Telangana HC Explains Section 31(7)(A) And (B) Of The A&C Act,1996 In Terms Of Timeframes, Embargo & Discretion

The Telangana High Court division bench of Justice Moushumi Bhattacharya and Justice M. G. Priyadarsini has held the arbitral tribunal has full authority to award interest from the date of the award until the date of payment, regardless of any contrary decision by the parties. If the award is silent on the rate of interest, the award holder is entitled to an interest rate 2% higher than the market rate.

Further, the bench held that the discretion of the arbitral tribunal to award pre-reference and pendente lite interest is subject to the agreement between the parties. The parties have the autonomy to agree or disagree on the inclusion and quantum of interest for the pre-reference and pendente lite periods, leaving the tribunal with no discretion in this regard.

The High Court referred to Section 31(7) of the Arbitration Act which delineates the parameters within which an Arbitral Tribunal can award interest including the applicable rate. It referred to Section 31(7)(a) which grants exclusive authority to the parties involved in the arbitration to decide on the inclusion of interest. Section 31(7)(b), on the other hand, shifts the decision-making focus to the arbitral award itself.

The High Court noted that the two clauses of sub-section (7) of Section 31 are interconnected and cannot be easily severed. It noted that Section 31(7)(b) underwent an amendment effective from October 23, 2015 which modified the rate of interest but did not alter the fundamental structure of the provision. The High Court then broke down Section 31(7)(a) and (b) into three distinct periods for arbitral awards for payment of money: pre-reference (from the date the cause of action arose to the date of commencement of the reference), pendente lite (from the date of commencement of the reference to the date of making the award), and post-award (from the date of the award to the date of payment).

The High Court noted that if the parties do not expressly refuse to pay interest or if the arbitration agreement is silent on the payment of interest for the pre-reference and pendente lite stages, the arbitral tribunal has the jurisdiction to award interest for these periods. This includes determining a reasonable rate of interest on the principal sum or any part of it for the pre-reference and pendente lite periods.

Regarding the discretion of the arbitral tribunal, the High Court held that Section 31(7)(a) is entirely subject to the agreement between the parties. The parties have the autonomy to agree or disagree on the inclusion of interest and its quantum for the pre-reference and pendente lite periods leaving the Tribunal with no discretion in this regard. However, Section 31(7)(b) does not depend on any agreement and pertains solely to the arbitral award.

The High Court identified two qualifiers in Section 31(7)(b). First, the principal amount will carry an interest rate of 2% higher than the current rate of interest on the date of the award if the award is silent on the rate. This higher rate applies unless the award specifies a different rate of interest. Second, the post-award period is the time frame for which the interest rate of 2% higher than the prevalent rate applies if the award does not fix a rate.

The High Court held that the arbitral tribunal has full authority to award interest from the date of the award until the date of payment regardless of any contrary decision by the parties. The award holder is entitled to an interest rate 2% higher than the market rate if the award is silent on the rate of interest.

It noted that the statutory position for pre-reference and pendente lite stages is determined solely by the parties and their arbitration agreement. The arbitral award becomes the guiding document for post-award interest. It held that the award holder is entitled to a rate 2% higher than the prevalent rate if the award does not fix the post-award interest rate.

The High Court referred to the decision of the Supreme Court in Hyder Consulting (UK) Ltd. vs. State of Orissa where it was held that an arbitrator could grant post-award interest on the aggregate of the principal and pre-award interest. In Union of India vs. Manraj Enterprises, the Supreme Court ruled against awarding interest based on Clause 16(2) of the G.C.C. which stipulated that no interest would be payable on amounts due under the contract. In Delhi Airport Metro Express vs. Delhi Metro Rail Corporation, it was held that the discretion to grant interest is available to the Arbitral Tribunal only when there is no contrary agreement between the parties. In Morgan Securities vs. Videocon Industries Limited, the Supreme Court clarified that the arbitrator has discretion to award post-award interest on a part of the sum and that "unless the award otherwise directs" in Section 31(7)(b) qualifies only the rate of interest.

Brief Facts:

Union Of India (Appellant) faced claims from Suntechno Constructions (Respondent) related to work performed under a contract. This contract involved the construction of a bridge across the Godavari River and included claims for extra work. price escalation, interest, and overhead charges which were governed by the General Conditions of Contract, 1998 (G.C.C).

The arbitral tribunal consisting of three senior officials from the South Central Railways issued the award largely favored the Respondents. The arbitral tribunal granted most of the Respondent's claims while partially or entirely denying others. The Appellant's attempt to have this Award set aside was dismissed by the Trial Court which held that the Appellant didn't demonstrate that the tribunal's findings were contrary to public policy. The court upheld the interest awarded to the Respondent noting it was within the Arbitral Tribunal's authority under the Arbitration Act. Feeling aggrieved, the Appellant approached the High Court.

Observations by the High Court:

The High Court noted that the arbitral tribunal awarded 12% simple interest from 30.06.2005 the date of entering the reference until the date of the Award. The claimant initially claimed interest at 24% per annum on all payments from the due dates up to 30.06.2003 along with future interest on the crystallized amount as on 30.06.2003 up to the date of payment. However, the Tribunal awarded pendente lite interest at 12% per annum.

The arbitral tribunal reasoned that Clauses 16(3) and 64.5 of the G.C.C. did not specifically bar the arbitrator from awarding interest where the claimant had suffered due to delays caused by the appellant. The award recorded that the delay spanned 40 months as against the agreed 12 months for the execution of the work. Consequently, the tribunal awarded 12% interest from the date of entering into the reference until the date of the Award.

The High Court observed that Clauses 16(3) and 64.5 of the G.C.C. contained a specific prohibition against the payment of interest during the pre-reference and pendente lite stages. This prohibition meant that the arbitral tribunal's award of pendente lite interest at 12% per annum was contrary to the terms of the G.C.C. and thus violated section 31(7)(a) of the Arbitration Act which gives primacy to the parties' intention as expressed in the arbitration agreement.

Further, the High Court noted that the G.C.C. was silent on the matter of post-award interest. The award also did not provide for post-award interest. Therefore, it noted that the claimant was entitled to the statutory benefit under section 31(7)(b) of the Arbitration Act which provides for interest from the date of the Award to the date of payment on the sum directed to be paid by the arbitral tribunal at a rate 2% higher than the prevalent rate of interest. As the agreement did not prohibit post-award interest and the award was silent on the issue, the High Court held that the claimant was entitled to interest at a rate 2% higher than the rate prevalent on the date of the Award.

Therefore, the High Court set aside the impugned order to the extent of awarding interest at 12% per annum from 30.06.2005 to 14.09.2007. However, it held that the Respondent was entitled to post-award interest from the date of the Award until the date of payment at a rate 2% higher than the prevalent rate of interest.

Case Title: The Union Of India, Secbad And 3 Others vs M/S. Suntechno Constructions

Case Number: C.M.A.No.857 OF 2016

Click Here To Read/Download Order or Judgment