Awarding of 'Interest on interest' by Arbitral Tribunal, CJI says, it is impermissible; Justice Bobde and Justice Sapre say, yes it is permissible. Decoding Section 31 (7) of the Arbitration and Conciliation Act, 1996 [Read the Judgment]

Three Judges of the Supreme Court have delivered three Judgments on an interesting question of law. While the Chief Justice H.L Dattu, heading the Bench interpreted the section against adding interest on interest, CJI's brothers on the Bench, Justice S.A Bode and Justice A. M Sapre, through independent judgments, dissented and laid down the law to be followed henceforth.

The precise question before the three Judge Bench was  'an award of interest  on  interest  from  the  date  of  award  is  permissible under sub- section (7) of section  31  of  the  Arbitration  and Conciliation Act, 1996 ?' .

In State  of  Haryana  and  Others v. S.L. Arora and Company, (2010) 3 SCC  690) it was held that interest on interest is not permissible. The said judgment was doubted based on the contention that the SL Arora decision was  not in  consonance  with earlier decisions of the Supreme  Court, viz McDermott International INC v. Burn Standard Co. Ltd. and Others, (2006) 11  SCC  181; Uttar Pradesh Cooperative Federation Limited v.  Three  Circles,  (2009)  10 SCC 374; Oil and Natural Gas Commission v.  M.C.  Clelland  Engineers  S.A., (1999) 4 SCC 327; and Central Bank of India v. Ravindra and  Others,  (2002) 1 SCC 367 and finally the issue travelled to three judges Bench for an authoritative pronouncement.

Sri K K Venugopal who appeared for the appellants canvassed for ' interest on interest' contenting that SL Arora decision is no longer good law, on the other hand Sri L N Rao supported Arrora's case.

CJI after an elaborate discussion touching various aspects such as concept  of  "per incuriam" ,the meaning  of the words "sum" and "interest" as used in clause (a) of sub- section (7)  of section 31 of the Act, 1996, the meaning  of  "interest" and the principles of interpretation to be resorted to, concurred with the judgment in State  of  Haryana  and  Others v. S.L. Arora and Company, and echoed the view that the reliance  upon  the McDermott case  in the 'three Circles  case'  is not in consonance with the doctrine of  precedents. According to CJI "On  a  perusal  of  the McDermott case (supra), it is observed that the substantive  proposition  of that case did not address the issue on the power of the  tribunal  to  award 'interest on interest' or compound interest. The proposition  on  'interest on interest' was made only in one  of  the  submissions  of  the  respondent therein.  The  ratio  decidendi  of  that  decision  merely  laid  down  the discretion of the arbitrator to decide the rate of  interest  awarded  under sub- section (7) of section 31 of the Act, 1996, on a part or whole  of  the award money"

And after an elaborate discussion touching various aspects of the issue, CJI read sub -section (7)  of section 31 of the Act, 1996 as follows :

"Therefore, in my considered view, the  term  "sum"  as  used  in clause (b) of sub- section (7) of section 31 of the  Act,  1996  would  have the same meaning as assigned to the  word  under  clause  (a)  of  the  same provision. It would refer to  the  money  as  adjudicated  by  the  arbitral tribunal based on the claim of the parties to the arbitral  proceedings.  It has already been  noticed  that  this  money  would  be  distinct  from  the interest as may have been awarded by the arbitral tribunal under clause  (a) of sub- section (7) of section 31 of the Act, 1996. Therefore, the  interest under clause (b) would be imposed on money awarded by the arbitral  tribunal on the basis of the claims of the parties, and the said money  cannot  merge within it any interest as imposed in the period from the date  of  cause  of action to the date of the award"

" I find no infirmity with the S.L. Arora case (supra), whereby  it  was held that if the arbitral award is silent about interest from  the  date  of award till the date of payment, the person in  whose  favour  the  award  is made will be entitled to interest at 18% per annum on the  principal  amount awarded, from the date of award till the date of payment."

