from NIRLAC. As claimant shifted to the third option from the second option only on 20.1.2007, claimant will be entitled to interest on the construction cost (due if any) only from the date of notice (20.1.2007) and not in regard to any earlier period."
32. The Arbitrator then finally decided the issue of the rate of interest payable by NIRLAC to TML. Clause 3.2(a) to 3.2(c) were considered by the Arbitrator, which are already extracted above.
OMP(COMM) 50/2018 Page 17 of 4133. TML claimed interest @ 36% p.a. compounded annually relying on Clause 3.2(a). According to the Petitioner cost of construction was Rs. 14.2291 Crores. Amount recovered from the tenants upto 14.11.2006 was Rs. 20.1157 Crores and thus after adjusting the amount and adding the compound interest @ 36% per annum and expenses, a sum of Rs.631.2244 Crores was due from NIRLAC, as on 30.09.2009. The Arbitrator has recorded in para 86 that during the arguments, Petitioner had submitted that if the Tribunal did not agree with the compound interest, it could award simple interest.
34. Per contra, the Respondent contended that the compound interest @ 36% per annum was shockingly exorbitant. Merely because TML failed to recover the cost from the lessees, NIRLAC could not be burdened with the liability. It also argued that the construction cost with interest and expenses was secured by mortgage of the Title Deeds and lien over the land and being a secured debt any claim for simple interest at a rate in excess of 7.5% p.a. would be usurious and a claim for 36% interest would be barred under provisions of Usurious Loans Act, 1918.
35. The Petitioner of course contended that 36% rate of interest was well recognized in commercial circles and relied upon a judgment of the Delhi High Court in LML Ltd. v. Saraswati Trading Company Limited &Ors. [1995 (35) DRJ] and K-7 Impex Pvt. Ltd. Vs. Shailendra Garg [2016 SCC OnLine Del 891].
36. Petitioner also contended that this was a contractual rate of interest and placed reliance on the judgment of the Supreme Court in Rajasthan State Industrial Development & Investment Corporation & Anr. v.
OMP(COMM) 50/2018 Page 18 of 41Diamond and Gem Development Corporation Ltd. & Anr. [(2013) 5 SCC 470].
37. Having analysed the contentions and the judgments relied upon by the parties, the Arbitrator concluded that the contention of NIRLAC was based on the provisions of Usurious Loans Act, 1918. In fact, the judgment in case of Rajasthan State Industrial Development & Investment Corporation (supra) supports NIRLAC that the Petitioner cannot compound the interest. Even clause 3.2(a) does not enable charging compound interest but only envisages simple interest.
38. The Arbitrator negatived the contention of the Petitioner that Clause 9 enables the Petitioner to charge compound interest and held that Clause 9 provides for consequences of TML not commencing the construction or completing it and would not help TML, as in the present case, construction was commenced as well as completed.
39. The Arbitrator relying on the Usurious Loans Act, 1918, more particularly, the definition of „loan‟ and Section 3 held that the Petitioner was not entitled to interest @ 36% per annum compounded, but would only be entitled to simple interest @ 7.5% per annum.
40. In my view, there is no patent illegality or perversity in the part of the Award where the Arbitrator has declined to grant compound interest and has only granted simple interest. Clause 3.2(a) of the Agreement provided for interest @ 36% p.a. and did not stipulate charging compound rate of interest.
41. In so far as the rate of interest is concerned, in my view, this part of the Award is patently illegal and contrary to the terms of the contract entered into between the parties. The Arbitrator in reducing the rate of OMP(COMM) 50/2018 Page 19 of 41 interest has relied upon the Usurious Loans Act, 1918, more particularly, Section 3 of the Act. Learned Senior Counsel for the Petitioner is right in its contention that Usurious Loans Act, 1918 would not apply to the present Arbitration Proceedings. The present transactions arise out of a Contract wherein an agreed rate of interest was provided. In commercial transactions, parties enter into Agreements voluntarily and the Agreements are carefully drafted and executed and signed, needless to say with legal advice. No party can plead that it was vulnerable and entered into a Contract without knowing its consequences.
