Introduction
The Hon'ble Supreme Court (hereinafter the "Hon'ble Court") has recently in the case of R.P Garg v. The Chief General Manager, Telecom Department and Ors.1, clarified that arbitral awards passed under the Arbitration and Conciliation Act, 1996 (hereinafter the "Act") must carry post-award interest as per section 31(7)(b) of the Act. The aforesaid decision of the Hon'ble Court emerges as the latest development in a string of judgements, that have evolved the jurisprudence surrounding the grant of post-award interest under the Act. Section 31(7) of the Act provides for the power of an arbitral tribunal to grant two types of interest: (1) pre-award interest, i.e., the date on which the cause of action arose and the date on which the arbitral award is made and (2) post-award interest i.e., the period after the issuance of the arbitral award until the actual payment. Additionally, Section 31(7) of the Act also provides for the power of an arbitral tribunal to exercise discretion within specific parameters such as the rate of interest, the amount on which such interest is to be paid, and the period for which the interest would be applicable. The said provision in the Act goes a long way in ensuring the awarded party is fairly compensated for any deferred payments, thereby reinforcing timely compliance with the award and aligning with the principles of justice.
As various judgements of the Hon'ble Court and the Hon'ble High Courts in India continue to shape and clarify the interpretation of section 31(7) of the Act, understanding the jurisprudence around the grant of post-award interest becomes increasingly important, especially the questions surrounding the scope and interpretation of whether 'sum' under Section 31(1)(b) encompasses both: (1) principal sum awarded by an arbitral tribunal and (2) interest awarded as per Section 31(7)(a), and the discretion of arbitrators in determining interest rates and the portion of sum on which interest can be awarded by the arbitral tribunals.
Analysis
As per Section 31(7) of the Act, unless otherwise agreed by the parties and wherein the arbitral award is for the payment of money, interest is awarded on the "sum" for which the award is made. The section is divided into two key clauses: Section 31(7)(a), which pertains to pre-award and pendente lite interest, and Section 31(7)(b), which concerns post-award interest. Another key difference between clause (a) and (b) of Section 31(7) is the fact that as per, Section 31(7)(a), pre-award and pendente lite interest cannot be granted by an arbitral tribunal, if the parties already have an agreement to that effect. However, no such bar is present in the section dealing with post-award interest i.e., Section 31(7)(b), which enforces the fact that the grant of post-award interest is a statutory right, which cannot be signed away by parties by way of an agreement. The difference in the language of the abovementioned two sections has given rise to significant debate into the interpretation of the sections.
One of the key questions in interpreting Section 31(7) in terms of post-award interest was whether the term 'sum' stipulated in the language of Section 31(7)(b) includes only the principal amount awarded in an arbitral award or would also be inclusive of the amount awarded as pre-award interest under Section 31(7)(a). Earlier this was answered in the negative by the Hon'ble Court in the case of State of Haryana and Ors. v. S.L. Arora2, wherein the Hon'ble Court held in favour of a narrower view, by restricting the scope of 'sum' under Section 31(7)(b) to mean only the principal amount and not the pre-award interest on the principal amount. However, the aforesaid ruling was overruled by the Hon'ble Court vide its decision in Hyder Consulting (UK) Limited v. State of Orissa3 wherein, the Hon'ble Court opined that, in deciding the post-award interest, the term 'sum' under Section 31(7)(b) can include both the principal amount awarded and pre-award interest awarded under Section 31(7)(a). Here, the Court emphasized that the Act does not qualify the term by specifying it as 'principal', thereby allowing a broader interpretation and accordingly a broader interpretation of the term 'sum' under Section 31(7)(b) was accepted.
The broader interpretation in Hyder Consulting (supra), implies that post-award interest can be charged on the total amount, which includes the principal plus any pre-award interest awarded under Section 31(7)(a). Since the ruling in Hyder Consulting (supra), the aforesaid interpretation has been affirmed in subsequent rulings, such as UHL Power Company Limited v. State of Himachal Pradesh4, wherein the Hon'ble Court upheld an arbitral tribunal's authority to award interest on the total sum (inclusive of pre-award interest), aligning with the statutory intent of compensating parties for delays in payment. Furthermore, it is interesting to note that the ruling in S.L. Arora (supra) had initially held that arbitrators could only award simple interest unless specifically authorized by contract or statute. However, this view was challenged in Hyder Consulting (supra), where the Hon'ble Court recognized that the term 'sum' could include interest, thereby allowing for the grant of compound interest under Section 31(7) of the Act.
