Arbitrator Cannot Disregard Interest Clause In Invoices While Enforcing Arbitration Clause Contained In Them: Delhi High Court

The Delhi High Court has held that once invoices are accepted as binding contractual documents, an arbitral tribunal cannot selectively enforce some clauses while ignoring other clauses contained in the same invoices. Allowing the appeal under section 37 of the Arbitration and Conciliation Act (Arbitration Act), Justice Chandrasekharan Sudha set aside an arbitral award on the ground that the arbitral tribunal had erred in refusing to grant contractual claim for interest. The appellant which was registered as a partnership firm and engaged as a commission agent had longstanding commercial dealings with the respondents. The transactions were conducted on credit and a running account was maintained. As per the case of the appellant, an amount of ₹1,92,483.46 was outstanding as on 1 April 2011. The appellant relied on the invoices which carried printed terms on the reverse including an arbitration clause and a clause providing for interest at the rate of 1.75 per hundred. After non-payment despite demands and legal notice, arbitration was invoked under the rules of the Delhi Hindustani Mercantile Association. The respondents were proceeded ex-parte due to its failure to appear before the arbitrator. While the arbitrator accepted the existence of a valid arbitration clause contained in invoices, it ultimately dismissed the claim for interest based on the same invoices. Objections under section 34 against the award were also dismissed by the District Court holding that the challenge amounted to re-appreciation of evidence, leading to the present appeal. Assailing the impugned order, the appellant submitted that the Award as well as the impugned Order are vitiated by patent illegality and contravene the mandate of Section 28(3), inasmuch as the learned Arbitrator failed to enforce the contractual terms agreed between the parties. It was further argued that having held that the arbitration clause printed on the invoices constituted a valid arbitration agreement, the learned Arbitrator could not have selectively disregarded the remaining contractual stipulations forming part of the same document. Addressing the first issue, the court noted that clause 2 of the Note printed on the invoice expressly provided that interest at the rate of 1.75 per hundred shall be charged. Interpreting this in the context of trade usage in Adhatiya transactions, the Court held that this clearly denoted 1.75% per month, i.e., 21% per annum. The court further observed that once invoices are accepted as binding contractual documents, their terms cannot be selectively ignored. Having relied on the terms of the invoices to uphold the arbitration agreement, the arbitrator was bound to grant interest as per the terms of the invoices. “..Once invoices are accepted as binding contractual documents, the terms and conditions printed thereon, including the clause relating to the levy of interest cannot be selectively ignored. Therefore, the learned Arbitrator, having held that there is a valid arbitration agreement between the parties on the basis of the clauses printed on the invoices/bijaks, erred in disregarding Clause 2 thereof, while adjudicating the claim for interest. This approach of the learned Arbitrator is contrary to Section 28(3) of the A&C Act.”, the court held. Quoting Section 28(3) of the Act, the Court emphasised that: “While deciding and making an award, the arbitral tribunal shall, in all cases, take into account the terms of the contract and trade usages applicable to the transaction.” The court held that the rejection of interest on the ground of ambiguity was unsustainable especially when the rate of interest was expressly provided and its application flowed from established mercantile usage. Relying on settled principles under section 31(7), the court held that interest is a normal accretion in commercial transactions and compensates a party for deprivation of money lawfully due. It held that “Clause 2 of the Note expressly permits levy of interest. Thus, this is not a case where the tribunal was required to infer power to grant interest in the absence of an agreement; rather, there existed a clear contractual stipulation authorising levy of interest. The learned Arbitrator, therefore, committed a manifest error in declining interest despite the existence of such an agreement.” The court found that the District Court wrongly concluded that the matter required re-appreciation of evidence. According to the court, the objections fell squarely within the permissible grounds provided under section 34 as the award suffered from patent illegality arising from disregard of contractual terms. Accordingly, the court set aside the award to the extent it rejected the claim for interest. Case Title: M/S Khubi Ram Rajiv Kumar & Co Vs. M/S Naveen Enterprises & Ors. Citation: 2025 LiveLaw (Del) 1790 Case Number: FAO...

Arbitrator Cannot Disregard Interest Clause In Invoices While Enforcing Arbitration Clause Contained In Them: Delhi High Court

Mohd Malik Chauhan

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