Supreme Court of India
STATE OF HARYANA & ORS.versusS. L. ARORA & COMPANY
- Citation
- 2010 INSC 69
- Decided
- 29 January 2010
- Disposal
- Appeal(s) allowed
- Bench
- R V RAVEENDRAN
Holding
Section 31(7) of the Arbitration and Conciliation Act, 1996 permits only simple interest; arbitral tribunals cannot award interest on interest absent a contractual or statutory provision.
Summary
The State of Haryana awarded a construction contract to S.L. Arora & Co., which was completed late, leading to arbitration. The arbitrator awarded Rs 14.94 lakh with 12% simple interest from 19‑Dec‑1990 to the award date and future interest of 18% per annum on the "total amount of award" if not paid within 30 days. The respondent later sought to modify the amount, claiming interest on the accrued pre‑award interest (compound interest), raising the sum payable. The Supreme Court examined whether Section 31(7) of the Arbitration and Conciliation Act, 1996 permits an arbitral tribunal to award interest on interest and whether the award’s future interest applied to the principal alone or to principal plus accrued interest. It held that Section 31(7) authorises only simple interest; interest on interest can be awarded only if expressly provided by contract or statute. Consequently, the award’s future interest applies only to the principal amount, and the respondent’s claim for interest on interest was rejected. The appeal was allowed, setting aside the execution court and High Court orders.
Issues considered
- Whether Section 31(7) of the Arbitration and Conciliation Act, 1996 authorises arbitral tribunals to award interest on interest from the date of award.
- Whether the arbitral award’s provision of future interest at 18% per annum applies to the principal sum alone or to the aggregate of principal and pre‑award interest.
Legislation cited
Subjects
ArbitrationInterestSimple interestCompound interestSection 31(7)Arbitral award modificationExecution proceedingsContractual interest clausePublic policy
Judgment
[2010] 2 S.C.R. 297
STATE OF HARYANA & ORS. A
v.
S.L. ARORA & COMPANY
(Civil Appeal No.1094 of 2010).
JANUARY 29, 2010
B
[R.V. RAVEENDRAN AND K.S. RADHAKRISHNAN, JJ.]
Interest Act, 1978:
s. 3 - Interest - Compound interest or Interest upon c
interest - HELD: Section 3 enables the courts and arbitral
tribunals to award interest from the date of cause of action to
the date of institution of legal proceedings or initiation of
arbitration proceedings - It does no deal with either pendente
lite or future interest- Sub-section (3)(c) of s.3 makes it clear
.D
that nothing in the said section shall empower the court or
arbitrator to award interest upon interest -Interest is usually
quantified in terms of a percentage of the 'principal' or the
'investment' or the 'amount of liability' - Interest unless
otherwise specified, refers to simple interest, that is interest E
paid on only the principal and not on any accrued interest -
Compound interest refers to a method of charging interest
where interest is computed not only on the principal, but also
the accrued interest - For this purpose, periodical rests are
provided for computation of interest, say yearly, or quarterly
or monthly - Compound interest can be awarded only if there F
is a specific contract, or authority under a Statute, for
compounding of interest - There is no general discretion in
courts or tribunals to award compound interest or interest upon
interest-Arbitration and Conciliation Act, 1996- s.31(7). {Para
~1cy G
State Bank of India vs. Ganjam District Tractor Owners
Association, 1994 (5) SCC 238, :-elied on.
297 H
. 298 SUPREME COLRT REPORTS [2010] 2 S.C.R.
·A Renusagar Power Co. Ltd v. General Electric Co. 1993(3)
Suppl. SCR 22 = 1994 Supp.(1) SCC 644; and· Central
Bank of India vs. Ravindra 2001(4) Suppl. SCR 323 2002 =
(1) sec 367 - referred to.
