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We use cookies to give you the best online experience. By using our website you agree to our use of cookies in accordance with our cookie policy. Learn more here . Close Me Home > India > Litigation, Mediation & Arbitration Last Updated: 23 December 2014 Article by Varuna Bhanrale, Shalaka Patil and Nishith Desai Nishith Desai Associates India: Supreme Court: Arbitrators Can Award Post Award Interest On Interest Pendente Lite 1 The Supreme Court has: Held that postaward interest under Section 31(7)(b) of the Arbitration and Conciliation Act, 1996 would also be awarded on the amount of interest pendent lite, if any, and not merely on the principal sum Interpreted the word 'sum' used in Section 31(7), subclauses (a) and (b) of the Act to be an amount of money that could include principal or interest or both. The Supreme Court's judgment in State of Haryana and Others vs S.L. Arora & Co. was pronounced as incorrect and overruled INTRODUCTION In its recent judgment of M/s Hyder Consulting (UK) Ltd v. Governor State Of Orissa through Chief Engineer, the Supreme Court has considered the much debated question of whether postaward interest can be awarded by an arbitral tribunal on pendite lite interest under Section 31(7) of the Arbitration and Conciliation Act, 1996 (" Act"). The majority decision has held in the affirmative. FACTS An arbitral award of Rs.2,30,59,802 was made in favour of the appellant. During execution proceedings, the District Judge ordered payment of Rs.8,92,15,993 taking into account interest payable on the principal amount and the interest pendant lite thereon for the calculation of post award interest. The High Court of Orissa, quashed the order of the District Judge on the basis of the judgment of the Supreme Court in the case of State of Haryana v. SL Arora and Co. 1 ("SL Arora Case") which stated that "interest on interest" in the post award phase could not be awarded. This order was set aside by the High Court of Orissa and the District Judge was instructed to calculate the total amount payable without considering interest on interest pendent lite. The High Court's order was appealed in the Supreme Court. ISSUE Whether, under Section 31(7) of the Act, interest pendent lite is included within the "sum" payable as per the arbitral award, for the purposes of awarding postaward interest. Whether the judgment in the SL Arora Case contained any infirmity, inter alia, in its interpretation of the McDermott 2 and the Three Circles 3 cases. JUDGMENT Majority Decision (A Bobde and AM Sapre J.J) Contrary to the view taken by the Hon'ble CJI, the majority decision disagreed with the judgment in the SL Arora Case whereby it had been held that unless stated in the contract, the tribunal did not have the power to provide for interest on preaward interest. The Hon'ble Court stated that post award interest, as prescribed under Section 31(7)(a) of the Act, would also be applicable to the interest pendent lite and not merely the principal amount awarded by an arbitral tribunal. In this regard, the Hon'ble Court reasoned and held as follows: Section 31(7)(a) of the Act contemplated that the term "sum" would include interest for the preaward period on the entire sum awarded by an Arbitral Tribunal. Only if no interest is awarded would "sum" comprise only the principal. This was evident from the language of Section 31(7)(a) of the Act which stated that "...the arbitral tribunal may include in the sum for which the award is made interest..." The Court, thus, concluded that this line in the Act itself suggested that the term "sum" could include interest. On a comparison with Section 34 of the Code of Civil Procedure, 1908 ("CPC") (which concerned interest in civil suits),

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    Home>India>Litigation,Mediation&Arbitration

    LastUpdated:23December2014ArticlebyVarunaBhanrale,ShalakaPatilandNishithDesaiNishithDesaiAssociates

    India: Supreme Court: Arbitrators Can Award Post Award InterestOn Interest Pendente Lite

    1

    TheSupremeCourthas:

    HeldthatpostawardinterestunderSection31(7)(b)oftheArbitrationandConciliationAct,1996wouldalsobeawardedontheamountofinterestpendentlite,ifany,andnotmerelyontheprincipalsum

    Interpretedtheword'sum'usedinSection31(7),subclauses(a)and(b)oftheActtobeanamountofmoneythatcouldincludeprincipalorinterestorboth.

    TheSupremeCourt'sjudgmentinStateofHaryanaandOthersvsS.L.Arora&Co.waspronouncedasincorrectandoverruled

    INTRODUCTION

    InitsrecentjudgmentofM/sHyderConsulting(UK)Ltdv.GovernorStateOfOrissathroughChiefEngineer,theSupremeCourthasconsideredthemuchdebatedquestionofwhetherpostawardinterestcanbeawardedbyanarbitraltribunalonpenditeliteinterestunderSection31(7)oftheArbitrationandConciliationAct,1996("Act").Themajoritydecisionhasheldintheaffirmative.

