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of <h1>Arbitral awards entitled to mandatory post-award interest under Section 31(7)(b) despite contractual prohibition</h1> <h3>R.P. GARG Versus THE CHIEF GENERAL MANAGER, TELECOM DEPARTMENT & ORS.</h3> The SC held that the HC erred in denying post-award interest on an arbitral award. The Court clarified that Section 31(7)(b) of the Arbitration Act ... Entitlement for post award interest on the sum awarded by the Arbitrator - denial of payment of such interest under a misplaced impression that the contract between the parties prohibited it - Validity of impugned Order passed by the High Court - HELD THAT:- We are of the opinion that the judgment of High Court is clearly erroneous. Firstly, the interest granted by the First Appellate Court only related to post award period, and therefore, for this period, the agreement between the parties has no bearing. Section 31(7)(b) deals with grant of interest for post award period i.e., from the date of the award till its realization. The statutory scheme relating to grant of interest provided in Section 31(7) creates a distinction between interest payable before and after the award. So far as the interest before the passing of the award is concerned, it is regulated by Section 31(7)(a) of the Act which provides that the grant of interest shall be subject to the agreement between the parties. This is evident from the specific expression at the commencement of the sub-section which says “unless otherwise agreed by the parties”. So far as the entitlement of the post-award interest is concerned, sub-Section (b) of Section 31(7) provides that the sum directed to be paid by the Arbitral Tribunal shall carry interest. The rate of interest can be provided by the Arbitrator and in default the statutory prescription will apply. Clause (b) of Section 31(7) is therefore in contrast with clause (a) and is not subject to party autonomy. In other words, clause (b) does not give the parties the right to “contract out” interest for the post-award period. The expression ‘unless the award otherwise directs’ in Section 31(7)(b) relates to rate of interest and not entitlement of interest. The only distinction made by Section 31(7)(b) is that the rate of interest granted under the Award is to be given precedence over the statutorily prescribed rate. The assumption of the High Court that payment of the interest for the post award period is subject to the contract is a clear error. The High Court, therefore, committed an error in relying on the decision of this Court in Jaiprakash [2019 (2) TMI 375 - SUPREME COURT] The judgement in Jaiprakash deals with the issue of prohibition of pendente-lite interest and will have no application to the facts of the present case where the claim relates to post-award interest. 1. ISSUES PRESENTED and CONSIDEREDThe core legal question considered by the Court was whether the appellant was entitled to post-award interest on the sum awarded by the Arbitrator under the Arbitration and Conciliation Act, 1996 ('the Act'). Specifically, the issues were:Whether the contract clause prohibiting payment of interest precludes the grant of post-award interest under the arbitral award.The interpretation and applicability of Section 31(7)(a) and Section 31(7)(b) of the Act regarding pre-award and post-award interest.Whether the parties can 'contract out' of post-award interest under the arbitration agreement or contract.The relevance and applicability of precedents, including the decision in Jaiprakash Associates Ltd. v. Tehri Hydro Development Corporation (India) Ltd., and Morgan Securities & Credits (P) Ltd. v. Videocon Industries Ltd., in determining entitlement to post-award interest.2. ISSUE-WISE DETAILED ANALYSISIssue 1: Whether the contract clause prohibiting payment of interest bars post-award interestRelevant legal framework and precedents: The contract between the parties contained a clause stating: 'No interest will be payable on the earnest money or security deposit amount or any amount payable to the contractor under the contract.' The High Court relied on this clause and the precedent set in Jaiprakash Associates Ltd. to hold that interest could not be granted as it was contractually prohibited.Court's interpretation and reasoning: The Supreme Court found this interpretation erroneous because the clause related to contractual payments and did not extend to post-award interest, which arises statutorily under Section 31(7)(b) of the Act. The Court emphasized that post-award interest is a statutory entitlement and not subject to party autonomy or contract terms.Application of law to facts: The Court distinguished between interest on contractual payments and post-award interest. The contractual clause prohibiting interest was held to be inapplicable to post-award interest, which is governed by statutory provisions.Treatment of competing arguments: The High Court's reliance on the contractual clause and Jaiprakash was countered by the Supreme Court's analysis of the statutory scheme and subsequent authoritative decisions.Conclusion: The contract clause prohibiting interest does not bar the grant of post-award interest under the Arbitration and Conciliation Act.Issue 2: Interpretation and applicability of Section 31(7)(a) and (b) of the Arbitration and Conciliation Act, 1996Relevant legal framework: Section 31(7) of the Act provides:'(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 interest at such rate as it deems reasonable for the period between the cause of action and the award date.''(b) 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 from the date of award to the date of payment.'Court's interpretation and reasoning: The Court elucidated that Section 31(7)(a) governs pre-award interest and is subject to party autonomy - parties can agree to exclude or modify such interest. In contrast, Section 31(7)(b) mandates post-award interest as a statutory right, which cannot be contracted out by the parties. The phrase 'unless the award otherwise directs' qualifies only the rate of interest, not the entitlement to interest itself.The Court relied on the recent authoritative decision in Morgan Securities & Credits (P) Ltd. v. Videocon Industries Ltd. which clarified that clause (b) confers no discretion to exclude post-award interest, only to fix the rate.Key evidence and findings: The statutory language and placement of qualifying phrases were analyzed to distinguish the scope of clauses (a) and (b). The Court noted that clause (a) is qualified by party agreement, while clause (b) is qualified only by the arbitral award's direction on rate.Application of law to facts: Since the Arbitrator denied post-award interest based on a contractual clause, and the High Court upheld this, the Supreme Court found this to be a misinterpretation of Section 31(7)(b). The appellant was thus entitled to post-award interest at the statutory rate.Treatment of competing arguments: The Court rejected the High Court's assumption that the contract could override statutory post-award interest and distinguished the pre-award interest regime from the post-award interest regime.Conclusion: Post-award interest under Section 31(7)(b) is a statutory entitlement and cannot be excluded by agreement between the parties.Issue 3: Applicability of precedent decisionsRelevant precedents: The High Court relied on Jaiprakash Associates Ltd. (2019) to deny post-award interest, while the Supreme Court relied on Morgan Securities & Credits (2023) to affirm the mandatory nature of post-award interest.Court's interpretation and reasoning: The Supreme Court clarified that the Jaiprakash decision pertained to pendente-lite interest (interest during the arbitration or litigation process), which is distinct from post-award interest. The Court held that Jaiprakash does not apply to post-award interest claims.Application of law to facts: The Court distinguished the present case from Jaiprakash on factual and legal grounds, emphasizing the statutory mandate for post-award interest.Conclusion: The precedent in Jaiprakash is not applicable to post-award interest, and the binding precedent in Morgan Securities & Credits governs the issue.3. SIGNIFICANT HOLDINGSThe Court held:'A sum directed to be paid by an Arbitral Award shall carry interest. This is a first principle. A sum directed to be paid by an Arbitral Award must carry interest.''Clause (b) of Section 31(7) is therefore in contrast with clause (a) and is not subject to party autonomy. In other words, clause (b) does not give the parties the right to 'contract out' interest for the post-award period.''The expression 'unless the award otherwise directs' in Section 31(7)(b) relates to rate of interest and not entitlement of interest.''The assumption of the High Court that payment of the interest for the post award period is subject to the contract is a clear error.''The judgment in Jaiprakash deals with the issue of prohibition of pendente-lite interest and will have no application to the facts of the present case where the claim relates to post-award interest.'The Court restored the decision of the District Court granting post-award interest at the rate of 18% per annum from the date of the award until realization, setting aside the High Court's order that denied such interest.
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