2025 (5) TMI 1124 - SC - Indian Laws

Seeking to set aside the directions contained in paragraph 58(b) of the award with regard to future interest - appeal filed under Section 37 of the Arbitration and Conciliation Act 1996 ( the 1996 Act ) - Nature of interest payment provided in the award - contract work - rate of interest or award of interest for the pre-reference/past period - HELD THAT - We have already noted about the limited nature of challenge made by the respondent during the hearing of the appeal filed under Section 37 of the 1996 Act. Learned senior counsel appearing for the respondent clarified that the challenge to the award stood restricted to the directions issued by the arbitral tribunal insofar the issue of interest was concerned. He clarified that the challenge was not with respect to either the rate at which interest was awarded or the grant of interest for the pre-reference/past period. The grievance was confined to the directions contained in paragraph 58(b)(i) of the award and the similar nature of interest in paragraph 58(b)(ii) inasmuch as the arbitral tribunal proceeded to award interest on identical terms on the principal amount plus the amount of interest for the pre-reference/past period. We now come to the analysis of Section 31(7) both clauses (a) and (b). For the time being we concentrate on clause (a) insofar it deals with the period for which interest may be awarded. A reading of clause (a) reveals that interest may be 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. In real terms it means the period from the date on which the cause of action arose till filing of the claim petition by the claimant and from the date of filing of the claim petition till the date of the award. A careful and minute reading of the Section 31(7)(a) will make it clear that the arbitral tribunal has the discretion to include in the sum awarded interest at such rate as it deems reasonable on the whole or any part of the money awarded for the whole or any part of the period from the date on which the cause of action arose till the date on which the award is made. We may exclude that part of the sentence on the whole or any part of the money from our analysis since this is not relevant to the controversy. If we exclude this portion what then becomes discernible is that the arbitral tribunal has the discretion to include in the sum awarded firstly interest at such rate as it deems reasonable; and secondly 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. This would mean that the arbitral tribunal can exclude a period from the date on which the cause of action arose till the date on which the award is made for the purpose of grant of interest as has been done in the present case. It would also mean that the arbitral tribunal can grant interest 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. It can be a composite period or the said period can be further sub-divided as done in the present case i.e. from the date of cause of action to filing of the claim and from the date of filing of the claim till the date of the award excluding the period when the appellant was found to be remiss. It would also mean that there can be one rate of interest for the whole period or one or more rates of interest for the sub-divided periods as has been done in the instant case. In our opinion this would be the correct approach to interpret Section 31(7)(a) given the scheme of the 1996 Act. That being the position we are of the view that the Division Bench had fallen in error by holding that the arbitral tribunal had no jurisdiction to award interest for two periods i.e. pre-reference and pendente lite when the statute provides for only one period viz. from the date when the cause of action arose till the date of the award. The view expressed by the High Court is not the correct interpretation of Section 37(1)(a) of the 1996 Act as explained by us supra as well as in Pam Developments Private Limited 2024 (8) TMI 1141 - SUPREME COURT and S.A. Builders Ltd. 2024 (12) TMI 1015 - SUPREME COURT This brings us to the second issue on which the High Court set aside the directions of the arbitral tribunal contained in paragraph 58(b) of the award. According to the Division Bench the arbitral tribunal had committed an illegality in forging the principal amount with interest while computing the awarded amount on which future interest is to be paid. Interest awarded for the past period could not have been subjected to further levy of interest during the pendente lite or post award period on merger with the principal amount as this would amount to levy of compound interest. This aspect of the matter is no longer res integra. A three-Judge Bench of this Court in UHL Power Company Ltd. Vs. State of Himachal Pradesh 2022 (1) TMI 307 - SUPREME COURT declared that the judgment in S.L. Arora 2010 (1) TMI 1261 - SUPREME COURT has since been overruled by a three-Judge Bench of this Court in Hyder Consulting (UK) Ltd. 2014 (11) TMI 1240 - SUPREME COURT The majority view in Hyder Consulting (UK) Ltd. 2014 (11) TMI 1240 - SUPREME COURT is that post-award interest can be granted by an arbitrator on the interest amount awarded. It has been held that the sum awarded would mean the principal amount plus the interest awarded from the date of cause of action upto the date of the award. The sum awarded in Section 31(7)(a) would mean principal amount plus the interest awarded. Thereafter as per Section 31(7)(b) of the 1996 Act the sum (principal amount interest) would carry further interest at the rate of 2 per cent higher than the current rate of interest prevalent on the date of the award to the date of payment. Therefore in view of the clear legal position delineated as above impugned judgment of the Division Bench dated 01.08.2023 cannot be sustained. Thus having regard to the discussions made above impugned judgment and order dated 01.08.2023 passed by the Division Bench of the High Court is hereby set aside. Civil appeal is accordingly allowed. However there shall be no order as to cost.

