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Synopsis

The Supreme Court has said that a sum directed to be paid by an Arbitral Award must carry interest, and agreement between the parties would have no bearing on it.

The apex court restored the judgment of the District Court in a case granting 18% interest from the date of the award to its realization. 

"We have held that as this is a case arising out of the Arbitration and Conciliation Act, 1996 by operation of Section 31(7)(b), the sum directed to be paid under the Arbitral Award shall carry interest," a bench of Justices P S Narasimha and Sandeep Mehta said.

The court pointed out that the clear position of law that granting post-award interest is not subject to the contract between the parties was recently affirmed in Morgan Securities & Credits (P) Ltd Vs Videocon Industries Ltd (2023).

A contract was executed on October 17, 1997 between the appellant contractor, R P Garg and the Telecom Department of Haryana, for trenching and laying of underground cables. Terms of the contract required the appellant to furnish a security of Rs 10 Lakhs. Disputes that arose with respect to non-payment of bills submitted by the appellant during execution of the contract were referred to Arbitrator appointed under Section 11 of the Act on October 24, 2000. 

The Arbitrator passed the Award on March 08, 2001. In the said Award, though the claim of the appellant was allowed, his plea for interest was denied on the ground that there was a specific clause in the Arbitration Agreement prohibiting it.

The Civil Judge, Senior Division by his order on October 10, 2002 dismissed the objection and affirmed the original award.

Aggrieved, the appellant filed an appeal. The District Judge allowed the appeal and by order on March 04, 2003 directed payment of post award interest at the rate of 18% on the Award amount. The appellant was also directed to approach the trial court for recovery of it. 

The Telecom Department, the respondent herein, filed a civil revision petition before the high court which was allowed. The high court looked into sub-clause (iv) of Clause 1 of the Contract entered between parties which provided for the scope of the grant of interest on certain payment. The sub clause stated that no interest would be payable on the earnest money, security deposit or any amount payable to the contractor.

The high court also referred to the decision of the top court in Jaiprakash Associates Ltd Vs Tehri Hydro Development Corporation (India) Ltd (2019) and came to the conclusion that the Supreme Court had laid down a precedent that interest could not be paid when a contractual clause specifically prohibited it. 

The top court, however, said, "We are of the opinion that the judgment of High Court is clearly erroneous. Firstly, the interest granted by the First Appellate Court only related to post award period, and therefore, for this period, the agreement between the parties has no bearing."

The court also pointed out Section 31(7)(b) which deals with the grant of interest for post award period i.e., from the date of the award till its realization. 

The statutory scheme relating to grant of interest provided in Section 31(7) creates a distinction between interest payable before and after the award. So far as the interest before the passing of the award is concerned, it is regulated by Section 31(7)(a) of the Act which provides that the grant of interest shall be subject to the agreement between the parties, the court said.

"So far as the entitlement of the post-award interest is concerned, sub-Section (b) of Section 31(7) provides that the sum directed to be paid by the Arbitral Tribunal shall carry interest. The rate of interest can be provided by the Arbitrator and in default the statutory prescription will apply. Clause (b) of Section 31(7) is therefore in contrast with clause (a) and is not subject to party autonomy," the bench said.

In other words, the bench explained that clause (b) does not give the parties the right to “contract out” interest for the post-award period. The expression ‘unless the award otherwise directs’ in Section 31(7)(b) relates to rate of interest and not entitlement of interest. The only distinction made by Section 31(7)(b) is that the rate of interest granted under the Award is to be given precedence over the statutorily prescribed rate, the court added. 

"The assumption of the High Court that payment of the interest for the post award period is subject to the contract is a clear error," the bench held.

Court declared that the high court, therefore, committed an error in relying on the decision in Jaiprakash case, which dealt with the issue of prohibition of pendente-lite interest. The decision would have no application to the facts of the present case where the claim related to post-award interest, it held.

Court accordingly allowed the appeal and set aside the high court's judgment of May 14, 2019.