Supreme Court interprets Section 31(7) of the Arbitration and Conciliation Act, 1996

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”