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TMI Blog2010 (1) TMI 1261X X X X Extracts X X X X X X X X Extracts X X X X ..... 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, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. - R.V. RAVEENDRAN AND K.S. RADHAKRISHNAN, JJ. For the Petitioner : Naresh Bakshi For the Respondent : S. Janani ORDER R.V. RAVEENDRAN J. 1. Leave granted. Heard the parties. 2. The appellants awarded a construction contract to the respondent. The work which had to be completed within 18 months from 18.3.1985, was actually complet ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndent alleged that earlier, due to oversight, it had calculated the future interest at the rate of 18% per annum from 23.6.2000 to date of execution petition (24.10.2004), only on the principal sum of ₹ 14,94,000/-; that the future interest ought to have been calculated on a higher sum of ₹ 31,98,879/= (made up of ₹ 14,94,000/- being the principal amount plus ₹ 17,04,879/- being the interest at 12% per annum which had accrued due up to the date of Award); and that therefore the amount due as on the date of execution petition was ₹ 56,97,685/- instead of ₹ 43,65,918/- claimed therein. The Executing Court after hearing the parties, by its order dated 5.9.2007 accepted the revised calculation made by the respondent. The revision petition filed by the appellants against the said order was dismissed by the High Court by the impugned order dated 9.9.2008 without examining the issue on merits, on the assumption that what was claimed was the balance of an admitted liability under the award. 5. The appellants did not dispute their liability to pay interest. They however contended that Section 31(7) of the Act does not contemplate award of interest on i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d, refers to simple interest, that is interest paid on only the principal and not on any accrued interest. 9. Compound interest refers to a method of charging interest where interest is computed not only on the principal, but also the accrued interest. For this purpose, periodical rests are provided for computation of interest, say yearly, or quarterly or monthly. At the end of the first rest , the interest accrued till then is added to the principal, so that for the second interest bearing period, the aggregate of the original principal and interest thereon becomes the enhanced principal. At the end of the second rest, the accrued interest on the enhanced principal is added to the enhanced principal so that such further enhanced principal becomes the principal for charging the interest for the third period. It goes on in this manner until repayment, by progressively enlarging the principal base by adding interest at regular intervals. As a result, the debtor is made to pay interest not only on the original principal, but on the interest on the principal, and on the interest upon the interest on the principal and so on. A variant of compound interest, involves limited compoundi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that in the absence of a provision for compound interest or interest with periodical rests in the agreement between a bank and the borrower, the bank cannot claim such interest. In Central Bank of India vs. Ravindra 2002 (1) SCC 367, a constitution bench of this Court, after exhaustive consideration of the case law, summarized the legal position regarding compound interest thus: The English decisions and the decisions of this Court and almost all the High courts of the country have noticed and approved long established banking practice of charging interest at reasonable rates on periodical rests and capitalising the same on remaining unpaid. Such a practice is prevalent and also recognised in non-banking money lending transactions. Legislature has stepped in from time to time to relieve the debtors from hardship whenever it has found the practice of charging compound interest and its capitalization to be oppressive and hence needing to be curbed. The practice is permissible, legal and judicially upheld excepting when superseded by legislation. There is nothing wrong in the parties voluntarily entering into transactions, evidenced by deeds incorporating covenant or stipula ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he arbitral tribunal may include in the sum for which the award is made, interest on the whole or any part of the money in clause (a) and use of the words a sum directed to be paid by an arbitral award shall carry interest in clause (b) of sub-section (7) of section 31 clearly indicate that the section contemplates award of only simple interest and not compound interest or interest upon interest. A sum directed to be paid by an arbitral award refers to the award of sums on the substantive claims and does not refer to interest awarded on the sum directed to be paid by the award . In the absence of any provision for interest upon interest in the contract, the arbitral tribunals do not have the power to award interest upon interest, or compound interest, either for the pre-award period or for the postaward period. 