Arbitrator Cannot Add The Amount Of Pre-Reference Interest To The Principal Amount While Determining Pendente Lite Interest: Delhi High Court

The bench of Justices Yashwant Varma and Dharmesh Sharma held that Section 31(7)(a) of the A&C Act provides only for two periods of interest payable under the Act i.e., from the cause of action till the date of the award and from the date of the award till the payment is made. Further, it held that the distinction between pre-reference and pendente lite interest has vanished and is inapplicable to arbitrations governed by the Act of 1996.

The Court held that under the it is impermissible for the arbitral tribunal to award interest under three heads/periods i.e., pre-reference, pendente lite and future interest, as the act only provides for pre-award (from the date of cause of action till the date of the award) and post award/future interest.

Facts

The appeal was filed against the judgment of the Ld. Single Judge on the petition under Section 34 of the A&C Act. By the impugned order, the Ld. Single Judge had upheld the arbitral award dated 28.10.2020.

The scope of appeal was limited challenging the findings by the Ld. Single Judge upholding the aspect of interest awarded by the arbitral tribunal. In paragraph 58(b) of the award, the arbitral tribunal had directed the payment of interest to be payable by the appellant to the respondents. The tribunal had added the amount of pre-reference interest to the principal amount while determining the pendente lite interest.

Grounds of Challenge

The appellant challenged the impugned judgement as well as the award on the following ground(s):

• The arbitrator has awarded interest on interest contrary to the mandate of the Act.
• The arbitrator has erred in adding the amount of pre-award interest to principal amount to calculate the pendente lite interest. The act of arbitrator has resulted in compounding of interest.

Analysis by the Court

The Court observed that the arbitrator under paragraph 58(b)(i)&(ii) has included in the amount on which the pendente lite interest has to be paid, the sum of pre-reference period along with the principal amount.

The Court that the arbitrator cannot add the amount of pre-reference interest to the principal amount while determining pendente lite interest as the same would amount to levying interest on a compounded basis. It held that the principal amount has to remain static throughout.

The Court held that the arbitral tribunal committed an illegality in forging the principal amount with pre-reference interest and the runs contrary to the express command of Section 31(7) of the Act.

Further, the Court held that Section 31(7)(a) of the A&C Act provides only for two periods of interest payable under the Act i.e., from the cause of action till the date of the award and from the date of the award till the payment is made. Further, it held that the distinction between pre-reference and pendente lite interest has vanished and is inapplicable to arbitrations governed by the Act of 1996.

The Court held that under the it is impermissible for the arbitral tribunal to award interest under three heads/periods i.e., pre-reference, pendente lite and future interest, as the act only provides for pre-award (from the date of cause of action till the date of the award) and post award/future interest.

Accordingly, the Court set aside the award to the extent of the findings given under Section 58(b) of the award.

Case Details: NATIONAL PROJECTS CONSTRUCTIONS CORPORATION LTD v. M/S INTERSTATE CONSTRUCTION

Citation: 2023 LiveLaw (Del) 657

Date: 01.08.2023

Counsel for the Appellant: Mr. Dhruv Mehta, Sr. Adv. Mr. Rajat Arora, Mr. Shyam Agarwal and Ms. Mariya Shahab, Advs.

Counsel for the Respondent: Mr. M. Lall, Mr. Rahul Yadav and Mr. Rajat Sharma, Advs. for R-1.

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