2015 (3) TMI 1452 - SC - Indian Laws

Appeal allows later majority rule permitting compound interest; prior precedent overturned, Section 34 objections rejected and execution remitted

M/s. Hyder Consulting (UK) Ltd. Versus Governor, State of Orissa Thr. Chief Engineer

SC held that an earlier Supreme Court ruling on compound interest was incorrectly declared and that the correct principle is the later majority view ... Power of Arbitral Tribunal to award interest on interest (compound interest) - HELD THAT:- It can be stated with certitude that decision in S.L. Arora [2010 (1) TMI 1261 - SUPREME COURT] does not lay down the law correctly. Hence, the computation of the amount has to be done by the executing court on the basis of principle stated in M/s. Hyder Consulting (UK) Ltd. [2014 (11) TMI 1240 - SUPREME COURT] - the judgment rendered by the High Court is modified to the extent indicated herein - Appeal disposed off. Whether the High Court, while dealing with an appeal arising from rejecting an objection under Section 34 of the Arbitration and Conciliation Act, 1996, could have modified the award especially the rate of interest determined by the learned Arbitrator? - HELD THAT:- The rate of interest granted by the Arbitrator is in consonance with M/s. Hyder Consulting (UK) Ltd. and hence, there was no justification on the part of the High Court hearing the appeal and it should not have modified the interest component applying equitable principle - the direction issued by the High Court qua reduction of interest is set aside and the appeal is allowed. Grant of interest - HELD THAT:- The High Court has allowed the objection by the State of Punjab on the basis of the pronouncement in S.L. Arora. The said judgment has been overruled by the majority view in M/s. Hyder Consulting (UK) Ltd. The judgment and order passed by the High Court relating to grant of interest set aside and it is directed that the executing court, as the same is pending, to compute the interest as per the decision rendered in M/s. Hyder Consulting (UK) Ltd. The appeal is allowed and the judgement and order passed by the High Court is set aside. ISSUES PRESENTED AND CONSIDERED 1. Whether the principle laid down in S.L. Arora that an Arbitral Tribunal lacks power to award interest on interest (compound interest) is good law. 2. Whether an award under Section 31(7) of the Arbitration and Conciliation Act, 1996 - specifically clauses (a) and (b) - may include interest computed on a 'sum' that itself includes interest (i.e., whether post-award interest can effectively operate on a principal inclusive of pre-award interest). 3. Whether a court entertaining an objection under Section 34 of the Act (or hearing an appeal arising therefrom) may, in the exercise of its powers, modify the rate or quantum of interest determined by the Arbitral Tribunal on equitable grounds. 4. The procedural consequence: how an executing court should compute amounts payable under an award where the law on interest (including compound interest) has been re-stated by a later majority decision. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Validity of S.L. Arora on interest on interest (compound interest) Legal framework: Section 31(7)(a) and (b) of the Arbitration and Conciliation Act, 1996 govern the content of an arbitral award including determination of a 'sum' and the grant of interest on 'a sum directed to be paid by an arbitral award'. Precedent Treatment: The High Court had relied on S.L. Arora which held that an Arbitral Tribunal cannot award interest on interest (compound interest) in the absence of a contractual provision allowing interest on interest. A later majority decision (referred to by the Court) has overruled S.L. Arora. Interpretation and reasoning: The Court accepts the majority view in the subsequent authority that (a) the expression 'sum' in Section 31(7)(a) includes interest awarded by the Arbitral Tribunal; (b) Section 31(7)(b) awards interest on the 'sum directed to be paid by an arbitral award' - which is the amount determined under clause (a) and thus may include interest; and (c) Parliament intended by the language of Section 31(7) to permit interest on the sum determined by the award, without treating that as an impermissible 'interest on interest' in the pejorative sense or requiring a contractual clause to that effect. Ratio vs. Obiter: Ratio - S.L. Arora is not good law; an award may lawfully include interest which becomes part of the 'sum' for the purpose of post-award interest under Section 31(7)(b). Obiter - discussions as to parliamentary power to legislate on interest generally. Conclusions: The prior rule that precluded compound interest in absence of contractual provision is disapproved; the correct legal position is that an Arbitral Tribunal is empowered under Section 31(7) to award interest which may effectively operate on a sum inclusive of interest, and post-award interest is payable on that 'sum'. Issue 2 - Scope of Section 31(7)(a) and (b): meaning of 'sum' and permissibility of interest on