SUPREME COURT UPHOLDS ARBITRATOR’S DISCRETION FOR GRANTING POST-AWARD INTEREST

A two Judge Bench of the Hon’ble Supreme Court of India comprising of Justice Dr Dhananjaya Y Chandrachud and Justice A S Bopanna passed a Judgment dated 01-09-2022 in the case of Morgan Securities And Credits Pvt. Ltd. v. Videocon Industries Ltd. [Civil Appeal No 5437 of 2022 and held that an Arbitrator has the discretion to grant Post-Award Interest.

In the present case, Morgan Securities And Credits Pvt. Ltd. (Appellant) and Videocon Industries Ltd. (Respondent) entered into an Agreement dated 27-01-2003 wherein the Respondent availed of bill discounting facilities from the Appellant. Pursuant to this, the Appellant disbursed Rs. 5,00,32,656. The dues remained unpaid.  Accordingly, the Appellant issued a Notice to the Respondent on 10-01-2006 demanding the payment of the principal amount of Rs. 5,00,32,656 as on 17-04-2003, which was the date of default, along with an overdue interest. Since the Respondent did not pay the amount as demanded, the Appellant issued a Notice on 31-01-2006, invoking the arbitration clause of the Agreement.

An Arbitral Award OMP No. 972 of 2013 was rendered in favour of the Appellant by the sole Arbitrator on 01-03-2013. The Award was corrected on 29-04-2013 and the following reliefs were granted:

1. Interest at the rate of twenty one percent per annum was granted from the date of default to the date of the demand notice;
2. Thirty six percent per annum with monthly rests from the date of the demand notice to the date of award (“pre-award interest”); and
3. Eighteen percent per annum on the principal amount of Rs. 5,00,32,656 from the date of award to the date of payment (“post-award interest”).

This Award was challenged on the grounds of grant of post-award and pre-award interest by the Appellant by filing a Petition under Section 34 of the Arbitration and Conciliation Act, 1996 (Act) (Application for setting aside arbitral awards) before the High Court of Delhi (High Court). The Respondent also filed a Petition OMP 665 of 2013.

A Single Judge of the High Court vide Judgment dated 07-02-2019 dismissed the Petition Filed by the Appellant on the grant of post-award interest. The Single Judge held that the “Arbitrator had in his discretion restricted the post award interest to the principal amount and that the court would not interfere with the exercise of discretion.”

Thereafter, an Appeal was filed against the Judgment of the Single Judge before the Division Bench of the High Court. The Division Bench vide Judgment dated 26-02-2020 dismissed the Judgment of the Single Judge. The Division Bench of the High Court observed that the Judgment in Hyder Consulting (UK) Limited v. Governor, State of Orissa (2015) 2 SCC 189 clarifies that when the arbitral award is silent on post-award interest, it would be payable on the ‘sum’ awarded, which would include both the principal and the pre-award interest. The Division Bench held that in this case since the arbitral award is not silent on post-award interest, the provisions of Section 31(7)(b) of the Act (Form and contents of arbitral award) would not be applicable.

Assailing the Judgment dated 26-02-2020 passed by the Division Bench of the High Court, proceedings were initiated under Article 136 of the Constitution of India, 1950 before the Hon’ble Supreme Court. The Apex Court issued a Notice confined to the issue of post-award interest on 16-07-2021.

After taking into consideration the facts of the case and arguments of the case, the Bench placed reliance on Section 31(7) of the Act. Section 31(7)(a) provides for pre-award interest, i.e. for 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 for post-award interest.

Section 31(7) of the Act is reproduced below for easy reference:

“(7) (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 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;

(b) A sum directed to be paid by an arbitral award shall, unless the award otherwise directs, carry interest at the rate of eighteen per centum per annum from the date of the award to the date of payment.”

The Supreme Court observed that:

“The arbitrator has the discretion to determine the rate of reasonable interest, the sum on which the interest is to be paid, that is whether on the whole or any part of the principal amount, and the period for which payment of interest is to be made – whether it should be for the whole or any part of the period between the date on which the cause of action arose and the date of the award.

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 arbitrator has the discretion to grant post-award interest. Clause (b) does not fetter the discretion of the arbitrator to grant post-award interest. It only contemplates a situation in which the discretion is not exercised by the arbitrator. Therefore, the observations Hyder Consulting (supra) on the meaning of ‘sum’ will not restrict the discretion of the arbitrator to grant post-award interest. There is nothing in the provision which restricts the discretion of the arbitrator for the grant of post-award interest which the arbitrator otherwise holds inherent to their authority.”

Further, the Bench held that the purpose and objective behind granting post-award interest is the make sure that the Award Debtor does not make a delay in payment of the award.

In this regard, the following observation was made:

“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, while dismissing the Appeal against the Judgment of the Division Bench of the High Court dated 26-02-2020, the Apex Court held as follows:

1. The phrase ‘unless the award otherwise directs’ in Section 31(7)(b) only qualifies the rate of interest;
2. 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;
3. Section 31(7)(b) does not fetter or restrict the discretion that the arbitrator holds in granting post-award interest. The arbitrator has the discretion to award post-award interest on a part of the sum;
4. The arbitrator must exercise the discretionary power to grant post-award interest reasonably and in good faith, taking into account all relevant circumstances; and
5. The arbitrator has the discretion to award post-award interest on a part of the ‘sum’.

Editor’s Comments:

The Arbitration and Conciliation Act, 1996 has vested the Arbitrator with wide powers while deciding a dispute, which includes granting of interest pre and post award. So long as the arbitration clause does not restrict the Arbitrator from awarding interest, the Arbitrator is free to grant interest as and when he deems fit. By and large, Courts are reluctant to interfere with arbitral awards if they do not find reasons for setting aside the award as laid down under Section 34 of the Act. The Apex Court has rightly summarized that post-award interest is to ensure that the Award Debtor does not unnecessarily prolong the enforcement of the Award by meaningless litigation to defeat the right of the Award Holder.

 

Suchitra Upadhyay

Associate

The Indian Lawyer & Allied Services

 

Edited by

Sushila Ram Varma

Chief Consultant

The Indian Lawyer & Allied Services