Leela Hotels Ltd.Vs. Housing
& Urban Development Corporation Ltd.
J U D G M E N T
ALTAMAS KABIR, J.
Appeal has been filed by Leela Hotels Ltd. against the judgment and order dated
20th July, 2009, passed by the Division Bench of the Delhi High Court in EFA(OS)
No.4 of 2009, heard along with several Miscellaneous Applications setting aside
the order dated 19th November, 2008, passed by the learned Single Judge, who had
directed payment to the Appellant herein as per its calculations. It is the common
case of the parties that on 17th October, 1996, the Housing and Urban Development
Corporation Ltd. (HUDCO) invited offers for grant of sub-lease of land
measuring 11,480 sq. meters in HUDCO Place situated in Andrews Ganj, New Delhi,
for construction of a Five-Star Hotel thereupon.
The Appellant herein being
the highest bidder, a letter of allotment of the said land was issued to it on 31st
March, 1997, which was followed by a perpetual sub-lease dated 4th July, 1997. Out
of the total consideration, the first installment comprising 40% of the
consideration amount was paid by the Appellant herein on 10th April, 1997. The second
and third installments, each amounting to Rs.65,38,29,000/-, were payable by
31st March, 1998, and 31st March, 1999, respectively.
It was stipulated in
the sub-lease that in case of default in payment of the second and third installments,
the same could be paid along with interest at the rate of 20% per annum within three
months of the due date. It was further stipulated that in default of payment even
in terms of the said relaxation, the allotment would automatically stand cancelled
and in such event 50% of the amount paid upto that date would stand forfeited and
the balance 50% would be refunded without interest.
Admittedly, the second
installment was paid by the Appellant herein along with interest for the delayed
payment and ground rent was also paid till 31st March, 1998. Since, however, the
Appellant defaulted in payment of the third installment, the lease agreement was
cancelled and as per the terms of the agreement 50% of the total amount paid by
the Appellant amounting to Rs.76,28,00,500/- was refunded by the Corporation to
the Appellant, while forfeiting the balance 50%.
aggrieved by the steps taken by the Respondent Corporation, the Appellant filed
a Petition before the Chief Justice of the Delhi High Court to appoint an Arbitrator
in terms of the arbitration clause, which was registered as Arbitration Application
No.193 of 1999.
On 23rd June, 1999, an
Arbitrator was appointed by the Delhi High Court before whom the Appellant herein
claimed a sum of Rs.142,16,08,896/- from the Respondent Corporation along with interest
at the rate of 20% per annum along with a further sum of Rs.19,24,45,800/- comprising
the ground rent paid along with interest thereon at the rate of 25% per annum along
with a sum of Rs.5,98,22,058/- towards refund of property tax. A sum of Rs.5,62,27,715/-
was also claimed by way of damages.
learned Arbitrator allowed the claims of Leela Hotels and rejected the
counter-claim made by HUDCO. In his Award, the learned Arbitrator held that
Leela Hotels was entitled to recover and HUDCO was obliged to pay damages computed
with regard to the amounts paid as the first and second installments of the premium,
together with interest paid with the second installment, less the amount
refunded by HUDCO to Leela Hotels under letter dated 8th July, 1999, and as
further reduced by the amount of property tax paid by HUDCO on behalf of Leela
Hotels to the Municipal Corporation of Delhi.
It was also directed
that the interest at the rate of 20% per annum would be paid by HUDCO to Leela
Hotels on the amount representing property tax for the period during which the amount
remained with HUDCO until payment to MCD and also on the amount refunded by HUDCO
under its letter dated 8th July, 1999, for the period for which that amount
remained with HUDCO until repayment to Leela Hotels. Leela Hotels was also held
to be entitled to such interest on the balance of the amount from the date of the
respective payments made initially by Leela Hotels to HUDCO till the date of
Appellant filed its objections under Section 34 of the Arbitration and
Conciliation Act, 1996, hereinafter referred to as the "1996 Act", before
the High Court. The same was dismissed by the High Court by its order dated 21st
January, 2003. Before the said petition was dismissed, the Respondent herein undertook
to deposit the principal sum awarded by the Arbitrator on or before 21st October,
The said sum of
Rs.89,78,84,930/-, was allowed to be deposited without prejudice to the rights and
contentions of the Respondent herein. When the cheque for the aforesaid amount was
brought to Court on 21st October, 2002, the said Respondent got it recorded that
it represented the net principal amount due and payable to the Appellant herein
under the Award and that the said deposit was without liability on its part to
pay future interest thereupon.
first appeal from the said order dated 20th January, 2003, having been dismissed
by the High Court on 9th November, 2004, the Respondent filed a Special Leave
Petition before this Court, which was dismissed on 12th February, 2008. Although,
the Special Leave Petition was dismissed, the rate of interest for the pre-Award
period was reduced from 20% to 18% per annum.
