Hon'ble Supreme Court of India ("Court") had in the case of Morgan Securities and Credits Pvt Ltd v. Videocon Industries Ltd,1 ("Morgan Securities") clarified the issue of whether the Arbitral Tribunal has the discretion to grant post-award interest on any part or whole of the 'sum' as provided in Section 31(7)(b) of the Arbitration and Conciliation Act, 1996 ("Act"). In Morgan Securities, the Court had ruled that the Arbitral Tribunal has the discretion to award post-award interest on any part or the whole of the 'sum' as interpreted in Hyder Consulting (UK) Limited v. Governor, State of Orrisa2 ("Hyder Consulting") under Section 31(7)(b) of the Act.
BACKGROUND
On 27.01.2003, the Appellant (Morgan Securities and Credit Pvt Ltd) and the Respondent (Videocon Industries) entered into an agreement under which the Respondent availed of bill discounting facilities from the Appellant. The Appellant disbursed Rs 5,00,32,656 pursuant to the said agreement. However, the said dues remained unpaid. The Appellant issued a notice on 31.01.2006 invoking the arbitration clause of the agreement.
Pursuant to the invocation of arbitration clause, the Sole Arbitrator rendered an arbitral award in favor of the Appellant on 01.03.2013 and decreed the claim of the Appellant to the tune of Rs. 5,00,32,656. In the said award, the Sole Arbitrator had also awarded interest on the decreed amount in the following manner:
- nterest at the rate of 21% P.A from the date of default to the date of the demand notice
- Interest at the rate of 36% P.A. from the date of demand notice to the date of the award.
- Interest at the rate of 18% P.A. on the principal amount of Rs 5,00,32,656 from the date of award to the date of payment.
The aforesaid award was challenged under Section 343 of the Act before the Hon'ble Delhi High Court wherein the Appellant had urged that the post-award interest of 18% per annum should be granted on the total sum awarded i.e. sum being inclusive of principal and the pre-award interest. The Hon'ble Delhi High Court dismissed the petition vide judgment dated 07.02.2019 holding that the Ld. The Arbitrator had in his discretion restricted the post-award interest to the principal amount and that the Court would not interfere with the exercise of this discretion by the Ld. Sole Arbitrator under Section 34 of the Act.
The Appellant challenged the judgment dated 07.02.2019 under an appeal filed u/s 37 of the Act and the same was also dismissed by the Division Bench by a judgment dated 26.02.2020. The Division Bench of the High Court observed that the judgment in Hyder Consulting clarifies that when the arbitral award is silent on postaward interest, it would be payable on the 'sum' awarded, which would include both the principal and the pre-award interest. The Appellant being aggrieved by the Judgment of the Division Bench of the Delhi High Court instituted proceedings under Article 136 of the Constitution whereupon notice was issued by Apex Court was confined to the issue of postaward interest on 16.07.2021.
ISSUES DISCUSSED IN MORGAN SECURITIES AND CREDITS PVT LTD V. VIDEOCON INDUSTRIES LTD (CIVIL APPEAL NO. 5437 OF 2022)
a. Grant of Post-Award Interest under Section 31(7)(b) of the Act
Section 31(7) of the Act contemplates the grant of interest by the Arbitral Tribunal for two different scenarios: Section 31(7)(a) of the Act provides for the grant of pre-award interest i.e. interest for the period between the date on which cause of action arose and the date on which the award is made by the Arbitral Tribunal, and Section 31(7)(b) of the Act provides for post-award interest i.e. interest for the period between the date of award to the date of payment. Unlike Section 31(7)(a) of the Act, Section 31(7)(b) of the Act provides that a sum directed to be paid under an arbitral award shall carry interest from the date of award to the date of payment, the use of the term 'shall' may be taken to mean that Arbitral Tribunal has no discretion under Section 31(7)(b) of the Act other than specifying through the direction in the award about the rate of interest.
b. Ruling of Hyder Consulting and discretion to grant interest under Section 31(7)(b) of the Act
In Morgan Securities, the Apex Court ruled that the decision in Hyder Consulting was on the limited issue of whether post-award interest could be granted on the aggregate of the principal and the pre-award interest. The Apex Court observed that issue of whether the Arbitral Tribunal could award post-award interest on a part of the aggregate sum was not conclusively decided in the opinions forming part of the majority in Hyder Consulting.
