Case Note & Summary
The dispute arose from a construction contract between M/s. Interstate Construction (appellant) and National Projects Construction Corporation Ltd. (respondent) for work at the Ramagundam Super Thermal Power Project. The appellant completed the work in 1987, but the respondent withheld certain sums. The appellant invoked arbitration in 1993, leading to a protracted arbitration process with multiple arbitrator changes. The final arbitral tribunal, chaired by former Judge R.C. Jain, passed an award on 28.10.2020, allowing various claims and awarding interest. The contentious part was paragraph 58(b), where the tribunal awarded pendente lite interest at 12% per annum on the total amount comprising principal plus pre-reference/past period interest (i.e., interest on interest). The respondent challenged the award under Section 34 of the Arbitration and Conciliation Act, 1996. The Single Judge partly allowed the petition, reducing future interest to 9% but upholding the rest. The respondent appealed under Section 37, and the Division Bench set aside paragraph 58(b), holding that interest cannot be awarded on interest. The appellant appealed to the Supreme Court. The Supreme Court allowed the appeal, holding that Section 31(7)(a) of the Act permits the arbitral tribunal to award interest on the sum awarded, which includes interest accrued up to the date of the award. The Court clarified that the phrase 'sum awarded' is not limited to principal but includes interest, and the tribunal has discretion to award interest on the aggregate amount. The Court also held that the award does not violate public policy, as the concept of public policy under Section 34 is narrow and does not include mere errors of law. The Supreme Court set aside the Division Bench's order and restored the award's directions on interest.
Headnote
A) Arbitration Law - Interest - Section 31(7)(a) Arbitration and Conciliation Act, 1996 - Compound Interest - The arbitral tribunal awarded pendente lite interest at 12% per annum on the total amount comprising principal plus pre-reference/past period interest. The Division Bench of the High Court set aside this direction, holding that interest cannot be awarded on interest. The Supreme Court reversed, holding that Section 31(7)(a) does not prohibit awarding interest on the aggregate amount, including accrued interest, unless the contract bars it. The Court held that the tribunal's discretion to award interest on the principal sum awarded includes the power to award interest on interest, as the phrase 'sum awarded' encompasses the principal and any interest accrued up to the date of the award. (Paras 23-30) B) Arbitration Law - Public Policy - Section 34(2)(b)(ii) Arbitration and Conciliation Act, 1996 - Interest on Interest - The High Court had set aside the award on the ground that awarding interest on interest was contrary to the public policy of India. The Supreme Court held that the concept of public policy under Section 34 is narrow and does not include mere errors of law. Since Section 31(7)(a) permits the tribunal to award interest on the sum awarded, which includes interest, the award does not violate the fundamental policy of Indian law. (Paras 31-35) C) Arbitration Law - Appeal under Section 37 - Scope - Section 37 Arbitration and Conciliation Act, 1996 - The Division Bench in appeal under Section 37 set aside the Single Judge's order which had upheld the award on interest. The Supreme Court held that the appellate court under Section 37 has limited jurisdiction and cannot reappreciate evidence or interfere with the tribunal's discretion unless the award is patently illegal or perverse. The Division Bench erred in interfering with the tribunal's discretionary power to award interest on interest. (Paras 36-40)
Issue of Consideration
Whether an arbitral tribunal can award interest on the aggregate amount of principal and pre-reference/past period interest (i.e., compound interest) during the pendente lite period under Section 31(7)(a) of the Arbitration and Conciliation Act, 1996, and whether such award is contrary to the public policy of India.
Final Decision
The Supreme Court allowed the appeal, set aside the Division Bench's judgment dated 01.08.2023, and restored the directions contained in paragraph 58(b) of the arbitral award dated 28.10.2020. The Court held that the arbitral tribunal's award of interest on the aggregate amount (principal plus pre-reference interest) during the pendente lite period is permissible under Section 31(7)(a) of the Arbitration and Conciliation Act, 1996, and does not violate public policy.
Law Points
- Arbitration
- Interest
- Compound Interest
- Section 31(7)(a) Arbitration and Conciliation Act
- 1996
- Pendente Lite Interest
- Pre-reference Interest
- Future Interest
- Public Policy
- Section 34 Arbitration and Conciliation Act
- Section 37 Arbitration and Conciliation Act
