HMT Limited v. C. Rajamma (since deceased) by LRs & Connected Matters

What happened

HMT Limited, a company wholly owned by the Central Government, invited applications in 1990 from its employees to become entrepreneurs making auto components and watch spare parts for it, on condition that they resign or take voluntary retirement. The claimants, who had no funds of their own, borrowed from the Karnataka State Financial Corporation (KSFC) on the security of their personal properties, and after a tripartite meeting on the assured workload the minimum period was fixed at eight years, HMT supplying raw material and the claimants manufacturing and supplying the parts. HMT provided the assured workload for about a year and thereafter fell short, the claimants continuing to supply on reduced workload because they could not terminate without defaulting on their loans. On the High Court's order of 3 December 1999 (C.M.P. Nos. 68 to 76 of 1999) a sole arbitrator was appointed, and by awards of 29 July 2002 allowed their claims for damages for the shortfall, of between ₹6,86,700 and ₹32,35,000 each in the eight appeals, with interest at 20% a year from the date of the claim statement till payment, the arbitrator reasoning that KSFC charged 19.5% and a further 2.5% penal interest on the loans.

HMT's suits under section 34 were dismissed on 9 August 2018 after the Supreme Court, disposing of its special leave petitions on 9 February 2018, had directed disbursement of the 75% of the awarded amount that HMT had deposited, with interest, and directed the District Court to decide the suits within six months. That deposit had been ordered under section 7 of the Interest on Delayed Payments to Small Scale and Ancillary Industrial Undertakings Act, 1993 read with section 19 of the Micro, Small and Medium Enterprises Development Act, 2006. HMT appealed under section 37(1)(c), arguing that the claims were speculative, that the claimants could have terminated the contract and instead acquiesced and waived their rights (sections 39 and 63 of the Indian Contract Act, 1872), that the damages for the whole period were outside the contract, that the force majeure clause and market conditions excused the shortfall, and that interest at 20% was illegal, beyond the arbitrator's jurisdiction and against public policy. The claimants defended the awards and said that, as micro and small enterprises, they were entitled to the statutory interest regime.

Questions before the court

• In an appeal under section 37 of the Arbitration and Conciliation Act, 1996 against the dismissal of a section 34 challenge, may the court interfere with the interest of 20% a year awarded on damages for short supply of work, and if so to what extent?

Why the court ruled this way

The shortfall in the assured workload and the claimants' continued supply were admitted, HMT's justification had been rejected by both the arbitrator and the District Court, and in an appeal under section 37, whose power is narrower than that under section 34, the Court cannot take a different view on the factual findings (paragraphs 19-20). The contention that the claimants could have terminated and sold in the open market was unacceptable for small entrepreneurs who were HMT's former employees, had taken voluntary retirement and had borrowed against their properties, and the arbitrator had rightly held that shortage of materials is not force majeure, so that none of the grounds in section 34(2)(a) was made out (paragraphs 21-23). The Court held that the interest could be examined because the 1993 and 2006 Acts had been pressed only for the 75% deposit, but that those Acts, which fix interest on delayed payment of the price of goods supplied at a multiple of the prime lending rate or the bank rate, cannot fix the rate on damages for presumptive loss from short supply, and the arbitrator himself had not relied on them (paragraphs 24-29).

The scope of section 37 is very limited and akin to superintendence, but the award of 20% from the date of the claim statement till payment was a patent illegality and against public policy, because it rested only on the 19.5% and 2.5% that the claimants paid on their KSFC loans, the details of the loans, the dates on which they were cleared and the sale of some claimants' properties were not on record, the damages are an estimate of expected profit and not a determined sum, and once the liability to KSFC was discharged the claimants had no liability to pay interest on the loan, so that 20% for that period is wholly unjustified (paragraphs 30-33). The Court therefore held that interest at 20% is payable on the damages only for the period of repayment of the loan from sanction to repayment, subject to proof, and 12% a year for the remainder in accordance with section 31(7)(b), noting that the award ran for twenty-six years, that HMT is a Central Government company that is a custodian of public money, and that the modification is supported by Gayatri Balaswamy v. ISG Novasoft Technologies, which accepts that a court can modify post-award interest if the facts justify it (paragraphs 33-34). The amounts deposited and already disbursed under the Supreme Court's order are to be taken into account (paragraph 35).

Controlling point

A court in an appeal under section 37 cannot disturb the arbitrator's findings on the shortfall in work and the damages, but interest of 20% a year over some twenty-six years on presumptive damages, justified only by the rate the claimants paid on their financing loan, is a patent illegality and against public policy, and is to be limited to the period of repayment of that loan, with 12% a year for the remainder.

Order and next steps

The Court disposed of all the appeals by confirming the award of 29 July 2002 and the District Court's judgment and decree of 9 August 2018 except for the rate of interest. It held that the claimants are entitled to interest at 20% a year on the damages only for the period in which they were repaying the KSFC loan, from sanction of the loan till its repayment or discharge, subject to proof to HMT, and to interest at 12% a year on the damages for the remainder of the period, and directed HMT to calculate each claimant's entitlement under the modified award, taking into account the amounts deposited before the High Court and disbursed under the Supreme Court's order, and to pay the balance in a time-bound manner.

Practical implications

A buyer facing an award of damages for short supply cannot reopen the findings on breach in a section 37 appeal, but can challenge post-award interest that has no basis in the contract or statute, and a claimant that finances its business on a loan should place the loan particulars and repayment dates on record, because interest tied to the cost of that loan may be limited to the period of repayment.

Limits of this ruling

• The Court confirmed the liability and the quantum of damages and modified only the interest, applying the arbitrator's own premise that 20% corresponds to the cost of the loan, and left the loan particulars to be proved by each claimant to HMT. The judgment gives the date from which the arbitrator awarded interest as 28 February 2000 in one place and 28 January 2000 in another, and its order lists the formula for interest at 20% as item (i) and the one at 12% as item (iv) in paragraph 33.