Karnataka High Court Modifies HMT's 20% Interest On ₹1.39 Crore Damages To Ex-Employees Turned Entrepreneurs

The Karnataka High Court has modified the interest payable by HMT on ₹1.39 crore in damages awarded to eight former employees-turned-entrepreneurs for the loss caused by a shortfall in the assured workload.

The entrepreneurs will get 20% annual interest on the damages only for the period during which they were repaying their Karnataka State Financial Corporation (KSFC) loans. For the remaining period, HMT will have to pay interest at 12% per annum.

A Division Bench of Justice Anu Sivaraman and Justice T.P. Vivekananda held that the higher rate could not continue after the KSFC loan liability was discharged.

“The grant of interest at the rate of 20% per annum could be held reasonable only for the period during which the respondents/claimants have repaid the loan amount to KSFC. Once the financial liability of KSFC is discharged, there was no liability of the claimants to pay interest on the loan amount.”, it ruled.

The dispute dates back to 1990, when HMT invited its employees to become entrepreneurs for manufacturing and supplying auto components. The selected employees either resigned or opted for voluntary retirement before setting up the units.

The entrepreneurs approached KSFC for financial assistance and offered their personal properties as security. After discussions between HMT, KSFC and the entrepreneurs, the minimum assured workload period was increased to eight years.

HMT provided the assured workload for about a year before reducing the supply. The entrepreneurs continued manufacturing and supplying spare parts despite the shortfall. They had already left their jobs and had taken KSFC loans secured against their personal properties.

They subsequently sought damages for the shortfall in the assured workload. The high court appointed a sole arbitrator on December 3, 1999, after the entrepreneurs invoked the arbitration clause.

The arbitrator allowed their claims on July 29, 2002. The eight individual awards totalled ₹1,39,39,300.

HMT challenged the awards under Section 34 of the Arbitration and Conciliation Act, 1996. The Bengaluru sessions court dismissed those challenges on August 9, 2018, following which HMT approached the high court under Section 37(1)(c).

It argued that the entrepreneurs' loss-of-profit claims were speculative. It also contended that they could have terminated the contracts after the shortfall and attributed the reduced supplies to competition, declining watch sales, and working-capital difficulties.

The entrepreneurs argued that they had taken KSFC loans expecting HMT to provide the assured workload for the full eight-year period. They also contended that some had to sell personal assets to discharge their loans.

The high court rejected HMT's argument that the entrepreneurs should have terminated the contracts. It observed that they had family responsibilities as well as KSFC loan liabilities secured against their personal properties.

“When the respondents were under the obligation of maintaining their families, so also had the obligation of discharging the loans availed from the KSFC, it cannot be expected from the respondents to terminate the contract on the ground of short supply and take the risk of committing default in discharge of loan resulting in sale of the assets, which have been offered as security to the loan availed from KSFC.”

The court found that the short supply of material was an admitted fact. HMT's justification for reducing the workload had not been accepted by the arbitrator or the Section 34 court.

The court therefore left the award of damages undisturbed. It, however, found the 20% interest awarded from the claim date until payment to be unjustified for the entire period because the damages represented a presumptive loss of expected profit, rather than an amount that HMT had already owed for goods supplied.

The court accordingly directed that 20% interest would run from the date of sanction of the KSFC loan until its repayment or discharge, subject to proof. For the remainder of the period, the rate would be 12% per annum.

It also directed that amounts already deposited by HMT and disbursed to the entrepreneurs pursuant to Supreme Court orders be taken into account while calculating the balance payable. The appeals were disposed of, with the awards and the 2018 judgments otherwise confirmed.    

For Appellant (HMT Limited): Advocate Sanath Kumar Shetty K.

For Respondents (C. Rajamma & Others): Advocate M. Narayana Bhat.