Interest For Prereference Period And Pendente Lite Interest Can't Be Claimed Under Arbitration Act, 1940: Jammu & Kashmir High Court

The bench held that when pre-suit interest, pendente lite interest and future interest has to be awarded on the principal sum adjudged, the interest can be awarded only on the principal sum and it does not provide for payment of interest on interest. Therefore, it held that there is no scope for the award of interest on the pendente lite interest under the Arbitration Act, of 1940.

Brief Facts:

The matter pertained to disputes between the Petitioners' predecessor and the Respondents regarding a construction contract for a 2.4 km section of the National Highway bypass starting from Athwajan, Srinagar. These disputes led to arbitration, resulting in an award dated November 13, 1998, which was subsequently submitted to the District Judge of Srinagar. The District Judge made the award the rule of the court but modified it by reducing the interest rate from 18% to 9% per annum and disallowing certain claims. Consequently, the District Judge awarded the Petitioners Rs. 71,91,785 along with 9% per annum interest.

Both the Petitioners and the Respondents appealed this judgment. The High Court dismissed the Respondent-State's appeal but allowed the Petitioners' appeal and raised the interest rate from 6% to 9% per annum. The Respondents then approached the Supreme Court which dismissed the appeals on March 26, 2021, but allowed the Respondents to argue in the executing court whether the interest should be simple or compound.

Subsequently, during the execution proceedings, the Principal District Judge of Srinagar, through an order decided that the 9% interest per annum awarded should be calculated as simple interest, not compound interest. Based on this, the court determined that Rs. 2,77,58,492.14 was due to the Petitioners. Following this order, the Respondents deposited Rs. 3,50,61,800, which included the calculated interest up to the date of deposition. This amount was released to the Petitioners, and the executing court held that the decree was satisfied and disposed of the execution petition. Feeling aggrieved, the Petitioners approached the High Court.

The Petitioners argued argue that the executing court erred in applying the Supreme Court's decision in State of Haryana and others vs. S. L. Arora & Company, (2010) 3 SCC 690, which was overturned by later Supreme Court judgments. They argued that the transaction between the parties was commercial which warranted compound interest on the awarded claims as modified by the District Judge, Srinagar. Additionally, the Petitioners contended that future interest should be calculated not merely on the principal amount but also on the accrued interest up to the award date.

Observations by the High Court:

The central question before the High Court was whether future interest should be calculated on the claims awarded in favor of the Petitioners, inclusive of the pendente lite interest awarded. The arbitration proceedings were conducted under the Jammu and Kashmir Arbitration Act, 1945, which is substantially similar to the Arbitration Act, 1940.

Regarding the award of interest for the pre-reference period and the period during which the arbitration proceedings were pending, the High Court noted that the Arbitration Act, 1940 does not contain specific provisions. However, Section 29 of the Arbitration Act, 1940 addresses the award of interest from the date the decree is made, i.e., when the award is confirmed by the court. This interest is payable on the principal sum adjudged by the award and confirmed by the decree.

The Supreme Court, in Hindustan Construction Co. Ltd. vs. State of Jammu & Kashmir, (1992) 4 SCC 217, relying on the Constitution Bench judgment in Secretary, Irrigation Department, Government of Orissa & Ors. vs. G. C. Roy, (1992) 1 SCC 508, clarified the issue regarding the award of pendente lite interest and interest from the date of the award to the date of the decree. The Supreme Court held that while the award of interest for the period before the arbitrator enters upon the reference is a matter of substantive law, the grant of interest for the post-award period is procedural. The principles of Section 34 of the Code of Civil Procedure (CPC), although not directly applicable, were held to be relevant to arbitration proceedings.

The High Court noted that under the Arbitration Act, 1940, an arbitrator can award interest from the date of the award to the date of the decree or realization, whichever comes first. The determination of interest for the period before the arbitrator's reference and pendente lite interest should be guided by Section 34 of the CPC, which states that interest can be awarded on the principal sum adjudged from the date of the suit to the date of the decree, with further interest on the principal sum from the date of the decree to the date of payment.

Therefore, the High Court held that there is no provision for awarding interest on pendente lite interest. It held that future interest is to be calculated only on the principal sum awarded by the arbitrator and confirmed by the decree. There is no scope under the Arbitration Act, 1940 for calculating future interest on the pendente lite interest awarded by the arbitrator.

The High Court noted that the Arbitration and Conciliation Act, 1996, is notably different from that under the Arbitration Act, 1940. The 1996 Act includes a specific provision, Section 31(7), which governs the award of interest by the Arbitrator. Section 31(7) states that unless the parties have agreed otherwise, the arbitral tribunal may include interest in the sum awarded, at a reasonable rate, for any period between the date on which the cause of action arose and the date on which the award is made. Additionally, it provides that the sum directed to be paid by an arbitral award shall carry interest at a rate two percent higher than the current rate of interest from the date of the award to the date of payment, unless the award directs otherwise. The term "current rate of interest" is defined as per the Interest Act, 1978.

This provision delineates pre-award and post-award interest, allowing the arbitral tribunal to include interest in the awarded sum, a feature absent which is absent in Arbitration Act, 1940. Consequently, the High Court held that under the Act of 1996, interest can be included in the arbitral award, unlike under the Arbitration Act, 1940, where the award of interest for the pre-reference and post-reference periods is governed by the principles of Section 34 of the CPC.

The inclusion of interest in arbitral awards under the 1940 Act was discussed by the Division Bench of the Delhi High Court in Indian Oil Corporation Ltd. vs. G. S. Jain & Associates (EFA(OS) No.17 and 18/2010, decided on 07.09.2012). The court noted that the golden rule of statutory interpretation must be followed, whereby clear, plain, and unambiguous wording must be given effect. Section 29 of the 1940 Act, which allows post-decree interest by the court only on the principal sum, must be read in its entirety. The term "principal sum" is significant and distinct from interest or costs, implying that interest should not be compounded.

Therefore, the bench held that under the Arbitration Act, 1940, it is impermissible to include interest components for calculating post-award and post-decree interest.

The High Court held that the Petitioners can only claim interest on the principal sum awarded by the Arbitrator which excludes pendente lite interest, which cannot form part of the principal sum.

Therefore, the appeal was dismissed.

Case Title:Manzoor Ahmad Gunna& Ors. Vs Ut Of J&K And Anr.

Citation: 2024 LiveLaw (JKL) 147

Case Number: CM(M) No.102/2023 CM No.2991/2023

Advocate for the Petitioner: Mr. Danish Majeed, Ms. Ahra Syed and Mr. Bhat Shafi, Advocates

Advocate for the Respondent: Mr. Ilyas Nazir Laway, GA