Furthermore, since this
Court had directed the Appellant to pay or deposit 50% of the balance decretal amount,
the Respondent paid a sum of Rs.59.61 crores to the Appellant herein on 23rd March,
2006. The Respondent paid a further sum of Rs.48.09 crores to the Appellant
herein on 16th April, 2008, which, according to the Respondent, satisfied the decree.
This, in fact, was the genesis of the dispute between the parties.
far as the Appellant herein was concerned, in its calculation sheet the sum of
Rs.89,78,84,930/- was shown to be appropriated towards the interest due under
the Award. A claim was also made for interest on the interest. On the other hand,
in the calculation sheet filed by the Respondent herein it was indicated that the
aforesaid amount deposited should be appropriated towards the principal sum payable
to the Appellant herein under the Award and had calculated simple interest at the
rate awarded by the Arbitrator as modified by this Court.
Consequently, as was
noted by the Division Bench of the Delhi High Court, the controversy which surfaced
on account of the contesting claims of the parties was whether the aforesaid amount
could be adjusted, as claimed by the Appellant herein, towards the interest, or
was the Appellant obliged to appropriate the said sum towards the principal sum
due to it under the Award. A further question which surfaced was whether the
Appellant herein was entitled to charge interest on interest or compound interest
in accordance with the method indicated in the calculation sheet filed by it.
dealing with the first question as to whether the payment made by the judgment-debtor
is to be appropriated first towards discharge of the principal or towards discharge
of the interest, the Division Bench noted the decision of this court in M/s I.C.D.S.
Ltd. Vs. Smithaben H. Patel & Ors. [(1999) 3 SCC 80], wherein, this Court had
held that Sections 59 and 60 of the Contract Act, 1872, would only be applicable
at the pre-decretal stage and not thereafter and that post-decretal payments
would have to be made either in terms of the decree or in accordance with the agreement
arrived at between the parties, though, on the genuine principles indicated in Sections
59 and 60 of the aforesaid Act.
After referring to various
other decisions of this Court and the Lahore High Court, the Division Bench of the
High Court referred to the decision in Meghraj Vs. Mst. Bayabai & others,
[AIR 1970 SC 161], wherein the law in this regard was laid down by this Court that
the general rule of appropriation of payment towards a decretal amount is that such
an amount is to be adjusted firstly strictly in accordance with the directions
contained in the decree and in the absence of such direction, adjustments would
have to be made firstly towards payment of interest and costs and, thereafter,
in payment of the principal amount.
It was, however,
indicated that such a principle would be subject to an exception when the parties
might agree to the adjustment of the payment in any manner despite the decree. It
was, accordingly, held that unless the Respondent herein was able to show that the
parties had either impliedly or expressly agreed to adjustment of the said sum of
Rs.89,78,84,930/- towards the principal amount, the Appellant herein would be entitled
to appropriate the said amount fully towards the payment of interest.
may be indicated that on 11th October, 2002, the Respondent herein undertook to
deposit the principal amount awarded by the Arbitrator on or before 21st
October, 2002. Such deposit was allowed to be made without prejudice to the rights
and contentions of HUDCO in the proceedings before the High Court.