15. There is a tendency among contractors to elevate the claims for interest and costs to the level of substantive disputes by describing them as separate and independent heads of claim. The long pendency of arbitration matters either due to prolonged arbitration proceedings or due to litigations (both intervening and post-arbitral), has the unfortunate effect of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... est during the pre-award period. The contract has no application in regard to interest during the post-award period. (ii) Clause (a) gives discretion to the Arbitral Tribunal in regard to the rate, the period, the quantum (principal which is to be subjected to interest) when awarding interest. But such discretion is always subject to the contract between the parties. Clause (b) also gives discretion to the Arbitral Tribunal to award interest for the post-award period but that discretion is not subject to any contract; and if that discretion is not exercised by the arbitral Tribunal, then the statute steps in and mandates payment of interest, at the specified rate of 18% per annum for the postaward period. (iii) While clause (a) gives the parties an option to contract out of interest, no such option is available in regard to the post-award period. In a nutshell, in regard to pre-award period, interest has to be awarded as specified in the contract and in the absence of contract as per discretion of the Arbitral Tribunal. On the other hand, in regard to the post-award period, interest is payable as per the discretion of the Arbitral Tribunal and in the absence of exercise of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... specified stage/s being treated as part of principal for the purpose of charging of interest during any subsequent period, the arbitral tribunal will have to give effect to it. But when the award is challenged under Section 34 of the Act, if the court finds that the interest awarded is in conflict with, or violating the public policy of India, it may set aside that part of the award. (18.4) Where an arbitral tribunal awards interest under section 31(7)(a) of the Act, it is given discretion in three areas to do justice between the parties. First is in regard to rate of interest. The Tribunal can award interest at such rate as it deems reasonable. The second is with reference to the amount on which the interest is to be awarded. Interest may be awarded on the whole or any part of the amount awarded. The third is with reference to the period for which the interest is to be awarded. Interest may be awarded for the whole or any part of the period between the date on which cause of action arose and the date on which the award is made. (18.5) The Act does away with the distinction and differentiation among the four interest bearing periods, that is, pre-reference period, pendente li ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ision in Mcdermott relates to an award under the Arbitration and Conciliation Act, 1996. The other two decisions relate to awards under the old Act (Arbitration Act, 1940) and are of no assistance in interpreting section 31(7) of the new Act. 20. In Mcdermott, paras 154 to 159 of the judgment deal with the issue of interest. Relevant portions thereof are extracted below in entirety: The power of the arbitrator to award interest for pre-award period, interest pendent lite and interest post-award period is not in dispute. Section 31(7) (a) provides that the arbitral tribunal may award 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 award is made, i.e., preaward period. This, however, is subject to the agreement as regard the rate of interest on unpaid sum between the parties. The question as to whether interest would be paid on the whole or part of the amount or whether it should be awarded in the pre- award period would depend upon the facts and circumstances of each case. The arbitral tribunal in this behalf will have to exer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt which is permissible in law. [emphasis supplied] But a careful reading of the decision in Mcdermott, shows that the portion of Mcdermott extracted in Three Circles, assuming it to be the law laid down in Mcdermott, is not a finding or conclusion of this court, nor the ratio decidendi of the case, but is only a reference to the contention of the respondent in Mcdermott. Paras 1 to 27 (of the SCC report) in Mcdermott state the factual background. Paras 28 and 29 contain the submissions of the learned counsel for BSCL, the respondent therein. Paras 30 to 44 contain the submissions made by the learned counsel for Mcdermott, the appellant therein, in reply to the submissions made on behalf of BSCL. The passage that is extracted in Three Circles is part of para 44 of the decision which contains the last submission of the learned counsel for Mcdermott on the question of interest. The reasoning in the decision starts from para 45. This Court considered the several questions seriatum in paras 45 to 160. The question relating to interest was considered in paras 154 to 159 relevant portions of which we have extracted above. Therefore, the observation in Three Circles that Mcdermott ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed the words total amount of the Award as referring to the total or aggregate of the awards on the substantive claims of the contractor (claims 1 to 7) excluding the ancillary claims (claim No.8) relating to interest. The Arbitrator has also used the words entire award and sums due synonymous with the words total amount of the award . Therefore, when the operative portion states that future interest is awarded on the sums due , it refers to the total amount of the award , that is total of the amounts awarded on substantive claims (that is claims (1) to (7) of the contractor) excluding the claim relating interest. 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). Conclusion 24. Thus it is clear that section 31(7) merely authorizes the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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