42. Section 31(7)(a) of the Act clearly provides that the Arbitral Tribunal is empowered to grant interest for the pre-reference and pendente lite period at such rate as it may deem reasonable "unless otherwise agreed by the parties". Therefore, it is clear that if the parties have agreed to a rate of interest that is payable by one party to the other as a part of the terms of the Contract, it is not open to the Tribunal or to the Court to interfere in the rate of interest. This Court in Morgan Securities and Credit Pvt. Ltd. v. Morepen Laboratories Ltd., (2006) 132 DLT 588 held as under:-
"It may also be mentioned that the passing of an order on interest at the time of making the award is clearly contemplated by the provisions of the Arbitration and Conciliation Act, 1996. Sections 31(7)(a) and 31(7)(b) may be referred to for this purpose. Clause (a) of Section 31(7) of the Act permits the Arbitral Tribunal to award interest in cases where the award is for the payment of money at such rate as it deems reasonable. Clause (b) provides that where a sum is directed to be paid by an arbitral award, unless the award otherwise directs, such sum shall carry interest at the rate of 18% per annum from the date of the award to the OMP(COMM) 50/2018 Page 20 of 41 date of payment. Assuming for the sake of argument, that an arbitral award had been made only for the return of the principal amount then by virtue of Section 31(7)(b), it would carry interest at the rate of 18% per annum from the date of the award to the date of payment. Would this provision be considered to be hit by Section 3 of the Usurious Loans Act, 1918? The obvious answer is, No. It would not because the Arbitration and Conciliation Act is also a statute and it permits the Arbitral Tribunal to award interest from the date of the cause of action till the making of the award as well as from the date of the award till the making of payment and even stipulates that where the award does not otherwise direct, the rate of interest upon the award would be 18% per annum which is much higher than the rate of interest contemplated under the Usurious Loans Act, 1918. It may be noted that Section 3 of the Usurious Loans Act, 1918 contains a non obstante clause but it is with regard to the Usury Laws Repeal Act, 1855 and not any other Act. The Arbitration and Conciliation Act, 1996 is also later in time and, therefore, even if there is a conflict the latter would apply. Leges posteriores priores contrarias abrogant."
43. In the case of M/S BPL Ltd. v. Morgan Securities & Credit Pvt. Ltd., O.M.P. (COMM) 176/2017, decided on 18.12.2018, by Delhi High Court, the Court has taken a view that the rate of interest as agreed in a bill discounting facility is a conscious conduct of the party taking a loan and Courts ought not to interfere. Relevant portion of the judgment is as under:-
"29. A reading of Section 31(7)(a) of the Act would show that the Arbitral Tribunal is empowered to grant interest for the pre-reference and pendente lite period at such rate as it may deem reasonable, unless otherwise agreed by the parties. In the present case, the parties have clearly stipulated the rate of interest that is payable by the OMP(COMM) 50/2018 Page 21 of 41 petitioner to the respondent and therefore, the award of such rate of interest by the Arbitrator cannot be faulted.
* * *
38. Learned senior counsel for the petitioner has further submitted that the claim of interest even otherwise is highly exorbitant and cannot be sustained. He has produced a chart to contend that the amount payable with interest as awarded would become multiple times that of the principal and is therefore, unjustified.
39. I am unable to agree with the submission made by the learned senior counsel for the petitioner. In PEL Industries Ltd. & Ors. vs. SE Investment Ltd. 2018 SCC OnLine Del 8746, this Court had considered the issue of award of interest and held that where party to the transaction, being a business entity, was well aware of the rate of interest payable under the transaction, it would be beyond the jurisdiction of this Court to go into the reasonableness or otherwise of the rate of interest agreed upon between the parties. Relying upon the judgment of this Court in Syndicate Bank vs. West Bengal Cements Ltd. & Ors. AIR 1989 Del 107, it was held that grant of interest at less than contractual rate as a matter of rule, will amount to giving a premium to those who trade upon the money of others; defaulting borrowers cannot be given the benefit by reducing the rate of interest.
40. In the present case also, the reasonableness of the rate of interest has gained in magnitude only because of persistent defaults on the part of the petitioner to honour its side of the bargain. The petitioner certainly cannot be allowed to take advantage of its own defaults.
41. In any case, the Arbitrator having granted interest in accordance with the terms of the contract between the parties, such Award cannot be set aside by invoking the general principles of fairness or equity."OMP(COMM) 50/2018 Page 22 of 41
44. Following the said judgment, a Coordinate Bench of this Court in Videocon Industries Ltd. v. Morgan Securities Credit Pvt. Ltd. [2019 SCC Online Del 7034] had declined to interfere in the rate of interest agreed between the parties in the Contract.
45. Another Coordinate Bench of this Court in the case of Shakuntla Educational and Welfare Society and Ors. v. S.E. Investments Ltd, OMP (Comm.) 194/2017, decided on 29.05.2017, held as under:-
23. The first and foremost question to be addressed is whether the impugned award is liable to be set aside inasmuch as the arbitral tribunal had rejected the contention of the Society/Guarantors that the contractual rate of interest was expropriatory and unconscionable and thus opposed to public policy. The arbitral tribunal had considered the aforesaid contentions and had held that the parties had agreed to the stipulated rate of interest and had availed the loans exercising their free will and, therefore, it was not open for the Society/Guarantors to resile from its agreement and challenge the loan agreements.
