Arbitrator Has Substantial Discretion In Awarding Interest U/Sec 31 (7) (a) Arbitration Act : Supreme Court

The Supreme Court observed that an Arbitrator has substantial discretion in awarding interest under Section 31(7)(c) of the Arbitration and Conciliation Act, 1996.

In this case, the Arbitrator had granted interest at the rate of 18% per annum from 01.01.2003 till the date of realization. Disposing the petition under Section 34 of the Arbitration and Conciliation Act, 1996 (Arbitration Act), the rate of interest was reduced by the District Court to 12% per annum. In Arbitration appeal, the High Court further reduced the rate of interest  to 9% per annum referring to a Supreme Court judgment in A.P. State Trading Corporation Ltd. Vs. G.V. Malla Reddy and Company 2010 AIR SCW 6337. In the said judgment, it was observed that in the absence of any specific contract in regard to rate of interest, pendente lite and future interest should not normally exceed 9% per annum.

In appeal, the court noted that the judgment relied upon by the High Court pertained to arbitration proceedings under the Arbitration Act of 1940, whereas the present dispute relates to arbitration under the Arbitration Act 1996.

"Per contra, Section 31 (7) of the Arbitration Act, 1996 grants substantial discretion to the arbitrator in awarding interest. No reason and grounds have been given to reduce the rate of interest.", the bench of Justices Sanjiv Khanna and Bela M. Trivedi observed.

Section 31 (7) (a) reads as follows: Unless otherwise agreed by the parties, where and in so far as an arbitral award is for the payment of money, the arbitral tribunal may include in the sum for which the award is made interest, at such rate as it deems reasonable, on the whole or any part of the money, for the whole or any part of the period between the date on which the cause of action arose and the date on which the award is made.

The court therefore restored the rate of interest as awarded by the judgment passed by the District Judge.

Recently, the Supreme Court had, in Garg Builders Vs Bharat Heavy Electricals Limited LL 2021 SC 535,  observed that an arbitrator cannot grant pendente lite interest if the contract contains a specific clause which expressly bars payment of interest.

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