The Supreme Court ruled that an arbitrator can award post award interest on interest components.
The division bench of Justice Dr Dhananjaya Y Chandrachud and Justice AS Bopanna observed that the interpretation of Section 31(7)(b) has to focus on the meaning of two phrases – first, the expression “sum”; and second, “unless the award otherwise directs”. The phrase ‘sum’ has been interpreted in the opinion of Justice Bobde and in the concurring opinion of Justice Sapre in Hyder Consulting to mean the amount directed to be paid by an arbitral award as arrived in Section 31(7)(a), which would include the aggregate of the principal and the pre-award interest.
The court said that while Justice Sapre was of the view that the arbitrator only has the discretion to determine the rate of post-award interest, Justice Bobde did not expressly discuss the ambit of discretion of the arbitrator while granting post award interest.
The court noted that both clauses i.e. 31 (7) (a) and (b) of the Arbitration and Conciliation Act 1996 are qualified. While clause (a) is qualified by the arbitration agreement, clause (b) is qualified by the arbitration award.
The court said that the words, “unless otherwise agreed by the parties” occurs at the beginning of clause (a) qualifying the entire provision. However, in clause (b), the words, “unless the award otherwise directs” occurs after the words ‘a sum directed to be paid by an arbitral award shall’ and before the words ‘carry interest at the rate of eighteen per cent”. Thereby, those words only qualify the rate of post-award interest.
In January 2003, the appellant and the respondent entered into an agreement under which the respondent availed of bill discounting facilities from the appellant. The appellant disbursed a certain amount pursuant to the agreement. The dues remained unpaid. The appellant issued a notice to the respondent demanding the payment of the principal amount as on 17 April 2003, which is the date of default, along with an overdue interest. Since the respondent did not pay the amount as demanded, the appellant issued a notice on 31 January 2006, invoking the arbitration clause of the agreement.
The appellant challenged the arbitral award in a petition under Section 34 before the Delhi High Court raising objections on the grant of post-award and pre award interest.
Advocate Abhishek Puri, appearing for the appellant, contended that in view of the provisions of Section 31 (7) of the Act and the judgment of the Court in Hyder Consulting, if pre-award interest is awarded on the principal sum, the aggregate of the principal and the pre-award interest is the ‘sum’ on which post-award interest must be granted.
He argued that the arbitral award is silent on post-award interest on the component of interest. Therefore, the appellant is entitled to the statutory rate of interest on the aggregate of the principal and pre-award interest under Section 31 (7) (b) of the Act.
Senior Advocate Nakul Dewan, appearing for the respondent, contended that Section 31(7)(b) is qualified by the phrase “unless the award otherwise directs”. Therefore, Section 31(7)(b) would only be applicable where an arbitral award is silent on the component of post-award interest.
He submitted that under Section 31(7)(b) of the Act, the arbitrator has the discretion to grant post-award interest, determine the quantum over which the post-award interest should be granted and determine the rate at which the interest should be calculated.
The court said that Section 31(7)(a) confers a wide discretion upon the arbitrator in regard to the grant of pre-award interest. The arbitrator has the discretion to determine the rate of reasonable interest, the sum on which the interest is to be paid, that is whether on the whole or any part of the principal amount, and the period for which payment of interest is to be made – whether it should be for the whole or any part of the period between the date on which the cause of action arose and the date of the award.
The court further stated that Clause (b) does not fetter the discretion of the arbitrator to grant post-award interest. It only contemplates a situation in which the discretion is not exercised by the arbitrator.
The court held that the observations in Hyder Consulting on the meaning of ‘sum’ will not restrict the discretion of the arbitrator to grant post-award interest and said that there is nothing in the provision which restricts the discretion of the arbitrator for the grant of post-award interest which the arbitrator otherwise holds inherent to their authority.
The court added that the phrase ‘unless the award otherwise directs’ in Section 31 (7) (b) only qualifies the rate of interest and in Section 31 (7) (b), if the arbitrator does not grant post award interest, the award holder is entitled to post-award interest at eighteen percent.
The court found that Section 31 (7) (b) does not fetter or restrict the discretion that the arbitrator holds in granting post-award interest. The arbitrator has the discretion to award post-award interest on a part of the sum.
Case title: Morgan Securities And Credits Pvt. Ltd. v/s Videocon Industries Ltd.
Citation: Civil Appeal No. 5437 of 2022