24. The arbitral tribunal had also referred to the decision of the Supreme Court in the case of Indian Bank v. Blue Jaggers Estates Limited and Others: (2010) 8 SCC 129 and the decision of this Court in Deepak Bhatia v. Virender Singh:
2015 SCC OnLine Del 12187 and concluded that it was not open for a borrower to challenge the rate of interest after having availed of the loan facilities.
27. The above also establishes that the Society/Guarantors were also in no doubt as to the terms of the loan agreements and had entered upon the same voluntarily at the effective rate of the interest payable by them.OMP(COMM) 50/2018 Page 23 of 41
28. The arbitral tribunal had referred to the decision of a Coordinate Bench of this Court in Morgan Securities & Credits Pvt. Ltd. v. Morepen Laboratories Ltd & Anr.: 2006 (3) ArbLR 159 Delhi and the decision of the Division Bench in Morepen Laboratories Ltd. & Ors. v. Morgan Securities and Credits Pvt. Ltd.: 2008 (105) DRJ 408 and rejected the contention that the loan transactions fell foul of the Usurious Loans Act, 1918. This Court finds no infirmity with the aforesaid view."
46. The issue of the interplay between the contractual rate of interest and applicability of Usurious Loans Act, 1918 came up for consideration before a Coordinate Bench of this Court in Jay Polychem (India) Ltd. & Ors. v. S.E. Investment Ltd., in O.M.P. (COMM) 273/2016, reported in 2018 SCC OnLine Del 8848. The Petitioner had assailed the order of the Tribunal where the Tribunal had held that there was enough evidence to show that the Respondents had entered into the Agreements knowing fully well the contents thereof with respect to the rate of interest on the loan amount. One of the contentions by the Petitioner was that the transactions would be hit by the Usurious Loans Act, 1918. After examining the issue, the Court held as under:-
"30. This Court is of the view that none of the contentions are merited. Copies of the Loan Agreements have not been annexed with the petition. However, copies of the same are available on the records of the petition filed by SEIL under Section 34 of the Act, being OMP (Comm) No. 12/2016, challenging the impugned award. Clause 1 of the Loan Agreements, which are identically worded expressly provides that "The said loan shall carry interest at the fiat rate of 10.75% per annum or such modified rates as indicated by the Company....". The words "flat rate" are important. The interest rate of 10.75% per annum is applicable on the loan amount for the entire term of the loan OMP(COMM) 50/2018 Page 24 of 41 without taking into account the installments paid during the term of the loan. The installments payable - seven of which were also paid - were also computed on the aforesaid basis. The Arbitral Tribunal had examined the same and concluded that the flat rate of interest of 10.75% per annum would work out to 23.59% on the reducing balance referred to by the learned arbitrator as "23.59% per annum (annualized)".
31. The contention that the loan was a friendly loan is also unmerited as, admittedly, the petitioners had executed several documents for documenting the transactions as is noticed in paragraph 42 of the impugned award. The documents clearly evidence that the transaction was a commercial transaction.
32. The Arbitral Tribunal had, after examining the documents and evidence on record observed that, "there are enough direct as well as circumstantial evidence to show that the Respondents have entered into the said agreements knowing fully well the contents thereof. This Court finds no infirmity with the aforesaid conclusion. And, in any view, this finding cannot be influenced with as it does not offend any of the grounds as set out in Section 34(2) of the Act.
33. The contention that the transaction is hit by the Usurious Loan Act, 1918 is also unmerited. The said contention was rejected by the Arbitral Tribunal and, in the opinion of this Court, rightly so. In Morgan Securities and Credits Pvt. Ltd. v. Morepan laboratories Ltd., 132 (2006) DLT 588, this Court had held that the Usurious Loan Act, 1918 does not include reference to an arbitral award.
34. In view of the above, the petition is dismissed on account of delay as well as on merits. The pending applications are also disposed of. The parties are left to bear their own costs."
OMP(COMM) 50/2018 Page 25 of 4147. In a connected judgment in the case of S.E. Investments Ltd. v. Jay Polychem (India) Ltd. & Ors., 2018 SCC Online Del 8846, decided on 07.05.2018, the Court was called upon to decide whether the Arbitral Tribunal erred in awarding interest @ 15% p.a. instead of 23.59% p.a. The Court relying on Section 31(7)(a) of the Act and various judgments on the issue of the discretion of the Arbitral Tribunal to Award interest in the face of a Contract between the parties, stipulating a certain rate of interest held as under:-
19. Next, the question to be examined is whether the Arbitral Tribunal erred in awarding pendente lite interest at the rate of 15% per annum instead of 23.59% per annum as urged on behalf of SEIL.
