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2010 (1) TMI 1261 - SC - Indian LawsInterpretation of Statute - section 31(7) of Arbitration and Conciliation Act 1996 - power of the arbitral tribunal to award interest - award of interest on interest from the date of award - future interest from the date of award. Whether section 31(7) of the Act authorizes and enables arbitral tribunals to award interest on interest from the date of award? - HELD THAT - Interest may be payable in pursuance of a contract, or a provision in a statute, or the fiat of a court of tribunal. 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 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 - This Court in Renusagar Power Co. Ltd v. General Electric Co. 1993 (10) TMI 232 - SUPREME COURT held that award of interest on interest was not opposed to the public policy of India, but could be awarded only if authorized by contract or statute. The principles relating to award of interest, in general, are not different for 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, not because 18% is the normal rate of interest to be awarded in arbitrations, but purely as a deterrent to award-debtors from avoiding payment or using delaying tactics. In fact a provision similar to section 31(7)(b) of the Act, if provided in section 34 of Code of Civil Procedure, will considerably reduce the travails of plaintiffs in executing their decrees in civil cases. The Act does away with the distinction and differentiation among the four interest bearing periods, that is, pre-reference period, pendente lite period, post-award period and post-decree period. Though a dividing line has been maintained between pre-award and post-award periods, the interest bearing period can now be a single continuous period the outer limits being the date on which the cause of action arose and the date of payment, subject however to the discretion of the arbitral tribunal to restrict the interest to such period as it deems fit. Clause (b) of Section 31(7) is intended to ensure prompt payment by the award-debtor once the award is made. The said clause provides that the sum directed to be paid by an arbitral award shall carry interest at the rate of 18% per annum from the date of award to the date of payment if the award does not provide otherwise in regard to the interest from the date of the award. This makes it clear that if the award grants interest at a specified rate up to the date of payment, or specifies the rate of interest payable from the date of award till date of payment, or if the award specifically refused interest, clause (b) of Section 31 will not come into play. But if the award is silent in regard to the interest from the date of award, or does not specify the rate of interest from the date of award, then the party in whose favour an award for money has been made, will be entitled to interest at 18% per annum from the date of award. He may claim the said amount in execution even though there is no reference to any post award interest in the award. Even if the pre-award interest is at much lower rate, if the award is silent in regard to post- award interest, the claimant will be entitled to post- award interest at the higher rate of 18% per annum. 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. Whether the Arbitral Award granted future interest from the date of award, only on the principal amount found due to the respondent (that is ₹ 14,94,000/-) or on the aggregate of the principal and interest upto the date of award (Rs.31,98,879/-) - HELD THAT - The Arbitrator allowed interest at the rate 12% per annum on the total amount of the award, that is ₹ 14,94,000/-, with effect from 19.12.1990 up to the date of the Award. He further directed that in case the total amount of the award together with this interest is not paid within 30 days from the date of making the award, future interest shall be paid at the rate 18% per annum on the entire Award from the date of Award upto the actual date of payment - Therefore, what was awarded by the Arbitrator was future interest at the rate of 18% per annum on the amounts awarded on various claims (that is Claim No.1 to 7) in all aggregating to ₹ 14,94,000/- and not upon the interest awarded thereon upto to date of the award. It should be noted that the difference in the interest awarded for the pre-award period and post-award period, is only with reference to the rate of interest and not the quantum of principal (that bears interest). We allow this appeal, set aside the judgment of the Executing Court dated 5.9.2007 and the order of the High Court 9.9.2008 and hold that the respondent was entitled only to simple interest on the principal amount as per original calculation shown in the Execution Petition.
Issues Involved:
1. Authority of arbitral tribunals to award interest on interest under Section 31(7) of the Arbitration and Conciliation Act, 1996. 2. Interpretation of the Arbitral Award regarding whether future interest was granted only on the principal amount or on the aggregate of the principal and interest up to the date of the award. Issue-wise Detailed Analysis: 1. Authority of Arbitral Tribunals to Award Interest on Interest under Section 31(7) of the Act: Analysis: - Nature of Interest: Interest can arise from various circumstances, such as compensation for the use of money, delayed payments, or contractual obligations. Typically, interest is simple, calculated only on the principal amount unless otherwise specified. - Compound Interest: Compound interest, which includes interest on accrued interest, is permissible only if explicitly authorized by contract or statute. Courts and tribunals generally lack discretion to award compound interest unless specified. - Interest Act, 1978: Section 3 of the Interest Act, 1978, does not empower courts or arbitrators to award interest on interest. - Judicial Precedents: In Renusagar Power Co. Ltd v. General Electric Co., the Supreme Court held that awarding compound interest is not against public policy if authorized by contract or statute. Similarly, in Central Bank of India vs. Ravindra, the Court recognized the legality of compound interest in banking practices. - Arbitration Act, 1940 vs. Arbitration and Conciliation Act, 1996: The old Act did not explicitly address the power of arbitral tribunals to award interest, whereas Section 31(7) of the new Act specifically deals with this power. Section 31(7) does not mention compound interest or interest on accrued interest. - Section 31(7) Interpretation: The section suggests that arbitral tribunals can award simple interest unless otherwise agreed by the parties. The provision for post-award interest at 18% per annum is intended to deter award-debtors from delaying payment. - Judicial Clarification: The Court clarified that Section 31(7) does not authorize arbitral tribunals to award compound interest or interest on interest unless explicitly provided for in the contract. 2. Interpretation of the Arbitral Award: Analysis: - Award Details: The Arbitrator awarded Rs. 14,94,000/- with 12% interest per annum from 19.12.1990 to the date of the award (22.06.2000). Future interest at 18% per annum was awarded on the "sums due" if not paid within 30 days. - Dispute on Calculation: The respondent later claimed that future interest should be calculated on the aggregate of the principal and accrued interest, leading to a higher amount due. - Court's Interpretation: The Court examined whether the award intended future interest on the principal amount alone or on the aggregate of principal and interest. - Findings: The Court found that the Arbitrator's use of terms like "total amount of award" and "sums due" referred to the principal amount of Rs. 14,94,000/- and not the accrued interest. Therefore, future interest at 18% per annum was to be calculated on the principal amount alone. - Conclusion: The Court concluded that the respondent was entitled only to simple interest on the principal amount as per the original execution petition calculation. Conclusion: The Supreme Court held that Section 31(7) of the Arbitration and Conciliation Act, 1996, does not authorize arbitral tribunals to award compound interest or interest on accrued interest unless explicitly provided for in the contract. The Arbitral Award in question granted future interest at 18% per annum only on the principal amount of Rs. 14,94,000/-, not on the aggregate of principal and accrued interest. The appeal was allowed, and the respondent was entitled to simple interest on the principal amount as per the original execution petition calculation.
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