Arbitration and Conciliation Act, 1996:
B
ss.31 (7)(a) and (b) - Awar.d of interest - Interest upon
interest- Clauses (a) and (b) of sub-section(?) of s.31 clearly
indicate that the section contemplates award of only simple
interest and not compound interest or interest upon interest
C - s.31(7) makes no reference to compound interest - Nor
does it require the interest which accrues till the date of award,
to be treated as part of the principal from the date of award
for calculating the post-award interest - In the absence of any
provision for interest upon interest in the contract, the arbitral
D tribunals do not have the power to award interest upon interest
or compound· interest either for the pre-award period or for the
post-award period - However, substantial the quantum of
interest and costs may be in a given case, interest, in
particular, interest from the date of the award, and costs arf:
E ancillary issues and are not substantive disputes - If the
contract provides for cpmpounding of interest, or provides for
payment of interest upon interest, or provides for interest
payable on the principal upto any specified stage/s being
treated as part of principal for the purpose of charging of
F interest during ·any subsequent period, the arbitraltribunal will
have to give effect to it - But when the award is challenged u/
s 34 of the Act, if the court finds that the interest awarded is
in conflict with, or violating the public policy of India,. it may
set aside that part of the award - In the instant case, the award
G ·of interest upon the total amount of award refers to the total
of the amounts awarded on substantive claims excluding the
claim relating to interest - The contractor was entitled only to
simple interest on the principal amount as per original
calculation shown in the execution petition - Judgment. [Para
14-15, 17, 18.3 and 21]
H
STATE OF HARYANA & ORS. v. S.L.ARORA & 299
COMPANY
s. 31 (7) - Legal position regarding award of interest by A
arbitral tribunals, as emerging from s.31 (7) - Explained -
Interest for pre-award period and interest for post-award period
- Difference between clauses (a) and (b) of s.31(7) -
Relevancy of contract in awarding interest - Discretion of
arbitral tribunal - Purpose of post-award interest - B
Applicability of 18% interest - Explained. [para 18 to 18. 6]
Judgment - Interpretation of - The observation in Three
Circles* that Mcdermott** held that interest awarded on the
principal amount upto the date of award becomes the principal C
amount and therefore award of future interest therein does not
amount to award of interest on interest, is per incuriam due
to an inadvertent erroneous assumption - Precedents. [Para
21] '
*Uttar Pradesh Cooperative Federation Limited vs. Three D
Circles 2009 (14) SCR 310 = (2009) 10 SCC 374; and
**Mcdermott International Inc. vs. Bum Standard Co. Ltd and
Others - 2006(2) Suppl. SCR 409=(2006) 11 SCC 181,
referred to.
E
Oil &. Natural Gas Commission v. M. C. Clelland
Engineers S.A. - 1999 (2) SCR 830 =(1999) (4) SCC 327 -
held inapplicable.
Case Law Reference:
F
1993(3) Suppl. SCR 22 referred to para 11
1994 (5). sec 238 relied on para 11
2001(4) Suppl. SCR 323 referred to para 11
1999 (2) SCR 830 held inapplicable para 19 G
2006(2) Suppl. SCR 409 referred to para 19
2009 (14)SCR 310 referred to para 19
H
300 SUPREME COURT REPORTS [2010] 2 S.C.R.
A CIVIL APPELLATE JURISDICTION : Civil Appeal No.
1094 of 2010.
From the Judgment & Order dated 9.9.2008 of the High
Court of Punjab & Haryana at Chandigarh in Civil Revision No.
B 259 of 2008.
Govind Geol, Ambuj Agarwal, Nitin Singh, Naresh Bakshi,
M.L. Sharma for the Appellants.
Anusuya Salwan, S. Janani, Neha Mittal for the
c Respondent.
The Order of the Court was delivered by
ORDER
D R.V. RAVEENDRAN J. 1. Leave granted. Heard the
parties.-
2. The appellants awarded a construction contract to the
respondent. The work which had to be completed within 18
E months from 18.3.1985, was actually completed on 30.11.1989.
The delay led to claims by the contractor and counter-claims
by the employer (appellants). The disputes were referred to a
sole Arbitrator who made an award dated 22.06.2000. The
Arbitral Tribunal rejected the counter claims of the appellants.
It awarded in all Rs.14,94,000/- with interest to the respondent-
F contractor. The operative portion of the award is extracted
below:
"I award Rs.14.94 lacs (Rupees Fourteen Lacs Ninety
Four Thousands only) along with interest at the rate of 12%
G with effect from 19.12.1990 till the date of award in favour
of Mis. S.L. Arora and Company, 5E-10, Bunglow Plot,
N.l.T., Faridabad(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
H
_,
STATE OF HARYANA & ORS. v. S.L.ARORA & 301
COMPANY [R.V. RAVEENDRAN, J.]
within 30 days from the date of making this award, future A
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)
8
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 C
amount:
(i) Principal amount : Rs.14,94,000/-
(ii) Interest at 12% per
annum on Rs.14,94,000/- D
from i9.12.1990 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 E
to 23.10.2004 (date of : Rs.11,67,039/-
execution petition)
TOTAL : Rs.43,65,918/-
-------------
F
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 at the rate
of 18% per annum from 23.6.2000 to 28.2.2005. According to
the appellants, the said payment was in full and final settlement, G
though full satisfaction of the decree was not entered.