    FACTS

    AnarbitralawardofRs.2,30,59,802wasmadeinfavouroftheappellant.Duringexecutionproceedings,theDistrictJudgeorderedpaymentofRs.8,92,15,993takingintoaccountinterestpayableontheprincipalamountandtheinterestpendantlitethereonforthecalculationofpostawardinterest.

    TheHighCourtofOrissa,quashedtheorderoftheDistrictJudgeonthebasisofthejudgmentoftheSupremeCourtinthecaseofStateofHaryanav.SLAroraandCo.1("SLAroraCase")whichstatedthat"interestoninterest"inthepostawardphasecouldnotbeawarded.ThisorderwassetasidebytheHighCourtofOrissaandtheDistrictJudgewasinstructedtocalculatethetotalamountpayablewithoutconsideringinterestoninterestpendentlite.

    TheHighCourt'sorderwasappealedintheSupremeCourt.

    ISSUE

    Whether,underSection31(7)oftheAct,interestpendentliteisincludedwithinthe"sum"payableasperthearbitralaward,forthepurposesofawardingpostawardinterest.

    WhetherthejudgmentintheSLAroraCasecontainedanyinfirmity,interalia,initsinterpretationoftheMcDermott2andtheThreeCircles3cases.

    JUDGMENT

    MajorityDecision(ABobdeandAMSapreJ.J)

    ContrarytotheviewtakenbytheHon'bleCJI,themajoritydecisiondisagreedwiththejudgmentintheSLAroraCasewherebyithadbeenheldthatunlessstatedinthecontract,thetribunaldidnothavethepowertoprovideforinterestonpreawardinterest.TheHon'bleCourtstatedthatpostawardinterest,asprescribedunderSection31(7)(a)oftheAct,wouldalsobeapplicabletotheinterestpendentliteandnotmerelytheprincipalamountawardedbyanarbitraltribunal.

    Inthisregard,theHon'bleCourtreasonedandheldasfollows:

    Section31(7)(a)oftheActcontemplatedthattheterm"sum"wouldincludeinterestforthepreawardperiodontheentiresumawardedbyanArbitralTribunal.Onlyifnointerestisawardedwould"sum"compriseonlytheprincipal.ThiswasevidentfromthelanguageofSection31(7)(a)oftheActwhichstatedthat"...thearbitraltribunalmayincludeinthesumforwhichtheawardismadeinterest..."TheCourt,thus,concludedthatthislineintheActitselfsuggestedthattheterm"sum"couldincludeinterest.

    OnacomparisonwithSection34oftheCodeofCivilProcedure,1908("CPC")(whichconcernedinterestincivilsuits),

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  • thelanguageofSection31(7)oftheActwasdifferentandevidentlyintendedtohaveadifferenteffect.

    ItwasheldthatsinceSection34ofCPCempoweredtheCourttoawardinterest"ontheprincipalsum"andnotmerelythe"sum"asprovidedunderSection31(7)oftheAct.Thus,clearlytheambitofSection31(7)oftheActwastoincludethepreawardinterestawardedalongwiththeprincipalsum.HadthatnotbeenthecaseSection31(7)oftheActwouldhavethesamelanguageasthetarget=_blankSection34oftheCPC.

    Atthepostawardstagethe"sumdirectedtobepaidbyanarbitraltribunal"wouldincludeinterest,aselucidatedabove.Thus,anypostawardinterestbeinggrantedbythetribunalunderSection31(7)(b)oftheActisonlyonthe"sumdirectedtobepaidbyanarbitraltribunal"andnotonanyamountreferredtoas"interest".Thus,usageoftheterm"interestoninterest"seemsinaccurate.

    ThepurposeofenactingtheprovisionunderSection31(7)wastoencourageearlypaymentoftheawardedsum.Thus,"sum"couldbeinterpretedtoincludeinterest,inlinewiththepurposeoftheprovision.

