Union Of India vs K.B. Construction And Co. Engg

Dhiraj Singh Thakur, J

This is an application filed under Section 34 of the J&K Arbitration and Conciliation Act, 1997 (hereinafter referred to as the “Act”) for setting aside the award dated 31.08.2009 passed by the Arbitrator.

Briefly stated the material facts are as under:-

The respondent was allotted a contract for special repair of certain roads inside the Army Ammunition Depot at Jindrah. An agreement was executed being No. CWE/U(A)-30/03-04 dated 21.01.2004. As per the agreement, the date of commencement of the work was 30.01.2004 and the date of completion was 29.05.2004. The contract, however, came to be terminated by the Union of India on 26.10.2004. As per Clause 54 of IAFW-2249, i.e., general condition of the contract, it was specifically provided that in case of termination of the contract by the Union of India because of the default of the contractor, the contract would be put to a fresh tendering process on risk and cost basis. It, therefore, meant that any extra expenditure incurred in the execution of the works earlier allotted would be chargeable from the original contract. Upon termination of the contract, the works were then allotted to a new contractor on 30.05.2005.

The basis of cancellation of the contract of the respondent-contractor was that it had failed to initiate and execute the work within the time prescribed. The amount stated to have been incurred by the Union of India on re-allotment of the contract, as also the price escalation etc. was stated to be around Rs. 2,96,435/-, which reflected the difference between the cost of the original contract, which was at Rs. 17,90,683- (Rupees Seventeen Lacs Ninety Thousand Six Hundred and Eighty Three) and the new contract, which was allotted for a sum of Rs. 20,87,118/-.

Being aggrieved of the termination of the contract, the respondent-contractor sought the adjudication of the disputes through arbitration as per the general condition of the contract. Before the arbitrator, there were as many as eight claims. As against this, the Union of India preferred as many as three claims. But out of the eight claims preferred by the contractor-respondent herein, Claim Nos. 1 and 2 were rejected and the others were allowed either wholly or partly. Since, none of the parties appearing before the Court today, challenged the rejection of the Claim Nos. 1 & 2, therefore, there is no need to advert to the same. However, what was allowed by the arbitrator in favour of the respondents were the following claims:-

(a) In regard to claim No. 3, as against an amount of Rs. 3,58,136,641/- claimed on account of loss of profit due to cancellation of the contract, what was allowed was 10% of the amount of the material cost, i.e., Rs. 2.50 lacs.

(b) In regard to claim No. 4, wherein an amount of Rs. 2, 50,000/- lacs had been claimed for cost of material dumped at site, but not paid, which material subsequently was claimed by the respondent to have been utilized by the new contractor, the entire claim of Rs. 2.50 lacs was awarded.

(c) Under claim No. 5, respondent-contractor had claimed release of FDR in regard to security deposits of Rs. 37,500/-, which was fully allowed and the FDR was directed to be released.

(d) Claim No. 6 pertains to loss of social and business reputation on account of recovery proceedings under the risk and cost clause. As against Rs. 2.00 lacs, an amount of Rs. 25,000/- was awarded by the arbitrator.

(e) Under claim No. 7, an amount of Rs. 1.50 lacs was claimed on account of loss suffered due to litigation and other expenses, for which an amount of Rs. 20,000/- was allowed.

(f) Under claim No. 8, 18% interest was claimed as pendente-lite and future interest on the amount due from the Union of India. The arbitrator allowed interest @ 8% on the amount due to the contractor with effect from 29.05.2004, the date when the respondent-contractor would have otherwise completed the contract. The award, further envisages that simple interest @ 10% per annum would be payable from the date of publication of the award till the actual payment, in case, the award was not satisfied within a period of 45 days from the date of the said award.

Insofar as the claims by the Union of India are concerned, claim No. 1 for an amount of Rs. 2,96,434.80/- revised to Rs. 3,05,725.36/- on account of the extra expenditure incurred for completion of the contract by invoking the risk and cost clause was rejected. Claim No. 2 for compensation for non-completion of the work within the time too, was rejected and so was claim No. 3 in regard to cost of arbitration.

The case set up by the respondent-claimant before the arbitrator was that the work could not be initiated and completed by the contractor in view of the failure of the army authorities to provide security passes to the labour, details whereof had been provided to them. The arbitrator accepted the view of the respondent-contractor that the Union of India even when it was bound to issue security passes, had not issued the same to the labourers, engaged by the contractor and in that background held that the cancellation of the contract was not proper.

In regard to the claim of respondent-contractor that he was entitled to receive an amount of Rs. 2.50 lacs for the material dumped on site, the arbitrator appears to have gone into the issue in detail. The conclusion drawn by the arbitrator was that the respondent had procured the material and dumped it at site and that the same material had been used by the new contractor, who executed the work in terms of the risk and cost clause. The basis for arriving at such a conclusion was the fact that the Union of India had not succeeded in proving that any payment had, in fact, been made to the new contractor for the material consumed at site and secondly that there was no evidence brought on record by them in the shape of the works diary, which was required to be maintained by the department for all activities being conducted in terms of the contract including the details of the material brought at site. The arbitrator also appears to have considered the affidavit of the supplier from whom the respondent-contractor allegedly had procured the material, which supplier, during the conduct of the board proceedings earlier had denied having supplied any such material to the respondent-contractor, but telephonically had admitted to the arbitrator that the supply had, in fact, been made. In any case, the conclusion arrived at by the arbitrator after considering all the evidence on record on this issue was that, in fact, the material amounting to Rs. 2.50 lacs had been dumped at site, for which claim was allowed.

