(Prayer: This Petition is filed under Section 34 of The Arbitration and Conciliation Act, 1996 to set aside the Arbitral Award dated 19.01.2017 passed by the learned Arbitrator in disputes arising out of the Agreement No.W.503/CN/TF/OT/2012-13/327 dated 10.09.2013 in so far as the award of simple interest of 18% for Rs.10,00,000/- is concerned.)
1. The Original Petition has been filed, seeking to set aside the Arbitral Award dated 19.01.2017 passed by the learned Arbitrator in disputes arising out of the Agreement No.W.503/CN/TF/OT/2012-13/327 dated 10.09.2013 in so far as the award of simple interest of 18% for Rs.10,00,000/- is concerned.
2. According to the petitioners, they called for a tender for 'Manufacture and supply of 100 sets of pre-stressed mono Block Concrete Sleepers for 1 in 8.5 Turn Outs' and the contract was awarded to the respondent herein. Subsequently, a Contract Agreement was executed between the parties on 10.09.2013 and failure on the part of the respondent in execution of the contract had resulted in termination of the contract on 29.02.2014 in terms of Clause 702 of Indian Railway Standard (IRS) Conditions of Contract on 13.03.2017. It is submitted that as per Clause 504 of IRS Conditions of Contract, the Security Deposit of Rs.10,00,000/- submitted by the respondent in the form of Bank Guarantee stood forfeited. Thereafter, various claims were raised by the respondent herein before the learned Arbitrator appointed by this Court and after adjudication, the learned Arbitrator had passed an Award with a direction to the petitioners herein to refund the Security Deposit of Rs.10,00,000/- with simple interest of 18% from 12.09.2014.
3. It is further submitted that the Award passed by the learned Arbitrator is highly arbitrary and contrary to the terms of agreement. Unless there is a specific clause in the agreement regarding payment of interest, the learned Arbitrator ought not to have awarded interest from 12.09.2014 to 13.03.2017, on the amount of Rs.10,00,000/-, which has been received as Security Deposit. It is the submission of the petitioners that they are governed by the General Conditions of the Contract (GCC) and that by means of agreement, the parties have agreed to approach the learned Arbitrator and for the default committed by the respondent in the Contract entered into between the parties, the Contractor had approached the learned Arbitrator, claiming various amounts under different heads, including refund of security deposit of Rs.10,00,000/- along with simple interest from 12.09.2014 till the amount is actually disbursed, on the ground that their company is registered under the capacity of Micro, Small and Medium Enterprises Development Act, 2006 (in short the 'Act, 2006').
4. The petitioners, in support of their contention that the respondent is not entitled to claim interest in the absence of any specific clause in the agreement, have relied upon a judgment of the Hon'ble Supreme Court in the case of Union of India vs. Concrete Products and Construction Company and Others, reported in (2014) 4 SCC 416, wherein, the Hon'ble Supreme Court, while considering the scope of Clause Nos.2401 and 2403 of IRS conditions, has been pleased to hold that any sum of money due and payable to the Contractors under the contract may be withheld and retained by way of lien by the Railway Authorities or the Government and the Contractors will have no right to claim interest or damages on the amount paid as Security Deposit, thereby interfered with the Award, granting interest by the Arbitrator therein. For better appreciation, the relevant portion of the judgment is extracted as hereunder:
'18. Clause 2403 again provides that any sum of money due and payable to the contractor under the contract may be withheld or retained by way of lien by the railway authorities or the Government in respect of payment of a sum of money arising out of or under any other contract made by the contractor with the railway authority or the Government. Clause 2403(b) further provides that it is an agreed term of the contract that against the sum of money withheld or retained under lien, the contractor shall have no claim for interest or damages whatsoever provided the claim has been duly notified to the contractor.
