10 January 2022, Monday

2 years ago

Merely because the interest component is large is not a ground to deny it. The legal position on grant of interest summarised: Delhi High Court

23 December 2021 | KMC Construction Ltd. v. National Highways Authority of India v. | OMP (Comm.) No. 458 of 2020 | Vibhu Bakhru J | Delhi High Court |

Did you read the Highlight right before or miss it? KMC had also mounted a separate challenge against partial or total rejection of some claims. Its petition was also dismissed except for the interest claim.

The contract provided an interest rate of 1% per month (12% per annum) compounded monthly. However, the tribunal awarded simple interest at the rate of 16% per annum (that is, 2% above the then prevailing prime lending rate of SBI). Thus, the tribunal increased the interest rate but deleted the provision for compounding interest. In the tribunal’s view, the award of interest at the contracted rate would become exorbitant because it was compounded monthly.

KMC’s contention that the award of interest ran contrary to the terms of the agreement was readily accepted by the court. It said, among others, that merely because the interest burden becomes large is not a ground to deny it. It also noted that the parties’ commercial arrangement bound them as also the arbitrator –a “creature of the contract. In addition, it also acknowledged that finance obtained from banks is on interest compounded monthly or quarterly. Even SBI provides finance on compound interest and not simple interest.

It also noted that the increase in the quantum of interest was mainly due to the period spent by KMC in securing the award (including settlement talks amidst without prejudice). The court said that this could not be advantageous to NHAI and of disadvantage to KMC.

After noting the precedent, the court summarized the legal position. If the agreement expressly provides for payment of interest, the tribunal must conform to the terms of the agreement unless they are found invalid or inapplicable. Where the agreement prohibits it, the tribunal cannot grant interest. However, the tribunal has discretion under Section 31 (7) ACA, where the contract is silent on interest.

Read the decision here.

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