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2025 (5) TMI 1279 - HC - Indian LawsInterpretation of the expression unless the award otherwise directs in Section 31(7)(b) of the Arbitration Conciliation Act 1996 ( the Act ) - rate of interest and not entitlement of interest -Contractual work - invokation of the arbitration clause of the agreement - imposition of penalty/liquidated damages upon the complainant till the completion of work - HELD THAT - The law with regard to the power of an Arbitrator to award interest for pre-award period the interest pendent lite and interest post-award period is no more in dispute. Section 31(7)(a) provides that the Arbitrator has the power to award interest at such rate as it deems reasonable on the whole or on 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. The grant of such interest during the pre-award period is subject to the agreement as regard the rate of interest or unpaid sum between the parties. In view of the judicial pronouncement in R.P. Garg Vs. The General Manager Telecom Department Ors 2024 (9) TMI 1742 - SUPREME COURT the interpretation of Clause (b) of Section 31(7) of the Act is no more res- integra. The grant of post-award interest under Section 31(7)(b) is mandatory. The only discretion which the Arbitral Tribunal has is to decide the rate of interest to be awarded. Where the Arbitrator does not fix any rate of interest then statutory rate as provided in Section 31(7)(b) shall apply. Since in the present case the Arbitrator did not award the post-award interest in respect of Claims No. 2 3 4 5 petitioners would be entitled to the post-award interest at the rate of 18% per annum as awarded by the learned executing court. The grant of post-award interest is a statutory mandate and therefore even if non-grant of interest is not challenged by the petitioners grant of post-award interest by the executing court would not amount to going beyond the decree. In the case of R.P. Garg Vs. The General Manager Telecom Department Ors. (supra) the post- award interest awarded by the executing court even though specifically denied in the award by the Arbitral Tribunal was affirmed in appeal by the Hon ble Supreme Court. I am therefore not impressed by the argument of the petitioners that the grant of interest by the executing court would amount to challenging the award in execution proceedings or going behind the decree. Thus no illegality or perversity in the impugned order dated 25.10.2024 passed by the learned executing court. The petition is therefore dismissed.
The principal legal question considered by the Court was the interpretation of the expression "unless the award otherwise directs" in Section 31(7)(b) of the Arbitration & Conciliation Act, 1996 ("the Act"), specifically whether it relates solely to the rate of interest or also to the entitlement of post-award interest. This issue arose in the context of an arbitral award that granted interest on certain claims but did not expressly award post-award interest on others, leading to a dispute over whether statutory post-award interest at 18% per annum would apply to those claims.
Three substantive issues were initially considered by the Arbitrator: (i) whether time was the essence of the contract; (ii) whether any penalty or liquidated damages were imposed on the complainant; and (iii) whether the complainant was entitled to the claimed amounts. Issues (i) and (ii) were decided in favor of the respondent, and on issue (iii), the Arbitrator awarded a total sum with interest only on part of the amount (specifically on claims No. 1 and 8) at 10% per annum from the date of cause of action till payment, while no post-award interest was awarded on other claims. The petitioners challenged the arbitral award under Section 34 of the Act, but the challenge was dismissed. Subsequently, during execution proceedings, the respondent sought post-award interest on claims on which the Arbitrator had not awarded such interest. The executing court granted post-award interest at 18% per annum on those claims, relying on the Supreme Court's decision in R.P. Garg and others, and directed payment accordingly. The petitioners contested this order, arguing that the Arbitrator's discretion to grant or withhold post-award interest on certain claims should be respected, and that the executing court erred in imposing statutory post-award interest. The Court's detailed analysis centered on the interpretation of Section 31(7) of the Act, which comprises two clauses relevant to interest:
