SUPREME COURT: ARBITRATORS CAN AWARD POST AWARD INTEREST ON INTEREST PENDENTE LITE
The Supreme Court has:
Held
that post-award interest under Section 31(7)(b) of the Arbitration and
Conciliation Act, 1996 would also be awarded on the amount of interest
pendent lite, if any, and not merely on the principal sum
Interpreted
the word ‘sum’ used in Section 31(7), sub-clauses (a) and (b) of the
Act to be an amount
of money that could include principal or interest or
both.
The Supreme Court’s judgment in State of Haryana and Others vs S.L. Arora & Co. was pronounced as incorrect and overruled
INTRODUCTION
In
its recent judgment of M/s Hyder Consulting (UK) Ltd v. Governor State
Of Orissa through Chief Engineer, the Supreme Court has considered the
much debated question of whether post-award interest can be awarded by
an arbitral tribunal on pendite lite interest under Section 31(7) of the
Arbitration and Conciliation Act, 1996 (“ Act”). The majority decision
has held in the affirmative.
FACTS
An arbitral
award of Rs.2,30,59,802 was made in favour of the appellant. During
execution proceedings, the District Judge ordered payment of
Rs.8,92,15,993 taking into account interest payable on the principal
amount and the interest pendant lite thereon for the calculation of post
award interest.
The High Court of Orissa, quashed the order of
the District Judge on the basis of the judgment of the Supreme Court in
the case of State of Haryana v. SL Arora and Co.1 (“SL Arora Case”)
which stated that “interest on interest” in the post award phase could
not be awarded. This order was set aside by the High Court of Orissa and
the District Judge was instructed to calculate the total amount payable
without considering interest on interest pendent lite.
The High Court’s order was appealed in the Supreme Court.
ISSUE
Whether,
under Section 31(7) of the Act, interest pendent lite is included
within the “sum” payable as per the arbitral award, for the purposes of
awarding post-award interest.
Whether the judgment in the SL Arora
Case contained any infirmity, inter alia, in its interpretation of the
McDermott2 and the Three Circles3 cases.
JUDGMENT
Majority Decision (A Bobde and AM Sapre J.J)
Contrary
to the view taken by the Hon’ble CJI, the majority decision disagreed
with the judgment in theSL Arora Case whereby it had been held that
unless stated in the contract, the tribunal did not have the power to
provide for interest on pre-award interest. The Hon’ble Court stated
that post award interest, as prescribed under Section 31(7)(a) of the
Act, would also be applicable to the interest pendent liteand not merely
the principal amount awarded by an arbitral tribunal.
In this regard, the Hon’ble Court reasoned and held as follows:
Section
31(7)(a) of the Act contemplated that the term “sum” would include
interest for the pre-award period on the entire sum awarded by an
Arbitral Tribunal. Only if no interest is awarded would “sum” comprise
only the principal. This was evident from the language of Section
31(7)(a) of the Act which stated that “…the arbitral tribunal may
include in the sum for which the award is made interest…” The Court,
thus, concluded that this line in the Act itself suggested that the term
“sum” could include interest.
On a comparison with Section 34 of
the Code of Civil Procedure, 1908 (“CPC”) (which concerned interest in
civil suits), the language of Section 31(7) of the Act was different and
evidently intended to have a different effect.
It was held that
since Section 34 of CPC empowered the Court to award interest “on the
principal sum” and not merely the “sum” as provided under Section 31(7)
of the Act. Thus, clearly the ambit of Section 31(7) of the Act was to
include the pre-award interest awarded along with the principal sum. Had
that not been the case Section 31(7) of the Act would have the same
language as the Section 34 of the CPC.
At
the post-award stage the “sum directed to be paid by an arbitral
tribunal” would include interest, as elucidated above. Thus, any post
award interest being granted by the tribunal under Section 31(7)(b) of
the Act is only on the “sum directed to be paid by an arbitral tribunal”
and not on any amount referred to as “interest”. Thus, usage of the
term “interest on interest” seems inaccurate.
