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The Financing Charges accrue until Actual Payment is made, not merely upon Furnishing a Bank Guarantee --- Islamabad High Court, Islamabad

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The Financing Charges accrue until Actual Payment is made, not merely upon Furnishing a Bank Guarantee --- Islamabad High Court, Islamabad

Islamabad 24-01-2025: In a landmark decision, the Islamabad High Court (IHC) dismissed an appeal filed by the National Highway Authority (NHA) against an order passed by the Executing Court, directing the calculation of financing charges on a compound interest basis in line with an arbitration award. The dispute arose from delays in payment under a contract between NHA and M/s. Sardar Muhammad Ashraf D. Baloch (Private) Limited for the rehabilitation of Sarhad Bypass to Daharki Road (N-5).

NHA awarded the contract to the respondent in 2012, which included a clause for arbitration under the Arbitration Act, 1940. The respondent claimed financing charges for delayed payments. The arbitrator, Mr. Justice (Retd.) Ijaz Nisar, issued an award on September 14, 2021, directing NHA to pay PKR 52.18 million along with financing charges compounded monthly, as stipulated under clause 14.8 of the contract. The award was made a rule of Court on March 25, 2022, by the Additional District Judge, Islamabad.

The main contention was whether the financing charges were to be calculated on a simple interest or compound interest basis. NHA argued for simple interest, while the respondent and the executing Court relied on clause 14.8 of the contract, which explicitly mandated compound interest.

Mr. Justice Miangul Hassan Aurangzeb dismissed NHA’s appeal, affirming the legality of compound interest in this case. The judgment emphasized the following key points:

Once an arbitration award is made a rule of Court, the executing Court cannot modify or re-determine the liabilities under the decree.
The clause explicitly provided for financing charges to be compounded monthly on unpaid amounts. The arbitrator and executing Court correctly applied this provision.
The Court clarified that the accrual of financing charges continues until actual payment is made, not merely upon furnishing a bank guarantee.

The judgment relied on several precedents, including:

Azad Government of the State of Jammu and Kashmir Vs. Muhammad Aslam Khan (1990 MLD 2333),
Topanmal Chhotamal Vs. M/s. Kundomal Gangaram (AIR 1960 388), and
Jajodia (Overseas) (Pvt.) Ltd. Vs. Industrial Development Corporation of Orissa Ltd. (1993 (2) SCC 106)

These cases emphasized the binding nature of arbitration awards and the principle of harmonious interpretation.

The Court upheld the Respondent’s right to financing charges calculated on a compound interest basis and dismissed NHA’s appeal, concluding that the executing Court’s directions were in conformity with the arbitration award and the decree.

This judgment reaffirms the sanctity of arbitration awards and emphasizes the importance of adhering to contractual terms. It also provides clarity on the calculation of interest in execution proceedings, setting a precedent for future disputes involving financing charges.

The decision serves as a cautionary tale for public authorities, highlighting the financial consequences of delaying contractual payments. It underscores the judiciary’s commitment to enforcing arbitration awards in strict accordance with the law and contractual terms.