20. At this stage, it would be necessary to refer to Section 31(7)(a) of the Act, which was relied upon by Mr. Nagesh in support of his contention. Section 31(7)(a) of the Act is set out below:--
"Unless otherwise agreed by the parties, where and in so far 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."
21. A plain reading of Section 31(7)(a) of the Act indicates that an arbitral tribunal has the jurisdiction to include interest, "at such rate as it deems reasonable" in the sum for which the award is made. Thus, on a plain reading of Section 31(7)(a) of the Act, the Arbitral Tribunal would have the discretion to determine the rate of pendente lite interest. However, the opening words of Section 31(7)(a) of the Act OMP(COMM) 50/2018 Page 26 of 41 "unless otherwise agreed by the parties" plainly, indicate that the discretion of the Arbitral Tribunal to award interest for the pre award interest is subject to the contract between the parties.
22. In Sayeed Ahmed & Co. v. State of U.P., (2009) 12 SCC 26, the Supreme Court had examined the provisions of Section 31(7) of the Act and observed as under:
"13. The legislature while enacting the Arbitration and Conciliation Act, 1996, incorporated a specific provision in regard to award of interest by Arbitrators. Sub-section (7) of Section 31 of the Act deals with the arbitrator's power to award interest. Clause (a) relates to the period between the date on which the cause of action arose and the date on which the award is made. Clause (b) relates to the period from the date of award to date of payment. The said sub-section (7) is extracted below:
"7(a) Unless otherwise agreed by the parties, where and in so far 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 eighteen per centum per annum from the date of the award to the date of payment."
Having regard to sub-section (7) of Section 31 of the Act, the difference between pre-reference period and pendente lite period has disappeared in so far as award of interest by arbitrator. The said section OMP(COMM) 50/2018 Page 27 of 41 recognises only two periods and makes the following provisions:
(a) In regard to the period between the date on which the cause of action arose and the date on which the award is made (pre-reference period plus pendente lite), the arbitral tribunal may award interest at such rate as it deems reasonable, for the whole or any part of the period, unless otherwise agreed by the parties.
(b) For the period from the date of award to the date of payment the interest shall be 18% per annum if no specific order is made in regard to interest. The arbitrator may however award interest at a different rate for the period between the date of award and date of payment.
14. The decisions of this Court with reference to the awards under the old Arbitration Act making a distinction between the pre-reference period and pendente lite period and the observation therein that arbitrator has the discretion to award interest during pendente lite period inspite of any bar against interest contained in the contract between the parties are not applicable to arbitrations governed by the Arbitration and Conciliation Act, 1996."
23. In Sree Kamatchi Amman Constructions v. The Divisional Railway Manager (Works), Palghar, (2010) 8 SCC 767, the Supreme Court held as under:--
"19. Section 37(1) of the new Act by using the words "unless otherwise agreed by the parties"
categorically clarifies that the arbitrator is bound by the terms of the contract insofar as the award of interest from the date of cause of action to date of award. Therefore, where the parties had agreed that no interest shall be payable, the Arbitral Tribunal cannot award interest between the date when the cause of action arose to date of award."
OMP(COMM) 50/2018 Page 28 of 4124. In Union of India v. Bright Power Projects(I) P. Ltd., (2015) 9 SCC 695, the Supreme Court expressed a similar view in the following words:
"13. Section 31(7) of the Act, by using the words "unless otherwise agreed by the parties", categorically specifies that the arbitrator is bound by the terms of the contract so far as award of interest from the date of cause of action to date of the award is concerned. Therefore, where the parties had agreed that no interest shall be payable, the Arbitral Tribunal cannot award interest."
25. In the present case, the Arbitral Tribunal found that the loan availed of by JPIL carried an interest at the flat rate of 10.75% per annum - that is, without accounting for repayment of installments - which works out to be 23.59% on reducing balance basis (referred to as „annualized‟ by the Arbitral Tribunal). Having found that the contract between the parties provided for payment of interest at the rate of 23.59% per annum, the Arbitral Tribunal could not have awarded pendente lite interest at a rate different from the rate as awarded for the pre-reference period. As noticed above, in Sayeed Ahmed & Co. v. State of U.P. (supra), the Supreme Court had unequivocally explained that the Act does not recognize any distinction between the pre-reference period and the pendente lite period (the period between the reference and making of the award) in so far as award of interest is concerned.
26. Although, the decisions referred to above, were rendered in the context of contractual clauses that prohibited payment of interest, the decisions rest on the principle that, insofar as pre-award interest is concerned, the Arbitral Tribunal is bound by the contractual provisions relating to interest. Thus, where the Arbitral Tribunal finds that the contract between the parties provides for interest, OMP(COMM) 50/2018 Page 29 of 41 the Arbitral Tribunal is required to award interest for the pre-award period. The interest for the post award period is, of course, at the discretion of the Arbitral Tribunal. In the present case, the Arbitral Tribunal has awarded interest at the contractual rate for the pre-reference period but reduced the same for the pendente lite period. This, in view of the decisions referred above, is impermissible.
