Introduction

The Supreme Court of India upheld the power of an arbitrator to grant ‘interest on interest’ or compound interest in its recent judgement in UHL Power Company Limited v State of Himachal Pradesh[1]. Placing reliance on its earlier decision in Hyder Consulting (UK) Limited v. Governor, State of Orissa[2], the Court has held that the terms of Section 31(7)[3] of the Arbitration and Conciliation Act, 1996 (“Act”), are explicit in granting an arbitral tribunal the power to award interest on the “sum” directed to be paid under an arbitral award, which is inclusive of the interest awarded thereunder.

Factual Background

In an arbitral award passed pursuant to the arbitration proceedings between UHL Power Company Limited (“UHL”) and the State of Himachal Pradesh, UHL was awarded inter-alia (a) a sum of Rs. 26,08,89,107.35, towards expenses claimed, along with pre-claim interest thereon, capitalized annually; (b) compound interest at the rate of 9% (nine percent) per annum till the date of filing of the claim; and (c) future interest at the rate of 18% (eighteen percent) per annum on the principal claim along with interest, if the awarded amount was not realised within a period of six months from the date of the award.

In a challenge to the award, filed by the State of Himachal Pradesh under Section 34 of the Act, a Single Judge of the High Court of Himachal Pradesh disallowed the entire claim of UHL. When the said decision of the Single Judge was challenged under Section 37 of the Act, a Division Bench of the High Court inter-alia partially set aside the decision of the Single Judge and granted the claim of UHL insofar as the principal amount claimed was concerned, along with simple interest of 6% (six percent) per annum from the date of filing of claim till realization. The Division Bench placed reliance on the decision of the Supreme Court in State of Haryana v. S.L. Arora[4] to disallow the grant of compound interest, awarded by the arbitrator. Both parties, being aggrieved by the findings of the Division Bench, approached the Supreme Court by way of separate civil appeals.

Legal Position

A Division Bench of the Supreme Court, in S.L. Arora (supra) had held that an arbitral tribunal does not have the power to award compound interest, unless specifically provided for by contract or by an authority under a Statute. The Court placed reliance inter-alia on Section 3(3)(c)[5] of the Interest Act, 1978, which provides that an arbitrator/ Court is not empowered to award interest upon interest. In the Court’s view, the expression, “a sum directed to be paid by an arbitral award” in Section 31(7) of the Act refers to the substantive claims; and interest from the date of the award and/or costs are ancillary issues, not substantive disputes. Therefore, the Court held that in the absence of any provision for interest in the contract, the arbitral tribunal does not have the power to award compound interest, for the pre-award or the post-award period.

Pertinently, the aforesaid findings in S.L. Arora (supra) are no longer good law, considering a Full Bench of the Supreme Court has, by its majority decision in Hyder Consulting (supra), held that the decision in S.L. Arora (supra) is not in consonance with the clear and plain language of Section 31(7) of the Act. In holding so, the Court inter-alia observed as under:

1. the expression “include in the sum for which the award is made” or “sum directed to be paid by an arbitral award”, used in Section 31(7), refers to the total amount or the sum for the payment of which the award is made. The Act does not qualify the said expression by prefixing the word “principal” before the word “sum” and therefore, the word “sum” simply means a particular amount of money. Therefore, it may include “principal” and “interest” or either of the two, as the case may be;
2. there exists no distinction between a “sum” with interest, and a “sum” without interest. Once interest is included in the sum for which the award is made, the original sum and the interest component cannot be segregated or seen as independent of each other. Under the provisions of Section 31(7), the arbitral tribunal is well empowered to grant interest, even in the absence of a clause providing for it in the contract;
3. Section 34 of the Code of Civil Procedure, 1908 (“CPC”), gives the Court power to grant interest on the “principal sum” adjudged, and not the “sum”, unlike Section 31(7) of the Act. Therefore, the departure from the language of the CPC is indicative of the intention of the legislature to grant the arbitral tribunal power to award compound interest;
4. the Parliament, having the undoubted power to legislate on the subject, has, vide the plain language of Section 31(7), provided that the arbitral tribunal may award interest on the sum adjudged to be paid; and
5. it is a settled principle of law that when the language of the statute is clear and explicit, Courts must give effect to it, irrespective of the consequences. In such cases, the words of the statute speak the intention of the legislature[6], and jurisdiction of Courts cannot be invoked to interpret a statute, to add or subtract words, or read something which is not there into a provision[7]. The language of Section 31(7) is plain and unambiguous, and therefore, the question of its construction or interpretation does not arise.

However, in his dissenting decision, the Hon’ble Mr. Justice H.L. Dattu found no infirmity with the judgement of S.L. Arora (supra) and held that the word “sum” used in Section 31(7) of the Act refers to the money as adjudicated by the arbitral tribunal, based on the claims of the parties, i.e. the principal amount awarded. He observed inter-alia that:

1. the words “sum” and “money” have been used by the legislature interchangeably in the said provision, and therefore, interest awarded on the “sum” could be read to mean interest being awarded on the “money”, i.e. the principal amount claimed;
2. the term “interest” is distinct from the principal amount, and is awarded in order to compensate a party for the denial of its rightful money under the agreement; and
3. Section 31(7) of the Act neither refers to compounding of interest, nor awarding for interest on interest.

