BACKGROUND
The Supreme Court of India, in its recent judgment given on November 25, 2014, in the case of Hyder Consulting (UK) Ltd v. Governor, State of Orissa, reconsidered one of the much debated questions under the provisions of Arbitration and Conciliation Act, 1996 (“Act”) which is, as under-
“In the event the Arbitral Tribunal has already awarded interest on the principal amount for the pre award period (i.e. . the period between the date on which cause of action arose till the date on which the award is made), then does the arbitral tribunal have power to award further interest for the post award period as well (i.e. the period between the date of the award till the date of payment)?”
A three judge bench of the said Court, as per majority decision (2 judges concurring and 1 dissenting), has answered the question in affirmative, thereby overruling its earlier decision given in 2010 in the case of State of Haryana v. S.L. Arora & Co., in which it was held that that Arbitral Tribunal did not have the power to award interest upon interest, or compound interest, either for the pre-award period, or for the post-award period.
RELEVANT LEGAL PROVISIONS
Section 31(7)of the Act (reproduced)
Quote-Unquote
“(7) (a) Unless otherwise agreed by the parties, where and in so far 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 centum per annum from the date of the award to the date of payment.”
Understanding of the aforesaid provisions
Pre-award interest
Section 31(7)(a) of the Act deals with grant of “pre-award interest”. It confers a power upon the Arbitral Tribunal while making an award for payment of money, to include interest in the sum for which the award is made, on either the whole, or any part of the money and for the whole or any part of the period commencing from the date on which the cause of action arose and ending on the date on which the award is made (i.e. the pre award period).
Pre-award interest is to ensure that arbitral proceedings are concluded without unnecessary delay. Longer proceedings would attract more interest. Pre-award interest is at the discretion of Arbitral Tribunal.
Post award interest
Sub-clause (b) of Section 31(7) of the Act deals with grant of post-award interest. It provides that, for the period commencing from the date on which award is made and ending on the date of the payment of money (i.e. the post award period), “a sum” which is ordered by the Arbitral Tribunal to be paid shall be paid with an interest rate of 18% per annum, unless the Tribunal directs payment of any other interest rate. Post-award interest is to ensure speedy payment in compliance of the award.
ISSUE
In the event the Arbitral Tribunal orders interest on the principal sum for the pre award period as explained above, then under the provisions of section 31(7)(b) of the Act, does the Tribunal have power to order further interest for the post award period as well?
So, whether or not the words “a sum” appearing in section 31(7)(b) of the Act includes interest adjudicated for the pre award period along with the principal amount?
JUDGMENT (by a bench of 3 judges of which 2 judges had a common view while 1 dissented)
By placing reliance on various legal dictionaries for the meaning of the word “sum”, the Court held that the word “sum” as appearing in section 31(7)(b) of the Act simply means “an amount of money”; and it may include – “principal” and “interest” or one of the two. Parliament has deliberately used the word “sum” to refer to the aggregate of the amounts that may be directed to be paid by the Arbitral Tribunal and not merely the “principal” sum without interest.
The purpose of enacting 31(7) was clear, namely, to encourage early payment of the awarded sum and to discourage the delay, which accompanies the execution of the Award in the same manner as if it were a decree of the court. Hence, the sum directed to be paid by the Arbitral Award under clause (b) of sub-section (7) of Section 31 of the Act is inclusive of interest pendent lite.
It was apparent that vide clause (a) of sub-section (7) of Section 31 of the Act, Parliament intended that an award for payment of money may be inclusive of interest, and the “sum” of the principal amount plus interest may be directed to be paid by the Arbitral Tribunal for the preaward period. Thereupon, the Arbitral Tribunal may direct interest to be paid on such “sum” for the post-award period vide clause (b) of sub-section (7) of Section 31 of the Act, at which stage the amount would be the sum arrived at after the merging of interest with the principal; the two components having lost their separate identities.
Over ruling the judgment passed in SL Arora’s case (supra), the Court held that Parliament has the undoubted power to provide that the Arbitral Tribunal may award interest on the “sum” directed to be paid by the Award, meaning a sum inclusive of principal sum adjudged and the interest.
The words “include in the sum” appearing in section 31(7)(a) are of utmost importance. This would mean that pre-award interest is not independent of the “sum” awarded. If in case, the Arbitral Tribunal decides to award interest at the time of making the award, the interest component will not be awarded separately but it shall become part and parcel of the award. An award is thus made in respect of a “sum” which includes within the “sum” component of interest, if awarded.
Therefore, for the purposes of an award, there is no distinction between a “sum” with interest, and a “sum” without interest. Once the interest is “included in the sum” for which the award is made, the original sum and the interest component cannot be segregated and be seen independent of each other. The interest component then looses its character of an “interest” and takes the colour of “sum” for which the award is made and hence the question of question of granting “interest on interest” does not arise.
OUR COMMENTS
The direct implication of this judgment will be that the party which is ordered to pay by the Arbitral Tribunal will think twice before challenging the enforcement of award and prolonging the litigation on frivolous grounds, because of the high penalty in the form of “interest on interest” which keeps accumulating till the payment is made.
At the same time, in certain situations, the high interest rate of 18% (unless a lower interest is awarded by the Tribunal) for the post award period, may turn out to be onerous, if the losing party is also required to pay pre award interest under the same award; and the winning party may ultimately recover more than it would have actually suffered. //
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