4. On 25.5.2005, the respondent made an application for
modification of the amount claimed, contending that due to
inadvertence, a lesser amount had been claimed in the H
302 SUPREME COURT REPORTS [2010] 2 S.C.R.
A execution petition. The respondent alleged that earlier, due to
oversight, it had calculated the future interest at the rate of 18%
per annum from 23.6.2000 to date of execution petition
(24.10.2004), only on the principal sum of Rs.14,94,000/-; that
the future interest ought to have been calculated on a higher
B sum of Rs.31,98,879/= (made up of Rs.14,94,000/- being the
principal amount plus Rs.17 r04,879/- being the interest at 12%
per annum which had accrued due up to the date of Award);
and that therefore the amount due as on the date of execution
petition was Rs.56,97,685/- instead of Rs.43,65,918/- claimed
c therein. The Executing Court after hearing the parties, by its
order dated 5.9.2007 accepted the revised calculation made
by the respondent. The revision petition filed by the appellants
against the said order was dismissed by the High Court by the
impugned order dated 9.9.2008 without examining the issue
0 on merits, on the assumption that what was claimed was the
balance of an admitted liability under the award.
5. The appellants did not dispute their liability to pay
interest. They however contended that Section 31 (7) of the Act
does not contemplate award of interest on interest; that an
E arbitral tribunal can award future interest only on the principal
amount but not on the interest thereon which had accrued due
up to the date of award; and that the Arbitral Tribunal in this case
has in fact awarded interest only on the principal of
Rs.14,94,000/- and not on the interest which had accrued due
F up to the date of the award. It was also submitted that even if
the Arbitral Tribunal had power to award interest, the award
could not be interpreted as awarding interest upon interest,
unless the arbitral tribunal expressly awards interest upon
interest.
G
6. The respondent contended that Section 31 (7)
authorises and empowers the arbitral tribunal to award interest
upon interest from the date of the award to date of payment.
The respondent submitted that the operative portion of the
H award stated that future interest has been awarded at 18% per
STATE OF HARYANA & ORS. v. S.L.ARORA & 303
COMPANY [RV. RAVEENDRAN, J.]
annum "on the sums due to the claimant" from the date of award A
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.
B
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? C
(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 0
upto th'e 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 E
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 paying an amount or in discharging a F
liability, when it is due and payable. Interest may be payable in
pursuance of a contract, or a provision in a statute, or the fiat
of a court of tribunal. It is usually quantified in terms of a
percentage of the 'principal' or the 'investment' or the 'amount ·
of liability'. Interest unless otherwise specified, refers to simple G
interest, that is interest paid on only the principal and not on
any accrued interest.
9. Compound interest refers to a method of charging
interest where interest is computed not only on the principal,
H
304 SUPREME COURT REPORTS (2010] 2 S.C.R.
A but also the accrued interest. For this purpose, periodical rests
are provided for computation of interest, say yearly, or quarterly
or monthly. At the end of the first 'rest', the interest accrued till
then Is added to the principal, so that for the second interest
bearing period, the aggregate of the original principal and
B interest thereon becomes the enhaneed principal. At the end
of the second rest, the accrued interest on the enhanced
principal is added to the enhanced principal so that such further·
enhanced principal becomes the principal for charging the
interest for the third period. It goes on in this manner until
c repayment, by progressively enlarging the principal base by
adding interest at regular intervals. As a result, .the debtor is
made to pay interest not only on the original principal, but on
the interest on the principal, and on the interest upon the interest
on the principal and so on. A variant of compound interest,
involves limited compounding, where interest is not added to
0
the principal with periodical rests, qut only once or twice at
agreed stages. For example, where a loan is repayable within
one year, if a provision is made in the contract that in the event
of the loan not being repaid within one year, the interest which
had accrued during the one year period witl be added to the
E principal, and as a consequence, after one year, interest will
be payable on the aggregate of the principal and the interest
for one year, it is 'a provision for interest upon interest.
Compound interest can be awarded only if there is a specific
contract, or authority under a Statute, for compounding of
F interest. There is no general discretion in courts or tribunals to
award compound interest or interest upon interest.
