Introduction
The article discusses the discretionary power of an Arbitral Tribunal to award post-award interest on a portion of the total sum owed in a case. While the Tribunal has the power to award interest, it is not obligated to do so and may choose to award interest on only a portion of the amount awarded. There are various factors that the Tribunal may consider when making its decision, such as the conduct of the parties during the arbitration proceedings and any delay in payment. Overall, the article emphasizes the importance of understanding the Tribunal's discretion in awarding post-award interest and the factors that may influence its decision.
Post-award interest can be granted under Section 31(7) of the Arbitration and Conciliation Act,1996 (hereon referred to as "Act"). The provision of post-award interest has a significant impact on the final monetary compensation awarded to the parties. The purpose of awarding interest on the arbitral award is to compensate the successful party for the delay in receiving the amount awarded to them. It also acts as a deterrent to the losing party from delaying the payment of the award.
However, it is pertinent to note that post-award interest is given as a way to discourage award[1]debtors from avoiding payment or using delay tactics after an award has been made against them. Under such circumstances, the 2010 judgment of the Hon'ble Supreme Court may result in a serious financial blow to the party that receives a favourable award.
Under Section 31(7), the Tribunal has broad discretion under Section 31(7)(a) of the Act to determine the rate of interest, the sum on which interest is payable, and the period for which interest is to be paid for pre-award interest. However, Section 31(7)(b) does not specify the extent of the Tribunal's discretion in granting post-award interest, except that the sum awarded will carry interest at a rate of 2% higher than the prevailing rate unless the award states otherwise. If the award is silent on post-award interest, Section 31(7)(b) applies.
Pre-Award Interest
Section 31(7) leaves room for ambiguity, however, the Apex Court, vide numerous judgments have clarified the surmises that give rise to disputes or challenges to the Award of the Arbitral Tribunal. One such controversy is the period that must be considered for the calculation of interest.
The Hon'ble Supreme Court has cleared this ambiguity in the case of Oriental Structural Engineering Pvt. Ltd. v. State of Kerala. 1 The Apex Court held in this case that the Arbitral Tribunal has been conferred with ample discretion to award interest under Section 31(7)(a) and the interest can be awarded from the date of reference till the date of the award, therefore allowing pre-award interest too. The Apex Court relied on the case of Union of India v. Bright Power Projects2 to establish that by virtue of Section 31(7)(a), the Arbitral Tribunal is bestowed with discretion to award any interest they deem as reasonable on the basis of the delay. Furthermore, the Hon'ble Supreme Court also held that such payment of pre-award interest can only be ousted in a situation where the contract specifically excludes such payment of interest.
"Sum" for Awarding Post-Award Interest
The meaning of "sum" for the purpose of post-award interest has been a matter of dispute in the past. Previously, the Court(s) interpreted "sum" to refer only to the principal amount. However, the Hon'ble Supreme Court has recently held that "sum" can also include any pre-award interest awarded. This leads to the question of whether post-award interest should be granted on the entire sum, including principal and interest, or only on a portion of it. We will discuss this question in detail below.
As elaborated above, it is a fairly settled position of law that the Arbitral Tribunal shall be vested with the power to award interest on the "sum" under an arbitral award.
In 2010, in the case of State of Haryana v. S.L. Arora, 3 a Division Bench of the Hon'ble Supreme Court held that an Arbitral Tribunal does not possess the authority to award compound interest unless explicitly stated in the contract or authorized by a statute. In this regard, the Apex Court referred to Section 3(3)(c) of the Interest Act, 1978, which prohibits the court of law from awarding interest upon interest that is already accrued.
The Hon'ble Supreme Court distinguished the verdict of Renusagar Power Co. Ltd. v. General Electric Co. 4 wherein such compounded interest was awarded by the Arbitral Tribunal and the same was held to be in perversity by a Bench of the Apex Court, however, the same can only be awarded in the instance where the contract or the statute empowers the Tribunal to award interest on interest.
In this case, the Division Bench was of the opinion that the phrase "a sum directed to be paid by an arbitral award" under Section 31(7) of the Act pertains to the primary claims that are based on the subject matter of dispute, while interest and costs are ancillary issues and not substantive disputes. In the light of such observations, the Hon'ble Division Bench finally held that the Arbitral Tribunal is not empowered to grant compound interest for either the pre-award or post-award period if the contract does not specify interest. The bench effectively clarified that the Arbitral Tribunal's discretion is limited to awarding interest only to the extent and nature as provided under the contract under which the Tribunal was appointed and/or if a specific statute provides for such interest on interest.
