INTEREST ON ARBITRAL AWARD

Interest on arbitration award

Section 31 of the Arbitration and Conciliation Act, 1996 (‘Act’ for short) provides the form and contents of the arbitral award. Section 31(7) of the Act prescribes the award the interest on the award amount. The said section 31(7)(a) provides that 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. Section 31(7)(b) provides that a sum directed to be paid by an arbitral award shall, unless the award otherwise directs, carry interest at the rate of two per cent. higher than the current rate of interest prevalent on the date of award, from the date of award to the date of payment.

According to the above said section arbitral tribunal’s power to award interest for the aforesaid period is subject to the agreement between the parties. if the agreement stipulates that no interest is payable, the arbitral tribunal cannot award interest for the aforesaid period. An award contrary to the terms of the contract will lead to litigation of challenge of award under Section 34 of the Act. The agreement for waival of interest is not ultra vires under Section 28 of the Contract Act, 1872.

The Arbitral Tribunal can award three types of interest-

• Pre-reference interest;
• Pendente lite interest;
• Post award interest.

The first two types of interests are awarded on the basis of the agreement made between the parties. The third type of interest is statutorily governed and not on the basis of the agreement between the parties.

Case law

In OIL AND NATURAL GAS CORPORATION LTD. Versus M/s G & T BECKFIELD DRILLING SERVICES PVT. LTD. - 2025 (9) TMI 617 - Supreme Court, an arbitration was conducted to resolve the disputes between the appellant and the respondent. The appellant raised objections before the Arbitral Tribunal which were summarily rejected by the Tribunal. The various claims filed by the respondent were admitted by the Arbitral Tribunal but rejected the interest portion in all claims. The Tribunal awarded a sum of Rs.6,56,272.34 payable by the appellant to the respondent. The Tribunal awarded interest at the rate of 12% per annum on and from 12.12.1998, the date when the statement of claim was affirmed, till recovery of the said amount and an Award for interest on the said amount is made accordingly. The Tribunal also award costs Rs.5 lakhs payable to the claimant.

The appellant filed an application before the District Court under Section 34 of the Act for setting aside the award. The appellant contended that clause 18.1 of the agreement does not allow payment of interest on the claim. The District Judge set aside the award on the following grounds-

• the award is non-reasoned, therefore, violates the mandate of Section 31(3) of 1996 Act; and
• objection under Section 16(2) was neither rejected prior to proceeding further, nor considered by the arbitral tribunal at the time of making final award.

Against this order the respondent filed an appeal before the High Court under Section 37(1) (c) of the Act. The said appeal was allowed by the High Court and affirmed the arbitral award in toto. The parties to the appeal confirmed that their submissions are only on the part of interest.

The appellant submitted the following before the Supreme Court-

• Section 31(7) of the Act provides that the power of the arbitral tribunal to award interest for the period between the date the cause of action arose up to the date of the award is subject to the agreement between the parties, therefore, in view of clause 18.1 no interest could have been awarded.
• The arbitral award is liable to be set aside to the extent it awards interest on the amount awarded from the date of the claim up to the date of the award.

The respondent submitted the following before the Supreme Court-

• According to Clause 18.1 of the agreement only when there is a dispute, interest is not payable on delayed payment.
• The Tribunal awarded interest not from the date of cause of action arose but from the date of claim.
• Once it was found that balance amount on the invoices was unjustifiably withheld, payment of interest is lawful.

The Supreme Court considered the submissions of both the parties and perused the documents on record. The question framed by the Supreme Court to be decided in this case is as to whether clause 18.1 of the agreement proscribes payment of even pendente lite interest on the sum awarded. The Supreme Court observed that the Arbitral Tribunal has declined interest on the balance amount payable under the invoices from the date the cause of action arose up to the date when the statement of claim was affirmed before the arbitral tribunal.

The Supreme Court analysed the provisions of the Arbitration Act for grant of interest under Section 37 of the Act. The Supreme Court also observed that in the present case the rate of interest is awarded @ 12% which appears reasonable. The interest is awarded not from the date of award (21.11.2024) but from the date 12.12.1998. The Supreme Court also analysed the clause 18.1 of the agreement. For this purpose, the Supreme Court relied on various case laws as detailed below-

• SECRETARY, IRRIGATION DEPARTMENT, GOVT. OF ORISSA Versus GC. ROY - 1991 (12) TMI 268 - Supreme Court;

The Constitution Bench of the Supreme Court held that-

• If the arbitration agreement or the contract itself provides for award of interest on the amount found due from one party to the other, no question regarding the absence of arbitrator’s jurisdiction to award the interest could arise as in that case the arbitrator has power to award interest pendente lite as well.
• If the agreement expressly provides that no interest pendente lite shall be payable on the amount due, the arbitrator has no power to award pendente lite interest.
• It must be presumed that interest was an implied term of the agreement between the parties and therefore when the parties refer all the disputes - or refer the dispute as to interest as such - to the arbitrator, he shall have the power to award interest.
• Union of India Versus M/s. Ambica Construction - 2016 (3) TMI 653 - Supreme Court;

The Supreme Court held that-

• where the agreement expressly provides that no interest pendente lite shall be payable on the amount due, the arbitrator has no power to award pendente lite interest;
• the bar to award interest on delayed payment by itself will not be readily inferred as express bar to award pendente-lite interest by the arbitral tribunal, as ouster of power of the arbitrator has to be considered on various relevant aspects;
• the grant of pendente lite interest may depend upon several factors such as phraseology used in the agreement, clauses conferring power relating to arbitration, nature of claim and dispute referred to arbitrator and on what items power to award interest been taken away and for which period.

• RELIANCE CELLULOSE PRODUCTS LTD. Versus OIL AND NATURAL GAS CORPORATION LTD. AND VICE-VERSA - 2018 (7) TMI 2273 - Supreme Court.

From the perusal of the above said cases the Supreme Court was of the view that arbitral tribunal can be denuded of its power to award pendente lite interest only if the agreement/contract between the parties is so worded that the award of pendente lite interest is either explicitly or by necessary implication. Clause 18.1 of the agreement between the parties proscribes grant of pendente-lite interest, when read as a whole, does not expressly or by necessary implication proscribes grant of pendente lite interest by the arbitral tribunal. The clause merely says that there would be no interest payable by the Corporation on any delayed payment / disputed claim. Neither it bars the arbitral tribunal from awarding pendente lite interest nor it says that interest would not be payable.

The Supreme Court was of the view that Clause 18.1 of the agreement would not limit the statutory power of the arbitral tribunal to award pendente-lite interest. Therefore, the Supreme Court found no error in the award. Since post-award interest is in line with the statutory provision of Section 31(7)(b) of the Act as was in vogue then, the Supreme Court found no merit in the appeal and therefore, the Supreme Court dismissed the appeal.