    MinorityDissentingJudgment(HLDattu,CJI)

    TheHon'bleJudgeconsideredthedecisionoftheSupremeCourtintheSLAroraCaseandfoundittobecorrect.TheHon'bleJudgeconsideredthefollowingrationaleundertheSLAroraCase:

    Theuseofthewords"whereandinsofarasanarbitralawardisforthepaymentofmoney"anduseofthewords"theArbitralTribunalmayincludeinthesumforwhichtheawardismade,interest...onthewholeoranypartofthemoney"inClause(a)anduseofthewords"asumdirectedtobepaidbyanarbitralawardshall...carryinterest"inClause(b)ofSubsection(7)ofSection31clearlyindicatethatthesectioncontemplatesawardofonlysimpleinterestandnotcompoundinterestorinterestuponinterest.

    TheHon'bleJudgeheldthattheinterpretationofSection31(7)oftheActundertheSLAroraCasewascorrectandthereforethejudgmentthereinwasnotperincuriam.

    ItwasfurtherheldthattheinterestawardedunderSection31(7)oftheActwasonlytowardscompensatingonepartyfortheotherparty'swithholdingofthemoneywhichrightfullybelongedtothefirstpartyandnotforwithholdingtheinterest.Thus,postawardinterestcouldonlybepaidtowardstheprincipalsumclaimedbythepartyandnottowardstheinterestpendentelite.

    Theword"sum"undersubsections(a)and(b)ofSection31(7)oftheAct,inthisregard,wasalsointerpretedtomeanthemoneydirectedtobepaidaspertheawardanddidnotincludetheinterestpendentlite.DattuJ.examinedanumberoflegaldictionariestogivetheterm"sum"itsordinarymeaningandindoingsoarrivedattheconclusionthat"sum"couldonlymeanprincipalsumandnotinterest.

    ANALYSIS

    Themajorityjudgmentinthiscasehasusedtheliteralruleofinterpretationtoreadtheprovisionsastheyareandgivethemtheirplainmeaninginordertogleanthelegislativeintentfromthewordsusedintheprovisions.Ithasexaminedthelegislativeintenttodeterminethattheword"sum"wouldhavetobereadasinclusiveoftheprincipalandinterestpendentlite.Theimplicationofthismajorityjudgmentwouldbethatpartieswouldavoidunnecessarydelaysorprolongingofproceedingsduringthecourseofarbitration.Duringthepostawardstage,therewouldbeareductioninfrivolouschallengestotheenforcementofawards,bythepartiessincethepartieswouldbepayingaheftyinterestoverapotentiallyenlargedclaimamount.

    ThejudgmentisalsoinlinewiththeLawCommissioninitsReportonAmendmentstoArbitrationandConciliationAct,19964

    whereintheinclusionofanexplanationtoSection31(7)(b)thatwouldlegislativelyoverrulethedecisionoftheSupremeCourtinSLAroraCaseandincludinginterestpendentliteasapartofword'sum'hasbeensuggested.

    Thedissentingjudgmentdoesprovidefoodforthoughtconsideringthenatureoftheterminterest,whichiscompensatoryinnature.Therecouldbealegitimateargumentthatshouldthedisputehavebeenadjudicatedthroughasuitthenpostdecreeinterestwouldonlybeoverthedecretalprincipalandnotoverthependentliteinterest.However,merelybecausethedisputeisadjudicatedthroughanarbitralaward,partiesbecomeentitledtoapostawardinterestoverboththeprincipalandtheinterestpendentlite,itremainstobeseeifthelegislatureintendedsucharesult.

    Onecouldalsosee,astheHon'bleChiefJusticehasheld,thatintheportion"thearbitraltribunalmayincludeinthesumforwhichtheawardismadeinterest"ofSection31(7)(a)couldbereaddichotomouslytostatethatthesummeansprincipalbutsuchprincipalcouldalsoincludeinterest,whentheawardisbeinggiven.

    Itisimportanttonotethatwhileinterestonpendenteliteinterestmaybepayableinrespectofdomesticarbitrations,itmaynotbeapplicabletointernationalarbitrationsseatedoutsideIndia.ThisisowingtothenonapplicabilityofSection31(7)oftheActtoforeignawards5andtheabsenceofasimilarprovisionunderPartIIoftheActwhichdealswiththeexecutionofforeignawards.

    WhilethisjudgmenthasoverruledSLAroraCaseandhasreversedthepositionoflawaslaiddowntherein,giventheimportanceofthisissueintherealmofarbitrationitremainstobeseenwhetherthecasewouldbeconsideredbyaconstitutionbenchoftheSupremeCourt,forfurtherclarityontheissue.

    Footnotes

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