In Hyder Consulting, Sapre J in Para 10 had observed that what carried under Section 31(7)(b) of the Act is the "sum directed to be paid by an arbitral award" and not any other amount much less by or under the name "interest". Accordingly, Sapre J held that the interest under sub-clause (b) is granted on the "sum" directed to be paid by an arbitral award wherein the "sum" is nothing more than what is arrived at under Section 31(7)(a) of the Act. Sapre J. noted that while the grant of pre-award interest is at the discretion of the Arbitral Tribunal; postaward interest is mandated by the statute where the Arbitral Tribunal only has the discretion to decide the rate of interest.
Whereas, the opinion of Bobde J. did not rule on whether the Arbitral Tribunal had the discretion to order post-award interest on a part of the 'sum' that was arrived under Section 31(7)(a). Thus, in Morgan Securities, the ruling of Hyder Consulting was not interpreted as having placed fetters on the discretion of the Arbitral Tribunal in the grant of post-award interest under Section 31(7)(b) of the Act.
c. Discretion of Arbitral Tribunal to grant postaward interest under Section 31(7)(b) of the Act
Once the ruling of Hyder Consulting is placed in context, it becomes apparent that the foundation for the power of the Arbitral Tribunal to award post-award interest on part of 'sum' has to be identified within the wordings of Section 31(7)(b) of the Act. An important aspect in this regard is the use of the phrase 'unless the award otherwise directs' in Section 31(7)(b) of the Act. Section 31(7)(b) of the Act simply provides that the sum directed to be paid by an arbitral award shall carry interest at a specified rate from the date of award to the date of payment unless the award otherwise directs. Interestingly, the Court, in Morgan Securities, has interpreted 'unless the award otherwise directs' as qualifying only the rate of postaward interest. In Morgan Securities, the Court contrasted the qualifier in Section 31(7)(b) with Section 31(7)(a) of the Act wherein "unless otherwise agreed by the parties" occurs at the beginning of the clause and thus qualifying the entire provision. Whereas "unless the award otherwise directs" appears in Section 31(7)(b) of the Act after the words 'a sum directed to be paid by an arbitral award shall' and before the words 'carry interest at the rate of eighteen per cent' and thus qualifies only the rate of interest.
Ratio of the Judgment in Morgan Securitie
The ruling of the Court in Morgan Securities is significant as it discussed the limitation and restriction on the exercise of discretion in grant of interest by the Arbitral Tribunal. The Court had by its judgment, strengthened a more flexible approach in determination of interest especially at the post-award stage by the Arbitral Tribunal. The Court compared the discretion available to Arbitral Tribunal in grant of interest at pre-award and post-award stage under the Act. Under Section 31(7)(a) of the Act, a wider discretion is conferred on the Arbitral Tribunal in regard to determine the reasonable rate of interest, the sum on which the interest is to be paid and the period for which payment of interest is to made. On the other hand, Section 31(7)(b) of the Act only contemplates a situation where the arbitration award is silent on post-award interest, in which event the award-holder is entitled to a post-award interest of eighteen percent. The Court held that the discretion of the Arbitral Tribunal can only be restricted by an express provision to that effect and there is nothing in Section 31(7)(b) of the Act which restricts the discretion of the Arbitral Tribunal for the grant of post-award interest. In Morgan Securities, Court has interpreted Section 31(7)(b) to hold that the Arbitral Tribunal has the discretion to grant post-award interest and that clause (b) of Section 31(7) of the Act does not fetter the discretion of the Arbitral Tribunal to grant post-award interest on the 'sum' as interpreted in Hyder Consulting or any part thereof.
Finally, the Court ruled that the Arbitral Tribunal must exercise the discretion in good faith, must take into account relevant considerations and must rationally taking cognizance of the surrounding circumstances.
CONCLUSION
The ruling of Morgan Securities is a welcome development as much as it lays down the ambit of discretion available in the grant of postaward interest by the Arbitral Tribunal. The Court has emphasized that Arbitral Tribunal takes note of various factors such as the financial standing of the award-debtor and the circumstances of the parties in dispute before awarding interest. The ruling of Morgan Securities clearly holds that the exercise of discretion in terms of whether interest is levied on principal or 'sum' as interpreted in Hyder Consulting stands clear from the perversity in terms of Section 34 of the Act.
Footnotes
1. Morgan Securities and Credits Pvt. Ltd. v. Videocon Industries Ltd, Civil Appeal No. 5437 of 2022.
2. Hyder Consulting (UK) Limited v. Governer, State of Orrisa, (2015) 2 SCC 189.
3. Morgan Securities & Credits Pvt Ltd v. BPL Display Devices Ltd and Anr, O.M.P No. 972 of 2013 & Videocon Industries Ltd. v. Morgan Securities & Credits Pvt Ltd and Anr, O.M.P No. 665 of 2013.
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