Subsequently, by order
dated 21st October, 2002, the said position was reiterated and it was recorded that
the deposit made by the Respondent would be without prejudice to the rights and
contentions of the parties in the pending proceedings and without any liability
on the part of the Respondent to make payment of further interest on the above-mentioned
The Division Bench took
the view that having regard to the submissions made on behalf of the Respondent
herein that the said amount of Rs.89,78,84,930/- was on account of the
principal sum due and payable to the Appellant herein under the Award, and since
no objection had been raised by the Appellant herein to such contention, it
would have to be held that the said sum had, in fact, been adjusted towards the
After observing that
before withdrawing the amount, the Appellant herein had neither sought permission
of the Court to appropriate the sum towards interest nor given any intimation
regarding withdrawal of the said amount, the Division Bench made it clear that the
said amount would be appropriated towards the principal amount due and not towards
The Division Bench noted
that the amount being withdrawn was without prejudice to the Appellant's rights
towards payment of interest. The Division Bench took the view that since the Respondent
herein was keen to avoid the possibility of paying further interest on the principal
sum, in the event of its objections being dismissed, it offered to deposit the
principal sum payable under the Award.
The Division Bench observed
that it made good business sense on the part of the Appellant, at that time, to
accept the aforesaid amount towards the principal sum payable to it under the
Award and to utilize the said sum for its business, instead of waiting for the final
outcome of the litigation between the parties. The Division Bench came to the conclusion
that it was in such circumstances that the Respondent had agreed to deposit the
said sum of Rs.89,78,84,930/- specifically, towards the principal amount under
Division Bench further observed that both the parties were duly represented by their
respective counsel, when the Respondent herein offered and undertook to deposit
the principal amount awarded by the Arbitrator and also insisted that it be
recorded as part of the proceedings that the said payment was to be
appropriated towards the principal amount awarded by the learned Arbitrator and
was without any further liability on the part of the Respondent to make payment
of further interest on the said amount.
The Division Bench
based its judgment, to a large extent, on the assumption that since the Appellant
had remained silent to the said stipulation made on behalf of the Respondent, it
would have to be presumed that the Appellant herein had consented to the said
such reasoning, the Division Bench set aside the order passed by the learned
Single Judge on 19th November, 2008, and after noting that a sum of Rs.50.54 crores
had been deposited by the Respondent No.1 herein during the pendency of the
Appeal, directed him to decide in the light of the judgment rendered by the Division
Bench as to whether any further amount was payable by the Respondent No.1
herein to the Appellant in terms of the judgment. Consequential directions were
also given on the outcome of such findings.
mentioned hereinbefore, this Appeal is directed against the said judgment of the
Division Bench dated 20th July, 2009.
for the Appellant, Mr. Ashok Desai, learned Senior Advocate, submitted that the
crucial question to be considered and decided in this case was whether the amounts
deposited or paid by HUDCO from time to time were to be appropriated first
towards the interest payable on the principal amount, following the decision in
Smithaben's case (supra), or towards the principal, having regard to the provision
in the Award relating to future interest which states that Leela Hotels is
entitled to interest at the rate of 15% per annum from the date of the Award to
the date of recovery.
Mr. Desai submitted that
the language of the Award is clear that the amount on which future interest has
to be calculated includes interest awarded by the Arbitrator till the date of the
Award. Mr. Desai submitted that it was not a case of compound interest, but a
case of calculating simple interest on the amount as remained unpaid each year.
Mr. Desai also submitted
that after the Award had been passed, Leela Hotels had calculated interest on
the basis of yearly rests, but subsequently gave up its claim on the basis of
compound interest and limited its claim to simple interest after appropriating
the amount received from HUDCO first towards interest and then towards principal,
in accordance with the decision in Smithaben's case (supra).
Mr. Desai submitted that
the High Court had erred in accepting the calculation made by HUDCO which had
not computed the amount awarded by the Arbitrator and had not computed future interest
in terms of the Award.
the second issue as to how the money paid by HUDCO is to be appropriated, Mr. Desai
urged that in Smithaben's case (supra), it had been very clearly explained that
in view of the consistent view taken first by the Privy Council and then by
this Court, the general rule of appropriation of payment towards a decretal amount
is that such an amount is to be adjusted firstly in accordance with the directions
contained in the decree and in the absence of such directions, adjustment should
firstly be made in payment of interest and costs and thereafter towards payment
of the principal amount.
Mr. Desai urged that the
Division Bench had misapplied the ratio in Smithaben's case (supra) in assuming
that the unilateral and voluntary deposit offered to be made by HUDCO in Court amounted
to such deposit being made upon an implied acceptance that the same would be
appropriated towards the principal amount. It was urged that the issue of
implied agreement had never been raised or argued before the learned Single
Judge and there is no pleading in support thereof.
