Twenty per cent interest for twenty-six years: Karnataka HC trims an award it declined to set aside

Using the power to modify recognised in Gayatri Balaswamy, a Division Bench ties the higher rate to the period the claimants were actually repaying their loans.

An arbitrator awarded damages in 2002 and directed interest at 20 per cent a year from 28 January 2000 until payment. Twenty-six years later, that clock is still running. On 18 September 2026, in a batch of eight connected appeals headed by HMT Limited v. Sri C. Narayana Gowda, a Division Bench of Justice Anu Sivaraman and Justice T.P. Vivekananda of the Karnataka High Court confirmed the award on damages, found the interest component patently illegal, and modified it — a course the Supreme Court’s decision in Gayatri Balaswamy v. M/s ISG Novasoft Technologies Ltd. now permits.

Employees who were asked to become suppliers

HMT Limited, a company wholly owned by the Central Government, issued an office order in 1990 inviting applications to identify prospective entrepreneurs for off-loading auto components. The invitation went to its own employees.

Those who responded gave up their jobs. They resigned from the company, obtained financial assistance from the Karnataka State Financial Corporation by mortgaging their properties, and set up units to make and supply the parts. The arrangement carried an assured workload.

HMT provided that workload for about a year. Thereafter there was a shortfall, and the workload was reduced intermittently. Having resigned their employment and taken on secured debt, the entrepreneurs had no practical option but to accept the lesser workload and continue supplying.

When their demand for damages for the loss caused by the short supply went unanswered, they invoked the arbitration clause. This Court appointed a sole arbitrator on 3 December 1999. HMT’s defence before the arbitrator was commercial: serious competition from private watch manufacturers using modern machinery had made inroads into the market it had created; large sums were due from dealers and could not be recovered; production and sales of watches had declined; and the company had run into difficulties of various kinds. The arbitrator framed fifteen issues, rejected the defence and allowed the claims, awarding amounts ranging from about Rs 18.29 lakh to Rs 32.35 lakh to individual claimants.

Eighteen years to the Section 34 decision

HMT challenged the awards in arbitration suits filed in 2002. During their pendency the claimants applied under Section 9 of the Arbitration and Conciliation Act for a direction that HMT deposit 75 per cent of the awarded sums, contending that it could challenge the awards only on complying with Section 7 of the Interest on Delayed Payments to Small Scale and Ancillary Industrial Undertakings Act, 1993 read with Section 7 of the Micro, Small and Medium Enterprises Development Act, 2006. A Single Judge accepted the plea and directed the deposit.

HMT went to the Supreme Court. Pursuant to an interim order, it deposited 75 per cent of the principal awarded. The special leave petitions were disposed of on 9 February 2018 with directions for disbursement. The District Court then dismissed the arbitration suits on 9 August 2018, and these appeals under Section 37(1)(c) followed.

By the time they were decided, several of the original claimants had died and were represented by their legal representatives — widows, sons and daughters now in their forties, fifties and sixties.

HMT's case, and why it failed

HMT’s grounds were several. The agreement allowed either party to terminate if its object was not achieved to their satisfaction, so a claimant who thought the workload short could have walked away; having instead continued to supply without raising concerns through an eight-year contractual period, they could not raise the dispute at the end of it. Not having exercised the right under Section 39 of the Contract Act, they had waived performance; their continued acceptance amounted to acquiescence and waiver under Section 63. A force majeure clause in the agreement was said to have frustrated the contract, the shortfall being caused by circumstances beyond HMT’s control — reduced production and falling sales in a market newly opened to competing manufacturers. The claim, counsel argued, was purely speculative: a short supply of raw materials does not automatically entitle a supplier to compensation, and no actual damage was proved, there being no guarantee that the parts would have sold had the materials come.

The arbitral tribunal had rejected the force majeure defence, holding that shortage or non-availability of materials cannot be brought within such a clause. The District Court found that none of the parameters of Section 34(2)(a) was satisfied and declined to interfere, giving its reasons in detail.