Justice Bobde, though agreed with findings in  S.L. Arora case that 'three  Circles 'was  incorrectly  founded   upon   the   decision   in   McDermott International and  that such reliance was not in consonance with  the  doctrine  of  precedent, did not  agree with CJI's final conclusion of supporting S.L Arora's case.

According to Justice Bobde"Clause (a) of sub-section (7) provides that where  an  Award  is  made for the payment of money, the Arbitral Tribunal may include interest in  the sum for which the Award is made.  In plain terms, this provision  confers  a power upon the Arbitral Tribunal  while  making  an  Award  for  payment  of money, to include interest in the sum for which the Award is made on  either the whole or any part of the money and for the whole  or  any  part  of  the period for the entire pre-award period between the date on which  the  cause of action arose and the date  on  which  the  Award  is  made.   To put it differently, sub-section (7)(a) contemplates that  an  Award,  inclusive  of interest for the pre-award period on the entire amount directed to  be  paid or part thereof, may be passed.  The "sum" awarded may be principal amount and such interest as the Arbitral Tribunal deems fit.   If no  interest  is awarded, the "sum" comprises only  the  principal.   The significant words occurring in clause (a) of sub-section (7) of Section 31  of  the  Act  are "the sum for which the award is made."  On a plain reading, this expression refers to the total amount or sum for the payment for which the Award  is made.  Parliament has not added a qualification like "principal"  to  the word "sum," and therefore, the word "sum" here simply  means  "a  particular amount of money."  In Section 31 (7), this particular amount of money may include interest from the date of cause of action to the date of the award."

The judge concluded thus "15.   In the result, I am of the view that S.L.  Arora's  case  is  wrongly  decided in that it holds that a sum directed  to  be  paid  by  an  Arbitral Tribunal and the reference to the Award on the substantive  claim  does  not refer to interest pendente lite awarded on the  "sum  directed  to  be  paid upon Award" and that in the  absence  of  any  provision  of  interest  upon interest in the contract, the Arbitral Tribunal does not have the  power  to award interest upon interest, or compound interest either for the  pre-award period or for the post-award period. Parliament has the undoubted  power  to legislate on the subject and provide that the Arbitral  Tribunal  may  award interest on the sum directed  to  be  paid  by  the  Award,  meaning  a  sum inclusive of principal sum adjudged and the  interest,  and  this  has  been done by Parliament in plain language"

Justice A. M Sapre, the third judge on the Bench found himself in agreement with Justice Bobde and not with CJI, thus forming the majority opinion. In his own words of Justice A.M Sapre .

"1.    I have had the benefit of reading the scholarly Judgments of  My  Lord the Chief Justice as also my learned brother Bobde J.

2. 
   

   With great respect, I find myself  in  complete  agreement  with  the reasoning and the eventual conclusion arrived at by brother Bobde  J.   Even though, the judgment delivered by brotherBobde J.  encapsulates  everything of what is required to be said, I, however, looking to  the  point  involved and very ably argued by all learned senior counsel, wish to  record  my  own reasons, in addition to what has already been laid down."

   
   

The Justice A. M Sapreconcludes as follows :

"10.   Coming now to the post-award interest, Section  31(7)(b)  of  the  Act employs the words, "A sum directed to be  paid  by  an  arbitral  award...". Sub-clause (b) uses  the  words  "arbitral  award"  and  not  the  "arbitral tribunal". The arbitral award, as held above, is made in respect of a  "sum" which includes the interest. It is, therefore,  obvious  that  what  carries 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".  In such situation,  it  cannot  be  said  that  what  is  being granted under Section  31(7)(b)  of  the  Act  is  "interest  on  interest". 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 sub-clause (a).

1. 
   

   Therefore, in my view, the expression "grant of interest on interest" while exercising the power under Section 31(7) of the Act   does  not  arise and, therefore, the Arbitral Tribunal is well empowered  to  grant  interest even in the absence of clause in the contract for grant of interest.

   
   

Read the Judgment here