Summary

ISSUES PRESENTED and CONSIDERED

1. Whether the arbitral tribunal was justified in awarding interest for three distinct periods-pre-reference/past period, pendente lite period, and future period-contrary to the interpretation of Section 31(7) of the Arbitration and Conciliation Act, 1996 (the 1996 Act) by the Division Bench of the High Court.

2. Whether the arbitral tribunal committed illegality by awarding interest on interest (compound interest) by adding interest amounts to the principal for calculating further interest during the pendente lite and post-award periods.

3. The correctness of the Division Bench's reliance on Section 31(7) of the 1996 Act and the precedent in Sayeed Ahmed and Company (2009) in holding that only two periods for awarding interest exist and that compound interest is impermissible.

4. The scope and interpretation of Section 31(7)(a) and (b) of the 1996 Act, including the effect of the 2015 amendment, with respect to awarding interest pre-award, pendente lite, and post-award.

5. The applicability of prior judicial pronouncements, including the overruling of S.L. Arora (2010) by Hyder Consulting (2015), and subsequent cases clarifying the power of arbitral tribunals to award compound interest.

ISSUE-WISE DETAILED ANALYSIS

Issue 1: Legality of awarding interest for three distinct periods under Section 31(7) of the 1996 Act

Legal framework and precedents: Section 31(7) of the 1996 Act, after the 2015 amendment, provides two distinct clauses: (a) allows the arbitral tribunal to award interest on the sum for any period between the cause of action and the date of the award, and (b) mandates interest at 2% above the current rate from the date of award to payment, unless otherwise directed. The Division Bench interpreted this to mean only two periods exist for interest: pre-award (including pre-reference and pendente lite combined) and post-award.

The Division Bench relied on the decision in Sayeed Ahmed and Company (2009), which held that the distinction between pre-reference and pendente lite interest has disappeared post-amendment, and only two periods are recognized.

Court's interpretation and reasoning: The Supreme Court disagreed with the Division Bench's narrow interpretation. It held that Section 31(7)(a) contemplates interest for the whole or any part of the period from cause of action to award, which can be subdivided into pre-reference and pendente lite periods. The Court emphasized that the statute does not prohibit awarding interest for sub-periods within this timeframe, nor does it disallow different interest rates for such sub-periods.

Key evidence and findings: The arbitral tribunal awarded 18% interest for the pre-reference period and 12% for pendente lite, excluding an eight-year period of laches. The Court found this approach permissible and consistent with the discretion granted under Section 31(7)(a).

Application of law to facts: The Court applied the statutory language and clarified that the first period under Section 31(7)(a) is a composite period that can be subdivided, allowing the arbitral tribunal to award interest accordingly. The distinction between pre-reference and pendente lite interest remains valid as a matter of practice and discretion.

Treatment of competing arguments: The Division Bench's argument that only two periods exist was rejected. The Court explained that Sayeed Ahmed and Company does not exclude pre-reference interest but recognizes the combined period under Section 31(7)(a). The Court also referred to recent decisions that reinforce the power of arbitral tribunals to award interest for multiple sub-periods.

Conclusions: The arbitral tribunal was within its jurisdiction to award interest for three periods, including separate rates for pre-reference and pendente lite periods, and the Division Bench erred in holding otherwise.

Issue 2: Legality of awarding compound interest (interest on interest) by adding interest to principal for subsequent interest calculations

Legal framework and precedents: The question of whether compound interest is permissible under the 1996 Act has been contentious. Earlier, in State of Haryana v. S.L. Arora (2010), the Court held that compound interest was impermissible. However, this was overruled by a three-Judge Bench in Hyder Consulting (2015), which clarified that the 'sum' awarded under Section 31(7) includes principal plus interest, and post-award interest can be awarded on this aggregate sum, effectively permitting compound interest.