The Division Bench added an observation of its own on the termination argument. Where a company of HMT’s standing, which had held the upper hand in the production and marketing of watches, faced serious competition it could not meet, it is wholly unreasonable to expect its former employees — who had resigned on its invitation and mortgaged their property to equip themselves for its work — to terminate the arrangement and take their chances in the open market.

What the Bench would not disturb

The judgment is careful about the limits of its own jurisdiction. The power under Section 34 is fairly narrow; on appeal under Section 37 the jurisdiction is more circumscribed still. Appellate power under Section 37 operates within the domain of Section 34 and is exercisable to find whether the court below acted within its prescribed limits, or exceeded or failed to exercise the power conferred.

Within those limits the Bench found nothing wrong with the substance. Neither the award nor the District Court’s judgment could be faulted on the claim for damages for loss sustained through the shortfall in assured workload. That part of the award was confirmed.

Why the interest rate could not stand

The interest was a different matter, and the reasoning turns on the character of what was awarded.

The Bench first put the statutory interest provisions to one side. Section 4 of the 1993 Act fixes interest for delayed payment at one and a half times the State Bank of India’s prime lending rate, the rate available to the bank’s best borrowers — so no percentage is stated in the section, and the notified rate at the relevant time has to be looked up. Section 16 of the 2006 Act imposes interest at three times the Reserve Bank’s notified bank rate where a buyer fails to pay for supplied goods on the agreed date. Neither applied, because what the arbitrator awarded was not the price of goods supplied and unpaid for. It was damages for short supply of workload — a presumptive loss, assessed on the footing that had sufficient workload been given, the claimants would have made and supplied the parts and earned a profit on them.

That distinction carried the result. The damages were not a determined amount due from HMT and were not calculable with mathematical exactitude. Awarding 20 per cent a year on such a figure, from 28 January 2000 until payment, could not be called just and reasonable — and over twenty-six years the compounding effect is the point rather than the rate.

The Bench found the justification for the higher rate in the claimants’ own case, and then confined it to that justification. The claimants had borrowed from the KSFC against mortgages of their properties to run the business. Interest at 20 per cent could reasonably be allowed for the period during which they were repaying that loan. Once the liability to KSFC was discharged, they bore no further interest burden, and for that later period an award at 20 per cent was unjustified. The Bench held the defect to be a patent illegality and contrary to public policy, requiring interference.

It added a consideration about who pays. HMT is a company owned by the Central Government and a custodian of public money, and an award running at 20 per cent for twenty-six years falls on that account.

Modification, not setting aside

The remedy the Bench chose is the most significant feature of the judgment. Rather than setting the award aside and sending the parties back to the beginning, it modified the interest component — relying on the Supreme Court’s reasoning in Gayatri Balaswamy v. M/s ISG Novasoft Technologies Ltd., which addresses the practical consequences of a court being confined to the binary of upholding or annulling.

The practical effect is that claimants who began this litigation in 1999, and whose legal representatives now stand in their place, are not sent back for a fresh arbitration on quantum. The damages stand. What has changed is the rate that runs on them, and for how long.

For award-debtors, the judgment marks out a narrow but real opening. An interest component untethered from any loss the claimant actually carried, left to run for decades on a sum that was itself an estimate, is now something an appellate court can correct without disturbing the award it sits on. The correction here was principled rather than arithmetical: the Bench did not substitute a rate it preferred, but tied the higher rate to the only fact that had justified it in the first place — the debt the claimants were servicing while they waited.

Order

All the appeals were disposed of. The award dated 29 July 2002 and the judgment and decree dated 9 August 2018 in the arbitration suits were confirmed, except as to the rate of interest. The claimants are entitled to interest at 20 per cent a year on the damages only for the period in which they were repaying the KSFC loan — from the date of sanction of the loan to the date of repayment or discharge — subject to submission of proof to HMT. For the remainder of the period, during which no liability to repay the loan subsisted, they are entitled to interest at 12 per cent a year on the damages awarded. In calculating each claimant’s entitlement under the award as modified, HMT is to account for the amounts already deposited before this Court and disbursed to the claimants.