19. We are of the opinion that the sole arbitrator in awarding interest to the contractors has failed to take into account the provisions contained in the aforesaid two clauses. We find merit in the submission made by learned Additional Solicitor General that award of interest at-least from the date when the amount was deposited in Court was wholly unwarranted. Therefore, the High Court as well as the arbitrator, in our opinion, have committed an error of jurisdiction in this respect. This view of ours will find support from the judgment of this Court in the case of Sayeed Ahmed & Company (supra), wherein it has been held as follows:-
'16. In view of clause (a) of sub-section (7) of Section 31 of the Act, it is clear that the arbitrator could not have awarded interest up to the date of the award, as the agreement between the parties barred payment of interest. The bar against award of interest would operate not only during the pre-reference period, that is, up to 13-3-1997 but also during the pendente lite period, that is, from 14-3-1997 to 31-7-2001.'
5. Per contra, learned counsel appearing for the respondent / Contractor would contend that the learned Arbitrator has rightly granted interest in terms of the provisions of the Act, 2006 and the arbitration proceedings had commenced and concluded not only in terms of the Arbitration and Conciliation Act, 1996, but also taking into account the provisions of the Act, 2006. He would further contend that in terms of Section 18 of the Act, 2006, the respondent may make a reference to the Micro and Small Enterprises Facilitation Council and Section 19 of the Act, 2006 applies, where there has been a reference to arbitration by the Council under the Act, 2006. Therefore, it is contended that the learned Arbitrator has rightly granted the rate of interest on the security deposit amount.
6. In reply, learned counsel for the petitioners would submit that it is not a reference under Section 18 of the Act, 2006 and it is an independent proceeding under The Arbitration and Conciliation Act, 1996 and the learned Arbitrator is governed by the clause in the Agreement and also by the General Conditions of the Contract (GCC). The petitioners had already paid the security amount of Rs.10,00,000/- on 13.03.2017 and that in terms of Clause Nos.2401 and 2403 of IRS conditions, interest cannot be demanded on the security deposit, especially when the amount was paid as early as on 13.03.2017 and the learned Arbitrator, without adhering to these factors, has simply rendered an adverse finding. He would firmly submit that the respondent company does not fall under the capacity of Micro, Small and Medium Enterprises.
7. Heard the learned counsel on either side and also perused the material documents available on record.
8. It is not in dispute that the parties to the case are governed by the Contract and the General Conditions of the Contract (GCC). It is no doubt true that the respondent has sought for interest in terms of the provisions of the Act, 2006 in the arbitration proceedings initiated under The Arbitration and Conciliation Act, 1996. Though the learned Arbitrator has got powers to grant interest, the main thing that has to be mainly looked into is, as to whether there is any reference in terms of Section 18 of the Act, 2006. It is pertinent to mention that what was before the learned Arbitrator was not an issue or reference made under Section 18 of the Act, 2006. Admittedly, there was no reference by the Micro and Small Enterprises Facilitation Council as per the mandate of the said Act in view of the fact that the respondent has not approached the Council at all.
9. In the light of the above discussion and following the judgment of the Hon'ble Supreme Court (cited supra), this Court is of the view that the grant of interest @ 18% p.a. on the security deposit is liable to be interfered with. Accordingly, this Original Petition is allowed and the Award insofar as the grant of simple interest of 18% o
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n the security deposit amount is set aside. 10. It is made clear that this order will not preclude the respondent from invoking the provisions of the Act, 2006 and in case they are able to establish that they come under the provisions of the Act, claiming interest with the delayed payment by seeking reference, it is open to the Council to take up the matter for adjudication and decide or to seek an independent Arbitrator in terms of the provisions of the said Act. In case any such proceedings are initiated by the respondent, it is open to the Council or Arbitrator on the reference made to decide the issue, regarding the grant of interest in terms of the Act, 2006 on due establishment that the respondent Company falls under the Act, 2006. It is also made clear that the period of pendency of Original Petition should be excluded for the purpose of seeking necessary reference in terms of the Act, 2006. No costs.