Interest Is Payable Post-Assessment, Grant Of Pre-Award Interest Is Patently Illegal: Calcutta High Court
The Calcutta High Court division bench, comprising Justice I. P. Mukerji and Justice Biswaroop Chowdhury, has observed that the grant of pre-award interest is patently illegal, thereby, setting aside the interest awarded for the period prior to the award date.
Facts:
Three agreements were signed between Damodar Valley Corporation (“DVC”) and Reliance Infrastructure Limited (“RIL”) on 06.12.2008, for the construction of two thermal power units of 600 MW each at Raghunathpur, a greenfield project. The time for completion of the project was 35 and 38 months from the “zero date” (i.e., 14.12.2007) for Unit 1 and Unit 2 respectively.
The project, however, was delayed. Unit 1 was completed on 15.05.2015 and Unit 2 was completed on 23.02.2016. Each party accused the other of delay. In the execution of Unit 2, a delay of 468 days of the total delay was attributable to RIL.
In the interregnum, RIL abandoned the project site, leaving the project incomplete, which was subsequently completed by DVC using other contractors.
On 15.06.2017, RIL initiated arbitral proceedings against DVC. The arbitral tribunal passed an award on 21.12.2019, directing DVC to pay Rs.721 crores with interest, aggregating to Rs.898 crores. RIL was awarded damages on account of an escalation in prices due to a change in law. The counterclaim filed by DVC was dismissed.
DVC challenged the arbitral award under Section 34 of the Arbitration and Conciliation Act, 1996, before a single Judge of the Calcutta High Court. The single judge upheld the award by its judgment dated 25.03.2022. The amount required to be deposited by DVC was reduced to Rs.595 crores.
Aggrieved by the partial rescission of the award, both DVC and RIL filed cross-appeals under Section 37 of the Act. DVC challenged the parts of the award that entitled RIL to escalation costs and other payments related to the prolongation of work. RIL filed the cross-appeal against setting aside the award, where the tribunal had directed DVC to pay RIL damages for delay.
Arguments:
By the Counsel for RIL
- During the prolongation of the contract, the value of each and every input used for executing it increased, thereby entitling RIL to extra payment for this prolongation.
- Relying on NTPC Ltd. vs. Deconar Services Pvt. Ltd. [(2021) 19 SCC 694], it was submitted that RIL was entitled to claim an extra amount on account of escalation in prices and that the arbitral tribunal was justified in allowing it.
By the Counsel for DVC
- The agreements in question were firm price agreements. The extension of time was without any price variation. Even if there was a prolongation of work by which the contractor incurred unforeseen expenses, RIL was not entitled to be compensated.
- In NTPC Ltd. vs. Deconar Services Pvt. Ltd., it was held that the stipulation as to fixed price is only good during the duration of the contract and is not applicable upon its extension.
Observations:
At the outset, the court reiterated the limitations on judicial interference with arbitral awards. It stated that an award can only be set aside if it is against the fundamental policy of Indian law or is patently illegal. There is no scope for re-appreciation of evidence in adjudging the validity of an award.
The court stated that the part of the award relating to interest was against the general law and the Interest Act, 1978. The court held that interest is payable post-assessment, and grant of pre-award interest is against the law and patently illegal. The court relied upon Union of India vs. Raman Iron Foundry [AIR 1974 SC 1265] to observe that a claim for damages for breach of contract is not for a sum presently due, and hence, the purchaser cannot recover such claims by appropriating amounts due to the contractor.
The court thus set aside the grant of interest for the period before the date of the award, i.e., 21.12.2019.
In respect of the claim regarding the rate of interest awarded, the court found that the awarded rate of 15% was unreasonable and perverse. The court observed that the bank typically retains margin money from the account holder to furnish a bank guarantee (BG), depriving the account holder of its use. When the guarantee is surrendered, this margin money is credited back to the account holder. The court held that to conceive a monetary loss of 15% of the guaranteed sum as interest was an erroneous assessment. Thus, the award for interest on the non-surrender of the BG after the stipulated date was set aside to the extent the awarded interest exceeded 7.5%.
Case Title: Damodar Valley Corporation vs. Reliance Infrastructure Limited
Case Numbers: APO 203 of 2023 with AP 40 of 2020 & APO 204 of 2023 with AP 40 of 2020
Date of Judgment: 27.09.2024
Counsel for the DVC: Mr. R. Venkataraman, Ld. Attorney General of India, Mr. Ratnakar Banrejee, Sr. Adv., Ms. Vineeta Meharia, Adv., Mr. Amit Meharia, Adv., Ms. Urmila Chakraborty, Adv., Mr. Kanishk Kejriwal, Adv., Ms. Paramita Banerjee, Adv., Ms. Subika Paul, Adv., Mr. Sayan Dey, Adv. and Mr. Ameyavikrama Thanvi, Advs.
Counsel for the Reliance: Mr. S. N. Mookerjee, Sr. Adv., Mr. Tilak Kr. Bose, Sr. Adv., Ms. Anjali Chandrukar, Adv., Mr. Paritosh Sinha, Adv., Mr. Saptarshi Banerjee, Adv., Ms. Shrayashee Das, Adv., Mr. Atanu Roy Chowdhuri, Adv., Mr. Himanshu Bhanesinghka, Adv. and Mr. Pushan Majumdar, Advs.