27. In view of the above, the contention that the Arbitral Tribunal was required to award pendente lite interest at the rate of 23.59% is merited. Thus, the impugned award, to the extent that it provides for pendente lite interest at a lower rate, is set aside. SEIL would be at liberty to seek a fresh reference to arbitration with regard to the disputes relating to pendente lite interest and the final calculation of the total amount due."
48. Reading of the above judgments makes it clear that in so far as pre- reference and pendente lite interest is concerned, the Tribunal is bound by the provisions of Contract with respect to the rate of interest as agreed upon by the parties and specified in the Contract, entered into, with open eyes. Therefore, it was not open to the Tribunal to reduce the rate of interest stipulated in the Contract in Clause 3.2(a) @ 36% p.a. to 7.5% p.a.
49. Since it is settled that the contractual bargains between the parties with regard to rate of interest will override the other considerations, in my view, reliance by the Arbitrator on the judgments in the case of P. Sarathy v. State Bank of India [2000 5 SCC 355] and FMI Investment P. Ltd. v. Montari Industries Ltd. and Anr,. 194 (2012) DLT 687 is misplaced. Once the rate of interest was agreed upon between the parties, the Usurious Loans Act, 1918 will not come into play and, therefore, the OMP(COMM) 50/2018 Page 30 of 41 judgments defining the words „Court‟ and „Loan‟ would also not be applicable. For the same reason the judgment of the Supreme Court in the case of Thakur Jugal Kishore Sinha v. Sitamarhi Central Coop. Bank Ltd [AIR 1967 SC 1494] relied upon by the Respondent would be of no avail to the Respondent as the said judgment deals with the meaning of the term „loan‟ occurring in the Usurious Loans Act. This part of the Award is accordingly set aside.
50. The claim of the Petitioner with regard to grant of interest with effect from 11.12.1995 i.e. the date when the installments fell due has been rightly rejected by the Tribunal and the period has been reckoned from 20.01.2007. The Arbitrator analysed the three options by which the recovery of the cost was to be secured. After extracting the three options, the Arbitrator gave a finding that it was the Petitioner who had created an anomalous and amorphous position by keeping the three options open. The premises were sealed on 14.11.2006, which is when the rental income ceased, and it was only thereafter that the Petitioner issued a notice dated 20.01.2007 choosing a different option to recover the balance from NIRLAC. But for the sealing, Petitioner would have proceeded to receive the rent till the expiry of the Lease. Thus, according to the Arbitrator, both parties proceeded on the basis that the Petitioner was the lessee and would bear the construction cost and enjoy the property without any obligation to account for the rents. Therefore, according to the Arbitrator till this period there was no liability of NIRLAC to pay the cost. This part of the Award suffers from no infirmity and calls for no interference.
OMP(COMM) 50/2018 Page 31 of 41CASE OF TML IN ARBITRATION-II (A-II)
51. As per TML, after the construction of the building was completed, NIRLAC and TML granted a lease of common areas such as parking space, pump room, HT rooms, lift lobbies, staircase, atrium etc. to M/s Tuareg Properties and Security Services Limited. (TUAREG) a subsidiary of TML under Lease Deed dated 15.10.1999. Both approached TUAREG for providing and maintaining various facilities in the building and accordingly a Facilities and Maintenance Contract dated 15.10.1999 (F&M) was entered into between the three parties. As NIRLAC was in possession of the ground floor of the building and the parking area in the basement, TUAREG provided the facilities to NIRLAC for which it was paying the fee. Subsequently on 29.11.2001, TUAREG and NIRLAC entered into another F&M Agreement whereby TUAREG agreed to provide facilities with respect to the space occupied by NIRLAC. NIRLAC later let out a part of the ground floor to M/s Pfizer Ltd., through a separate F&M Agreement dated 01.09.2004.
52. Vide a Deed of Assignment dated 16.03.2005, TUAREG assigned all its right under the F&M Agreement, 1999 in favour of TML. Since the property was sealed and the occupants vacated their areas, TML was unable to earn income by providing services and hence raised the claim of Rs. 11.33 crores till 31.08.2017 on NIRLAC towards service, electricity and other charges.
53. TML contended that it had invested Rs. 342.14 Lacs in plant and machinery which were depreciating without any income. According to the Petitioner, as on 30.09.2009, NIRLAC was to pay a sum of Rs. 214.39 Lacs towards service, electricity and other charges with a OMP(COMM) 50/2018 Page 32 of 41 compound interest @ 36% per annum. A detailed chart was given to the Arbitrator.
