A Division Bench of the Delhi High Court on May 5, 2020 in the case of V4 Infrastructure Private Limited (“Appellant”) vs. Jindal Biochem Private Limited (“Respondent”), had the occasion to adjudicate upon the legality of awarding a high rate of interest by way of damages at the rate of interest at the rate of 18% per annum by an arbitrator.    

Facts of the case: 

The Respondent had preferred a petition under Section 9 of the Arbitration and Conciliation Act, 1996 (“the Act”) before the commencement of the arbitration proceedings wherein the Delhi High Court vide its order dated September 16, 2011 directed the parties to maintain status quo. 

Thereafter, arbitration proceedings commenced between the parties and the same culminated in the arbitral award dated May 20, 2017 in favour of the Respondent. During this period, the above-noted interim order continued to bind the parties. The Appellant assailed the award under Section 34 of the Act, inter-alia, on the ground that the premise of the award was intrinsically flawed. The arbitrator granted relief of return of the consideration amount along-with interest on the premise that the Respondent had not claimed specific performance of the agreements. The court, however, vide its order dated March 19, 2018, dismissed the objection petitions of the Appellant under Section 34 of the Act and upheld the arbitral award holding that there is no infirmity in the same. Thereafter, the instant appeal was preferred. 

The Appellant, at the stage of admission had expressed its inclination to settle the matter and stated that it was ready and willing to pay Rs. 7,40,00,000 crores (Rupees Seven Crores Forty Lacs) as the principal amount along-with interest in instalments, with reasonable reduction in the rate of interest. Taking note of this stand, the court issued notice to the Respondent. In the proceedings that followed, the Appellant honoured its commitment and proceeded to make payments, which was also accepted by the Respondent without prejudice to its rights and contentions. As a result, on the date of final hearing of the present case, the Appellant had paid the principal amount awarded by the arbitral tribunal and the balance that remained due was towards damages and interest awarded at the rate of interest at the rate of 18% per annum.  

During the course of hearing of the appeal, the court had called upon the counsel for the Respondent to take instructions as to whether the Respondent would be willing to settle the matter if, the rate of interest is reduced from 18% per annum to 9% per annum. Similarly, the court also called upon the counsel for the Appellant to confirm the above option. However, while the Appellant agreed to the above proposition, the Respondent declined.  

Issue: 

The issue which arose for consideration before the court was whether an award of interest by way of damages at exceptionally high rate of interest in comparison to the prevalent market rate, sustainable?  

Decision of the court: 

The Delhi High Court observed that although the court would have not interfered on this aspect considering that the fact that the jurisdiction under Section 37 of the Act is restricted. But, since there are inherent and glaring contradictions between the claim made by the Respondent and the relief granted by the arbitral tribunal which awarded interest at the rate of interest at the rate of 18% per annum in addition to the damages, the court decided to step in. The court also, remarked that the award of interest at the rate of 18% per annum is wholly unjustified and the same shocked the conscience of the court and prompted them to intervene. 

The court noted that the award of compensation in terms of the Specific Relief Act, 1963 (“SPRA”), is inherently linked to the claim for specific performance of a contract. In these circumstances, even if the court were to hold that refund of the consideration amount is an exercise of discretionary power in a proceedings pertaining to specific performance, yet the compensation/damages awarded would have to withstand the test laid down for grant of compensatory relief under Section 73 of the Indian Contract Act (“ICA”).  

The court also observed that while awarding the damages, the arbitrator had to be mindful of the fact that under the agreement in question, there was no specified rate of interest. Moreover, there was no stipulation under the agreement which enabled the Respondent to seek refund of the consideration amount.  

The Delhi High Court thus, enumerated that the award of interest by way of damages had to be tested and examined on a different yardstick i.e. under Section 73 and 74 of the ICA and opined that there are contradictory findings in the arbitral award and the decision of the court under Section 34 of the Act, as on one hand, the court had observed that even though the Respondent in its statement of claim had sought the relief of specific performance of the agreement, but on the other hand, it observed that the said relief was not pressed as no issue was claimed in this regard and it would be the discretion of the arbitrator as to whether to award specific performance of the agreement, or to award damages in lieu thereof. 

The Division Bench of the Delhi High Court, thus, held that:- 

“24.…Having regard to the fact that the banking rate of interest at all relevant times and even as on date is much lower than the rate of interest awarded by the learned arbitrator and further, in absence of any evidence placed on record that could justify grant of interest @18%, we are inclined to take into account the market rates and trade practice. Accordingly, we hold the award of interest @ 18% p.a. to be unreasonable, irrational, unjustified and reduce the same to 9% p.a. for the same period as has been awarded by the learned arbitrator. The award stands modified to the above extent. The appeals are allowed in the above terms.”                                                                                                                                (emphasis supplied) 

Our Observation: 

Whilst the Division Bench had held the rate of interest at the rate of 18% per annum to be unreasonable, interestingly, prior to the amendment to sub-section (b) of Section 31(7) of the Act, unless the award otherwise directed, carried interest at the rate of 18% per annum from the date of the award to the date of payment and courts had repeatedly upheld such award default interest rate. It would be interesting to track the development in this ever-evolving jurisprudence. 

This update has been contributed by Arka Majumdar (Partner) and Kunal Dey (Associate).