10. Section 3 of the Interest Act, 1978 enables the courts
and arbitral tribunals to award interest from the date of cause
G of action to the date of institution of legal proceedings or
initiation of arbitration proceedings. Sub-section (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
H
STATE OF HARYANA & ORS. v. S.L.ARORA & 305
COMPANY [R.V. RAVEENDRAN, J.]
of Interest Act does not deal with either pendente lite or future A
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,
B
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 C
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 D
that award of interest on interest, i.e., compound interest,
is against the public policy of India. We are, therefore,
unable to accept the contention that award of interest on
interest i.e. compound interest is contrary to public policy
of India." E
[emphasis supplied]
In State Bank of India vs. Ganjam District Tractor Owners
Association - 1994 (5) SCC 238, this Court again observed
that in the absence of a provision for compound interest or F
interest with periodical rests in the agreement between a bank
and the borrower, the bank cannot claim such interest.
In Central Bank of India vs. Ravindra - 2002 (1) SCC
367, a constitution bench of this Court, after exhaustive G
consideration of the case law, summarized the legal position
regarding compound interest thus:
"The English decisions and the decisions of this Court and
almost all the High courts of the country have noticed and
H.
306 SUPREME COURT REPORTS [2010] 2 S.C.R.
A approved long established banking practice of charging
interest at reasonable rates on periodical rests and
capitalising the same on remaining unpaid. Such a
practice is prevalent and also recognised in non-banking
money lending transactions. Legislature has stepped in
B from time to time to relieve the debtors from hardship
whenever it has found the practice of charging compound
interest and its capitalization to be oppressive and hence
needing to be curbed. The practice is permissible, legal
and judicially upheld excepting when superseded by
c legislation. There is nothing wrong in the parties
voluntarily entering into transactions, evidenced by
deeds incorporating covenant or stipulation for payment
of compound interest at reasonable rates, and authorising
the creditor to capitalise the interest on remaining unpaid
so as to enable interest being charged at the agreed rate
D on the interest component of the capitalised sum for the
succeeding period. Interest once capitalised, sheds its
colour of being interest and becomes a part of principal
so as to bind the debtor/borrower."
E [emphasis supplied]
12. In the Arbitration Act, 1940 ('old Act' for short) there
was no provision dealing with the power of arbitral tribunals to
award interest. Section 29 of the old Act merely provided for
F post-decree interest and authorized the court to direct in the
decree, where the award was for payment of money, payment
of interest from the date of decree at such rate as the court
deemed reasonable, to be paid on the principal sum as
adjudged by the award and confirmed by the decree. The power
of arbitral tribunals to award interest was governed by the
G 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
H the arbitral tribunal to award interest. The said provision is
STATE OF HARYANA & ORS. v. S.L.ARORA & 307
COMPANY [R.V. RAVEENDRAN, J.]
incorporated in sub-section (7) of Section 31 which deals with A
the form and contents of arbitral awards. The said Sub-section
(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
8
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. c
(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." D
14. Section 31 (7) makes no reference to payment of
compound interest or payment of interest upon interest Nor
does it require the interest which accrues till the date of the
award, to be treated as part of the principal from the date of
award for calculating the post-award interest. The use of the E
words "where and in so far as an arbitral award is for the
payment of money" and use of the words "the arbitral tribunal
may include in the sum for which the award is made,
interest ...... on the whole or any part of the money" in clause
(a) and use of the words "a sum directed to be paid by an F
arbitral award shall carry interest" in clause (b) of sub-section
(7) of section 31 clearly indicate that the section contemplates
award of only simple interest and not compound interest or
interest upon interest. 'A sum directed to be paid by an arbitral
award' refers to the award of sums on the substantive claims G
and does not refer to interest awarded on the 'sum directed to
be paid by the award'. In the absence of any provision for
interest upon interest in the contract, the arbitral tribunals do
not have the power to award interest upon interest, or
H
308 SUPREME COURT REPORTS [2010] 2 S.C.R..
A compound interest, either for the pre-award period or for the
post-award period.
