State Of Haryana & Ors vs M/S S.L.Arora & Company, (2010) 3 SCC 690
Before the Supreme Court of India.
Decided on: 29 January 2010
Bench: R.V. Raveendran, K.S. Radhakrishnan
Author – R.V. RAVEENDRAN J.
- Oil & Natural Gas Commission v. M.C. Clelland Engineers S.A. – (1999) (4) SCC 327
- Mcdermott International Inc. vs. Burn Standard Co. Ltd and Others (2006) 11 SCC 181
- Uttar Pradesh Cooperative Federation Limited vs. Three Circles – (2009) 10 SCC 374
- Renusagar Power Co. Ltd v. General Electric Co. – [1994 Supp.(1) SCC 644
- In State Bank of India vs. Ganjam District Tractor Owners Association – 1994 (5) SCC 238
- In Central Bank of India vs. Ravindra – 2002 (1) SCC 367
Brief Facts and Procedural History:
- The appellants awarded a construction contract to the respondent. There was a delay in completion of the work which led to claims by the contractor and counter-claims by the employer (appellants). The disputes were referred to a sole Arbitrator who made an award dated 22.06.2000. The Arbitral Tribunal rejected the counterclaims of the appellants. It awarded in all Rs.14,94,000/- with interest to the respondent-contractor.
- The application filed by the appellants to set aside the said the award, under Section 34 of the Arbitration and Conciliation Act 1996 (`Act’ for short), was rejected by the civil court.
- The appellants paid to the respondent, a sum of Rs.44,59,587/- on 1.3.2005, which was made up Rs.14,94,000/- plus interest thereon at the rate of 12% per annum from 19.12.1990 to 22.6.2000 plus interest at the rate of 18% per annum from 23.6.2000 to 28.2.2005. According to the appellants, the said payment was in full and final settlement, though full satisfaction of the decree was not entered.
- On 25.5.2005, the respondent made an application for modification of the amount claimed, contending that due to inadvertence, a lesser amount had been claimed in the execution petition. Thus the amount due as on the date of execution petition was Rs.56,97,685/- instead of Rs.43,65,918/- claimed therein. The Executing Court after hearing the parties, by its order accepted the revised calculation made by the respondent. The revision petition filed by the appellants against the said order was dismissed by the High Court by the impugned order without examining the issue on merits, on the assumption that what was claimed was the balance of an admitted liability under the award.
Arguments of the appellants:
- Section 31(7)of the Act does not contemplate award of interest on interest; that an arbitral tribunal can award future interest only on the principal amount but not on the interest thereon which had accrued due up to the date of award; and that the Arbitral Tribunal, in this case, has in fact awarded interest only on the principal of Rs.14,94,000/- and not on the interest which had accrued due up to the date of the award.
- Even if the Arbitral Tribunal had the power to award interest, the award could not be interpreted as awarding interest upon interest, unless the arbitral tribunal expressly awards interest upon interest.
Arguments of the Respondent:
- Section 31(7)authorizes and empowers the arbitral tribunal to award interest upon interest from the date of the award to date of payment.
- The operative portion of the award stated that future interest has been awarded at 18% per annum “on the sums due to the claimant” from the date of award to the actual date of payment; and that as the interest up to date of award is a `sum due’ on the date of the award, the said amount would also carry interest at 18% per annum from the date of the award.
(i) Whether section 31(7) of the Act authorizes and enables arbitral tribunals to award interest on interest from the date of award?
(ii) Whether the Arbitral Award granted future interest from the date of award, only on the principal amount found due to the respondent (that is Rs.14,94,000/-) or on the aggregate of the principal and interest up to the date of award (Rs.31,98,879/-).
- Payment of interest arises in different circumstances. It is usually quantified in terms of a percentage of the `principal’ or the `investment’ or the `amount of liability’. Interest unless otherwise specified refers to simple interest, that is interest paid on only the principal and not on any accrued interest.
- Compound interest refers to a method of charging interest where interest is computed not only on the principal but also the accrued interest. As a result, the debtor is made to pay interest not only on the original principal, but on the interest on the principal, and on the interest upon the interest on the principal and so on. Compound interest can be awarded only if there is a specific contract, or authority under a Statute, for compounding of interest. There is no general discretion in courts or tribunals to award compound interest or interest upon interest.
- Section 3of the Interest Act, 1978 enables the courts and arbitral tribunals to award interest from the date of cause of action to the date of institution of legal proceedings or initiation of arbitration proceedings. It should be noted that section 3 of Interest Act does not deal with either pendente lite or future interest. The Arbitration and Conciliation Act 1996, on the other hand, contains a specific provision dealing with the power of the arbitral tribunal to award interest. The said provision is incorporated in sub-section (7) of Section 31.
- Section 31(7)makes no reference to the payment of compound interest or payment of interest upon interest. The use of the words “where and in so far as an arbitral award is for the payment of money” and use of the words “the arbitral tribunal may include in the sum for which the award is made, interest…… on the whole or any part of the money” in
clause (a) and use of the words “a sum directed to be paid by an arbitral award shall carry interest” in clause (b) of sub-section (7) of section 31 clearly indicate that the section contemplates the award of only simple interest and not compound interest or interest upon interest.
- In the absence of any provision for interest upon interest in the contract, the arbitral tribunals do not have the power to award interest upon interest, or compound interest, either for the pre-award period or for the post- award period.
- The principles relating to the award of interest, in general, are not different from courts and arbitral tribunals, except to the extent indicated in section 31(7) of the Act and CPC. A comparatively high rate of post-award interest is provided in section 31(7)(b) of the Act purely as a deterrent to award-debtors from avoiding payment or using delaying tactics.
- The authority of the arbitral tribunals to award interest under section 31(7)(a) is subject to the contract between the parties and the contract will prevail over the provisions of section 31(7)(a) of the Act.
- Clause (b) ofSection 31(7) is intended to ensure prompt payment by the award debtor once the award is made. The higher rate of interest is provided in clause (b) with the deliberate intent of discouraging award-debtors from adopting dilatory tactics and to persuade them to comply with the award.
- The award, when read with the operative portion of the award, shows that the words `entire award’ used in the para dealing interest and the words `sums due’ used in the operative portion of the award refer to the `total amount of award’ referred to earlier in the said two portions relating to interest when the operative portion states that future interest is awarded on the “sums due”, it refers to the “total amount of the award”, that is total of the amounts awarded on substantive claims (that is claims (1) to (7) of the contractor) excluding the claim relating interest.
- The calculation that was made in the execution petition as originally filed was correct and the modification by the respondent increasing the amount due under the award was contrary to the Award.
- The judgment of the executing court was thus set aside and the respondent was entitled only to simple interest on the principal amount as per original calculation is shown in the Execution Petition.