The purpose of
enacting the provision under Section 31(7) was to encourage early
payment of the awarded sum. Thus, “sum” could be interpreted to include
interest, in line with the purpose of the provision.
Minority Dissenting Judgment (HL Dattu, CJI)
The
Hon’ble Judge considered the decision of the Supreme Court in the SL
Arora Case and found it to be correct. The Hon’ble Judge considered the
following rationale under the SL Arora Case:
The
use of the words "where and insofar as an arbitral award is for the
payment of money"and use of the words "the Arbitral Tribunal may include
in the sum for which the award is made, interest... on the whole or any
part of the money" in Clause (a) and use of the words"a sum directed to
be paid by an arbitral award shall... carry interest" in Clause (b) of
Sub-section (7) of Section 31 clearly indicate that the section
contemplates award of only simple interest and not compound interest or
interest upon interest.
The Hon’ble Judge held that the
interpretation of Section 31(7) of the Act under the SL Arora Case was
correct and therefore the judgment therein was not per incuriam.
It
was further held that the interest awarded under Section 31(7) of the
Act was only towards compensating one party for the other party’s
withholding of the money which rightfully belonged to the first party
and not for withholding the interest. Thus, post-award interest could
only be paid towards the principal sum claimed by the party and not
towards the interest pendente lite.
The
word “sum” under sub-sections (a) and (b) of Section 31(7) of the Act,
in this regard, was also interpreted to mean the money directed to be
paid as per the award and did not include the interestpendent lite.
Dattu J. examined a number of legal dictionaries to give the term “sum”
its ordinary meaning and in doing so arrived at the conclusion that
“sum” could only mean principal sum and not interest.
ANALYSIS
The
majority judgment in this case has used the literal rule of
interpretation to read the provisions as they are and give them their
plain meaning in order to glean the legislative intent from the words
used in the provisions. It has examined the legislative intent to
determine that the word “sum” would have to be read as inclusive of the
principal and interest pendent lite. The implication of this majority
judgment would be that parties would avoid unnecessary delays or
prolonging of proceedings during the course of arbitration. During the
post-award stage, there would be a reduction in frivolous challenges to
the enforcement of awards, by the parties since the parties would be
paying a hefty interest over a potentially enlarged claim amount.
The
judgment is also in line with the Law Commission in its Report on
Amendments to Arbitration and Conciliation Act, 19964 wherein the
inclusion of an explanation to Section 31(7)(b) that would legislatively
overrule the decision of the Supreme Court in SL Arora Case and
including interestpendent lite as a part of word ‘sum’ has been
suggested.
The dissenting judgment does provide food for thought;
considering the nature of the term interest, which is compensatory in
nature. There could be a legitimate argument that should the dispute
have been adjudicated through a suit then post decree interest would
only be over the decretal principal and not over the pendent lite
interest. However, merely because the dispute is adjudicated through an
arbitral award, parties become entitled to a post award interest over
both the principal and the interestpendent lite, it remains to be see if
the legislature intended such a result.
One could also see, as
the Hon’ble Chief Justice has held, that in the portion “the arbitral
tribunal may include in the sum for which the award is made interest” of
Section 31(7)(a) could be read dichotomously to state that the sum
means principal but such principal could also include interest, when the
award is being given.
It is important to note that while interest
on pendente lite interest may be payable in respect of domestic
arbitrations, it may not be applicable to international arbitrations
seated outside India. This is owing to the non-applicability of Section
31(7) of the Act to foreign awards5 and the absence of a similar
provision under Part II of the Act which deals with the execution of
foreign awards.
While this
judgment has overruled SL Arora Case and has reversed the position of
law as laid down therein, given the importance of this issue in the
realm of arbitration it remains to be seen whether the case would be
considered by a constitution bench of the Supreme Court, for further
clarity on the issue.