Arbitrator’s Power to Grant Interest on Interest: A Desideratum Discord

By: Ayushi Dubey and Yash Jain (Institute of Law, Nirma University, Ahmedabad)


In the recent past, the question of granting interest on sum payable has garnered enormous consideration in the arbitration regime. In fact, the practice of granting interest has become so popular that the exigency to pay interest is acknowledged as an international legal norm. Apparently, this recent trend is in contrast to the former practice whence parties and tribunals did not place much emphasis on the concept of interest. The authors through this article endeavour to analyse and discuss the provisions and dictums appurtenant to the aforesaid controversial practice.

EXISTING FRAMEWORK

The Arbitration Act, 1940 had no explicit provision regarding the arbitrator’s power to grant interest. However, Section 29 of the erstwhile legislation provided a limited power to the courts to grant payment of money on the principal sum from the date of the decree until payment. Similarly, the Interest Act, 1978 and the Code of Civil Procedure, 1908 (“CPC”) also has provisions for such powers.

At present, an Arbitrator’s power to grant interest is enshrined under Section 31(7) of the Arbitration and Conciliation Act, 1996 (“the Act”). According to this provision, the arbitrator has the discretion to grant interest on the whole or any portion of the money at such rate as he/she deems it fair and such interest is granted for a period between the date on which the cause of action arose till the date of the award, which is commonly known as pendente lite interest.

Notably, the arbitrator also has the power to grant interest for the post-award period i.e., between the passing of the award till the enforcement of the same. Nonetheless, the labyrinthine interpretation of Section 31(7) (b) opened the Pandora’s Box as to whether the arbitral tribunal is vested with the power to award post-award interest on interest, a question which the authors will discuss throughout the article in detail.

GENESIS OF SECTION 31(7)

Initially, the power of an arbitrator to grant interest was considered to be on par with the powers vested with the courts and the same was governed by Section 34 of CPC. In fact, to this extent, the Apex Court had also observed that there is no reason to differentiate between the powers of the court and the arbitrator.

Regardless of the above, considering the complexity i.e., strenuous calculations and substantial sums involved in its application and the need for a more organised approach towards arbitration, called for the inclusion of Section 31(7). The 246th Law Commission, while discussing the power of an arbitrator to award compound interest, observed the then prevailing dichotomy where Section 29 of the Arbitration Act, 1940, read with Section 34 of CPC and Section 3 of Interest Act had explicitly barred the arbitrators from granting compound interest. Moreover, the courts interpreting Section 31(7) have held that awarding compound interest is a norm and not against public policy. Thus, the Law Commission recommended ending the controversy surrounding Section 31(7) by recommending to add Explanation 2 to the current sub-clause stating that “the expression ‘sum directed to be paid by an arbitral award’ includes the interest awarded in accordance with section 31(7)(a).” However, the said explanation was not added to Section 31(7) in the 2015 amendment to the Act. 

Also interestingly, the UNCITRAL Model Law does not contain any unequivocal arrangements or provisions on awarding compound interest. These standards like most other arbitral rules assume that arbitrators will decide the subject of interest by applying the applicable law.

POST-AWARD INTEREST ON INTEREST 

Section 31(7) of the Act lays down two stages at which interest can be granted by the arbitral tribunal. Firstly, under sub-clause (a), the arbitrator can grant interest for the period between the dates when the cause of action arose till the date of passing of the award; secondly, under sub-clause (b), for the period between after passing of the award till the date of payment. Pertinently, the position of law concerning Section 31(7)(a) is quite clear; however, a discord revolves around the arbitrator’s power to grant compound interest i.e., interest on interest under sub-clause (b) of Section 31(7). The ambiguity in the use of the word “sum” in Section 31(7)(b) gives rise to the moot point i.e., whether the arbitrator can grant interest only on the principal amount or sum includes both the principal amount and the interest granted by the arbitrator under Section 31(7)(a) of the Act. 

The issue regarding the arbitrator’s power to grant compound interest was raised before the Supreme Court in the case of State of Haryana & Ors v S.L. Arora & Co (“S.L. Arora”), wherein the Apex Court observed that Section 31(7) of the Act accord the arbitrator the discretion to grant both pre-award and post-award interest in the nature of simple interest only. The court added that the section does not allow the arbitrator to grant compound interest unless the agreement between the parties specifically mentions the same. The pre-award interest does not automatically become part of the principal amount for the purpose of granting post-award interest. 

