The article aims to decode the quantum and extent of pre award and post award interest and in doing so aims to answer the following issues:
a. Whether the Arbitrator has the discretion to grant post award interest on only the principal sum due under clause (a) of Section 31(7) of the Arbitration and Conciliation Act, 1996 (Hereinafter referred to as “The Act”), or should post award interest be granted on the total sum awarded, i.e., principal plus pre award interest.
b. The definition of the word “sum” as used in clauses (a) and (b) of Section 31(7) of the Act.
c. Whether the Arbitrator has the discretion to grant post award interest on only a part of the “sum” awarded under Section 31(7)(b) of the Act.
For better understanding the provisions, a bare perusal of Section 31(7) reads as follows:
“(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 two per cent higher than the current rate of interest prevalent on the date of award, from the date of award to the date of payment.”
Clause (a) herein relates to pre award interest, i.e., Till the date of Award, on the other hand clause (b) relates to post award interest, i.e., from the date of Arbitral Award till actual payment. For the purposes of answering these issues, a catena of judgements have been analysed which deal with the legislative intent and judicial interpretation of the aforementioned provisions.
Analysis
The first judgement that dealt with the issue of pre award and post award interest was State of Haryana and Others v. S.L. Arora and Company1, (Hereinafter referred to as, “S.L. Arora”) wherein it was held that the Arbitral Tribunal does not have the authority to provide interest on the aggregate amount unless provided for in the contract between the parties or by an authority under a statute.
The Division Bench judgement in S.L Arora was referred to a larger bench in Hyder Consulting Limited v. Governor, State of Orrisa2(Hereinafter referred to as, “Hyder Consulting”). Here, the main issue under consideration was whether interest accrued till the date of award will be included within the definition of “sum” for the purposes of awarding post award interest. The majority opinion in this case, held that that the word “sum” under Section 31(7)(b) would mean the aggregate of principal plus interest. The ratio in Hyder Consulting can be understood through the following points:
1) Clause (a) of Sub Section (7) of Section 31, allows the Arbitrator to incorporate interest on the “sum” for which the award is made. What clause (a) contemplates is pre award interest, i.e., from the date when the cause of action arose till the date of Arbitral Award. That under clause (a) the “sum” that is awarded as part of the Arbitral Award may be inclusive of interest, and the “sum” of the principal and interest amount may be directed to be paid by the Arbitral Tribunal
2) Clause (b) contemplates interest on such “sum” from the date of award till the date of actual payment. Herein, what “sum” means is the aggregate of principal plus interest, because till this juncture the two components have lost their separate identities. Once interest has been incorporated at the pre award stage, it cannot be then segregated for the purposes of awarding post award interest. The interest component then loses its character of interest and mergers with the identity of “sum”, against which further interest is to be paid. Thereby, meaning that the Arbitral Tribunal is well empowered to grant interest on the aggregate amount, even in the absence of a clause providing for the same in the contract between the parties.
3) There is a clear departure from the wording of Section 34 of the Civil Procedure Code, 1908 (Hereinafter referred to as “CPC”), which empowers the court to give interest on the “Principal sum”. Since the parliament has not qualified the word “sum” with the word principal (as has been done under Section 34 of CPC) it is meant to include both principal as well as interest. The stark distinction between the wording of Section 34 of CPC and Section 31(7) of the Act, clearly shows the intention of the legislature. Had the intention of the legislature been to confine the authority of the Arbitrator, it would have qualified the word “sum” with the word principal.
Therefore, for the purposes of an award there is no distinction between a “sum” with interest and a “sum” without interest. The majority opinion herein, overturned the decision in S.L. Arora.
For the purposes of critically analysing the judgement, it is imperative to take into account the reasoning behind the dissenting opinion in Hyder Consulting. The dissenting opinion is first and foremost based on the rationale, that in common parlance the meaning of the word “sum” as mentioned in clause (a) of Section 31(7) would mean money and therefore the parliament has used the words “money” and “sum” interchangeably under Section 31(7) of the Act. This interpretation would lead to the conclusion that “sum” would mean principal amount, Secondly, that clause (b) is qualified by the terms “unless the award otherwise directs”, which means that clause (b) will have applicability only in case the Arbitral award does not mention anything about post award interest. Thirdly, it is a settled principal of law that if a word is used more than once in the same provision of the statute, the intention of the
legislature must be to give the same meaning to the word at each place where it is repeated3. Hence the interpretation of the word “sum” under clause (b) will be the same as under clause (a) of Section 31(7).
The majority opinion in Hyder Consulting was upheld in UHL Power Company Limited v. State of Himachal Pradesh4, wherein the court while holding, the reliance of a division bench of the Himachal Pradesh High Court on S.L. Arora erroneous, upheld the ratio of Hyder Consulting till the extent that the Arbitrator has the discretion and power to grant interest on the aggregate amount.
In Morgan Securities and Credits Private Limited v. Videocon Industries Limited5( Hereinafter referred to as, “Morgan Securities”), the question that arose for consideration was; whether the Arbitrator has the discretion to award post award interest on only a part of the “sum.” The issue as further crystallised was whether the phrase “unless the award otherwise directs” under Section 31(7)(b) allows the Arbitrator the discretion to determine the rate of interest or both the rate of interest and the “sum” on which it will be applied.
The court in its ratio held that clause (a) of Section 31(7), gives the Arbitrator wide powers for grant of pre award interest, inter alia, the rate of reasonable interest, the sum on which such interest has to be paid that is whether it is whole or any part of principal amount. The Arbitrator under clause (a) also has the discretion to decide the period for which the interest may be given. It was held that when discretion has been granted to the Arbitrator in case of pre award interest, it would be against the grain of statutory interpretation to hold that the Arbitrator will have no such discretion when it comes to post award interest.
It was held that the Arbitrator had the discretion to grant post award interest and clause (b) does not fetter the discretion of the Arbitrator, it only contemplates a situation where the Arbitral Award is silent.
Conclusion
The judgment of the two judge bench in S.L. Arora was referred to a three judge bench in Hyder Consulting, on whether post award interest can be granted on the aggregate of principal and pre award interest.
This was held in the affirmative in Hyder Consulting, however the majority opinion in this judgement did not discuss whether the Arbitrator can grant post award interest on only a part of the “sum”. In Morgan Securities, the court while affirming the decision in Hyder Consulting, held that the Arbitrator has the discretion to award post award interest on only a part of the “sum”. Section 31(7)(b) does not fetter or restrict the discretion that the arbitrator holds in deciding the sum on which post award interest has to be granted, i.e., on whole or on part of the sum.