MSMED interest is a substantive right not contingent on invoking Section 18 dispute resolution procedures.

The Petitioner, a government hospital, entered into an agreement dated 23.08.2017 with the Respondent, an MSME-registered security firm, for providing security manpower

While the initial contract stipulated a specific strength of guards, the Respondent deployed additional guards, bouncers, and gunmen based on the Petitioner's oral instructions and a variation clause in the Notice Inviting Tender (NIT)

A dispute arose when the Petitioner refused to pay invoices totaling Rs. 1,37,05,429/- for the additional deployment

The matter was referred to a Sole Arbitrator who, via an award dated 26.02.2024, granted the principal sum, 18% interest under the MSMED Act, and 20% future interest

The Petitioner challenged the award under Section 34 of the Arbitration and Conciliation Act, 1996 (A&C Act), primarily on grounds of patent illegality and perversity

1. Whether the Arbitrator committed patent illegality by awarding claims for bouncers and gunmen when the agreement allegedly only contemplated "security guards"

2. Whether the award of 18% interest under the MSMED Act was valid in the absence of the Respondent invoking the Section 18 facilitation mechanism of said Act

3. Whether the award of 20% future interest was arbitrary, unreasoned, or patently illegal

Section 34 of the A&C Act, noting that judicial intervention is restricted to "patent illegality" and "fundamental policy of Indian law," and does not permit re-appreciation of evidence or substituting a plausible interpretation of a contract

The court relied on OPG Power Generation (P) Ltd. v. Enexio Power Cooling Solutions to define the scope of Section 34

The court relied on Ssangyong Engg. & Construction Co. Ltd. v. NHAI regarding patent illegality

Under the MSMED Act, 2006, the court applied Sections 15 and 16, holding that the buyer's obligation to pay interest on delayed payments to an MSME is absolute

Following Indian Highways Management Co. Ltd. v. SOWiL Limited, it held that statutory interest under MSMED applies even if the Section 18 mechanism is not invoked, provided arbitration is otherwise validly initiated

Section 31(7) of the A&C Act was applied regarding the tribunal’s wide discretion to award post-award interest

Regarding the principal claim, the Court found that the Arbitrator’s reliance on the "variation clause" in Annexure IV of the NIT—which was contractually incorporated via Clause 2(c) of the Agreement—was a plausible interpretation of the contract

Since the interpretation was not perverse, the Court refused to interfere under Section 34

On the issue of MSMED interest, the Court reasoned that once the Respondent's status as an MSME and the delay in payment were established, the penal interest under Sections 15 and 16 followed as a statutory consequence

It rejected the Petitioner’s argument that Section 18 was a mandatory prerequisite for such interest, clarifying that the MSMED Act overrides the A&C Act regarding interest rates but does not negate a validly constituted arbitral tribunal's power to award it

Finally, the 20% future interest was upheld as a deterrent measure within the Arbitrator's statutory discretion under Section 31(7)(b), noting that high interest rates alone do not constitute patent illegality unless they shock the judicial conscience

The Arbitrator’s interpretation of the variation clause was plausible

Statutory interest under the MSMED Act is an absolute obligation independent of the Section 18 procedure

The rate of future interest was within the tribunal's discretion

The Court directed the Petitioner (Judgment Debtor) to deposit the entire awarded sum with accrued interest within four weeks and allowed the Enforcement Petition to proceed