Whether Arbitrator has power to grant compound interest?

This position is settled today in view of Supreme Court Judgment of UHL Power Company Limited v State of Himachal Pradesh (Decided on 07 January 2022).

The Supreme Court of India in UHL has upheld the power of an arbitrator to grant compound interest by placing reliance on its earlier decision in Hyder Consulting (UK) Limited v. Governor, State of Orissa (Decided on 25 November 2014), whereby the Court had held that the terms of Section 31(7) of the Arbitration and Conciliation Act, 1996 (“Act”), are explicit in granting 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.

The Hyder Judgment has overruled the Supreme Court Judgment of State of Haryana v. S.L. Arora and Co (Decided on 29.06.2010).

. The Supreme Court, in case of 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 in terms of Section 3(3)(c) of the Interest Act, 1978, which provides that an arbitrator/ Court is not empowered to award compound interest.

Relevant Para from S.L. Arora Judgment-

9. ….. 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.

Relevant Para from Hyder Judgment overruling the S L Arora Judgment-

"21. In the result, I am of the view that S.L. Arora case [State of Haryana v. S.L. Arora and Co. (2010) 3 SCC] is wrongly decided in that it holds that a sum directed to be paid by an Arbitral Tribunal and the reference to the award on the substantive claim does not refer to interest pendente lite awarded on the "sum directed to be paid upon award" and that in the absence of any provision of interest upon interest in the contract, the Arbitral Tribunal does not have the power to award interest upon interest, or compound interest either for the pre-award period or for the post-award period. Parliament has the undoubted power to legislate on the subject and provide that the Arbitral Tribunal may award interest on the sum directed to be paid by the award, meaning a sum inclusive of principal sum adjudged and the interest, and this has been done by Parliament in plain language.”

Facts and Background of UHL Case-

In the UHL case the Contractor was awarded principal along with pre-claim interest annually; (b) compound interest at the rate of 9% 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 not paid within 6 months of Award.

The Employer filed section 34 Appeal which was allowed thereby setting aside the award. Against this Order, the contractor preferred section 37 Appeal which was allowed, setting aside the section 34 Order, thereby granting principal claim along with simple interest of 6% (six percent) per annum from the date of filing of claim till realization. Section 34 Court in UHL case placed reliance on the decision of the Supreme Court in State of Haryana v. S.L. Arora (which is over ruled by Hyder Supra) 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

Reproducing the provision for ease of reference-

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,— (a) if the proceedings relate to a debt payable by virtue of a written instrument at a certain time, then, from the date when the debt is payable to the date of institution of the proceedings; (b) if the proceedings do not relate to any such debt, then, from the date mentioned in this regard in a written notice given by the person entitled or the person making the claim to the person liable that interest will be claimed, to the date of institution of the proceedings:

Provided that where the amount of the debt or damages has been repaid before the institution of the proceedings, interest shall not be allowed under this section for the period after such repayment.

(2) Where, in any such proceedings as are mentioned in sub-section (1),— (a) judgment, order or award is given for a sum which, apart from interest on damages, exceeds four thousand rupees, and (b) the sum represents or includes damages in respect of personal injuries to the plaintiff or any other person, or in respect of a person’s death, then, the power conferred by that sub-section shall be exercised so as to include in that sum interest on those damages or on such part of them as the court considers appropriate for the whole or part of the period from the date mentioned in the notice to the date of institution of the proceedings, unless the court is satisfied that there are special reasons why no interest should be given in respect of those damages.

(3) Nothing in this section,—

(a) shall apply in relation to— (i) any debt or damages upon which interest is payable as of right, by virtue of any agreement; or (ii) any debt or damages upon which payment of interest is barred, by virtue of an express agreement;

(b) shall affect— (i) the compensation recoverable for the dishonour of a bill of exchange, promissory note or cheque, as defined in the Negotiable Instruments Act, 1881 (26 of 1881); or (ii) the provisions of rule 2 of Order II of the First Schedule to the Code of Civil Procedure, 1908 (5 of 1908);

(c) shall empower the court 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.

Decision in Recent Judgment of UHL Supra

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 given in Section 34 Judgment 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).

The Supreme Court in Hyder Consulting (UK) Limited v. Governor, State of Orissa (Decided on 25.11.2014), 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, 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. The language of Section 31(7) is plain and unambiguous, and therefore, the question of its construction or interpretation does not arise.

Conclusion.

As on date, the Full Bench in UHL Power Company (supra) has universally recognised that the judgement in S.L. Arora (supra) stands overruled; 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.

The Word Sum includes the Principal and interest Awarded.