Arbitrator Has Discretion To Award Post-Award Interest On A Part Of The 'Sum': Supreme Court

The Supreme Court held that an arbitrator has the discretion to award post-award interest on a part of the 'sum'.

The arbitrator has the discretion to determine the rate of reasonable interest, the sum on which the interest is to be paid, that is whether on the whole or any part of the principal amount, and the period for which payment of interest is to be made - whether it should be for the whole or any part of the period between the date on which the cause of action arose and the date of the award, , the bench comprising Justices DY Chandrachud and AS Bopanna observed.

The court added that the arbitrator must exercise the discretionary power to grant post award interest reasonably and in good faith, taking into account all relevant circumstances.

In this case, the Arbitrator decreed the claim and awarded amount of Rs. 5,00,32,656 along with Interest at the rate of (i) twenty one percent per annum has been granted from the date of default to the date of the demand notice; (ii) thirty six percent per annum with monthly rests from the date of the demand notice to the date of award ("pre-award interest"); and (iii) eighteen percent per annum on the principal amount of Rs. 5,00,32,656 from the date of award to the date of payment ("post-award interest"). The Delhi High Court rejected the challenge raised against this award observing that the Arbitrator had in his discretion restricted the post award interest to the principal amount.

Before the Apex Court, Advocate  Abhishek Puri for the appellant contended that the Arbitrator does not have the discretion to determine the 'sum' on which the post-award interest is to be granted. Relying on the decision in Hyder Consulting (UK) Ltd. v. State of Orissa, if pre-award interest is awarded on the principal sum, the aggregate of the principal and the pre-award interest is the 'sum' on which post-award interest must be granted. On the other hand, Senior Advocate Nakul Dewan, who appeared for the respondent, contended that Section 31(7)(b) is qualified by the phrase "unless the award otherwise directs" and thus Section 31(7)(b) would only be applicable where an arbitral award is silent on the component of post-award interest. In other words, the contention was that the arbitral tribunal has the discretion to determine- a) whether post-award interest should be granted; b) the 'sum' on which the post-award interest is to be granted; and c) the rate of such interest.

Thus the issue considered was whether the phrase 'unless the award otherwise directs' in Section 31(7)(b) of the Act only provides the arbitrator the discretion to determine the rate of interest or both the rate of interest and the 'sum' it must be paid against?

Referring to Section 31(7), the bench observed that it confers a wide discretion upon the arbitrator in regard to the grant of pre-award interest. The bench observed:

"The arbitrator has the discretion to determine the rate of reasonable interest, the sum on which the interest is to be paid, that is whether on the whole or any part of the principal amount, and the period for which payment of interest is to be made - whether it should be for the whole or any part of the period between the date on which the cause of action arose and the date of the award. When a discretion has been conferred on the arbitrator in regard to the grant of pre-award interest, it would be against the grain of statutory interpretation to presuppose that the legislative intent was to reduce the discretionary power of the arbitrator for the grant of post-award interest under clause (b). Clause (b) only contemplates a situation where the arbitration award 16 is silent on post-award interest, in which event the award-holder is entitled to a post-award interest of eighteen percent. The arbitrator has the discretion to grant post-award interest. Clause (b) does not fetter the discretion of the arbitrator to grant post-award interest. It only contemplates a situation in which the discretion is not exercised by the arbitrator. Therefore, the observations Hyder Consulting (supra) on the meaning of 'sum' will not restrict the discretion of the arbitrator to grant post-award interest. There is nothing in the provision which restricts the discretion of the arbitrator for the grant of post-award interest which the arbitrator otherwise holds inherent to their authority"

Purpose is to ensure that the award debtor does not delay the payment of the award

The court observed that the purpose of granting post-award interest is to ensure that the award debtor does not delay the payment of the award.

With the proliferation of arbitration, issues involving both high and low financial implications are referred to arbitration. The arbitrator takes note of various factors such as the financial standing of the award-debtor and the circumstances of the parties in dispute before awarding interest. The discretion of the arbitrator can only be restricted by an express provision to that effect. Clause (a) subjects the exercise of discretion by the arbitrator on the grant of pre-award interest to the arbitral award. However, there is no provision in the Act which restricts the exercise of discretion to grant post-award interest by the arbitrator. The arbitrator must exercise the discretion in good faith, must take into account relevant and not irrelevant considerations, and must act reasonably and rationally taking cognizance of the surrounding circumstances.

The court thus summarized the legal position as follows:

1. The judgment of the two-Judge Bench in SL Arora (supra) was referred to a three-Judge Bench in Hyder Consulting (supra) on the question of whether post-award interest could be granted on the aggregate of the principal and the pre-award interest arrived at under Section 31(7)(a) of the Act;
2. Justice Bobde's opinion in Hyder Consulting (supra) held that the arbitrator may grant post-award interest on the aggregate of the principal and the pre-award interest. The opinion did not discuss the issue of whether the arbitrator could use their discretion to award postaward interest on a part of the 'sum' awarded under Section 31(7)(a);
3. The phrase 'unless the award otherwise directs' in Section 31(7)(b) only qualifies the rate of interest;
4. According to Section 31(7)(b), if the arbitrator does not grant postaward interest, the award holder is entitled to post-award interest at eighteen percent;
5. Section 31(7)(b) does not fetter or restrict the discretion that the arbitrator holds in granting post-award interest. The arbitrator has the discretion to award post-award interest on a part of the sum;
6. The arbitrator must exercise the discretionary power to grant postaward interest reasonably and in good faith, taking into account all relevant circumstances; and
7. By the arbitral award dated 29 April 2013, a post-award interest of eighteen percent was awarded on the principal amount in view of the judgment of this Court in SL Arora (supra). In view of the above discussion, the arbitrator has the discretion to award post-award interest on a part of the 'sum'; the 'sum' as interpreted in Hyder Consulting (supra). Thus, the award of the arbitrator granting post award interest on the principal amount does not suffer from an error apparent.

Case details

Morgan Securities And Credits Pvt. Ltd. vs Videocon Industries Ltd. | 2022 LiveLaw (SC) 728 | CA 5437 of 2022 | 1 September 2022 | Justices DY Chandrachud and AS Bopanna

Counsel: Shardul Amarchand Mangaldas & Co. represented the Respondent in the matter (Videocon Industries Limited) : Mr. Aashish Gupta, Partner; Mr. Arjun Pall, Principal Associate; and Ms. Sadhika Gulati, Associate.  

Headnotes

Arbitration and Conciliation Act, 1996 ; Section 31(7) - The arbitrator has the discretion to award post-award interest on a part of the 'sum' - The arbitrator has the discretion to determine the rate of reasonable interest, the sum on which the interest is to be paid, that is whether on the whole or any part of the principal amount, and the period for which payment of interest is to be made - whether it should be for the whole or any part of the period between the date on which the cause of action arose and the date of the award - The arbitrator must exercise the discretionary power to grant post award interest reasonably and in good faith, taking into account all relevant circumstances - The purpose of granting post-award interest is to ensure that the award debtor does not delay the payment of the award. (Para 18-22)

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