CASE OF NIRLAC FOR ARBITRATION -II (A-II)
54. NIRLAC did not dispute the execution of F&M Agreements dated 15.10.1999 and 29.11.2001. Its contention was that out of the ground floor area of 13430 sq. ft, only Zone B measuring 6602 sq. ft was habitable as on 12.12.2001. Zone A was not fit for habitation till 01.04.2004 and hence no service charges were payable. From the time, it was made habitable service charges were paid by the tenant and therefore, it is liable to pay service charges only for Zone B from 12.12.2001 to 14.11.2006, when the premises were sealed. NIRLAC further contended that in Zone B the service charges were at @ 7 per sq. ft. i.e. Rs. 46,214/- per month and thus the total amount would be Rs.27,31,237/-. NIRLAC further claimed that in all it had paid admittedly Rs. 19,69,216/- towards service and electricity charges and if the security deposit of Rs. 5 Lacs is to be taken; the balance payable would only be Rs. 2,62,031. Liability to pay interest @ 36% p.a. compounded annually was completely denied. In regard to the lift, equipments and Air Conditioning etc. it was pointed out that the same were included in the cost of construction charged by TML @ Rs. 2000 per sq. ft.
55. The Arbitrator analysed the statement Exhibit T-45 which is as under:
(Amount in Rupees lakhs) Period Service Electricity Total Payments Balance Charges & Other by Due Charges NIRLAC 29.11.2001 3.28 5.33 8.61 0.33 8.28 OMP(COMM) 50/2018 Page 33 of 41 to 31.3.2002 2002-03 10.24 0.11 10.35 9.91 0.44 2003-04 11.28 0.56 11.84 3.19 8.65 2004-05 8.41 0.73 9.14 4.85 4.29 2005-06 5.54 1.10 6.64 1.23 5.41 1.4.2006 to 4.67 1.78 6.45 0.28 6.17 30.11.2006 Total 53.03 19.79 33.24
56. From the ledger extracts for the relevant period, the Arbitrator found that balance outstanding was Rs. 31,27,165/- and in fact Rs. 5 Lacs had been paid by NIRLAC as security deposit to TUAREG on 23.04.2002. The Arbitrator was of the view that between the chart prepared by the Petitioner and the ledger extracts, the latter will prevail and accordingly, held that the amount payable was Rs. 31,27,165/-.
57. Insofar the dues with regard to Zone A were concerned, the Arbitrator examined the evidence led before it particularly the deposition of Shri D.K. Trivedi and came to a conclusion that NIRLAC was in fact liable to pay the service charges, till it was let out to a tenant and awarded Rs. 26,27,165/- in favour of the Petitioner.
58. The contention of the Petitioner is primarily on the grant of interest by the Arbitrator.
59. The submission in law is that the terms of the agreement are sacrosanct. In PEL Industries Ltd. Vs. S.E. Investment Ltd., 2018 SCC OnLine Del 8746, this Court had held that where a party to a transaction being a business entity was aware of the rate of interest, it would be beyond the jurisdiction of a Court to go into the reasonableness of the rate of interest. In the case of Syndicate Bank Vs. West Bengal Cements OMP(COMM) 50/2018 Page 34 of 41 Ltd., AIR 1984 Del 107 and Hyder Consulting (U.K.) Ltd. Vs. Governor, State of Orissa, [(2014) SCC Online SC 490], it has been held by the Courts that the Arbitrator cannot ignore the terms of the contract while awarding interest under Section 31(7) of the Act.
60. Before the Arbitrator, the Petitioner had relied upon Clause 3.2 of the F&M Agreement dated 15.10.1999 between TMLL, TUAREG and NIRLAC, relevant portion of which is as under:
"In the event this Agreement is terminated and/or Tuareg is forced to cease to enjoy the benefits under this Agreement during the Initial Term or any renewals thereof because of any action of TMLL or NIRLAC or because of any Government stipulations or because of any action of the Delhi Development Authority or any other Government Authority, TMLL and NIRLAC shall refund to Tuareg the entire amount spent on the infrastructure for provision of Facilities, including but not limited to expenditure on air conditioning plant, elevators, electrical distribution system, water supply and sanitation facilities, horticulture, etc. along with interest @36% p.a. along with all losses and damages suffered by Tuareg."