Mr. Vishal Sharma, learned ASGI appearing on behalf of the applicant/petitioner questions the award, primarily, on the ground that the conclusion drawn by the arbitrator in making the award in favour of the claimant, was not supported by the evidence on record and was, in fact, perverse in nature.

A lot of emphasis was laid on the statement made by the supplier before the Board, constituted for verification of the factum of supplies, wherein the supplier, namely, Naresh Kumar had denied having made any supplies to the respondent-contractor. However, this issue has squarely been dealt with by the arbitrator on the basis of other material and the conclusion arrived at by the arbitrator in regard to the claim Nos. 4 cannot be, therefore, said to be, in any manner, perverse. However, Mr. Vishal Sharma, learned ASGI, vehemently urged that there was no basis for the arbitrator to make an award of Rs. 25,000/- on account of loss of reputation, allegedly suffered by the claimant/respondent herein, for which it was stated that there was no evidence.

Learned counsel for the petitioner also questions the award on the ground of awarding dual interest by the arbitrator, stating that the same was contrary to the ratio of the judgment of the Hon’ble Supreme Court rendered in case titled, “Vedanta Limited. Vs. Shenzen Shandong Nuclear Power Construction Co. Ltd., reported in 2019 (11) SCC 465. Reliance was specifically placed on paragraph Nos. 8, 9, 10 and 13 of the aforementioned judgment to state that the Hon’ble Supreme Court had ordered deletion of the rate of interest in that case. The facts in the Vedanta’s case (supra) were that the arbitrator had awarded payment of interest @ 9% for 120 days post-award and if the amount awarded was not paid within 120 days, the rate of interest was scaled up to 15% on the sum awarded. In Paragraph Nos. 8, 9, 10 and 13 of the said judgment, what was stated by the Hon’ble Supreme Court is reproduced as under:-

“8. …….. In the present case, the arbitral tribunal has adopted a dual rate of Interest in the Award. The Award directs payment of Interest @ 9% for 120 days post award; if the amount awarded is not paid within 120 days’, the rate of Interest is scaled up to 15% on the sum awarded.

The dual rate of Interest awarded seems to be unjustified. The award of a much higher rate of Interest after 120 days’ is arbitrary, since the Award-debtor is entitled to challenge the award within a maximum period of 120 days’ as provided by Section 34(3) of the 1996 Act. If the award-debtor is made liable to pay a higher rate of Interest after 120 days, it would foreclose or seriously affect his statutory right to challenge the Award by filing objections under Section 34 of the said Act.

The imposition of high rate of interest @ 15% post-120 days is exorbitant, from an economic standpoint, and has no correlation with the prevailing contemporary international rates of Interest. The Award-debtor cannot be subjected to a penal rate of interest, either during the period when he is entitled to exercise the statutory right to challenge the Award, before a Court of law, or later. Furthermore, the arbitral tribunal has not given any reason for imposing a 15% rate of Interest post 120 days.

The Petitioner in his Written Submissions submitted a chart which shows that the Interest component of the Award amounts to almost 50% of the sum awarded. The grant of 15% Interest is excessive and contrary to the principle of proportionality and reasonableness.

In light of the above-mentioned discussion, the Interest awarded by the arbitral tribunal is modified only to the extent mentioned hereinbelow:-

(i) The Interest rate of 15% post 120 days granted on the entire sum awarded stands deleted. A uniform rate of Interest @ 9% will be applicable for the INR component in entirety till the date of realization.

(ii) The Interest payable on the EUR component of the award will be as per LIBOR+3 percentage points on the date of the award, till the date of realization.”

In para-13 of the aforementioned judgment, the Hon’ble Supreme Court deleted the rate of interest at 15% post 120 days and awarded a uniform rate of interest @ 9%, insofar as the INR component of the award was concerned.

On a perusal of the aforesaid judgment, it can be seen that the reason for interfering with the dual rate of interest was firstly that if the award debtor was made to pay higher rate of interest after 120 days, it would foreclose or seriously affect the statutory right to challenge the award by filing objections under Section 34 of the Arbitration and Conciliation Act. The second ground for interfering with the dual rate of interest was that the arbitrator had not given any reasons for imposing the higher rate of interest of 15% post 120 days and the third reason for interfering with the dual interest component was that it was excessive and contrary to the principles of proportionality and reasonableness.

Mr. R.K. Gupta, learned Sr. Advocate, appearing on behalf of the respondent, on the other hand, states that the judgment relied upon by the learned counsel for the petitioner was in the context of Section 31(7) (a) of the Arbitration and Conciliation Act, 1996, which reads as under:-

“37(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.”