interest Legal framework: Section 31(7)(a) defines the award amount (a 'sum' directed to be paid by the arbitral award) and clause (b) permits interest on 'a sum directed to be paid by an arbitral award'. Precedent Treatment: The Court follows the majority exposition in the later authority which construed 'sum' to include awarded interest and construed clause (b) as granting interest on that 'sum'. This departs from the narrower construction in S.L. Arora. Interpretation and reasoning: The Court reasons that the natural reading of clauses (a) and (b) shows an integrated scheme: clause (a) determines the sum (which may comprise principal and interest awarded pre-award), clause (b) then permits interest on that sum post-award. The machinery does not create a forbidden 'interest on interest' but awards interest on the declared sum. The tribunal's power to award interest is not circumscribed by absence of a contractual stipulation for interest on interest. Ratio vs. Obiter: Ratio - 'Sum' in Section 31(7) includes interest awarded under clause (a); thereby clause (b) authorises interest on that sum. Obiter - policy observations about Parliament's intention and comparative legislative competence. Conclusions: Section 31(7) must be applied to allow interest on the award sum as determined by the tribunal; such interest need not be treated as impermissible compound interest when construed in statutory context. Issue 3 - Power of courts to modify arbitrator's interest award on appeal/section 34 proceedings Legal framework: Section 34 provides limited grounds for setting aside an award. Appellate/revisional interference is constrained by the statutory scheme and the autonomy of the arbitral determination. Precedent Treatment: The High Court in some matters reduced rates of interest awarded by arbitrators applying equitable considerations and reference to S.L. Arora. The Court disapproved such modifications where the arbitrator's award accorded with the correct statutory interpretation as affirmed by the later majority decision. Interpretation and reasoning: The Court holds that where the Arbitrator has lawfully exercised the power to award interest - including rates and compounding consistent with the statutory principle - appellate courts are not justified in modifying the interest component by applying equitable principles not contemplated by the Act. The arbitral determination on interest, if within the tribunal's statutory competence and reasoned basis, should generally stand unless it falls within the narrow Section 34 infirmities. Ratio vs. Obiter: Ratio - a court entertaining Section 34 objections should not modify an arbitrator's interest award merely on equitable grounds where the arbitrator's award conforms to the law; appellate modification of rates is impermissible absent Section 34 infirmity. Obiter - remarks on reasonableness of rates and standards for interference. Conclusions: The High Court's reductions of arbitrator-awarded interest on equitable grounds were set aside; arbitrators' interest determinations consistent with Section 31(7) and authoritative precedent must be respected. Issue 4 - Execution and computation by executing courts in light of corrected law on interest Legal framework: Execution courts must compute amounts payable under awards and apply the law as laid down by the Supreme Court. Precedent Treatment: Where earlier orders or High Court directions relied on S.L. Arora, those directions were corrected to reflect the majority view that S.L. Arora is not good law. Interpretation and reasoning: The Court directs executing courts to compute the amount payable under awards in conformity with the majority decision that interprets Section 31(7) to permit interest on the 'sum' (including awarded interest). If any excess was paid under prior computation based on S.L. Arora, the executing court should determine whether refund is due. Ratio vs. Obiter: Ratio - executing courts must compute and execute awards according to the correct binding law (as restated); earlier calculations premised on disapproved precedent must be revisited. Obiter - procedural observations on computation mechanics. Conclusions: Orders inconsistent with the majority position are modified; executing courts are directed to compute interest and award amounts in accordance with the later majority authority. If excess payment occurred under the disapproved approach, refund entitlement must be determined. Cross-references and Practical Outcomes 1. Issues 1 and 2 are interlinked: the overruling of S.L. Arora (Issue 1) informs the statutory construction of Section 31(7) (Issue 2). 2. Issue 3 follows from Issues 1-2: where the tribunal's award on interest is consistent with the correct construction of Section 31(7), courts should not substitute equitable adjustments on appeal or Section 34 proceedings. 3. Issue 4 is the procedural consequence: executing courts must compute and effect payment in conformity with the corrected legal position; High Court directions based on S.L. Arora are to be modified accordingly.