BACKGROUND
The civil appeal (No. 3148 of 2012) arose from a judgment by the High Court of Orissa at Cuttack on 28.07.2010. The case began with Writ Petition (Civil) No. 5302 of 2009, which challenged two orders by the District Judge, Khurda, dated 19.02.2009 and 26.03.2009. These orders related to Execution Petition No. 17 of 2006, where the District Judge had issued an attachment order in favor of the appellant for Rs. 8,92,15,993/-. This amount included post-award interest on the principal sum and interest pendente lite, based on an arbitral award dated 26.04.2000. The arbitral award, which was confirmed by the High Court of Orissa on 28.06.2006, had granted a principal amount of Rs. 2,30,59,802/- to the appellant. However, the High Court, in its judgment on 28.07.2010, referred to the S.L. Arora case and annulled the District Judge’s orders. The High Court instructed the executing court to recalculate the total amount owed under the award according to the guidelines set in the S.L. Arora case. Additionally, the Central Bank of India case was cited, which dealt with compound interest under Section 34 of the Code of Civil Procedure, 1908, but it did not directly address the matter of interest on interest under Section 31(7) of the Arbitration and Conciliation Act, 1996.
Issued Raised
The primary issue raised was whether the arbitral tribunal under Section 31(7) of the Arbitration and Conciliation Act, 1996, could grant interest on interest, specifically post-award interest on the principal amount and interest pendente lite. The Court needed to determine if there was any error in the S.L. Arora decision in light of other cases like Three Circles and McDermott. Additionally, it had to decide if Section 31(7) allowed including interest pendente lite within the sum payable for awarding post-award interest.
CONTENTION
Petitioner’s Arguments
In the referral order dated 13.03.2012, the appellants questioned the correctness of the decision in the S.L. Arora case. They argued that this decision was flawed when compared to several other cases, specifically McDermott International INC v. Burn Standard Co. Ltd. and Others (2006), Uttar Pradesh Cooperative Federation Limited v. Three Circles (2009), Oil and Natural Gas Commission v. M.C. Clelland Engineers S.A. (1999), and Central Bank of India v. Ravindra and Others (2002). The appellants contended that, according to these previous decisions, any interest awarded on the principal amount up to the date of the award becomes part of the principal amount. This new total should then be used as the basis for calculating future interest under the Arbitration and Conciliation Act, 1996. They claimed that the S.L. Arora decision mistakenly disregarded this principle by not applying the same rationale. The appellants pointed out that the S.L. Arora case assumed the principles from the aforementioned cases did not apply to it. This assumption led to a conclusion that negated the established understanding that interest on the principal amount up to the date of the award merges with the principal for calculating future interest. Because of this, the appellants argued that the S.L. Arora decision required reconsideration by a larger Bench of the Supreme Court. Furthermore, the appellants highlighted that under Section 31(7) of the Arbitration and Conciliation Act, 1996, the arbitral tribunal has the discretion to award interest. This discretion should be exercised based on the facts and circumstances of each case, and it must be within the parameters of the statute and consistent with the rule of law. They emphasized that the rate of interest, if awarded, must be deemed reasonable by the tribunal. It is a settled legal principle that discretion must always be exercised lawfully. The appellants suggested that the decision in S.L. Arora did not adhere to this principle, as it failed to consider the merging of interest with the principal for the purposes of awarding future interest. This misstep led to an incorrect application of the law, necessitating a review and potential reversal of the S.L. Arora ruling by a larger Bench to ensure that future interest calculations align with the established legal precedents. The appellants sought a re-evaluation of the S.L. Arora decision to correct what they perceived as an inadvertent and erroneous interpretation of how interest should be calculated under the Arbitration and Conciliation Act, 1996.
Appellant’s Argument Arguments
Shri L. Nageshwara Rao, the learned Senior Counsel and Additional Solicitor General of India, argued against the appellants’ contention that the S.L. Arora case was flawed. He maintained that there was no error in the decision of the S.L. Arora case and thus, there was no need for the present reference. According to him, the interpretation provided in the S.L. Arora case regarding the calculation of interest under Section 31(7) of the Arbitration and Conciliation Act, 1996, was correct and should be upheld. The Additional Solicitor General emphasized that the term “sum” as used in sub-section (7) of Section 31 of the Act should be understood as the “principal amount.” This interpretation was a central aspect of the S.L. Arora decision. He argued that the appellants’ claim, which suggested that the interest awarded up to the date of the award should merge with the principal amount for the purpose of calculating future interest, was incorrect. Shri Rao contended that the established legal interpretation, as confirmed in the S.L. Arora case, does not support the inclusion of interest as part of the principal sum for the purpose of awarding future interest. He suggested that the appellants were trying to reinterpret the law in a way that was not consistent with the statute or the intentions of the legislation. Furthermore, he argued that the arbitral tribunal’s discretion to award interest, as provided under Section 31(7), should be exercised within the parameters of the law and based on the specific facts of each case. He emphasized that the S.L. Arora case correctly adhered to these principles by clarifying that the term “sum” refers only to the principal amount, excluding any accrued interest. This approach ensures a clear and lawful application of the law. In addition, Shri Rao pointed out that the discretion to award interest, and at what rate, must be exercised reasonably and within the statutory limits. The decision in the S.L. Arora case respected this discretion by providing a clear framework that does not conflate the principal amount with interest, thereby preventing an erroneous interpretation that could lead to unfair calculations of future interest. The Additional Solicitor General argued that the S.L. Arora decision was consistent with the law and did not require reconsideration. He urged the Court to dismiss the appellants’ arguments and uphold the established interpretation that the “sum” in Section 31(7) of the Arbitration and Conciliation Act, 1996, refers exclusively to the principal amount, maintaining clarity and consistency in the application of interest calculations in arbitral awards.
