The Division Bench of Supreme Court (“SC”), vide its judgment dated September 1, 2022 in the matter of Morgan Securities and Credits Private Limited v. Videocon Industries Limited [Civil Appeal No. 5437 of 2022] held that the arbitral tribunal has discretion under Section 31(7)(b) of the Arbitration and Conciliation Act, 1996 (“Act”) to grant post-award interest only on a part of the aggregate sum due.

Facts

Morgan Securities and Credits Private Limited (“Appellant”) had entered into an agreement, under which Videocon Industries Limited (“Respondent”) availed of certain bill discounting facilities from the Appellant. The Appellant had disbursed INR 5,00,32,656/- under the agreement.

The Respondent defaulted in repayment of the dues as a consequence of which, the Appellant issued demand notice for repayment of the dues along with overdue interest. However, when the Respondent failed to repay the sums, the Appellant issued a notice invoking arbitration clause provided under the agreement.

The sole arbitrator rendered the award in favour of the Appellant and decreed the claim of the Appellant for the amount of INR 5,00,32,656/-. Following was the interest granted in respect of the principal claimed:

– Interest at the rate of 21 % per annum from the date of default to the date of the demand notice;
– 36% per annum with monthly rests from the date of the demand notice to the date of award (“Pre-award Interest”); and
– 18% per annum on the principal amount, that is, INR 5,00,32,656/- from the date of award to the date of payment (“Post-award Interest”).

The Post-award Interest was granted at the rate of 18% per annum only on the principal amount, by following the judgment of the Hon’ble SC in the matter of State of Haryana and Others v. S.L. Arora and Company., [(2010) 3 SCC 690] (“S.L. Arora”).

The Appellant challenged the arbitral award under Section 34 (Application for setting aside arbitral awards) of the Act before the Delhi High Court (“DHC”), on the ground that the Post -award Interest of 18% per annum should be granted on the total sum awarded, inclusive of both principal and Pre-award Interest. By a judgment dated February 7, 2019, the single Judge dismissed the petition holding that the arbitrator had in his discretion restricted the Post-award Interest to the principal amount and that the Court would not interfere with the exercise of discretion by the arbitrator.

The appeal against the judgment of the single Judge was carried before the division bench of the DHC, which was dismissed by a judgment dated February 26, 2020 (“Impugned Judgment”), on the ground that since the arbitral tribunal in its discretion, had granted Post-award interest @18% per annum on the principal amount, the provisions of Section 31(7)(b) of the Act would not be applicable, as the statutory rate of interest as provided in the Section 31(7)(b) applies to those cases only, where the arbitral award is silent on post-award interest. The Appellant then preferred a Special Leave Petition (“SLP”) before the SC challenging the Impugned Judgment.

Issues

• Whether the phrase ‘unless otherwise directs’ in Section 31(7)(b) of the Act only provides the arbitrator the discretion to determine the rate of interest or both the rate of interest and the ‘sum’ it must be paid against.
• Whether the arbitrator has the discretion to grant Post-award Interest on a part of the aggregate sum.

Arguments

Contentions raised by the Appellant:

The Appellant relied on the judgment dated November 25, 2014 in the matter of Hyder Consulting (U.K.) Limited v. Governor, State of Orissa [(2015) 2 SCC 189] (“Hyder Consulting”), which overruled the judgment in S.L. Arora wherein, it was held that the arbitral tribunal had the authority to grant interest on interest under Section 31(7) of the Act. The Appellant contended that if pre-award interest is awarded on the principal sum, then the aggregate of the principal and the pre-award interest is the ‘sum’ on which post-award interest must be granted. On the basis of the said judgment, the Appellant tried to buttress the argument that, once pre-award interest is granted on the principal sum under Section 31(7)(a) of the Act, the interest award loses its character as interest and takes the colour of the awarded ‘sum’ for the purposes of post-award interest under Section 31(7)(b) of the Act.

