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TMI Blog2010 (1) TMI 1261X X X X Extracts X X X X X X X X Extracts X X X X ..... ridabad(Claimant) to be paid by the Haryana PWD B&R Branch Department (respondent). In case the total amount of award together with this interest is not paid within 30 days from the date of making this award, future interest shall be paid @ 18% per annum on the sums due to the claimant from the date of Award upto the actual date of payment ............" (emphasis supplied) 3. The application filed by the appellants to set aside the said the award, under Section 34 of the Arbitration and Conciliation Act 1996 ('Act' for short), was rejected by the civil court. Thereafter, on 26.10.2004, the respondent levied execution against the appellants, to recover the following amount: (i) Principal amount Rs.14,94,000/- (ii) Interest at 12% per annum on Rs. 14,94,000/- from 19.12.1990 to 22.6.2000 (date of the award) Rs.17,04,879/- (iii)Interest at 18% per annum on Rs. 14,94,000/- from 23.6.2000 to 23.10.2004 (date of petition) Rs.11,67,039/- execution TOTAL Rs.43,65,918/- The appellants paid to the respondent, a sum of Rs. 44,59,587/- on 1.3.2005, which was made up Rs. 14,94,000/- plus interest thereon at the rate of 12% per annum from 19.12.1990 to 22.6.2000 plus interest a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... future interest has been awarded at 18% per annum "on the sums due to the claimant" from the date of award to the actual date of payment; and that as the interest up to date of award is a 'sum due' on the date of the award, the said amount would also carry interest at 18% per annum from the date of the award. 7. On the contentions urged, the following questions arise for consideration: (i) Whether section 31(7) of the Act authorizes and enables arbitral tribunals to award interest on interest from the date of award? (ii) Whether the Arbitral Award granted future interest from the date of award, only on the principal amount found due to the respondent (that is Rs. 14,94,000/-) or on the aggregate of the principal and interest upto the date of award (Rs.31,98,879/-). Re : Question (i) 8. Payment of interest arises in different circumstances. It can be the consideration paid by a borrower to a lender for use of the money lent or made available by the lender. It can be the return given by a bank, financial institution or a company on amounts deposited or invested with them by a customer or constituent. It can be the compensation paid by a person who withholds or defaults in pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o award interest from the date of cause of action to the date of institution of legal proceedings or initiation of arbitration proceedings. Subsection (3)(c) of section 3 of the Interest Act, 1978 makes it clear that nothing in the said section shall empower the Court or arbitrator to award interest upon interest. It should be noted that section 3 of Interest Act does not deal with either pendente lite or future interest. 11. This Court in Renusagar Power Co. Ltd v. General Electric Co. - [1994 Supp.(1) SCC 644] held that award of interest on interest was not opposed to the public policy of India, but could be awarded only if authorized by contract or statute. This Court observed: "Merely because in Section 3(3)(c) of the Interest Act, 1978, the court is precluded from awarding interest on interest does not mean that it is not permissible to award such interest under a contract or usage or under the statute. It is common knowledge that provision is made for the payment of compound interest in contracts for loans advanced by banks and financial institutions and the said contracts are enforced by courts. Hence it cannot be said that award of interest on interest, i.e., compound in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d and confirmed by the decree. The power of arbitral tribunals to award interest was governed by the provisions of Interest Act, 1978 and the law enunciated by courts. 13. The Arbitration and Conciliation Act 1996, on the other hand, contains a specific provision dealing with the power of the arbitral tribunal to award interest. The said provision is incorporated in sub-section (7) of Section 31 which deals with the form and contents of arbitral awards. The said Subsection (7) is extracted below:- "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 cent per annum from the date of the award to the date of payment." 14. Section 31(7) makes no reference to payment of compound interest or paym ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s the rate of post-award interest in all arbitral awards should be 18% per annum, and that they do not have any discretion in regard to post-award interest. Some have misconstrued it further to infer the rate of interest mentioned therein is an indication that invariably the rate of interest in arbitrations, either pre-award or post-award, should be 18% per annum. Both these assumptions are baseless and erroneous. If that was the legislative intention, there would have been no need for vesting discretion in Arbitral Tribunals, in the matter of interest, under section 31(7)(a). The principles relating to award of interest, in general, are not different for courts and arbitral tribunals, except to the extent indicated in section 31(7) of the Act and CPC. A comparatively high rate of post-award interest is provided in section 31(7)(b) of