However, the correctness of S.L. Arora was challenged before a three-judge bench of the Supreme Court in the case of Hyder Consulting (UK) Ltd v Governor, State of Orissa (“Hyder Consulting”). The court overruled the judgement in S.L. Arora and observed that the power of an arbitrator to award interest is equivalent to the power of court provided under Section 34 of CPC and thus there exists no difference between a sum with interest and a sum without interest. The court noted that once the final award has included interest in the sum then they cannot be seen independent of each other. Therefore, unless specifically barred by the contract between the parties, the arbitrator has the power to award interest on interest and for that purpose; a sum in Section 31(7) (a) includes pre-award interest. 

Of late, this issue yet again surfaced before the Supreme Court in the case of Munshi Ram & Associates v Union of India. The history of the case was such that the Delhi High Court had set aside the post-award interest granted by the arbitrator following the reasoning given in S.L. Arora. Understanding the anomaly, the Apex Court reversed the High Court’s order and ruled that the issue of post-award interest on interest has attained finality through its judgements in Hyder Consulting, thus expressly overruling S.L. Arora.

ARBITRATOR’S POWER TO GRANT INTEREST IN DIFFERENT JURISDICTIONS 

In international arbitration, arbitrators have broad authority and discretion in awarding interest. Though there is no uniform approach that is followed around the world. The prominent arbitral rules and tribunals adopt awarding both simple and compound interest. Under Section 49 of the English Arbitration Act, 1996, the parties are free to decide the powers of the tribunal and the tribunal can award simple or compound interest from any date and at any rate, it considers suitable. Moreover, Article 31(4) of the International Centre for Dispute Resolution, the global division of the American Arbitration Association, provides the tribunal to grant pre-award and post-award interest, simple or compound, as it considers proper, taking into account the contract and applicable laws. 

By contrast to the recognized jurisdictions, many nations follow the traditional method of allowing only simple interest. For example, Section 289 of the German Civil Code laid prohibition on awarding compound interest. Similarly, Switzerland forbids interest to be paid upon interest, even if agreed upon in the contract. The traditional approach of the tribunals to grant simple interest was because of a certain tendency that existed in international jurisdictions and also over a period of time the tribunals started granting simple interest as a custom. In a lot of cases, it has been observed that tribunals have not even cited the reasons to grant simple interest as it was so much in practice. Further, tribunals also did not grant compound interest to avoid the complexity of going against the norm or to indulge in expensive calculations. The Court in the case of Compania del Desarrollo de Santa Elena observed that awarding compound interest would result in an amount that would exceed even the principal sum. Thus, it became one of the biggest reasons that courts at that time were reluctant to award compound interest.

CONCLUSION 

A matured arbitration system is characterized by party autonomy. The traditional approach adopted by the arbitral tribunals in granting only simple interest at post-award is insufficient in the current era of arbitration. As per the data, arbitral tribunals have favoured compound interest in the last decade. The availability of scholarly writings proves that the practice of awarding only simple interest fails to achieve the goal of restoring the claimant to its pre-injury condition. If it would not have been the delay on the part of the respondent, the claimant could have either invested the said money or used it for other financial purposes. Thus, commercially, parking aside the funds in lieu of pending resolution and subsequently awarding only simple interest adversely affects the claimant’s business. Further, limiting the course to awarding only simple interest does not entirely reimburse the claimant, consequently, resulting in an ineffective dispute resolution process. Appositely, if the arbitral tribunal is divested of the power to grant post-award compound interest, the claimant, in that case, will have to approach the court, thereby, leading to a multiplicity of proceedings. Additionally, as observed by the tribunal in Kuwait v. American Independent Oil Co., when there is a significant difference between the amounts of simple and compound interest and awarding simple interest would therefore be a loss to the claimant. It is laudable that the Indian arbitration regime has through a catena of judgements accepted post-award interest on interest for the betterment of the party who has suffered losses during and even after the proceedings. Section 31(7) acts as a deterrent for the other party and pushes for timely payment to avoid further interest on the due amount. Moreover, avoiding compound interest for the pendente lite period is acceptable as the same is a penalty on the principal sum. However, the failure of the losing party to perform its obligations even after awarding interest shows its disregard and empowers the court to award interest on interest for the assistance of the party who has suffered losses due to untimely payment.


(Ayushi Dubey and Yash Jain are final year students at Institute of Law, Nirma University, Ahmedabad. They have specific interest in Dispute Resolution and Competition Law. They welcome any feedback at 17bal015@nirmauni.ac.in and 17bal121@nirmauni.ac.in respectively.)

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