I. Introduction
Recently, the Hon'ble Supreme Court ("the Hon'ble Court/Hon'ble SC") in North Delhi Municipal Corporation v. M/S. S.A. Builders Ltd.1("North Delhi Municipal Corporation") has reaffirmed the Arbitrator's authority to grant post-award interest on the interest amount under Section 31(7)(b) of the Arbitration & Conciliation Act, 1996 ("the Act/1996, Act"). The Hon'ble Court, relying on its earlier judgment in M/s Hyder Consulting (UK) Limited v. Governor, State of Orissa,2 ("Hyder Consulting") held that the post-award interest would be granted on both the principal amount and the interest on the principal amount, which together would constitute the 'sum' awarded. This article examines key Hon'ble SC rulings on the subject and explores the nuances of an Arbitrator's authority to grant post-award interest, addressing whether interest on interest may be awarded and identifying which components of an arbitral award may be subject to such a grant.
II. Statutory Framework in the Act for Awarding Interest on Award
Section 31 of the Act primarily delineates the broad contours of the form and contents of the arbitral award. It is Section 31(7) of the Act which permits the Arbitral Tribunal to grant interest on the award in three distinct stages- (i) pre-award interest, (ii) pendente lite, and (iii) post-award interest. The statutory scheme relating to the grant of interest provided in Section 31(7) creates a distinction between interest payable before and after the award. Section 31(7)(a) of the Act provides for pre-award interest, that is for the period between the date on which the cause of action arose and the date on which the award is made; and Section 31(7)(b) provides for post-award interest, between the date of award to the date of payment. Under Clause (a), the arbitrator has the discretion regarding pre-award interest to determine (i) the applicable interest rate for the awarded sum; (ii) the amount on which such interest will be payable (whether the full award or a part); (iii) the duration for which interest is to be paid on the awarded sum. In contrast to Clause (a), Clause (b) merely states that the awarded sum shall accrue interest at a 2% higher than the prevailing interest rate unless the arbitral award specifies otherwise.3 Thus, Clause 31(7)(b) is only applicable if the Arbitral Award is silent about the rate of post-award interest.
The legislature's prime intention behind awarding pre-award interest is primarily to compensate the Claimant for the pecuniary loss suffered from the time the cause of action arose until the passing of the arbitral award. Similarly, the grant of post-award interest serves as a disincentive to the award debtor not to delay payment of the arbitral amount to the award holder.
III. Jurisprudence on Interpretation of "Sum" under Section 31(7)(b) of the Act
In the context of post-award interest under Section 31(7)(b), the term' Sum' has elicited differing and inconsistent interpretations from the Hon'ble SC. Previously, the Court Hon'ble SC interpreted it to refer solely to the 'principal amount', excluding the interest portion. However, in recent times, the Hon'ble SC has consistently maintained that the 'sum' awarded encompasses the total of the principal amount plus any pre-award interest which may have been granted.4 Certain seminal judgements of the Court interpreting 'sum' under Section 31(7)(b) have been discussed hereunder-
In State of Haryana v. S.L. Arora & Co,5 ("SL Arora") the Hon'ble SC, while interpreting the expression "sum" under Section 31(7), ruled that the provision did not make any reference to the payment of compound interest or interest on interest. Therefore, the Hon'ble SC opined that the phrase "sum directed to be paid by the award" refers to the award of "sums on substantive claims", that is, the principal amount. The Court had further held that in the absence of a provision enabling the grant of compound interest, such a power cannot be read into the provisions either for the pre-award period or for the post-award period.
However, the Hon'ble SC in Hyder Consulting disagreeing with the view taken in SL Arora held that the sum directed to be paid by the Arbitral Award under Section 31(7)(b) of the Act, is inclusive of the interest granted pendente lite along with the principal amount. The Hon'ble SC reasoned that the legislature had consciously used the word "sum" in Section 31(7) of the Act, to refer to the aggregate of the amounts that may be directed to be paid by the Arbitral Tribunal and not merely the "principal" sum without interest. Therefore, the "sum" for the post-award period under Section 31(7)(b) would be the sum arrived at after the merging of interest with the principal, as the two components would lose their separate identities.
