Interest Liability under Arbitration and Conciliation Act, 1996

 Interest Liability under Arbitration and Conciliation Act, 1996

Introduction

A&C Act, 1996 contains 87 sections. S.37 is in part 1 of the Act. Arbitration and Conciliation Act, 1996 was amended in the year 2015 through Arbitration and Conciliation (Amendment) Act, 2015 which had added S.29A (1) to the principal Act which had fixed a time limit of 12 months for making the award; through S.16 of the said Amendment Act, 2015, S.31 (7) was amended as well.  S.29B was also added through the Arbitration and Conciliation (Amendment) Act, 2015 which provided for fast track procedure.

S.31 (7)(a) says "unless otherwise agreed by the parties, where and in so far as an arbitral award is for the payment of money, the arbitral tribunal may include in the sum for which the award is made 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 the award is made." 

S.31 (7)(b) says "a sum directed to be paid by an arbitral award shall, unless the award otherwise directs, carry interest at the rate of two per cent. higher than the current rate of interest prevalent on the date of award, from the date of award to the date of payment."

Interpretation of S.31 (7)

Hyder Consulting (UK) Ltd v. Governor, State of Orissa [2014] GCtR 6092 (SC) has dealt with the issue : "Whether grant of interest by the Arbitral Tribunal under Section 31(7) of the Arbitration and Conciliation Act, 1996 amounts to granting "interest on interest"? 

It was explained at page 76 that Section 31(7)(a) of the Act deals with grant of preaward interest while sub-clause (b) of Section 31(7) of the Act deals with grant of post-award interest. Preaward interest is to ensure that arbitral proceedings are concluded without unnecessary delay. Longer the proceedings, would be the period attracting interest. Similarly, post-award interest is to ensure speedy payment in compliance of the award. Pre-award interest is at the discretion of Arbitral Tribunal, while the post-award interest on the awarded sum is mandate of statute - the only difference being that of rate of interest to be awarded by the Arbitral Tribunal. In other words, if the Arbitral Tribunal has awarded post-award interest payable from the date of award to the date of payment at a particular rate in its discretion then it will prevail else the party will be entitled to claim postaward interest on the awarded sum at the statutory rate specified in clause (b) of Section 31(7) of the Act, i.e., 18%. Thus, there is a clear distinction in time period and the intended purpose of grant of interest. Section 31(7)(a) employs the words "...the arbitral tribunal may include in the sum for which the award is made interest...". The words "include in the sum" are of utmost importance. This would mean that pre-award interest is not independent of the "sum" awarded. If in case, the Arbitral Tribunal decides to award interest at the time of making the award, the interest component will not be awarded separately but it shall become part and parcel of the award. An award is thus made in respect of a "sum" which includes within the "sum" component of interest, if awarded. There may arise a situation where, the Arbitral Tribunal may not award any amount towards principal claim but award only "interest”. This award of interest would itself then become the "sum" for which an award is made under Section 31(7)(a) of the Act. Thus, in a pre-award stage, the legislation seeks to make no distinction between the sum award and the interest component in it.

"What carries under Section 31(7) (b) of the Act is the "sum directed to be paid by an arbitral award" and not any other amount much less by or under the name "interest". In such situation, it cannot be said that what is being granted under Section 31(7)(b) of the Act is "interest on interest"." Arbitral Tribunal is well empowered to grant interest even in the absence of clause in the contract for grant of interest.

Power of Tribunal under S.31 (7)

The issue related to S.31 (7) of the A&C Act, 1996 was also discussed in NATIONAL PROJECTS CONSTRUCTIONS CORPORATION LTD v Interstate Construction [2023] GCtR 2470 (Delhi). Hon'ble J. Yashwant Varma was part of the Bench and he authored the decision. Arbitral Tribunal had directed payment with 18% interest and matter went to Court. It was explained that "as is manifest from a conjoint reading of Clauses (a) and (b) of Section 31(7) of the Act, the AT now stands empowered to award interest at such rate as it may deem reasonable for the period between the date on which the cause of action arose upto the date when an Award ultimately comes to be rendered. In terms of Clause (b), the AT is additionally empowered to direct payment of interest for the period between the date of the Award till the amounts specified therein are paid." "Section 31(7) of the Act thus in unequivocal terms recognizes only two periods for which interest may be awarded. These have been spelt out to be the period falling between the date on which the cause of action arose till the Award is made and the second comprising of the period starting from the date of the Award till the actual payment of the sums that the AT may have found the respondent liable to pay. This thus constitutes a clear departure from the interest regime which prevailed under the Arbitration Act, 1940 and where three distinct periods- pre-reference/past period, pendente lite and future period were recognized to exist." 

Changed Regime from Arbitration Act, 1940

The shift from Arbitration Act, 1940 to Arbitration and Conciliation Act, 1996 was explained way back in the year 2009.  Sayeed Ahmed and Company v. State of UP [2009] GCtR 2523 (SC) has held that "the Arbitration Act, 1940 did not contain any specific provision relating to the power of the arbitrator to award interest. That led to considerable confusion about the power of arbitrators in regard of award of interest from the date of cause of action to date of award, that is, pre-reference period (from the date of cause of action up to the date of reference) and pendente lite (from the date of reference to the date of award)." Sayeed Ahmed (2009) clearly holds that the distinction between the pre-reference/past period and pendente-lite period has clearly vanished and is inapplicable to arbitrations governed by A&C Act, 1996.