In the light of the law established in the case of S.L. Arora, the Hon'ble Supreme Court had the opportunity to analyze the issue regarding what would constitute as "sum" in the case of Hyder Consulting (UK) Ltd. v. Governor, State of Orissa. 5 The instant case was initially placed before a Division Bench of the Hon'ble Supreme Court, however, it was observed that the Division Bench was not empowered to overrule the verdict of a bench of equal strength. Therefore, the matter was placed before Chief Justice of India to be placed before an appropriate bench vide order dated 13.03.2012.6 The majority of this Bench of the Apex Court finally held that Arbitrator is empowered to grant interest for the post-award period. The Hon'ble Supreme Court also clarified that such award for interest can also be compounded, therefore, effectively award interest on interest. The Court delved into the definition of what would constitute as "sum" under Section 31(7) of the Act. The Majority held that the "sum" would not only include the principle amount that was awarded by the Arbitral Tribunal but also the interest that was awarded therein on such principle amount.
While this case clarified the constituents for "sum", the verdict of the Majority of the Bench meant that the verdict in S. L. Arora and Hyder Consulting were pronounced by the same bench of judges. This leaves room for a notable uncertainty.
Numerous benches of the Hon'ble Apex Court followed in the footsteps of the Majority Bench in the case of Hyder Consulting, including Indian Oil Corporation Limited v. U.B. Engineering Limited, 7 decided on April 12, 2022, wherein the Apex Court concurred with the verdict pronounced by the Majority in Hyder Consulting.
In the catena of judgments that have given rise to the jurisprudence regarding interest on Award, it can be noted that there are numerous subject matters that have given rise to ambiguity in law. The verdict of the Hon'ble Supreme Court in Morgan Securities & Credits (P) Ltd. v. Videocon Industries Ltd.8 cleared the air by establishing that it shall be the Arbitrator's discretion to award interest on a part or whole of 'sum'. This judgment borrowed its definition to 'sum' from another verdict of the Hon'ble Supreme Court in Hyder Consulting (UK) Limited v. Governor, State of Orrisa, 9 thus, upholding that 'sum' may include principle amount and the interest thereon.
It is pertinent to note that the Court's decision in Morgan Securities case is significant because after the Hyder Consulting case creating controversy since only the Majority overruled the decision of a Division Bench, the three-judge bench in this case clarified that the verdict of the Majority in Hyder Consulting does not suffer from any perversity.
Thus, effectively putting an end to the debate regarding compounding of interest at the post-award stage.
Furthermore, the Court in this case clarified that under Section 31(7)(a) of the Act, the post-award interest may be granted on the principle amount and may also include pre-award interest. The case widened the discretionary power of the Arbitral Tribunal and clarified that under Section 31(7)(b) of the Act, the Arbitrators are empowered to award interest on a part of the "sum".
The only reasonable caveat imposed is the if the Award specifically excludes any such interest in the light of Section 31(7)(b). The Apex Court further clarified that Section 31(7)(b) of the Act only discusses the post-award rate of interest and has little implication on the pre-award interest.
Conclusion
Thus, in the light of the numerous judicial pronouncements of the Hon'ble Supreme Court, it can be said that controversies regarding interest on an Award of the Arbitral Tribunal and the extent of the discretionary power of the Arbitrators have been put to rest.
Furthermore, the Apex Court, while deciding challenges to Awards on the grounds of interest awarded wherein Arbitrators exercise their discretionary powers, have continued to keep judicial intervention in Final Awards to a minimal.
It is notable in this regard that the three-judge bench in Morgan Securities & Credits (P) Ltd. v. Videocon Industries Ltd.10 has successfully managed to clarify the interest that can be awarded pre-award, post-award and the powers that can be exercised by the Arbitrators under Section 31(7)(a) and (b) of the Act.
Footnotes
1 (2021) 6 SCC 150
2 (2015) 9 SCC 695
3 (2010) 3 SCC 690.
4 1994 Supp (1) SCC 644.
56 (2016) 6 SCC 362.
6 https://main.sci.gov.in/jonew/bosir/orderpdf/1479780.pdf
7 Civil Appeal Nos. 2921-2922 of 2022
8 (2023) 1 SCC 602.
9 (2015) 2 SCC 189
10 (2023) 1 SCC 602.
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