15. There is a tendency among contractors to elevate the
claims for interest and costs to the level of substantive disputes
by describing them as separate and independent heads of
8
claim. The long pendency of arbitration matters either due to
prolonged arbitration proceedings or due to litigations (both
intervening and post-arbitral), has the unfortunate effect of
swelling the interest payable on the amount awarded and costs
to very substantial amounts. In many arbitral awards for money,
C the interest awarded often exceeds the amount awarded, by
..:: several times. Leisurely arbitrations, avoidable judicial
· .,. · interventions, and indecisiveness on the part of decision makers
in government and statutory bodies in accepting and settling
genuine claims either at the stage when the claim is made or
D at least at the stage when the award is made have resulted in
undue emphasis and importance being bestowed upon interest
and costs. However substantial their quantum may be in a given
case, interest, in particular interest from the date of the award,
and costs are ancillary issues and are not substantive disputes.
E
16. Some Arbitral Tribunals have misconstrued clause (b)
of section 31 (7) of the Act and assumed that the said provision
requires the rate of post-award interest in all arbitral awards
should be 18% per annum, and that they do not have any
F 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 woul(:I have been no
G 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
H
STATE OF HARYANA & ORS. v. S.L.ARORA & 309
COMPANY [R.V. RAVEENDRAN, J.]
interest is provided in section 31 (7)(b) of the Act, not because A
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 8
plaintiffs in executing their decrees in civil cases. Be that as it
may.
17. The difference between clauses (a) and (b) of section
31 (7) of the Act may conveniently be noted at this stage. They C
are:
(i) Clause (a) relates to pre-award period and clause (b)
relates to post-award period. The contract binds and
prevails in regard to interest during the pre-award period.
The contract has no application in regard to interest during D
the post-award period.
(ii) Clause (a) gives discretion to the Arbitral Tribunal in
regard to the rate, the period, the quantum (principal which
is to be subjected to interest) when awarding interest. But E
such discretion is always subject to the contract between
the parties. Clause (b) also gives discretion to the Arbitral
Tribunal to award interest for the post-award period but that
·discretion is not subject to any contract; and if that
discretion is not exercised by the arbitral Tribunal, then the
F
statute steps in and mandates payment of interest, at the
specified rate of 18% per annum for the post-award
period.
(iii) While clause (a) gives the parties an option to contract
out of interest, no such option is available in regard to the G
post-award period .
.In a nutshell, in regard to pre-award period, interest has
to be awarded as specified in the contract and in the absence
of contract as per discretion of the Arbitral Tribunal. On the other H
_... ,,
310 SUPREME COURT REPORTS [2010] 2 S.C.R.
A hand, in regard to the post-award period, interest is payable
as per the discretion of the Arbitral Tribunal and in the absence
of exercise of such discretion, at a mandatory statutory rate of
18% per annum.
8 18. As there is some confusion as to what section 31 (7)
authorizes and what it does not authorize, we will attempt to set
out the legal position regarding award of interest by the arbitral
tribunals, as emerging from section 31 (7) of the Act.
(18.1) The provision for interest in the Act is contained in
C section 31 dealing with the form and contents of arbitral award.
It employs two significant expressions "where the arbitral award
is for payment of money" and "the arbitral tribunal may include
in the sum for which the award is made, interest. .... on the whole
or any part of the money". The legislature has thus made it clear
D that award of interest under sub-section (7) of section 31 (and
award of costs under sub-section (8) of Section 31 of the Act)
are ancillary matters to be provided for by the award, when the
arbitral tribunal decides thl substantive disputes between the
parties. The words 'sum for which the award is made' and 'a
E sum directed to be paid by an arbitral award' contextually refer
to award on the substantive claims and ndt ancillary or
consequential directions relating to interest and costs.
(18.2.) The authority of the arbitral tribunals to award
F 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
G 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
H awarding pre-award interest. Where the contract does not
STATE OF HARYANA & ORS. v. S.L.ARORA & 311
COMPANY [R.V. RAVEENDRAN, J.]
prohibit award of interest, and where the arbitral award is for A
payment of money, the arbitral tribunal can award interest in
accordance with Section 31 (7) (a) of the Act, subject to any term
regarding interest in the contract.
(18.3) If the contract provides for compounding of interest,
B
or provides for payment of interest upon interest, or provides
for interest payable on the principal upto any specified stage/
s being treated as part of principal for the purpose of charging
of interest during any subsequent period, the arbitral tribunal
wiil have to give effect to it. But when the award is challenged C
under Section 34 of the Act, if the court finds that the interest
awarded is in conflict with, or violating the public policy of India,
it may set aside that part of the award.