Further, Appellant argued that since the arbitral award was silent on post-award interest on the component of interest, the Appellant was entitled to the statutory rate of interest on the aggregate of the principal and pre-award interest, as provided under Section 31(7)(b) of the Act. The Appellant contended that even if the judgment of S.L. Arora was to be taken into consideration, the learned Judges in that matter as well held that the only discretion that the arbitral tribunal had under Section 31(7)(b) of the Act was to decide the ‘rate’ of post-award interest. Thus, the Arbitrator does not have the discretion to determine the ‘sum’ on which the post-award interest is to be granted.

Contentions raised by the Respondent:

The Respondent argued that Section 31(7)(b) is qualified by the phrase “unless the award otherwise directs”. Therefore, Section 31(7)(b) would only be applicable only when an arbitral award is silent on the component of post-award interest. Under Section 31(7)(b) of the Act, the arbitrator has the discretion to (a) grant post-award interest; (b) determine the quantum over which the post-award interest should be granted; and (c) determine the rate at which the interest should be calculated.

The Respondent pointed out that in Hyder Consulting, the larger bench of the Court overruled the judgment dated January 29, 2010 of S.L. Arora, to the extent that the latter decision held that the arbitral tribunal does not have the power to award interest over interest. However, in Hyder Consulting, it was not held that it is mandatory that the post-award interest ought to only be granted on the aggregate of the principal and the pre-award interest.

Observations of the Supreme Court

SC analysed Section 31(1) of the Act, the judgment in S.L. Arora and Hyder Consulting to make the following observations:

• Section 31 provides for the “form of content of arbitral award”. Section 31(7)(a) provides for pre-award interest, that is for the period between the date on which the cause of action arose and the date on which the award is made. Section 31(7)(b) provides for post-award interest, between the date of award to the date of payment.
• In S.L. Arora, SC interpreted the expression ‘sum’ in Section 31(7) and held that Section 31(7) does not make any reference to the payment of interest or interest on interest. The “sum directed to be paid by the award” refers to the award of “sums on substantive claims”, that is, the principal amount. In the absence of a provision enabling the grant of compound interest, such a power cannot be read into the provisions either for the pre-award period or for the post-award period. The discretion under Section 31(7)(b) to award interest for the post-award period is not subject to any contract and if the arbitrator does not exercise the discretion by awarding post-award interest, then the mandated interest of 18 % shall be awarded. If the award provides interest at a specified rate till the date of payment, then Section 31(7)(b) is silent on the post-award interest.
• In Hyder Consulting, the learned Judges overruled the decision in S.L. Arora. SC held that it is apparent that vide Section 31(7)(a) of the Act, the Parliament intended that an award for payment of money may be inclusive of interest and the ‘sum’ of the principal amount plus interest may be directed to be paid by the arbitral tribunal.
• The SC observed that Justice Bobde only made a passing reference to the phrase ‘unless the award otherwise directs’ in Section 31(7)(b), in paragraph 13 of Hyder Consulting to hold that post-award interest is a statutory mandate and that the arbitrator only has the discretion to determine the rate of interest to be awarded on such ‘sum’ arrived at after merging of interest with the principal; the two components having lost their separate identities. While, Justice Sapre held that ‘unless the award otherwise directs’ meant that the post-award interest is a statutory mandate and the arbitrator only has the discretion to decide the rate of such post-award interest, Justice Bobde on the other hand, did not specifically interpret the phrase. Thus, SC only dealt with a limited issue- – whether post-award interest could be granted on the aggregate of the principal and the pre-award interest. The said judgment does not deal with the aspect of the discretion of the arbitrator to determine the post-award interest on a part of the aggregate sum.