Decision in UHL Power Company

In UHL Power Company (supra), a Full Bench of the Supreme Court, while upholding the position of law settled by the majority decision of Hyder Consulting (supra), held that post-award interest can be granted by an arbitrator on the interest amount awarded. The Court inter-alia placed reliance on the legal principle that the term “sum”, used in Section 31(7)(b) of the Act, includes interest directed to be paid by an arbitral award. The Court set aside the findings in the order passed by the Division Bench of the High Court, which held that the arbitral tribunal was not empowered to grant compound interest or interest upon interest and hence only simple interest could be awarded in favour of UHL on the principal amount claimed, and restored the arbitral award that granted compound interest to UHL. This was in view of the fact that the said findings were based on the overruled judgement of S.L. Arora (supra).

Conclusion

It is a settled principle of law that interest is awarded against a party for breach of contract, more specifically monetary obligations, so as to put the injured party in the same economic position it would have been in, if the contract had been duly performed.

Section 29[8] of the Arbitration Act, 1940, granted an arbitral tribunal the power to award interest specifically on the principal sum adjudged. However, the Supreme Court in its landmark decision in Renusagar Power Co. Ltd v. General Electric Co.[9], has held that the award of interest on interest, i.e. compound interest, by an arbitral tribunal is not against the public policy of India. The Court observed that merely because the Court is precluded from awarding interest on interest under Section 3(3)(c) of the Interest Act, 1978, it does not mean that awarding interest under contract or usage or under the statute is not permissible. The aforesaid position, as laid down by the Supreme Court, was codified in the Act, when under Section 31(7) thereof, an arbitral tribunal was granted the discretionary power to award interest upon the sum for which the award is made, at such rate as it deems reasonable, on the whole or any part of the money. Therefore, Section 31(7), in explicit departure from the provisions of the Arbitration Act, 1940, did not make any reference to payment of interest on merely upon the “principal” sum adjudged under the award.

Even the 246^th Report of the Law Commission of India (“Report”) clarified that the terms of Section 31(7) of the Act are of wider import. As per the Report, the scheme of the relevant provisions of the Act indicated that the award of interest on interest is not only permitted but is also the norm. In view thereof, the Commission opined that the decision in the judgement of S.L. Arora (supra) required reconsideration, on the issue of awarding interest on the principal sum as well as on the interest accrued till the date of the award. Accordingly, the majority judgement of Hyder Consulting (supra) was deemed to be a welcome step on the subject. Furthermore, when the Full Bench in UHL Power Company (supra) unanimously recognised that the judgement in S.L. Arora (supra) stands overruled[10]; and held that the arbitrator has the power to award compound interest under Section 31(7) of the Act, the law now stands well and finally settled.

Lastly, it is relevant to state that the power under Section 31(7) of the Act is wider than that under Section 34 of the CPC, and the decision in UHL Power Company (supra) is another example of Courts recognising/ reiterating this. Courts have, time and again, recognised arbitration as an effective alternate dispute resolution mechanism, as also the wide powers of an arbitrator to deal with and resolve disputes between parties. This judgment is another step to strengthen the confidence of parties to opt for such alternate dispute resolution mechanism.

[1] 2022 SCC OnLine SC 19

[2] (2015) 2 SCC 189

[3] “Section 31. Form and contents of arbitral award–

(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.

Explanation. —The expression “current rate of interest” shall have the same meaning as assigned to it under clause (b) of section 2 of the Interest Act, 1978 (14 of 1978).”

[4] (2010) 3 SCC 690

[5] “Section 3. Power of court to allow interest.—(1) In any proceedings for the recovery of any debt or damages or in any proceedings in which a claim for interest in respect of any debt or damages already paid is made, the court may, if it thinks fit, allow interest to the person entitled to the debt or damages or to the person making such claim, as the case may be, at a rate not exceeding the current rate of interest, for the whole or part of the following period, that is to say…

(3) Nothing in this section ….

(c) shall empower the court to award interest upon interest.”

[6] Ganga Prasad Verma v State of Bihar, 1995 Supp (1) SCC 192 (Para 5); Keshavji Ravji & Co. v CIT, (1990) 2 SCC 231 (Para 11); T.N. SEB v Central Electricity Regulatory Commission, (2007) 7 SCC 636

[7] Nasiruddin v Sita Ram Agarwal, (2003) 2 SCC 577 (Para 37)

[8] “Section 29. Interest on awards. Where and in so far is an award is for the payment of money the Court may in the decree order interest, from the date of the decree at such rate as the Court deems reasonable, to be paid on the principal sum as adjudged by the award and confirmed by the decree.”

[9] 1994 Supp (1) SCC 644 (Para 92, 93)

[10] As opposed to the decision in Hyder Consulting (supra), where only the majority opinion (delivered by two of the three Judges) overruled the decision in S.L. Arora (supra), also a Division Bench decision.