Mr. Desai also urged that
the provisions of Sections 59 and 60 of the Indian Contract Act would also have
no application to the facts of this case since they only applied in regard to
distinct debts and not for enforcing a decree or what is regarded as a decree
by legal fiction.
Desai submitted that the judgments of both the learned Single Judge and the Division
Bench were centered around the payment of Rs.89.78 crores and the manner in which
the same was to be appropriated. It was urged that since the same was paid after
the passing of the decree, Leela Hotels is entitled to appropriate the said amount
first towards the interest and costs and then towards the principal. Mr. Desai
urged that on account of the wrong assumptions made by the Division Bench, its
judgment under appeal was liable to be set aside.
the other hand, appearing for HUDCO, Mr. Parag P. Tripathi, learned Additional Solicitor
General, firstly urged that the issue regarding charging of compound interest did
not survive, since the parties had agreed that no compound interest was payable
in terms of the Award.
As to the other
question as to whether the sums deposited by HUDCO were to be appropriated first
against the interest and then against the principal, it was contended that the same
was no longer res integra since the Award had made it clear that the first payment
of Rs.76.28 crores had to be reduced from the principal amount which was due.
The learned ASG
submitted that it was for the first time before this Court that the Appellant has
contended that the sum of Rs.76.28 crores would be appropriated first towards the
interest and then towards the principal amount. The learned ASG pointed out
that the refund had been made even prior to the making of a Reference to the Arbitrator
or pronouncing of the Award i.e. at the pre-decretal stage and, accordingly,
when the refund was made, there was no determination as to whether any payment was
due from HUDCO to the Appellant.
contention of Leela Hotels that the said refund of Rs.76.28 crores was to be first
appropriated towards the interest does not even arise. It was also submitted
that the first payment of 50% of the awarded amount amounting to Rs.76.28 crores
was, therefore, treated by the Award to be payment appropriated towards the principal
and since the Award had not been challenged by the Appellant herein, the objections
to the Award under Section 34 of the Act filed by the Respondent also stood
concluded by the decision of this Court in Civil Appeal No.1094 of 2006.
regards the second amount of Rs.89.78 crores tendered by HUDCO in the Delhi High
Court on 21st October, 2002, during the pendency of the proceedings under
Section 34 of the Arbitration and Conciliation Act, 1996, it was submitted by the
learned ASG that the same has to be appropriated towards the principal amount due
from HUDCO to Leela Hotels. It was submitted that the said amount was in the nature
of a pre-decretal payment and that the appropriation of the amount will have to
be in the manner indicated by the Respondent to which there had been no demur.
was next submitted by the learned ASG that analogy of a post-decretal payment cannot
be applied to an Arbitration Award under the 1996 Act for the simple reason that
the Arbitration Award under the 1996 Act does not attain the status or
character of a decree within the meaning of the Code of Civil Procedure. It is
to be executed "as if it were a decree", which means that it is not a
was thirdly urged by the learned ASG that assuming that the Award could be treated
as a decree and the second payment is a post-decretal payment, even then the
said payment will have to be treated as appropriation towards the principal
sum, since Leela Hotels had been duly intimated of the nature of the deposit and
by way of an implied contract, Leela Hotels had appropriated the said sum
towards the principal.
learned ASG referred to the decision of this Court in NALCO Vs. Presteel &
Fabrication Pvt. Ltd. [(2004) 1 SCC 540], wherein it had been held that there is
no question of any decree being honoured pursuant to the passing of an Award and
unlike a judgment within the meaning of the Civil Procedure Code, an Award remains
unenforceable during the period available for challenging the Award, and, thereafter,
till such time as the Petition under Section 34 is disposed of by the
Reference was also made
to the decision of this Court in (1) Paramjeet Singh Patheja Vs. ICDS Ltd. [(2006)
13 SCC 322], wherein it was explained that the Arbitrator is not a Court and accordingly
an arbitration is not an adjudication and an Award is not a decree, (2) Morgan Securities
and Credit Pvt. Ltd. Vs. Modi Rubber Ltd. [(2006) 12 SCC 642] and (3) West
Bengal Essential Commodities Supply Corporation Vs. Swadesh Agro Farming & Storage
Pvt. Ltd. & Anr. [(1999) 8 SCC 315], where similar views have been
expressed. Reference was also made to the decision of the Privy Council in the case
of Rai Bahadur Seth Nemichand Vs. Seth Radha Kishen [AIR 1922 PC 26], wherein it
was, inter alia, held that a creditor to whom principal and interest are owed
is entitled to appropriate any indefinite payment which he gets from a debtor
towards the payment of interest.