Decision of the Supreme Court

The relevant extract of Section 31(7) of the Act is reproduced hereinbelow, which provision has been dealt with and interpreted by the SC in the present judgment:

“31. Form and contents of arbitral award-
……………………….
(7) (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.”
(emphasis supplied)

Firstly, the SC clarified that Section 31(7)(a) and (b) of the Act are qualified. The placement of the phrase of the ‘unless otherwise agreed by the parties’ at the beginning of clause (a) of Section 31(7) of the Act, qualifies the entire provision, meaning thereby, that the discretion of the arbitral tribunal to determine pre-award interest, would come into picture, only if the parties have not agreed anything to the contrary in respect of applicability of interest. In case, the parties have an arrangement in respect of applicability interest on the payment of money, the arbitral tribunal would be bound to determine the interest on the basis of such agreement between the parties. On the contrary, the placement of the phrase ‘unless the award otherwise directs’ before ‘carry interest at the rate of eighteen percent’ in Section 31(7)(b) only qualifies the rate of interest and not the ‘sum’ directed to be paid by an arbitral award. This implies that Section 31(7)(b) of the Act only provides for statutory rate of 18% p.a. on the ‘sum’, which statutory rate would be triggered only when the arbitral tribunal has not determined the quantum/rate of post-award interest.

Thus, SC held that Section 31(7)(a) confers wide discretion upon the arbitrator to grant pre-award interest. The discretion is wide enough for the arbitrator to determine:

(a) the rate of reasonable interest,
(b) the sum on which interest is to be paid, that is, whether on the whole or any part of the principal amount and
(c) 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.

SC held that the statutory rate of interest at the rate of 18% per annum in Section 31(7)(b) of the Act is only contemplated in a situation where the arbitration award is silent on post-award interest and cannot mean to take away the discretion of the arbitrator to decide the quantum of post-award interest. The discretion of the arbitrator can only be restricted by an express provision to that effect. Finally, the SC held that the arbitrator must exercise the discretionary power to grant post-award interest reasonably and in good faith, taking into account all relevant circumstances.

Therefore, SC held that the arbitrator has the discretion to award post-award interest on a part of the ‘sum’ and thus, in the instant case, the grant of post-award Interest only on the principal claim was held to be well within the discretion of the arbitral tribunal.

VA View:

The SC in Hyder Consulting settled the law in respect of authority of the arbitral tribunal to grant interest on interest from the date of award, thereby, overruling the decision in S.L. Arora. The present judgment does not delve into the aspect of ‘interest on interest’, however, the judgment rightly points out that the judgment of Hyder Consulting did not effectively interpret the qualifying phrases contained in Clauses (a) and (b) of Section 31(7) of the Act, thereby, not dealing with the aspect of “discretion of the arbitral tribunal” while granting pre-award and post-award interest.

The present judgment adds clarity to the ruling in Hyder Consulting and goes on to explain the nature and scope of discretion which was intended to be embedded in the provision by the legislators, thereby, leaving no room in the Act for curtailing or restricting it. Thus, the key takeaways from the judgment are as follows:

• The arbitral tribunal cannot grant interest on the ‘sum’ under Section 31(7)(a) of the Act contrary to the arbitration agreement between the parties on account of the qualifying phrase “unless otherwise agreed by the parties”;
• In the absence of any such agreement in respect of grant of interest on the ‘sum’ claimed, the arbitral tribunal has the discretion under Section 31(7)(a) of the Act to: (a) grant or refuse interest, (b) determine the rate of interest, (c) determine the ‘sum’ on which interest is to be granted, which may be on the whole or part of the money claimed and (d) determine the period for which pre-award interest is to be granted;
• The arbitral tribunal has the discretion to determine (i) whether further rate of interest can be granted under Clause (b) of Section 31(7) of the Act, (ii) determine the ‘sum’ on which the further interest (which can either be the aggregate of the principal amount and the pre-award granted under Clause (a) of Section 31(7) of the Act, or part of the aggregate claim and (iii) the rate of interest to be granted;
• Only in the event where no post-award interest is specified by the arbitral tribunal under Clause (b), the statutory rate of interest would be applicable to the award, that is, eighteen percent per annum, by virtue of the qualifying phrase “unless the award otherwise directs” in Clause (b);
• The interest so imposed under Section 31(7) of the Act is to be at such rate as the arbitral tribunal deems reasonable.

For any query, please write to Mr. Bomi Daruwala at [email protected]

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