A three
judge bench of the Hon’ble Supreme Court of India (“SC”) comprising of Chief
Justice H.L Dattu and Justice S.A Bobde and Justice A.M Sapre, his brothers on
the bench, had the occasion to decide the below mentioned questions in
reference titled as Hyder Consulting (UK) v. State of Orissa (copy avaialble here) decided on
November 25, 2014:
Q. Whether the decision of the SC in
State of Haryana & Ors. v. S.L Arora and Company (“S.L Arora”) wherein it
was held that an award of interest on interest from the date of award is not
permissible under section 31(7) of the Arbitration and Conciliation Act, 1996
(the “Act”) is good in law; and
Q. Whether the arbitral tribunal is
empowered to grant interest (both pre and post award), under the provisions of
section 31(7), even in the absence of a clause to that effect in the contract,
empowering the tribunal to do so.
Chief Justice H.L Dattu held that
S.L Arora is good law in so much as where the arbitral award is silent about
interest from the date of award till the date of payment, the person in whose
favour the award has been made will be entitled to interest at the rate of 18
(eighteen) per cent per annum on the principal amount awarded, from the date of
award till the date of payment.
However, Justice S.A Bobde and
Justice A. M Sapre, through independent judgments, dissented with the above
view and held that S.L Arora is wrongly decided in that it holds that the sum
directed to be paid by the arbitral tribunal and the reference to the award on
substantive claim does not refer to interest pendent 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 tribunal does not have the power to
award interest upon interest, or compound interest either for pre award period
or for the post award period and held that the arbitral tribunal is well
empowered under section 31(7) to grant interest even in the absence of a clause
in the contract to grant interest.
Relevant excerpts from the
judgments are quoted below:
Justice S.A Bobde
“It is apparent that vide Section 31(7) (a) of the Act, parliament
intended that an award for payment of money may be inclusive of interest, and
the sum of the principle amount plus interest may be directed to be paid by the
Arbitral Tribunal for the pre-award period. Thereupon the Arbitral Tribunal
directed interest to be paid on such sum for the post award period vide Section
31(7)(b) 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”
Justice A.M Sapre
“I am inclined to hold that the amount awarded under Section 31(7)(a) of
the act, whether with or without interest, constitutes a sum for which the
award is made.” “Therefore, for the purposes of an award there is no
distinction between a sum with interest, and a sum without interest. Once
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 losses its character of interest and takes
the color of the sum for which the award is made”