the Act, not because 18% is the normal rate of interest to be awarded in arbitrations, but purely as a deterrent to award-debtors from avoiding payment or using delaying tactics. In fact a provision similar to section 31(7)(b) of the Act, if provided in section 34 of Code of Civil Procedure, will considerably reduce the travails of plaintiffs in execu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en the arbitral tribunal decides the substantive disputes between the parties. The words 'sum for which the award is made' and 'a sum directed to be paid by an arbitral award' contextually refer to award on the substantive claims and not ancillary or consequential directions relating to interest and costs. (18.2.) The authority of the arbitral tribunals to award interest under section 31(7)(a) is subject to the contract between the parties and the contract will prevail over the provisions of section 31(7)(a) of the Act. Where the contract between the parties contains a provision relating to, or regulating or prohibiting interest, the entitlement of a party to the contract to interest for the period between the date on which the cause of action arose and the date on which the award is made, will be governed by the provisions of the contract, and the arbitral tribunal will have to grant or refuse interest, strictly in accordance with the contract. The arbitral tribunals cannot ignore the contract between the parties, while dealing with or awarding pre-award interest. Where the contract does not prohibit award of interest, and where the arbitral award is for payment of money, the arb ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ayment, or specifies the rate of interest payable from the date of award till date of payment, or if the award specifically refused interest, clause (b) of Section 31 will not come into play. But if the award is silent in regard to the interest from the date of award, or does not specify the rate of interest from the date of award, then the party in whose favour an award for money has been made, will be entitled to interest at 18% per annum from the date of award. He may claim the said amount in execution even though there is no reference to any post award interest in the award. Even if the pre-award interest is at much lower rate, if the award is silent in regard to post- award interest, the claimant will be entitled to post- award interest at the higher rate of 18% per annum. The higher rate of interest is provided in clause (b) with the deliberate intent of discouraging award-debtors from adopting dilatory tactics and to persuade them to comply with the award. 19. We will next deal with the three cases relied upon by the learned counsel for the respondent to contend that this Court has recognized and accepted the power of the arbitral tribunals to award interest upon interest: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ws that there is no reference to awarding of compound interest or interest from the date of the award on the interest that had accrued due up to the date of award. The decision dealt with the rate of interest and exercise of jurisdiction under Article 142 of the Constitution to set right anomalies in regard to rate of interest. The said decision is therefore, of no assistance. 21. Learned counsel for the respondent submitted that in Three Circles, this Court has observed that Mcdermott recognized that interest awarded on the principal amount upto the date of the award becomes part of the principal from the date of the award. We extract below the relevant portion of Three Circles relied upon by the respondent : "Now the question comes which is related to awarding of `interest on interest'. According to the appellant, they have to pay interest on an amount which was inclusive of interest and the principal amount and, therefore, this amount to a liability to pay `interest on interest. This question is no longer res integra at the present point of time. This Court in McDermott International Inc. v. Burn Standard Co. Ltd, and Ors.- 2006 (11) SCC 181 has settled this question in which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... @ 30% per annum with effect from 18.8.1990 till final payment of Award. Keeping in view the reasonability of the claim, I allow interest @ 12% per annum on the total amount of Award i.e. on Rs. 14.94 lacs with effect from 19.12.1990 (date of first reference of Arbitrator) upto the date of making this award. In case the total amount of award together with this interest is not paid within 30 days from the date of making this award, future interest shall be paid @ 18% per annum on the entire Award from the date of Award upto the actual date of payment". (emphasis supplied) The above portion of the award when read with the operative portion of the award shows that the words 'entire award' used in the para dealing interest and the words 'sums due' used in the operative portion of the award refer to the 'total amount of award' referred to earlier in the said two portions relating to interest. 23. The Arbitrator allowed interest at the rate 12% per annum on the total amount of the award, that is Rs. 14,94,000/-, with effect from 19.12.1990 up to the date of the Award. He further directed that in case the "total amount of the award together with this interest" is not paid within 30 da ..... X X X X Extracts X X X X X X X X Extracts X X X X
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