2022 (9) TMI 108 - SC - Indian Laws

Arbitrators can grant post-award interest under Section 31(7)(b) on principal sum and aggregate amount including pre-award interest

Morgan Securities And Credits Pvt. Ltd. Versus Videocon Industries Ltd.

The SC held that arbitrators have discretion to grant post-award interest under Section 31(7)(b) of the Arbitration Act on both the principal sum and ... Post-award interest - To be calculated on principal sum due u/s 31(7)(b) of the Act - Claim of post award interest on the aggregte of the principal and pre-award interest - whether the arbitrator has the discretion to grant post-award interest only on the principal sum due under Section 31(7)(b) of the Act? - HELD THAT:- The issue is whether the phrase ‘unless the award 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. At this juncture, it is crucial to note that both clauses (a) and (b) are qualified. While, clause (a) is qualified by the arbitration agreement, clause (b) is qualified by the arbitration award. However, the placement of the phrases is crucial to their interpretation. 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. When a discretion has been conferred on the arbitrator in regard to the grant of pre-award interest, it would be against the grain of statutory interpretation to presuppose that the legislative intent was to reduce the discretionary power of the arbitrator for the grant of post-award interest under clause (b). Clause (b) only contemplates a situation where the arbitration award is silent on post-award interest, in which event the award-holder is entitled to a post-award interest of eighteen percent. The purpose of granting post-award interest is to ensure that the award-debtor does not delay the payment of the award. With the proliferation of arbitration, issues involving both high and low financial implications are referred to arbitration. The arbitrator takes note of various factors such as the financial standing of the award-debtor and the circumstances of the parties in dispute before awarding interest. The discretion of the arbitrator can only be restricted by an express provision to that effect. Clause (a) subjects the exercise of discretion by the arbitrator on the grant of pre-award interest to the arbitral award. However, there is no provision in the Act which restricts the exercise of discretion to grant post-award interest by the arbitrator. The arbitrator must exercise the discretion in good faith, must take into account relevant and not irrelevant considerations, and must act reasonably and rationally taking cognizance of the surrounding circumstances. Thus, according to 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 arbitrator must exercise the discretionary power to grant post-award interest reasonably and in good faith, taking into account all relevant circumstances - appeal dismissed. Issues Involved:1. Whether the arbitrator has the discretion to grant post-award interest only on the principal sum due under Section 31(7)(b) of the Arbitration and Conciliation Act, 1996.Issue-wise Detailed Analysis:1. Discretion of Arbitrator on Post-Award Interest:The core issue in this case is whether the arbitrator has the discretion to grant post-award interest only on the principal sum due under Section 31(7)(b) of the Arbitration and Conciliation Act, 1996. The appellant and the respondent entered into an agreement on 27 January 2003, and the appellant disbursed Rs. 5,00,32,656 to the respondent. Due to non-payment, the appellant invoked the arbitration clause. The sole arbitrator awarded the appellant Rs. 5,00,32,656 with varying interest rates for different periods, including 18% per annum post-award interest on the principal amount.2. Appellant's Objections:The appellant challenged the arbitral award under Section 34 before the Delhi High Court, arguing that post-award interest should be on the total sum awarded, inclusive of both principal and pre-award interest. The Single Judge dismissed this petition, stating that the arbitrator had the discretion to restrict post-award interest to the principal amount. The Division Bench upheld this decision, noting that the arbitral award was not silent on post-award interest, thus Section 31(7)(b) was not applicable.3. Supreme Court Proceedings:Proceedings under Article 136 of the Constitution were initiated to challenge the Division Bench's judgment. The Supreme Court confined the notice to the issue of post-award interest, highlighting that the decision in SL Arora, which the arbitrator relied upon, was overruled by Hyder Consulting.4. Appellant's Submissions:The appellant argued that under Section 31(7) and the judgment in Hyder Consulting, post-award interest should be on the aggregate of the principal and pre-award interest, as the interest awarded loses its character as interest and becomes part of the awarded sum. The appellant contended that the arbitrator only has the discretion to determine the rate of post-award interest, not the sum on which it is to be granted.5. Respondent's Submissions:The respondent argued that Section 31(7)(b) applies only when the arbitral award is silent on post-award interest. The arbitrator has the discretion to grant post-award interest, determine the quantum over which it should be granted, and the rate at which it should be calculated. The respondent asserted that Hyder Consulting does not mandate that post-award interest must be on the aggregate of principal and pre-award interest.6. Analysis of Legal Provisions:Section 31(7) deals with pre-award and post-award interest. Section 31(7)(a) allows the arbitrator to include interest in the sum awarded for the period between the cause of action and the award date. Section 31(7)(b) provides for post-award interest from the award date to payment. The interpretation of 'sum' in Section 31(7) was crucial, with Hyder Consulting clarifying that it includes both principal and pre-award interest.7. Interpretation of 'Unless the Award Otherwise Directs':The phrase 'unless the award otherwise directs' in Section 31(7)(b) was interpreted to mean that the arbitrator's discretion is not limited to the rate of interest but also includes the sum on which post-award interest is to be granted. The arbitrator has the discretion to grant post-award interest on a part of the sum, taking into account relevant circumstances.Conclusion:The Supreme Court concluded that the arbitrator has the discretion to grant post-award interest on a part of the sum, which includes the aggregate of the principal and pre-award interest. The award of post-award interest on the principal amount does not suffer from an error apparent. The appeal against the Delhi High Court's judgment was dismissed, affirming the arbitrator's discretion in awarding post-award interest.