Mr. Gupta, learned Sr. Advocate also urged that the aforesaid judgment was rendered in the light of Section 31(7) of the Arbitration and Conciliation Act, 1996 post-amendment in the year 2015, which was reproduced in para-5 of the judgment and envisages as under:-

“(b) A sum directed to be paid by an arbitral award shall, unless the award otherwise directs, carry interest at the rate of two percent higher than the current rate of interest prevalent on the date of award, from the date of award to the date of payment.”

Explanation:- The expression “current rate of interest” shall have the same meaning as assigned to it under clause (b) of Section 2 of the Interest Act, 1978.

It was further stated that before amendment, Section 31(7)(b) read as under:-

“(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 award to the date of payment.”

It was also stated that the difference between Section 31(7) and, in particular, Sub-Clause (b) thereof, was that whereas before amendment the statutory rate of interest allowable to the claimant by the arbitrator was fixed at 18% for the post-award period, unless directed otherwise by the arbitrator, the same was modified to a rate of 2% higher than the rate, which was currently applicable on the date of the award, from the date of the award to the date of payment.

The Hon’ble Supreme Court while considering the case of Vedanta’s (supra) was, in fact, dealing with the provisions of the Central Act, which were materially different from the provisions, which were applicable in the then State of Jammu and Kashmir. The power to award the interest by the arbitrator post the award even at the rate higher than 6% from the date of the award, was permissible. In the Central Act, there was no provision, whereby the arbitrator could have arbitrarily enhanced the rate of interest from 9% (assuming that was the prevalent rate of interest) upto 15% and to that extent, the Hon’ble Supreme Court was justified in holding that it was arbitrary and excessive. The arbitrator had also not stated in so many words as to what was the prevalent rate of interest, which would then form the basis for awarding rate of interest higher than the prevalent rate of interest, which, in any case, could not be more than 2% thereupon.

Insofar as the then State of Jammu and Kashmir is concerned, the Act that was applicable was Arbitration and Conciliation Act, 1997. Section 31(7) of the Act applicable to the then State of Jammu and Kashmir was in para-materia with the provisions of Section 31(7) with the Central Act till 21.04.2010 when Section 31 (7)(a)(b) came to be amended and after amendment, the said Sections read as under:-

“(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, not exceeding 6% as it may deem 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 [six per centum] per annum from the date of the award to the date of payment.”

Learned counsel for the respondent tried to impress upon the Court the intent and purpose behind Section 31(7)(b), permitting imposition of higher rate of interest, which he stated was provided with a view to prevent frivolous litigation from being encouraged in the courts. Reliance in this regard is placed upon judgment of Allahabad High Court rendered in case titled, “Vipul Agarwal vs Atul Kanodia And Co. reported in 2003 AIR (All) 280” as also the judgment of the Bombay High Court rendered in case titled, “ Godrej Properties Investments Ltd. Vs. Tripura Construction and ors., reported in 2003 (2) ArbLR 195.”

It was further stated that the Vedanta’s case (supra) was rendered in the peculiar facts and circumstances of the case. What was stated by the Hon’ble Supreme Court in para 2.13 is reproduced hereunder:-

“2.13.Aggrieved by the judgment of the Division Bench, the Appellant has preferred the present Special Leave Petition.

At the time of arguments, the appellant restricted the challenge to the rate of Interest awarded by the arbitral tribunal.

The challenge on the Interest awarded by the Tribunal is being considered in the peculiar facts and circumstances of the present case, and the specific clauses of the Contracts in question.”

In the present case, before the amendment, the arbitrator even when could statutorily allow 18% interest post the award, the contractor had been awarded interest @ 10% only. What was thus awarded is neither excessive, nor arbitrary nor violative of the provisions of Section 31(7), as were applicable then to the case of the petitioner and was permissible in view of the specific provisions of the Act as were then applicable to the State of J&K as regards grant of interest.

After considering the submissions made by the learned counsel for the parties in its entirety, the objection to the award of payment of interest is held to be without any merit.

Insofar as claim for loss of reputation is concerned, it is not even denied by the learned counsel for the respondent, that, in fact, there was no evidence on record at all, which could support the award of the said claim.

In “Kuldeep Singh Vs. Commissioner of Police and ors., 1999 (2) SCC 10”, what was stated by the Hon’ble Supreme Court in para-10 is reproduced hereunder:-

“10. A broad distinction has, therefore, to be maintained between the decisions which are perverse and those which are not. If a decision is arrived at on no evidence or evidence which is thoroughly unreliable and no reasonable person would act upon it, the order would be perverse, But if there is some evidence on record which is acceptable and which could be relied upon, howsoever compendious it may be the conclusions would not be treated as perverse and the findings would not be interfered with.”

Having gone through the award in question and on a plain reading thereof, it does appear that the award made in terms of Claim No. 6 is, in fact, on the basis of no evidence and is, therefore, held to be perverse.

Having considered the matter in its entirety, in my opinion, only Claim No. 6 for loss of reputation, for which an amount of Rs. 25,000/-was awarded by the arbitrator, is held to be perverse. Since Claim No. 6 is severable from the rest of the claims as per the award, the same is set aside.

The instant application is, accordingly, disposed of.