However, a debtor might
in making a payment stipulate that it was to be applied only towards the principal.
If such a stipulation was made, the creditor was at liberty to refuse the
payment on such terms, but then he would have to give back the money or the cheque
by which the money was offered. If the amount was accepted then the creditor
would be bound by the appropriation as proposed by the debtor.
to the decision of this Court in Smithaben's case (supra), the learned ASG
submitted that the payment was unilaterally made out of Court by the debtor with
a covering letter, which was immediately responded to by the decree-holder who
made it clear that he had appropriated the amount towards interest alone. This Court,
therefore, held that the creditor was not bound by the appropriation so made by
The learned ASG submitted
that in the instant case the Respondent had tendered a sum of Rs.89.78 crores
in Court as payment towards the principal amount and the same had been accepted
by Leela Hotels without objection and accordingly the decision in Smithaben's case
(supra) would have no application to the facts of this case. The learned ASG
submitted that there being little or no substance in the Appeal, the same was
liable to be dismissed with costs.
the two issues involved in this matter, it appears that the issue relating to charging
of compound interest did not survive since the parties had agreed that no compound
interest would be payable in terms of the Award. In fact, although such an
assertion had been made by the learned ASG, the same was not seriously opposed
by Mr. Desai who had taken the stand that this was not a case of compound
interest, but a case of calculating simple interest on the amount as remained unpaid.
Mr. Desai also accepted
the position that after the Award had been passed by the learned Arbitrator,
Leela Hotels had calculated the interest on the basis of yearly rests, but had subsequently
given up its claim of compound interest and limited its claim to simple interest
after appropriating the amount received from HUDCO, first towards interest and then
towards the principal in accordance with the decision in Smithaben's case (supra).
the only issue which remains for decision is whether the amounts deposited and/or
paid by HUDCO to M/s Leela Hotels in terms of the Award of the learned Arbitrator,
was first to be appropriated towards payment of the interest due on the principal
sum or whether the same was to be appropriated against the principal sum
the submissions made on behalf of the respective parties, the following payments
appear to have been made by HUDCO to the Appellant herein:-(i) 12.07.1999 - Rs.76.28
crores(ii) 21.10.2002 - Rs.89.78 crores(iii) March 2006 - Rs.59.61 crores(iv) May
2008 - Rs.48.09 crores and (v) May 2009 - Rs.50.54 crores.
It has been contended
by the learned ASG that the amount of Rs.89.78 crores having been paid towards the
principal amount, the other payments made subsequently were towards interest and,
accordingly, there was no amount due and payable to the Appellant. On the other
hand, it has been claimed on behalf of the Appellant that the said sum of Rs.89.78
crores had been appropriated against the interest as per the decision in
Smithaben's case (supra), and, accordingly, the stand taken on behalf of HUDCO
indicated hereinbefore, the submissions made by the learned ASG on behalf of
HUDCO was based on the proposition as contained in Sections 59 and 60 of the
Indian Contract Act, 1872, on account of the stipulation recorded on behalf of HUDCO
that the amount of Rs.89.78 crores was being tendered towards the principal sum,
to which there was no objection from the Appellant and, accordingly, it must be
held that that since the amount had been received without demur, such payment fell
within the provisions of Section 59 of the aforesaid Act.
In fact, the Division
Bench of the High Court proceeded to consider such payment and acceptance to be
a voluntary acceptance by the Appellant of the aforesaid amount as appropriation
towards the principal as it made good business sense to accept the same and to utilise
the same in spite of waiting for something indefinite in the future. Such a
submission, though legal and correct, is not supported by the materials on
there was no agreement between the parties as to how the amounts to be paid in terms
of the Award were to be appropriated by the Appellant. Accordingly, in terms of
the well settled principle that in such cases it was for the creditor to appropriate
such payment firstly against the interest payable, would, in our view, be squarely
attracted to the facts of this case.