(18.4) Where an arbitral tribunal awards interest under
section 31(7)(a) of the Act, it is given discretion in three areas D
to do justice between the parties. First is in regard to rate of
interest. The Tribunal can award interest at such rate as it
.. deems reasonable. The second is with reference to the amount
on which the interest is to be awarded. Interest may be
awarded on the whole or any part of the amount awarded. The E
third is with reference to the period for which the interest is to
be awarded. Interest may be awarded for the whole or any part
of the period between the date on which cause of action arose
and the date on which the award is made.
(18.5) The Act does away with the distinction and F
differentiation among the four interest bearing periods, that is,
pre-reference period, pendente lite period, post-award period
and post-decree period. Though a dividing line has been
maintained between pre-award and post-award periods, the
interest bearing period can now be a single continuous period G
the outer limits being the date on which the cause of action
arose and the date of payment, subject however to the discretion
of the arbitral tribunal to restrict the interest to such period as
it deems fit.
H
312 SUPREME COURT REPORTS [2010] 2 S.C.R.
A (18.6) Clause (b) of Section 31 (7) is intended to ensure
prompt payment by the award-debtor once the award is made.
The said clause provides that the "sum directed to be paid by
an arbitral award" shall carry interest at the rate of 18% per
annum from the date of award to the date of payment if the
B award does not provide otherwise in regard to the interest from
the date of the award. This makes it clear that if the award
grants interest at a specified rate up to the date of payment,
or specifies the rate of interest payable from the date of award
till date of payment, or if the award specifically refused interest,
c 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
0
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 in.terest, 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
E 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
F 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: Oil & Natural Gas Commission
v. M.C. Clelland Engineers S.A. - (1999) (4) SCC 327,
Mcdermott International Inc. vs. Bum Standard Co. Ltd and
G Others - (2006) 11 SCC 181 , and Uttar Pradesh. Cooperative
Federation Limited vs. Three Circles - (2009) 10 SCC 374.
But out of these three decisions only the decision in Mcdermott
relates to an award under the Arbitration and Conciliation Act,
1996. The other two decisions relate to awards under the old
H Act (Arbitration Act, 1940) and are of no assistance. in
STATE OF HARYANA & ORS. v. S.L.ARORA & 313
COMPANY [R.V. RAVEENDRAN, J.]
interpreting section 31 (7) of the new Act. A
20. In Mcdermott, paras 154 to 159 of the judgment deal
with the issue of interest. Relevant portions thereof are
extracted below in entirety:
"The power of the arbitrator to award interest for pre-award B
period, interest pendent lite and interest post-award period
is not in dispute. Section 31 (7) (a) provides that the arbitral
tribunal may 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 C
the cause of action arose and the date on which award is
made, i.e., pre-award period. This, however, is subject to
the agreement as regard the rate of interest on unpaid sum
between the parties. The question as to whether interest
would be paid on the whole or part of the amount or o
whether it should be awarded in the pre- award period
would depend upon the facts and circumstances of each
case. The arbitral tribunal in this behalf will have to
exercise its discretion as regards (i) at what rate interest
should be awarded; (ii) whether interest should be E
awarded on whole or part of the award money; and (iii)
whether interest should be awarded for whole or any part
of the pre-award period."
''The 1996 Act provides for award of 18% interest. The
arbitrator in his wisdom has granted 10% interest both for F
the principal amount as also for the interim. By reason of
the award, interest was awarded on the principal amount.
An interest thereon was upto the date of award as also the
future interest at the rate of 18% per annum.
I
G
However, in some cases, this Court was resorted to
exercise its jurisdiction under Article 142 in order to do
complete justice between the parties .......... In this case,
given the long lapse of time, it will be in furtherance of
justice to reduce the rate of interest to 7 1/2%. " H
314 SUPREM~ COURT REPORTS [201 OJ 2 S.C.R
A A careful reading of the same shows 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 pp to
the date of award. The decision dealt with the rate of interest
and exercise of jurisdiction under Article 142 of the Constitution
B 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
C 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
D '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
E in McDermott International Inc. v. Burn Standard Co. Ltd,
and Ors.- 2006 (11) SCC 181 has settled this question in
which it had observed as follows:
The Arbitrator ha& awarded the principal amount and
interest thereon upto the date of award and future interest
F thereupon which do not amount to award of interest on
interest as interest awarded on the principal amount upto
the date of award became the principal amount which is
permissible in law."
