Arbitration | Impermissible For Arbitral Tribunal Or Courts To Grant Interest Upon Interest Under 1940 Act : Supreme Court

The Supreme Court on Wednesday (Aug. 7) held that an Arbitral Tribunal is not empowered to grant interest upon interest while passing an arbitral award as the Arbitration Act, 1940 does not specifically provide for the grant of interest on interest.

“In the light of the above legal provisions and the case law on the subject, it is evident that ordinarily courts are not supposed to grant interest on interest except where it has been specifically provided under the statute or where there is specific stipulation to that effect under the terms and conditions of the contract. There is no dispute as to the power of the courts to award interest on interest or compound interest in a given case subject to the power conferred under the statutes or under the terms and conditions of the contract but where no such power is conferred ordinarily, the courts do not award interest on interest.”, the bench comprising Justices PS Narasimha and Pankaj Mithal said.

"Neither the Act specifically empowers the Arbitrator or the court to award interest upon interest or compound interest nor there is any other provision which provides for grant of compound interest or interest upon interest. Even Section 34 CPC is silent in this regard whereas Sub-Section (3) of Section 3 of the Interest Act specifically prohibits the same," the Court added.

In the present case, the arbitrator had awarded the interest for two periods viz. (i) from the date of completion of the work up to the date of the award @ 12% per annum (simple interest); and (ii) @ 15% per annum from the date of the award till the date of its payment or the date of the court decree, whichever is earlier.

The issue was whether 15% interest per annum awarded would be on the principal sum award plus 12% per annum interest on it for the pre-award period.

In short, the petitioner claimed 15% interest per annum on the amount awarded including the 12% interest component i.e. the pre-award interest.

The Court said that once the interest is granted on the arbitral award for the pre-award period, then an interest cannot be granted on the arbitral award for the post-award stage.

The court reasoned that an arbitral tribunal is not empowered to grant interest upon interest because the statute/Arbitration Act doesn't specifically provide for a grant of interest upon interest. This means that the court cannot order for payment of interest on interest but only on the principal sum adjudged.

"Section 29 of the Act provides that the court may in the decree order interest at the rate deemed reasonable to be paid on the principal sum as adjudged by the award meaning thereby in drawing the decree, the court may order for payment of interest on the principal sum as adjudged by the award. In other words, the court cannot order for payment of interest on interest but only on the principal sum adjudged.", the court clarified.

On perusing the award and Arbitration Act, the court held that the award nowhere specifically contemplates awarding 15% interest per annum on the amount awarded including the interest component i.e. the pre-award interest.

“The first part relates to the pre-award period from the date of the completion of the work till the passing of the award whereas the second part is the post-award period commencing from the date of the award till the satisfaction of the award. In the first part, simple interest @ 12% per annum has been awarded on the 'amount awarded' whereas in the second part, interest @ 15% per annum has been awarded referring to the 'amount awarded'. The amount awarded in both the situations have to be the same and cannot be two distinct amounts. The 'amount awarded' refers to the principal amount of compensation awarded that is Rs.21,56,745/-. The award and the decree nowhere specifically contemplate for awarding 15% interest per annum on the amount awarded including the interest component i.e. the pre-award interest. This could not have been done even otherwise as there is no provision to that effect under the relevant statutes or the contract. No material has been placed before us or as a matter of fact before any court below to show that the terms and conditions of the contract contained any such provision.”, the judgment authored by Justice PS Narasimha observed.

Post Award Interest On Interest Amount Awarded Permissible Under Arbitration & Conciliation Act 1996 

As the award was passed under the 1940 Act where Act does not provide the power to the arbitrator to grant interest on interest, therefore the tribunal/courts are precluded from awarding interest on interest, however while referring to a recent case of UHL Power Company Ltd. vs State of Himachal Pradesh reported in 2022 LiveLaw (SC) 18, the court opined that the post-award interest can be granted by an Arbitrator on the interest amount awarded under the 1996 Act.

In the UHL Power Company Case, the reference was made to the case of Hyder Consulting (UK) Ltd. V. Governor, State of Orissa reported in (2015) 2 SCC 189, where the Court while dealing with Section 31(7) of the Arbitration and Conciliation Act, 1996, wherein for the purposes of payment of post-award interest, the phrase 'sum directed to be paid by award' was used and it was held that it includes the pre-award interest and, therefore, post-award interest is payable on the sum awarded which includes pre-award interest.

Appearance:

For Petitioner(s) Ms. Jyoti Mendiratta, AOR Mr. Sourabh Malhotra, Adv. Ms. Ananya Basudha, Adv.

For Respondent(s) Ms. Aishwarya Bhati, A.S.G. Ms. Sthavi Asthana, Adv. Mr. Akshaja Singh, Adv. Mr. Nitesh Shrivastav, Adv. Dr. N. Visakamurthy, AOR Mr. Chitrangada Rastravara, Adv. Mr. Mukul Singh, Adv. Mr. Amit Sharma Ll, Adv. Mr. Kartikeya Asthana, Adv. Mr. Mukesh Kumar Maroria, Aor

Case Details: M/S D. KHOSLA AND COMPANY VERSUS THE UNION OF INDIA, SPECIAL LEAVE PETITION (CIVIL) NO.812 OF 2014

Citation : 2024 LiveLaw (SC) 558

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