Awarding of ‘Interest on interest’ by Arbitral Tribunal, CJI says, it is impermissible; Justice Bobde and Justice Sapre say, yes it is permissible. Decoding Section 31 (7) of the Arbitration and Conciliation Act, 1996 [Read the Judgment]
Three Judges of the Supreme Court have delivered three Judgments on an interesting question of law. While the Chief Justice H.L Dattu, heading the Bench interpreted the section against adding interest on interest, CJI’s brothers on the Bench, Justice S.A Bode and Justice A. M Sapre, through independent judgments, dissented and laid down the law to be followed henceforth.
The precise question before the three Judge Bench was ‘an award of interest on interest from the date of award is permissible under sub- section (7) of section 31 of the Arbitration and Conciliation Act, 1996 ?’ .
In State of Haryana and Others v. S.L. Arora and Company, (2010) 3 SCC 690) it was held that interest on interest is not permissible. The said judgment was doubted based on the contention that the SL Arora decision was not in consonance with earlier decisions of the Supreme Court, viz McDermott International INC v. Burn Standard Co. Ltd. and Others, (2006) 11 SCC 181; Uttar Pradesh Cooperative Federation Limited v. Three Circles, (2009) 10 SCC 374; Oil and Natural Gas Commission v. M.C. Clelland Engineers S.A., (1999) 4 SCC 327; and Central Bank of India v. Ravindra and Others, (2002) 1 SCC 367 and finally the issue travelled to three judges Bench for an authoritative pronouncement.
Sri K K Venugopal who appeared for the appellants canvassed for ‘ interest on interest’ contenting that SL Arora decision is no longer good law, on the other hand Sri L N Rao supported Arrora’s case.
CJI after an elaborate discussion touching various aspects such as concept of "per incuriam" ,the meaning of the words "sum" and "interest" as used in clause (a) of sub- section (7) of section 31 of the Act, 1996, the meaning of "interest" and the principles of interpretation to be resorted to, concurred with the judgment in State of Haryana and Others v. S.L. Arora and Company, and echoed the view that the reliance upon the McDermott case in the ‘three Circles case’ is not in consonance with the doctrine of precedents. According to CJI “On a perusal of the McDermott case (supra), it is observed that the substantive proposition of that case did not address the issue on the power of the tribunal to award 'interest on interest' or compound interest. The proposition on 'interest on interest' was made only in one of the submissions of the respondent therein. The ratio decidendi of that decision merely laid down the discretion of the arbitrator to decide the rate of interest awarded under sub- section (7) of section 31 of the Act, 1996, on a part or whole of the award money”
And after an elaborate discussion touching various aspects of the issue, CJI read sub -section (7) of section 31 of the Act, 1996 as follows :
“Therefore, in my considered view, the term "sum" as used in clause (b) of sub- section (7) of section 31 of the Act, 1996 would have the same meaning as assigned to the word under clause (a) of the same provision. It would refer to the money as adjudicated by the arbitral tribunal based on the claim of the parties to the arbitral proceedings. It has already been noticed that this money would be distinct from the interest as may have been awarded by the arbitral tribunal under clause (a) of sub- section (7) of section 31 of the Act, 1996. Therefore, the interest under clause (b) would be imposed on money awarded by the arbitral tribunal on the basis of the claims of the parties, and the said money cannot merge within it any interest as imposed in the period from the date of cause of action to the date of the award”
“ I find no infirmity with the S.L. Arora case (supra), whereby it was held that if the arbitral award is silent about interest from the date of award till the 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 the date of payment.”
Justice Bobde, though agreed with findings in S.L. Arora case that ‘three Circles ‘was incorrectly founded upon the decision in McDermott International and that such reliance was not in consonance with the doctrine of precedent, did not agree with CJI’s final conclusion of supporting S.L Arora’s case.
According to Justice Bobde”Clause (a) of sub-section (7) provides that where an Award is made for the payment of money, the Arbitral Tribunal may include interest in the sum for which the Award is made. In plain terms, this provision 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 for the entire pre-award period between the date on which the cause of action arose and the date on which the Award is made. To put it differently, sub-section (7)(a) contemplates that an Award, inclusive of interest for the pre-award period on the entire amount directed to be paid or part thereof, may be passed. The "sum" awarded may be principal amount and such interest as the Arbitral Tribunal deems fit. If no interest is awarded, the "sum" comprises only the principal. The significant words occurring in clause (a) of sub-section (7) of Section 31 of the Act are "the sum for which the award is made." On a plain reading, this expression refers to the total amount or sum for the payment for which the Award is made. Parliament has not added a qualification like “principal" to the word "sum," and therefore, the word "sum" here simply means "a particular amount of money." In Section 31 (7), this particular amount of money may include interest from the date of cause of action to the date of the award.”
The judge concluded thus “15. In the result, I am of the view that S.L. Arora's case is wrongly decided in that it holds that a sum directed to be paid by an Arbitral Tribunal and the reference to the Award on the substantive claim does not refer to interest pendente lite awarded on the "sum directed to be paid upon Award" and that in the absence of any provision of interest upon interest in the contract, the Arbitral Tribunal does not have the power to award interest upon interest, or compound interest either for the pre-award period or for the post-award period. Parliament has the undoubted power to legislate on the subject and 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, and this has been done by Parliament in plain language”
Justice A. M Sapre, the third judge on the Bench found himself in agreement with Justice Bobde and not with CJI, thus forming the majority opinion. In his own words of Justice A.M Sapre .
“1. I have had the benefit of reading the scholarly Judgments of My Lord the Chief Justice as also my learned brother Bobde J.
With great respect, I find myself in complete agreement with the reasoning and the eventual conclusion arrived at by brother Bobde J. Even though, the judgment delivered by brotherBobde J. encapsulates everything of what is required to be said, I, however, looking to the point involved and very ably argued by all learned senior counsel, wish to record my own reasons, in addition to what has already been laid down.”
The Justice A. M Sapreconcludes as follows :
“10. Coming now to the post-award interest, Section 31(7)(b) of the Act employs the words, "A sum directed to be paid by an arbitral award...". Sub-clause (b) uses the words "arbitral award" and not the "arbitral tribunal". The arbitral award, as held above, is made in respect of a "sum" which includes the interest. It is, therefore, obvious that what carries under Section 31(7)(b) of the Act is the "sum directed to be paid by an arbitral award" and not any other amount much less by or under the name "interest". In such situation, it cannot be said that what is being granted under Section 31(7)(b) of the Act is "interest on interest". Interest under sub-clause (b) is granted on the "sum" directed to be paid by an arbitral award wherein the "sum" is nothing more than what is arrived at under sub-clause (a).
Therefore, in my view, the expression "grant of interest on interest" while exercising the power under Section 31(7) of the Act does not arise and, therefore, the Arbitral Tribunal is well empowered to grant interest even in the absence of clause in the contract for grant of interest.
Read the Judgment here