G [emphasis supplied]
But a careful reading of the decision in Mcdermott, shows that
the portion of Mcdermott extracted in Three Circles, assuming
it to be the law laid down-in Mcdermott, is not a finding or
conclusion of this court, rior 'ftie ratio decidendi of the case, but
H
STATE OF HARYANA & ORS. v. S.L.ARORA & 315
COMPANY [R.V. RAVEENDRAN, J.]
is only a reference to the contention of the respondent in A
Mcdermott. Paras 1 to 27 (of the SCC report) in Mcdermott
state the factual background. Paras 28 and 29 contain the
· submissions of the learned counsel for BSCL, the respondent
therein. Paras 30 to 44 contain the submissions made by the
learned counsel for Mcdermott, the appellant therein, in reply B
to the submissions made on behalf of BSCL. The passage that
is extracted in Three Circles is part of para 44 of the decision
which contains the last submission of the learned counsel for
Mcdermott on the question of interest. The reasoning in the
decision starts from para 45. This Court considered the several c
questions seriatum in paras 45 to 160. The question relating
to interest was considered in paras 154 to 159 relevant
portions of which we have extracted above. Therefore, the
observation in Three Circles that Mcdermott held that interest
awarded on the principal amount upto the date of award
0
becomes the principal amount and therefore award of future
interest therein does not amount to award of interest on interest,
is per incuriam due to an inadvertent erroneous assumption.
Re : Question (ii)
E
22. The operative portion of an arbitral award dealing with
several claims on which separate decisions have been
recorded, is really an abstract of the decisions/awards on each
of the claims. Therefore, the findings/award reached by the
Arbitrator on claim No. (8) relating to interest, have to be read F
with the operative portion to know what is directed by the award.
We therefore extract below the reasoning, finding and award
on claim No. (8) relating to.interest:
"Claim 8 : Payment on account of interest at the rate of
30% per annum with effect from 18. 8. 1990 till final G
payment.
The claimant has claimed interest @ 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@ H
316 SUPREME COURT REPORTS [2010] 2 S.C.R.
A 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
B 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)
C 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
D 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
E further directed that in case the "total amount of the award
together with this interest" is not paid within 30 days from the
date of making the award, future interest shall be paid at the
rate 18% per annum on the entire Award from the date of
Award upto the actual date of payment. The words "total amount
F of the Award together with interest" makes it clear that the
Arbitrator has used the words "total amount of the Award" as
referring to the total or aggregate of the awards on the
substantive claims of the contractor (claims 1 to 7) excluding
the ancillary claims (claim No.8) relating to interest. The
Arbitrator has also used the words "entire award" and "sums
G due" synonymous with the words "total amount of the award".
Therefore, when the operative portion states that future interest
is awarded on the "sums due", it refers to the "total amount of
the award", that is total of the amounts awarded on substantive
claims (that is claims (1) to (7) of the contractor) excluding the
H claim relating interest. Therefore, what was awarded by the
STATE OF HARYANA & ORS. v. S.L.ARORA & 317
COMPANY [R.V. RAVEENDRAN, J.]
Arbitratorr was future interest at the rate of 18% per annum on A
the amounts awarded on various claims (that is Claim No.1 to
7) in all aggregating to Rs.14,94,000/- and not upon the interest
awarded thereon upto to date of the award. It should be noted
that the difference in the interest awarded for the pre-award
period and post-award period, is only with reference to the rate B
of interest and not the quantum of principal (that bears interest).
Conclusion
24. Thus it is clear that section 31(7) merely authorizes the
arbitral tribunal to award interest in accordance with the contract C
and in the absence of any prohibition in the contract and in the
absence of specific provision relating to interest in the contract,
to award simple interest at such rates as it deems fit from the
date on which the cause of action arose till the date of payment.
It also provides that if the award is silent about interest from D
the date of award till date of payment, the person in whose
favour the award is made will be entitled to interest at 18% per
annum on the principal amount awarded, from the date of award
till date of payment. The calculation that was made in the
execution petition as originally filed was correct and the E
modification by the respondent increasing the amount due,
under the award was contrary to the Award.
25. In view of the above, we allow this appeal, set aside
the judgment of the Executing Court dated 5.9.2007 and the
order of the High Court 9.9.2008 and hold that the respondent F
was entitled only to simple interest on the principal amount as
per original calculation shown in the Execution Petition.
R.P. Appeal allowed.
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