"DEFAULT BY NIRLAC Should NIRLAC default in payment of the Service or other fees payable hereunder or otherwise hot conform to Tuareg's notices of payment given to him Tuareg is entitled to terminate this Agreement by a thirty (30) day's written notice or to forthwith cease providing any or all of the Facilities and/or facilities to the Occupied Space, including but not limited to the ceasing of provision of air conditioning, lighting, electricity and/or water supply, and NIRLAC is not entitled to claim any compensation of any damage or loss of OMP(COMM) 50/2018 Page 35 of 41 business which may result therefrom. NIRLAC also agrees to pay penalty at the rate of 2% per month on the overdue amount to Tuareg calculated on a monthly basis from the date of default until full payment is completed."
61. The Arbitrator rendered a finding that the amount claimed towards service and electricity charges were adjusted by the Petitioner against the excess recoveries made by it and nothing was due. Thus the question of awarding interest did not arise. However, the parties had rendered elaborate arguments and thus the Arbitrator proceeded to decide the rate of interest. The Arbitrator examined clause 3.2 and came to a finding that it did not provide for compound interest. Secondly, the claim by the Petitioner against NIRLAC was under the terms of F&M agreement entered into between them on 29.11.2001 and there was no claim under clause 3.2 of the Tripartite Agreement dated 15.10.1999. Thirdly, clause 3.2 would apply only if TUAREG made a claim against TMLL and NIRLAC for refund of expenditure on account of ACs, elevators, etc. The Arbitrator also records that the Petitioner conceded that the claim for these charges was not governed by Clause 3.2 and alternatively contended that NIRLAC was liable to pay interest by way of penalty @ 2% per month compounded monthly under Clause 11 of the 2001 Agreement. The said Clause reads as under:
"Clause 11. INTERRUPTION OF SERVICES If the Services rendered under this Agreement, in whole or in part, are interrupted through no fault of the Service Receiver, the Service Provider agrees to use its best OMP(COMM) 50/2018 Page 36 of 41 endeavours to remedy and make good the same at its own expense within a reasonable period."
62. The Arbitrator held that a reading of the clause did not show that it supported the claim of the Petitioner. Firstly, there was no provision of interest and the provision was only for penalty. Secondly, there was no provision for compounding of interest and thus the question of the said claim being allowed did not arise. Petitioner tried to contend that the words calculated on monthly basis would mean penalty payable calculated with monthly rests. The Arbitrator held that the term „monthly rest‟ or „compounding‟ are used in the context of payment of interest and not penalty and in my view, rightly so. The Arbitrator correctly concluded that under the Agreement there could be no compounding with regard to the penalty stipulated. Insofar as the stipulated penalty was concerned, the Arbitrator correctly observed that Petitioner had made no claim for penalty and the claim was for interest. As far as penalty is concerned, the Arbitrator relied on Section 74 of the Contract Act and held that a provision for penalty is for payment of money stipulated in terrorem. Under the law, penalty clause merely fixes an upper limit for the damages awardable. Section 74 of the Indian Contract Act disentitles a party seeking damages to recover simpliciter the penal sum named in the agreement as due and payable on the breach of contract and only reasonable compensation for breach can be awarded. The Arbitrator has held that if NIRLAC owed any money to the Petitioner on account of service and electricity charges Petitioner could be entitled to a penalty for non-payment. However, since nothing was due, there was no liability of OMP(COMM) 50/2018 Page 37 of 41 NIRLAC to pay any penalty. The view of the Arbitrator is based on analysis of the contractual clauses between the parties as well as the law of damages when a pre-estimate penalty is stipulated and Section 74 of the Contract Act comes into play. The Arbitrator has as a matter of fact rendered a finding that the Petitioner had already adjusted the electricity and other charges from the excessive rents received from the leased premises and thus was not entitled to any interest. The view is not only a possible but a plausible view and has its basis in the facts of the case as well as the law on the subject.
63. Scope of judicial review in an Arbitral Award is very limited and was further restricted by the Amendment Act 3 of 2016. Recently the Supreme Court has reiterated this position of law and in the case of Ssangyong Engineering & Construction Co. Ltd. vs. National Highways Authority of India Ltd.[2019 SCC OnLine SC 677] held as under:
"35. What is clear, therefore, is that the expression "public policy of India", whether contained in Section 34 or in Section 48, would now mean the "fundamental policy of Indian law" as explained in paragraphs 18 and 27 of Associate Builders (supra), i.e., the fundamental policy of Indian law would be relegated to the "Renusagar"
understanding of this expression. This would necessarily mean that the Western Geco (supra) expansion has been done away with. In short, Western Geco (supra), as explained in paragraphs 28 and 29 of Associate Builders (supra), would no longer obtain, as under the guise of interfering with an award on the ground that the arbitrator has not adopted a judicial approach, the Court's intervention would be on the merits of the award, which cannot be permitted post amendment. However, insofar as OMP(COMM) 50/2018 Page 38 of 41 principles of natural justice are concerned, as contained in Sections 18 and 34(2)(a)(iii) of the 1996 Act, these continue to be grounds of challenge of an award, as is contained in paragraph 30 of Associate Builders (supra).
