2024 (8) TMI 390 - SC - Indian Laws

Interpretation of interest clauses in an arbitration award - whether interest is payable on interest or whether 15% interest per annum awarded would be on the principal sum award plus 12% per annum interest on it for the preaward period? - HELD THAT - Section 34 of the CPC provides that where the decree is for payment of money, the court may order interest at such rate as the court deems reasonable to be paid on the principal sum adjudged. Again, the reading of the aforesaid Sub-Section (1) of Section 34 CPC would reveal that the interest is payable on the principal sum adjudged and not on interest part of the award. The Interest Act, 1978 vide Sub-Section (3) of Section 3 specifically lays down that nothing in Section 3 which permits the court to award interest shall empower the court to award interest upon interest. It means that ordinarily the courts are not entitled to award interest upon interest unless specifically provided either under any statute or under the terms and conditions of the contract. It is evident that ordinarily courts are not supposed to grant interest on interest except where it has been specifically provided under the statute or where there is specific stipulation to that effect under the terms and conditions of the contract. There is no dispute as to the power of the courts to award interest on interest or compound interest in a given case subject to the power conferred under the statutes or under the terms and conditions of the contract but where no such power is conferred ordinarily, the courts do not award interest on interest. Neither the Act specifically empowers the Arbitrator or the court to award interest upon interest or compound interest nor there is any other provision which provides for grant of compound interest or interest upon interest. Even Section 34 CPC is silent in this regard whereas Sub-Section (3) of Section 3 of the Interest Act specifically prohibits the same. It is not deemed appropriate under the facts and circumstances of the case to exercise our discretionary jurisdiction under Article 136 of the Constitution of India so as to interfere with the opinion expressed concurrently by the two courts below - SLP dismissed.

Summary

Issues:
1. Interpretation of interest clauses in an arbitration award.
2. Whether interest can be awarded on interest.
3. Applicability of legal provisions and case law on the subject.

Analysis:
1. The judgment involved a dispute related to the interpretation of interest clauses in an arbitration award dated 17.09.1997 under the Indian Arbitration Act, 1940. The award provided for interest on the amount awarded for two periods: 12% per annum from the completion of work to the date of the award, and 15% per annum from the date of the award till payment or court decree. The dispute arose when the petitioner sought 15% interest on the principal amount awarded plus the 12% simple interest, claiming it as part of the principal sum for post-award interest.

2. The primary issue was whether interest could be awarded on interest. The petitioner contended that the 15% interest should be calculated on the principal sum plus the 12% interest, while the respondent argued that interest on interest could only be granted if specifically provided in the award or court order. The courts below had ruled in favor of the respondent, stating that interest was payable only on the principal sum adjudged, not on the interest component of the award.

3. The judgment extensively analyzed legal provisions and case law on the subject. It referred to Section 29 of the Arbitration Act, Section 34 of the CPC, and the Interest Act, 1978, emphasizing that interest on interest was not permissible unless expressly provided by statute or contract terms. Previous cases like Oil and Natural Gas Commission vs. M.C. Clelland Engineers S.A. and State of Haryana vs. S.L. Arora and Company were cited to establish the principle that interest was generally payable only on the principal amount, not on accrued interest.

4. The court highlighted the distinction between Section 31(7) of the Arbitration and Conciliation Act, 1996, and Section 34 CPC regarding the payment of post-award interest. It was noted that while Section 31(7) allowed for post-award interest on the sum awarded, including pre-award interest, Section 34 CPC specified interest only on the principal sum adjudged. The judgment concluded that interest on interest was not awarded in the case at hand, as the award and decree did not provide for such calculation, and there was no contractual provision for compound interest.

5. Ultimately, the Supreme Court dismissed the Special Leave Petition, upholding the concurrent opinions of the lower courts. The judgment reaffirmed that interest on interest could not be granted unless explicitly authorized by law or contract terms, and in the absence of such provision, courts were not entitled to award interest on interest.