Introduction
It is a settled law that the arbitrator has the power to award interest at all three stages: “pre-reference period”, “pendente lite” and “post-award period”.
This article aims to analyse the issue of:
(a) Whether the arbitrator has the discretion to grant “post-award interest”, only on the “principal sum due”, under Section 31(7)(b)1 of the Arbitration and Conciliation Act, 1996 (the Act) or does the “post-award interest” should be granted on the total sum awarded, inclusive both of principal and pre-award interest.
(b) Does the arbitrator have the discretion to grant interest on a part of the “sum” awarded under Section 31(1)(a) in light of the decision in Hyder Consulting (UK) Ltd. v. State of Orissa2?
For this purpose, Section 31(7)(a) of the Act deals with pre-award interest and Section 31(7)(b) deals with post-award interest. Section 31(7) reads as follows:
31. (7)(a) Unless otherwise agreed by the parties, where and insofar 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.
(b) A sum directed to be paid by an arbitral award shall, unless the award otherwise directs, carry interest at the rate of eighteen per centum per annum from the date of the award to the date of payment.
Jurisprudence over the expression “sum” in Section 31(7) of the Act
In State of Haryana v. S.L. Arora & Co.3 (S.L. Arora), the two-Judge Bench of the Supreme Court held that post-award interest could only be charged on the principal amount and not on pre-award interest. However, thereafter a three-Judge Bench of the Supreme Court overruled the decision in S.L. Arora4 in Hyder Consulting (UK) Ltd. v. State of Orissa5 (Hyder Consulting).
Three separate judgments were authored in Hyder Consulting6. Recently, in Morgan Securities & Credits (P) Ltd. v. Videocon Industries Ltd.7 (Morgan Securities), the Supreme Court has analysed the ratio decidendi laid down in Hyder Consulting8.
The factual background of Morgan Securities
(a) The sole arbitrator rendered an arbitral award for the amount of Rs 5,00,32,656 in favour of the appellant with (i) an interest rate of 20% p.a. from the date of default to the date of demand notice; (ii) 36% p.a. with monthly rests from the date of the demand notice to the date of award (pre-award interest); and (iii) 18% p.a. on the principal amount of Rs 5,00,32,656 based on the decision in S.L. Arora9.
(b) The appellant challenged the award under Section 3410 of the Act, before the Delhi High Court, wherein it was urged that the post-award interest of 18% should be granted on the aggregate sum of the principal amount and pre-award interest. The Single Judge of Delhi High Court held that the arbitrator in his discretion restricted the post-award interest to the principal amount and hence no interference is required. Even the Divisional Bench decided to concur the same.
(c) Special leave petition under Article 13611 of the Constitution was filed which was confined to the issue of post-award interest.
(d) It was contended by the appellant that the arbitrator's discretion is limited to determining the rate of post-award interest. It was further contended that since the majority opinion in Hyder Consulting12 states that once pre-award interest is granted on principal sum under Section 31(7)(a) of the Act, interest award loses its character as interest and is merged with “sum” for the purpose of post-award interest under Section 31(7)(b) of the Act. Hence, the arbitrator does not have the discretion to determine the “sum” on which the post-award interest is to be granted.
(d) The respondent contended that in Section 31(7)(b) of the Act, the arbitrator has the discretion to (i) grant post-award interest; (ii) determine the quantum over which post-award interest should be granted; and (iii) determine the rate at which the interest should be calculated.
The Supreme Court's decision
The Supreme Court clarified that both clauses (a) and (b) of Section 31(7) of the Act, are qualified, however, the placement of the phrases is crucial for their interpretation. In Section 31(7)(a), the words, “Unless otherwise agreed by the parties” occurs at the beginning of clause (a) qualifying the entire provision. However, in clause (b), the words, “unless the award otherwise directs”, occurs after the words “a sum directed to be paid by an arbitral award shall” and before the words “carry interest at the rate of eighteen per cent”. Thereby those words only qualify the rate of post-award interest.
The Supreme Court further held that:
(i) Hyder Consulting13 does not discuss the issue of whether arbitrator could use their discretion to award post-award interest on a part of the “sum” awarded under Section 31(7)(a). Hyder Consulting14 only decides 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.
(ii) The words, “unless the award otherwise directs” in Section 31(7)(b) only qualify interest i.e. if the arbitrator does not grant post-award interest, the award holder is entitled to post-award interest at 18%.
(iii) The arbitrator has the discretion to award post-award interest on a part of the sum, which must be exercised reasonably, and in good faith, taking into account all relevant circumstances.
Thus, in the present case, it was held that the award of the arbitrator granting post-award interest on the principal amount does not suffer from an error apparent.
Conclusion
This decision gives important clarity to the issue of whether the arbitrator could award post-award interest on a part of the aggregate sum which was not conclusively decided in the opinions forming part of the majority in Hyder Consulting15.
It is pertinent to note that the Supreme Court has once again reiterated that the rate of interest and discretionary power to grant post-award interest must be reasonable and in good faith taking into account relevant circumstances.
Therefore, while challenging the arbitral awards the parties are advised to keep in mind the discretionary powers of the Tribunal as laid down in the aforesaid decisions of the Supreme Court to avoid unsuccessful challenges to set aside award on the basis of the interest component awarded.
† Associate Partner, Desai Desai Carrimjee and Mulla. Author can be reached at <aditi.prabhu@ddcm.in>.
1. Arbitration and Conciliation Act, 1996, S. 31(7)(b).
10. Arbitration and Conciliation Act, 1996, S. 34.
11. Constitution of India, Art. 136.