The Hon'ble SC reiterated the same in UHL Power Company v. State of Himachal Pradesh,6 observing that the position of law regarding an arbitral tribunal awarding compound interest was no longer res integra in view of the judgement in Hyder Consulting, which had overruled the judgement in S.L. Arora. It, therefore, affirmed that an Arbitrator can grant post-award interest on the interest amount under Section 31(7)(b) of the Act.
IV. Analysis of the Instant Case
The Hon'ble SC in North Delhi Municipal Corporation was adjudicating a dispute in which the Arbitrator, in the original award, had not specified whether the granted interest would be calculated on the principal sum or the principal sum plus interest accrued from the date of cause of action to the date of the award. Subsequently, vide another order, the Tribunal clarified that post-award interest would accrue on both the amount of claim plus the interest for the pre-reference period and interest pendente lite under Section 31(7) of the Act. Assailing this clarification from the Tribunal, the Appellant submitted that the judgement in Hyder Consulting was not an authority for the proposition that where the arbitrator had exercised his jurisdiction not to grant compound interest, even then such compound interest should be granted. The Hon'ble SC carefully examined the issue and concluded that if the Tribunal exercises its discretion and grants interest for the pre-award period, then the 'sum' directed to be paid by the arbitral award for the post-award period under Clause (b) of sub-Section (7) of Section 31 of the 1996 Act would be inclusive of the interest granted pendente lite. Put, while the Arbitrator has the discretion to award or not award interest under Section 31(7)(a), however, if the Arbitrator exercises its discretion to award interest on the principal amount, then post-award interest under Section 31(7)(b) would be automatically levied on the aggregate sum of the principal amount and the interest levied thereto.
V. Contrasting Scheme under the Arbitration Act of 1940
The legal position on the Arbitrator's power to grant interest was vastly different under the Arbitration Act of 1940 from the 1996 Act. The 1940 Act did not contain any specific provision that dealt with the arbitrator's power to grant interest. However, in the interests of justice, a general power to award interest was usually assumed to be vested with the Arbitrator unless there was an express provision excluding such jurisdiction of the Arbitrator from awarding interest for the dispute in question.7 However, ambiguity persisted on whether interest on interest could be granted for the post-award period under the 1940 Act, similar to the 1996 Act.
The Hon'ble SC, recently, in DK Khosla v. Union of India8 The context of the 1940 Act clarified the legal position in this regard. The Hon'ble SC has categorially observed that an Arbitrator is not authorized to award interest on interest as neither the Act specifically empowered the Arbitrator nor the Court to award interest upon interest, nor was there any other provision which provided for the grant of compound interest or interest upon interest. Therefore, such a power cannot be conferred on the Arbitral Tribunal without an enabling provision.
VI. Conclusion
The Hon'ble SC's reiteration of the Arbitrator's power to grant interest on interest in the post-award period under Section 31(7) of the Act has solidified the law in this regard. The judgement clearly recognizes that interest for the post-award period would be superimposed over the interest granted in the pre-award period. However, it is crucial to note that the Arbitrator is not permitted to impose interest on interest for the post-award period on claims under the 1940 Act due to the absence of a similar enabling provision.
Footnotes
1 North Delhi Municipal Corporation v. M/S. S.A. Builders Ltd, 2024 INSC 988.
2 M/s Hyder Consulting (UK) Limited v. Governor, State of Orissa, 2016 SCC 6 362.
3 The provision was amended via the Arbitration and Conciliation (Amendment) Act, 2015. The pre-amendment provision reads: "A sum directed to be paid by an arbitral award shall unless the award otherwise directs, carry interest at the rate of eighteen per centum per annum from the date of the award to the date of payment."
4 Morgan Securities & Credits (P) Ltd. v. Videocon Industries Ltd, (2023) 1 SCC 602. Also refer to R.P. Garg v. the Chief General Manager, Telecom Department, 2024 INSC 743.
5 State of Haryana v. S.L. Arora & Co, (2010) 3 SCC 690.
6 2022 SCC OnLine SC 19.
7 Pam Developments Private Limited vs The State of West Bengal, 2024 INSC 628.
8 DK Khosla v. Union of India, 2024 INSC 587.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