Subsequent decisions, including UHL Power Company (2022), Delhi Airport Metro Express (2022), and Morgan Securities (2023), reaffirmed this position.

Court's interpretation and reasoning: The Supreme Court reiterated that the sum awarded by the arbitral tribunal includes principal and interest accrued till the date of the award, and Section 31(7)(b) mandates interest on this sum from award date till payment. This statutory scheme implicitly allows compound interest.

Key evidence and findings: The arbitral tribunal's approach of adding interest amounts to principal for calculating further interest was consistent with the statutory language and judicial precedents.

Application of law to facts: The Court applied the clarified legal position to uphold the arbitral tribunal's award of interest on interest, rejecting the Division Bench's finding of illegality.

Treatment of competing arguments: The Division Bench's reliance on the earlier S.L. Arora decision was held to be outdated and overruled. The Court emphasized the binding nature of the three-Judge Bench ruling in Hyder Consulting and later cases.

Conclusions: Awarding compound interest under Section 31(7) is permissible, and the arbitral tribunal did not err in awarding interest on the principal plus accrued interest.

Issue 3: Interpretation of Section 31(7) of the 1996 Act, including the effect of the 2015 amendment

Legal framework and precedents: Section 31(7) post-2015 amendment provides arbitral tribunals discretion to award interest for the period between cause of action and award, and prescribes interest at 2% above current rates from award to payment unless otherwise directed.

Judicial pronouncements, including Pam Developments (2024) and North Delhi Municipal Corporation (2024), have clarified the scope of this provision, recognizing the tribunal's power to award pre-reference, pendente lite, and post-award interest.

Court's interpretation and reasoning: The Court held that the 2015 amendment codified the power of arbitral tribunals to award interest for the pre-award period and post-award period distinctly, but did not eliminate the practical subdivision of the pre-award period into pre-reference and pendente lite.

Key evidence and findings: The arbitral tribunal's exclusion of the eight-year laches period from interest calculation was a valid exercise of discretion under Section 31(7)(a).

Application of law to facts: The Court applied the statutory language and recent case law to uphold the arbitral tribunal's approach to interest calculation and rates.

Treatment of competing arguments: The Division Bench's restrictive interpretation was rejected as inconsistent with the statutory scheme and judicial precedents.

Conclusions: Section 31(7) permits awarding interest for the entire pre-award period, subdivided if necessary, and mandates post-award interest at prescribed rates unless otherwise directed.

Issue 4: Treatment of laches and discretion of the arbitral tribunal in awarding interest

Legal framework and precedents: The arbitral tribunal has discretion to exclude periods of laches from interest calculation under Section 31(7)(a). This discretion is recognized in judicial pronouncements.

Court's interpretation and reasoning: The Court upheld the arbitral tribunal's finding of laches by the appellant for the period 01.01.2009 to 31.12.2016 and consequent exclusion of interest for that period as a valid exercise of discretion.

Application of law to facts: The appellant's delay in pursuing claims was established, justifying the exclusion of interest for the said period.

Conclusions: The arbitral tribunal's discretion in excluding laches periods from interest is valid and was rightly upheld.

SIGNIFICANT HOLDINGS

"Section 31(7)(a) of the Arbitration and Conciliation Act, 1996 confers discretion on the arbitral tribunal to award 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. This includes the power to subdivide the period and award varying rates of interest for such sub-periods."

"The 'sum' directed to be paid by an arbitral award under Section 31(7)(b) includes the principal amount plus interest awarded for the pre-award period, and such sum shall carry interest at the prescribed rate from the date of award till payment. This statutory scheme permits the awarding of compound interest."

"The distinction between pre-reference and pendente lite interest remains valid in practice and is encompassed within the period contemplated under Section 31(7)(a). The arbitral tribunal's discretion to exclude periods of laches from interest calculation is valid."

"The Division Bench's interpretation that only two periods exist for awarding interest and that awarding interest on interest is impermissible is erroneous and inconsistent with the statutory language and binding precedents."

"The arbitral tribunal's award of interest for three periods with varying rates and exclusion of laches period, as well as its calculation of interest on the aggregate sum including accrued interest, is upheld."

"The appeal is allowed, and the impugned judgment and order of the Division Bench setting aside the arbitral award directions on interest are set aside."