36. It is important to notice that the ground for interference insofar as it concerns "interest of India" has since been deleted, and therefore, no longer obtains. Equally, the ground for interference on the basis that the award is in conflict with justice or morality is now to be understood as a conflict with the "most basic notions of morality or justice". This again would be in line with paragraphs 36 to 39 of Associate Builders (supra), as it is only such arbitral awards that shock the conscience of the court that can be set aside on this ground.
37. Thus, it is clear that public policy of India is now constricted to mean firstly, that a domestic award is contrary to the fundamental policy of Indian law, as understood in paragraphs 18 and 27 of Associate Builders (supra), or secondly, that such award is against basic notions of justice or morality as understood in paragraphs 36 to 39 of Associate Builders (supra). Explanation 2 to Section 34(2)(b)(ii) and Explanation 2 to Section 48(2)(b)(ii) was added by the Amendment Act only so that Western Geco (supra), as understood in Associate Builders (supra), and paragraphs 28 and 29 in particular, is now done away with.
38. Insofar as domestic awards made in India are concerned, an additional ground is now available under sub-section (2A), added by the Amendment Act, 2015, to Section 34. Here, there must be patent illegality appearing on the face of the award, which refers to such illegality as goes to the root of the matter but which does not amount to mere erroneous application of the law. In short, what is not subsumed within "the fundamental policy of Indian law", namely, the contravention of a statute not linked to public policy or public interest, cannot be brought in by the backdoor when it comes to setting aside an award on the ground of patent illegality.
OMP(COMM) 50/2018 Page 39 of 4139. Secondly, it is also made clear that re-appreciation of evidence, which is what an appellate court is permitted to do, cannot be permitted under the ground of patent illegality appearing on the face of the award.
40. To elucidate, paragraph 42.1 of Associate Builders (supra), namely, a mere contravention of the substantive law of India, by itself, is no longer a ground available to set aside an arbitral award. Paragraph 42.2 of Associate Builders (supra), however, would remain, for if an arbitrator gives no reasons for an award and contravenes Section 31(3) of the 1996 Act, that would certainly amount to a patent illegality on the face of the award.
41. The change made in Section 28(3) by the Amendment Act really follows what is stated in paragraphs 42.3 to 45 in Associate Builders (supra), namely, that the construction of the terms of a contract is primarily for an arbitrator to decide, unless the arbitrator construes the contract in a manner that no fair-minded or reasonable person would; in short, that the arbitrator‟s view is not even a possible view to take. Also, if the arbitrator wanders outside the contract and deals with matters not allotted to him, he commits an error of jurisdiction. This ground of challenge will now fall within the new ground added under Section 34(2A).
42. What is important to note is that a decision which is perverse, as understood in paragraphs 31 and 32 of Associate Builders (supra), while no longer being a ground for challenge under "public policy of India", would certainly amount to a patent illegality appearing on the face of the award. Thus, a finding based on no evidence at all or an award which ignores vital evidence in arriving at its decision would be perverse and liable to be set aside on the ground of patent illegality. Additionally, a finding based on documents taken behind the back of the parties by the arbitrator would also qualify as a decision based on no evidence inasmuch as such decision is not based on evidence led by the parties, and therefore, would also have to be characterised as perverse."
OMP(COMM) 50/2018 Page 40 of 4164. Again in the case of Hindustan Construction Company Limited & Anr. Vs. Union of India & Ors. [2019 SCC OnLine SC 1520], Supreme Court held as under:
"55. Further, this Court has repeatedly held that an application under Section 34 of the Arbitration Act, 1996 is a summary proceeding not in the nature of a regular suit
- see Canara Nidhi Ltd. v. M. Shashikala 2019 SCC O.M.P. (COMM) 131/2017 Page 26 of 26 OnLine SC 1244 at paragraph 20. As a result, a court reviewing an arbitral award under Section 34 does not sit in appeal over the award, and if the view taken by the arbitrator is possible, no interference is called for - see Associated Construction v. Pawanhans Helicopters Ltd. (2008) 16 SCC 128 at paragraph 17.
65. Thus, the Impugned Award to the extent it has reduced the rate of interest from 36% to 7.5% under Arbitration-I is set aside. Petitioner would be at liberty to seek a fresh reference through Arbitration with regard to the disputes relating to the rate of interest payable under Arbitration-I.
66. Petition is partly allowed in the aforesaid terms. Pending application stands disposed of accordingly.
JYOTI SINGH, J th MAY 14 , 2020 Yo/rd OMP(COMM) 50/2018 Page 41 of 41