Summary
The Court set aside a Division Bench judgment under Section 37 of the Arbitration and Conciliation Act, 1996 which had struck down an arbitral tribunal's pendente lite interest directions on the grounds that Section 31(7) recognises only two interest periods and that interest on principal plus pre-reference interest amounted to impermissible compound interest. Section 31(7)(a) gives the tribunal discretion to award interest for the whole or any part of the period from cause of action to award, to sub-divide that period, exclude a period of laches and apply different rates, and the 'sum' awarded on which post-award interest runs includes interest up to the award (Hyder Consulting), so neither reasoning was sustainable.
Issues
- Whether, under Section 31(7)(a) of the Arbitration and Conciliation Act, 1996, an arbitral tribunal may award interest separately for the pre-reference period and the pendente lite period, at different rates and excluding a period of laches, or whether the statute recognises only a single period from cause of action to award.
- Whether an arbitral tribunal awarding pendente lite and post-award interest on the principal amount together with interest already awarded for the earlier period levies impermissible compound interest.
Provisions considered
- Section 31(7)(a), Arbitration and Conciliation Act, 1996Clause (a) lets the tribunal, unless otherwise agreed, include in the sum awarded interest at a reasonable rate for the whole or any part of the period from the cause of action to the award. The Court read this as merging the pre-reference and pendente lite periods into one statutory period while leaving the tribunal free to grant interest for a composite or sub-divided period, exclude any part of it (here about eight years of laches) and apply different rates. Sayeed Ahmed does not exclude pre-reference interest; Pam Developments and S.A. Builders confirm the statutory power to grant pre-reference, pendente lite and post-award interest. (¶¶ 27, 28, 30, 31, 32, 33, 34, 35, 36)
- Section 31(7)(b), Arbitration and Conciliation Act, 1996Clause (b) provides that the sum directed to be paid by the award carries interest from the date of award to payment (18% per annum before 23.10.2015; thereafter 2% above the current rate) unless the award otherwise directs. Following the three-Judge Bench in Hyder Consulting (UK) Ltd., which overruled State of Haryana v. S.L. Arora, and S.A. Builders, the 'sum' means the principal plus the interest awarded from cause of action to the date of award, and post-award interest runs on that aggregate; this is not an impermissible levy of interest upon interest. (¶¶ 27, 27.1, 37, 39, 40, 41, 42, 43, 44)
- Grant of interest by arbitrator (no specific provision), Arbitration Act, 1940Noted by contrast: the 1940 Act contained no provision empowering an arbitrator to grant interest, the power to award pre-reference, pendente lite and post-award interest having been conferred through judicial pronouncements; Section 31(7)(a) of the 1996 Act fills that vacuum by statutory recognition. (¶¶ 32, 34)
Held
- Section 31(7)(a) of the 1996 Act gives the arbitral tribunal discretion to include interest at a reasonable rate for the whole or any part of the period between the date the cause of action arose and the date of the award. The tribunal may therefore exclude a part of that period (as it did for the roughly eight years during which the claimant was remiss in pursuing its claim), treat the period as composite or sub-divide it into pre-reference and pendente lite segments, and apply one rate for the whole or different rates for the sub-periods. The Division Bench erred in holding that the tribunal lacked jurisdiction to award interest for the pre-reference and pendente lite periods because the statute provides only one period from cause of action to award. (¶¶ 28, 30, 35, 36)
- Sayeed Ahmed and Company v. State of Uttar Pradesh does not say that interest should not be granted for the pre-reference period; it explains only that Section 31(7)(a) has merged the pre-reference and pendente lite periods into the first of the two statutory periods. The position is clarified by Pam Developments v. State of West Bengal and North Delhi Municipal Corporation v. S.A. Builders: unlike the 1940 Act, the 1996 Act statutorily recognises the tribunal's power to grant pre-award, pendente lite and post-award interest. (¶¶ 30, 31, 32, 33, 33.1, 34)
- The 'sum' awarded under Section 31(7)(a) means the principal together with the interest awarded from the cause of action to the date of the award, and under Section 31(7)(b) that sum carries further interest from the award until payment. State of Haryana v. S.L. Arora, which held that tribunals could not award interest upon interest, was declared wrongly decided in Hyder Consulting (UK) Ltd. v. Governor, State of Orissa (three Judges) and stands overruled as recognised in UHL Power Co. and reiterated in Delhi Airport Metro Express, Morgan Securities and S.A. Builders. The Division Bench's view that merging past-period interest with the principal for levying further interest amounted to impermissible compound interest was therefore unsustainable. (¶¶ 37, 38, 39, 40, 41, 42, 43, 44, 45)
Result
Appeal allowed; the Division Bench's judgment dated 01.08.2023 in the Section 37 appeal, which had set aside the interest directions in paragraph 58(b) of the award dated 28.10.2020, set aside; no order as to costs.