Power to Award Interest on Interest: Matter referred to a Three Judge Bench

Recently, a two judge Bench of the Supreme consisting of RM Lodha & HL Gokhale, JJ in Hyder Consulting (UK) Ltd. v. Governor, State of Orissa [SLP (C) 29407/2010] has referred the question pertaining to whether an arbitral tribunal could award interest on interest. The question before the court in the case concerned whether an arbitral tribunal could award post-award interest on the sum of the claim along-with pre-award interest. It was argued before the court that there were conflicting judgements on this issue. 

 

In State of Haryana v. SL Arora & Co. (2010) 3 SCC 690 (SL Arora), it was held by a two judge Bench of the Supreme Court that the tribunal cannot award post-award interest on pre-award interest. On the other hand, in ONGC v. MC Clelland Engineers (1999) 4 SCC 327, McDermott International v. Burn Standard Co (2006) 11 SCC 181 and UP Co-operative Fund Ltd v. Three Circles (2009) 10 SCC 374, it was held that the tribunal could award post-award interest even on pre-award interest. In view of the conflicting decisions, the Supreme Court deemed it fit to refer the matter to the Chief Justice of India for the constitution of a Three Judge Bench to resolve the question. In addition, the court also referred the question of whether the tribunal can award post-award interest on costs.

Section 31(7) which reads below deals with the provision on award of costs in arbitration:

“(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.”

In SL Arora, the arbitrator awarded interest at 12% till the date of award (i.e., pre-award interest) on the claim and a post award interest on the claim and pre-award interest at 18% per annum. The said award was passed in June 2000. After the proceedings under Section 34 were dismissed, the party in whose favour the award was passed filed a petition in October 2004 for the execution of the award. In the execution petition, the execution petitioner claimed post-award interest at 18% on the claim amount as well as on the pre-award interest. The respondent in the execution proceedings contended that the arbitrator could not have awarded post-award interest on the pre-award interest. The court held that Section 31(7) does not empower the tribunal to order interest on interest for the following reasons:

(a) There is no reference in Section 31(7) to compound interest or inter4est on interest

(b) Section 31(7) does not require the interest accruing till the date of interest to be treated as a part of the principal for the purpose of calculating post-award interest.

(c) The said provision merely uses the words "a sum directed to be paid by an arbitral award shall carry interest" thereby indicating that interest shall be awarded only on the amount in the award and not pre-award interest. 

On the other hand, in McDermott, the Supreme Court held that it was within the discretion of the arbitral tribunal to grant post-award interest even on pre-award interest. [ONGC v. MC Clelland Engineers (1999) 4 SCC 327 and and UP Co-operative Fund Ltd v. Three Circles (2009) 10 SCC 374 may not be altogether relevant because these are decisions under the Arbitration Act, 1940.]

In view of the difference in views, the court referred the matter to the Chief Justice for decision by a three judge Bench. The order of the Court can be accessed from here.