The UHL Power (supra) decision further reinforced the permissibility of awarding compound interest, emphasizing that such awards are not against public policy. The Hon'ble Court ruled that arbitral tribunals are armed with the discretion to award compound interest, which is consistent with the notion to fully compensate the award-holder for delays, emphasizing the legislative intent behind Section 31(7) of the Act. This development marked a shift from earlier conservative interpretations of section 31(7), thereby expanding the scope of an arbitral tribunal's discretion in granting interest in arbitral awards.
A critical aspect of the debate also revolves around whether the interpretation of Section 31(7) can deviate from the provisions of the Code of Civil Procedure ("CPC"), particularly Section 345 of the CPC. The CPC allows courts to grant interest only on the 'principal sum', but Section 31(7) of the Act makes no such specific distinction, suggesting a broader scope for arbitral tribunals. In Hyder Consulting (supra), the Hon'ble Court highlighted the aforesaid departure and stated that the omission of the word 'principal' in Section 31(7) of the Act reflects a legislative intent to afford greater flexibility to arbitrators and arbitral tribunals. This interpretation also supports the notion that arbitral awards need not be confined to the restrictions under the CPC, enabling a more commercially reasonable outcome for all the parties involved in arbitration proceedings.
It is pertinent to note that Section 31(7)(a) of the Act, provides discretion to an arbitral tribunal to decide the rate of interest, the portion of money such interest would apply on, and the period of time on which interest would be applicable. However, such wide discretion and flexibility are not present in the language of Section 31(7)(b) of the Act. Furthermore, Section 31(7)(b) of the Act uses the phrase "unless the award otherwise directs," which raised questions about the extent of an arbitrator's discretion in granting post-award interest. While the "sum" for which the post-ward interest has to be calculated can be inclusive of pre-award interest - was established by Hyder Consulting (supra), the question that later arose was, whether an arbitral tribunal has the discretion to award such interest on only a "part" of that sum? This important question was clarified by the Hon'ble Court in the decision of Morgan Securities & Credits (P) Ltd. v. Videocon Industries Ltd.6, wherein the Hon'ble Court laid down that Section 31(7)(b) of the Act grants arbitral tribunals discretion not only over the rate of interest, but also grants the discretion to award post-award interest on part of the "sum" of award, the word "sum" connoting an aggregate of the principal and interest.
Further, in the latest judgment by the Supreme Court in the case of R.P Garg (supra) the Hon'ble Court has held that the sum directed to be paid under the arbitral award shall carry interest and cannot be contracted out by any agreement/ stipulation between the parties to that effect. Therefore, the aforesaid decision solidifies the fact that the grant of post-award interest is a statutory right and is not subject to agreement between the parties, which also demarcates the difference between Section 37(1)(a) and Section 37(1)(b) of the Act. The expression 'unless the award otherwise directs' in Section 31(7)(b) relates to the rate of interest and not entitlement of interest, accordingly, the rate of interest granted under the award is to be given precedence over the statutorily prescribed rate.
The recent case of Morgan Securities (supra) has clarified arbitral discretion under Section 31(7)(b) and highlighted the reasonableness of post-award interest rates. It reinforces that while arbitrators have significant leeway, they must exercise it wisely. Unlike the SL Arora (supra) case, which excluded interest from the term 'sum,' and the Hyder Consulting (supra) case, which included both principal and interest, the ruling in Morgan Securities (supra) establishes that arbitrators can apply interest to only part of the sum. It thus provides a clearer interpretation of Section 31(7)(b), signifying that the arbitral tribunal's flexibility in granting pre-award interest in Section 31(7)(a) should also apply while granting post-award interest.
Conclusion
The jurisprudence on interest in arbitral awards under Section 31(7) of the Act has evolved considerably, shifting from a conservative and narrower interpretation of the discretion held by an arbitral tribunal, while granting post-award interest, towards a broader, more flexible understanding. The key cases discussed hereinabove underscore the courts' attempts to bring in line the interpretation of Section 31(7) of the Act with the intention of the legislature. The current legal position, shaped by these cases and statutory amendments, empowers arbitrators to award interest, including compound interest, and to include pre-award interest in the 'sum', thereby allowing grant of interest on interest. This evolution enhances the effectiveness of arbitration as a dispute resolution mechanism, aligning it more closely with the principles of time-bound efficiency and providing appropriate monetary compensation to the parties.
Footnotes
1 (2024) INSC 743
2 MANU/SC/0131/2010
3 MANU/SC/1078/2014
4 MANU/SC/0019/2022
5 Section 34 of the Code of Civil Procedure, 1908 ("CPC"), gives the Court power to grant interest on the "principal sum" and not the "sum", unlike Section 31(7) of the Arbitration and Conciliation Act, 1996.
6 MANU/SC/1084/2022
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