Rational and Judgement
In the case of M/S Hyder Consulting (UK) Ltd. vs Governor, State of Orissa & Chief Engineer, the Supreme Court of India delivered a significant judgment on November 25, 2014, dealing with arbitration and the awarding of interest. The case involved a dispute over a construction contract and subsequent arbitration proceedings. The Supreme Court addressed several key legal issues, including the arbitrator’s power to award interest and the interpretation of relevant provisions of the Arbitration and Conciliation Act, 1996. Firstly, the court discussed the power of the arbitrator to award interest. It cited Section 31(7)(a) of the Arbitration and Conciliation Act, 1996, which empowers the arbitrator to include interest in the sum for which the award is made, at a rate deemed 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. This provision underscores the arbitrator’s discretion in awarding interest, subject to any agreement between the parties. The court also referred to the principles laid down in McDermott International Inc. v. Burn Standard Co. Ltd and Ors.,(2006) 11 SCC 181, where it was held that interest awarded on the principal amount up to the date of the award becomes part of the principal amount, which is permissible under the law. Furthermore, the judgment discussed the concept of “interest on interest” or compound interest. It clarified that under Section 31(7)(a), the arbitrator has the authority to award interest on the principal amount up to the date of the award, but not on the interest already awarded. The court cited the decision in Oil and Natural Gas Commission v. M.C. Clelland Engineers S.A. (1999) 4 SCC 327, where it was recognized that interest could be awarded as compensation for delayed payment, but it should not be construed as compound interest. The Supreme Court also addressed the Law Commission of India’s 246th Report, which suggested that interest on interest is not only permitted but is the norm under Section 31(7)(a). However, the court clarified that the McDermott case did not deal with the question of compound interest and that the principles laid down in S.L. Arora v. State of Uttar Pradesh, (2010) 4 SCC 72, which held that interest on interest is not permissible under Section 31(7)(a), were sound and conclusive. The judgment provides clarity on the arbitrator’s powers to award interest under the Arbitration and Conciliation Act, 1996. It establishes that while the arbitrator has discretion to award interest, such awards must adhere to the principles laid down in relevant judgments and statutory provisions. The court’s decision ensures that interest awarded by arbitrators is fair and reasonable, without permitting compound interest, thus maintaining the integrity of arbitration proceedings under Indian law.
Defects of Law
The judgment acknowledges the arbitrator’s discretion in awarding interest under Section 31(7)(a) of the Arbitration and Conciliation Act, 1996. However, it does not clearly define the limits or standards for exercising this discretion. This lack of clarity may lead to inconsistent awards by different arbitrators, which can undermine the predictability and fairness of arbitration proceedings. It also fails to provide guidance on how arbitrators should balance competing interests, such as compensating for delay while preventing overcompensation. To address this issue, the legislature or the judiciary could provide more specific guidelines or principles for arbitrators to follow when exercising their discretion under Section 31(7)(a). This could include defining what constitutes a “reasonable” rate of interest, when interest can be awarded on the whole or part of the principal sum, and the factors arbitrators should consider in making these decisions. Clearer legislative or judicial guidance would help ensure consistency in awards while preserving the flexibility needed for arbitrators to adapt to the specifics of each case.
CONCLUSION
In conclusion, the Supreme Court’s decision in M/S Hyder Consulting (UK) Ltd. vs Governor, State of Orissa & Chief Engineer, has clarified important aspects of how interest is awarded in arbitration cases under the Arbitration and Conciliation Act, 1996. While the court affirmed that arbitrators have the power to include interest in their awards, it did not provide clear guidelines on how this power should be exercised. This lack of clarity could lead to inconsistent decisions by different arbitrators, which might affect the fairness and predictability of arbitration proceedings. To address this issue, it is essential for either the legislature or the judiciary to establish specific rules and principles for arbitrators to follow. This could involve defining what constitutes a “reasonable” rate of interest, specifying when interest can be awarded on the whole or part of the principal sum, and outlining the factors that arbitrators should consider in making these decisions. By doing so, we can ensure that arbitration awards are consistent and fair while allowing arbitrators the flexibility to adapt their decisions to the unique circumstances of each case.
Aryan Gupta
Rajiv Gandhi National University Of Law (RGNUL), Punjab
2nd Year