As was laid down by the
Privy Council in Meka Venkatadri Appa Rao Bahadur Zamindar Garu & Ors. Vs. Raja
Parthasarathy Appa Rao Bahadur Zamindar Garu [AIR 1922 PC 233], and later
reiterated in Rai Bahadur Seth Nemichand's case (supra), when monies are received
without a definite appropriation on the one side or the other, the rule which is
well established in ordinary cases is that in those circumstances, the money is
first applied in payment of interest and when that is satisfied, in payment of the
capital. In the latter case, the said principal was restated and it was indicated
that a creditor to whom principal and interest are owed is entitled to appropriate
any indefinite payment which he gets from a debtor to the payment of interest.
It was also indicated
that a debtor might in making a payment stipulate that it was to be applied only
towards the principal. If he did so, the creditor was at liberty to refuse payment
on such terms, but then he would have to give back the money or the cheque by which
the money is proffered and if the same is accepted, the creditor would then be bound
by the appropriation as proposed by the debtor.
the instant case, a unilateral assertion had been made by HUDCO as the debtor that
the sum of Rs.89.78 crores was being tendered as payment towards the principal amount
and that there was, therefore, no other amounts due and payable to the creditor
Leela Hotels Ltd.
The principle as laid
down in the two aforesaid decisions, and as subsequently followed in Smithaben's
case (supra) will not apply in the facts of the instant case, since the amount as
deposited was accepted by the Appellant without prejudice to its rights and
contentions in the appeal.
Since the amount had been
accepted on protest, the principle laid down in Rai Bahadur Seth Nemichand's case
(supra) will have no application.
philosophy behind the principle set out in Meka Venkatadri's case (supra) and
as reiterated in Rai Bahadur Seth Nemichand's case (supra) and also in Smithaben's
case (supra) and then consistently followed by this Court, is that a debtor
cannot be allowed to take advantage of his default to deny to the creditor the amount
to which he would be entitled on account of such default, by way of elimination
of the principal amount due itself, unless, of course, the provisions of Section
59 of the Indian Contract Act, 1872, were attracted or there was a separate agreement
between the parties in that regard.
That is not so in the
instant case and, accordingly, the creditor cannot be denied its dues on a
unilateral stipulation that the amount of Rs.89.78 crores was being deposited as
against the principal sum due in terms of the Award. Since the said amount was accepted
by the Appellant on protest, it would be entitled to appropriate the same
against the interest which was due and payable till that date on the principal
amount, as has been asserted by it.
our view, the Division Bench of the Delhi High Court erred in presuming that the
said amount had been accepted by the Appellant on account of good business sense
in view of the uncertainty of the final outcome of the case.
In our view, the
Division Bench of the High Court should have proceeded on the basis of the
principles of law as laid down by this Court in Smithaben's case (supra), keeping
in mind the earlier decisions of the Privy Council in both Meka Venkatadri's case
(supra) and Rai Bahadur Seth Nemichand's case (supra) in interfering with the judgment
of the learned Single Judge.
The Division Bench seems
to have erroneously taken the presence of the learned counsel for the Appellant,
when the aforesaid undertaking of the Respondent was recorded, in coming to the
conclusion that since no objection had been raised with regard to the said
deposit, it must be presumed that it had the consent of the Appellant and hence
was covered by the provisions of Sections 59 and 60 of the Indian Contract Act,
the question as to whether the Award of the learned Arbitrator tantamounts to a
decree or not, the language used in Section 36 of the Arbitration and Conciliation
Act, 1996, makes it very clear that such an Award has to be enforced under the Code
of Civil Procedure in the same manner as it were a decree of the Court. The
said language leaves no room for doubt as to the manner in which the Award of
the learned Arbitrator was to be accepted.
the submissions made by the learned ASG on behalf of HUDCO cannot be accepted and
are, therefore, rejected. Consequently, the Appeal succeeds and the judgment
and order of the Division Bench of the High Court is set aside and that of the
learned Single Judge is restored.
regard to the nature of the issues involved in this case, the parties will bear
their own costs.
(SURINDER SINGH NIJJAR)