The Court observed that clause (a) confers broad discretion on the Arbitrator regarding pre-award interest, including whether to grant it, on what sum, and at what rate, subject to party agreement. Clause (b), however, is distinct: it mandates post-award interest on the awarded sum unless the award specifies a different rate. The phrase "unless the award otherwise directs" qualifies only the rate of interest, not the entitlement to interest itself. Thus, the entitlement to post-award interest is statutory and mandatory, whereas the rate is subject to the Arbitrator's discretion. The Court relied heavily on authoritative precedents to elucidate this interpretation. In M/s. Hyder Consulting (UK) Ltd. v. Governor, State of Orissa, the Supreme Court clarified that while pre-award interest is discretionary, post-award interest is statutorily mandated, with the Arbitrator's discretion limited to fixing the rate. The Court quoted Justice A.N. Sapre's concurring opinion emphasizing the distinct purposes of pre-award and post-award interest: pre-award interest incentivizes expeditious arbitration proceedings, while post-award interest discourages delay in payment after the award. Further, the Court examined the recent Supreme Court decision in Morgan Securities & Credits Pvt. Ltd. v. Videocon Industries Ltd., which confirmed that the phrase "unless the award otherwise directs" in Section 31(7)(b) only qualifies the rate of interest, not the entitlement. The Supreme Court held that the Arbitrator has discretion to grant post-award interest on part of the sum awarded but cannot deny the entitlement altogether. The Arbitrator's discretion must be exercised reasonably and in good faith, considering all relevant circumstances. In R.P. Garg v. The General Manager, Telecom Department & Ors., the Supreme Court reinforced that post-award interest is mandatory and not subject to party autonomy or contractual prohibition. The Court rejected the High Court's view that parties could contract out of post-award interest, holding that the statutory mandate overrides any such agreement. The Court also noted that the executing court's grant of post-award interest, even if denied by the Arbitrator, does not amount to going behind the decree but enforces the statutory mandate. Applying the law to the facts, the Court noted that the Arbitrator had granted pre-award interest on some claims but had not awarded any post-award interest on others. The petitioners' contention that the Arbitrator's discretion allowed withholding post-award interest on those claims was unsustainable in light of the statutory mandate and judicial pronouncements. The executing court correctly applied Section 31(7)(b) by awarding statutory post-award interest at 18% per annum on the claims where the Arbitrator was silent on post-award interest. The Court rejected the petitioners' argument that the executing court exceeded its jurisdiction or improperly interfered with the arbitral award by granting post-award interest. The Court emphasized that enforcement under Section 36 of the Act requires the executing court to give effect to the statutory provisions relating to interest, and that the grant of post-award interest by the executing court is consistent with the law and does not amount to challenging the award. In conclusion, the Court held that Section 31(7)(b) mandates post-award interest on sums awarded by the Arbitrator unless the award specifies a different rate, and that the phrase "unless the award otherwise directs" pertains solely to the rate of interest, not the entitlement. The Arbitrator's discretion is limited to fixing the rate of post-award interest and cannot exclude the grant of such interest altogether. Consequently, the executing court's order directing payment of post-award interest at 18% per annum on claims where the Arbitrator did not award such interest was upheld. Significant holdings include the following verbatim extract from the judgment: "Clause (b) of Section 31(7) of the Act gives discretion to the Arbitral Tribunal to award interest for the post-award period but that discretion is not subject to any contract. If such discretion is not exercised by the Arbitral Tribunal, then the statute steps in and mandates the payment of interest at the rate specified for the post-award period. While Clause (a) gives parties an option to contract out of interest, no such option is available in regard to the post-award period." "The expression 'unless the award otherwise directs' in Section 31(7)(b) relates to rate of interest and not entitlement of interest. The only distinction made by Section 31(7)(b) is that the rate of interest granted under the Award is to be given precedence over the statutorily prescribed rate." "The grant of post-award interest is a statutory mandate and therefore even if non-grant of interest is not challenged by the petitioners, grant of post-award interest by the executing court would not amount to going beyond the decree." The Court thus firmly established that post-award interest is a mandatory statutory entitlement under Section 31(7)(b) of the Act, with the Arbitrator's discretion confined to determining the rate. This principle ensures that award debtors are incentivized to comply promptly with arbitral awards and that award holders receive compensation for delayed payments post-award, reinforcing the efficacy and enforceability of arbitral awards.
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