LAW ON GRANTING OF PRE-AWARD INTEREST BY ARBITRATOR

 

LAW ON granting OF PRE-AWARD interest by arbitrator

 

The arbitrator is a creature of the agreement and the power of the arbitrator in a dispute emanates from the terms of the agreement and what is prohibited in the agreement, generally speaking cannot be provided by the Arbitrator. However, if there has not been specific prohibition, how the issues should be dealt with is a moot point and therefore law courts have dealt with the matter and the issue is now well settled. The present write up in the aforesaid canvas is relating to grant of interest. Whether Arbitrator can grant interest, if not specified in the agreement and if so, whether pre-award or post award interest can be granted by the Arbitrator?  

To reiterate the power of the Arbitrator to award pre-reference and pendente lite interest is not restricted when the agreement is silent, on whether interest can be awarded7 or does not contain a specific term that prohibits the same. The section 31(7) of the Arbitration & Conciliation Act 1996 deals with grant of interest. The relevant provision is extracted hereunder for ready reference.

 

“31. Form and contents of arbitral award.—

(7) (a) 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.

(b) 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.

Explanation.—The expression “current rate of interest” shall have the same meaning as assigned to it under clause (b) of section 2 of the Interest Act, 1978 (14 of 1978).”

 

 

1940 Act and 1996 Act: Comparison

 

 

The wording of Section 31(7) (a) marks a departure from Arbitration Act, 1940 in two ways: first, it does not make an explicit distinction between pre-reference and pendente lite interest, as both of them are provided for under this subsection;

second, it sanctifies party autonomy and restricts the power to grant pre-reference and pendente lite interest, the moment, the agreement bars payment of interest, even if it is not a specific bar against the Arbitrator.(Ref: Sayeed Ahmed and Company v. State of Uttar Pradesh, (2009) 12 SCC 26).

The power of the Arbitrator to grant pre-reference interest, pendente lite interest, and post-award interest, under Section 31(7) of the Act is fairly well-settled. The judicial determinations also highlight the difference in the position of law under the Arbitration Act, 1940. The following propositions can be summarized from a survey of these cases:

 

(i)   Under the Arbitration Act, 1940, there was no specific provision that empowered an Arbitrator to grant interest. However, through judicial pronouncements, this Court has affirmed the power of the Arbitrator to grant pre-reference, pendente lite, and post-award interest on the rationale that a person who has been deprived of the use of money to which he is legitimately entitled has a right to be compensated for the same.

 

(ii) When the agreement does not prohibit the grant of interest and a party claims interest, it is presumed that interest is an implied term of the agreement, and therefore, the Arbitrator has the power to decide the same.

(iii)      The Supreme Court has consistently  taken  strict view under the 1940 Act, whereby strict construction of contractual clauses that prohibit the grant of interest were held to be the norm and it is construed that that the Arbitrator has the power to award interest, unless, there is an express, specific provision that excludes the jurisdiction of the Arbitrator from awarding interest for the dispute in question (ref: Board of Trustees for the Port of Calcutta v. Engineers-de-Space-Age, (1996) 1 SCC 516 . State of U.P. v. Harish Chandra and Co., (1999) 1 SCC 63

 

Under the 1996 Act, the power of the Arbitrator to grant interest is governed by the statutory provision in Section 31(7). This provision has two parts. Under sub-section (a), the Arbitrator can award interest for the period between the dates of cause of action to the date of the award, unless otherwise agreed by the parties. Sub-section (b) provides that unless the award directs otherwise, the sum directed to be paid by an arbitral award shall carry interest at the rate of 2% higher than the current rate of interest, from the date of the award to the date of payment.

The power of the Arbitrator to award pre-reference and pendente lite interest is not restricted, when, the agreement is silent on whether interest can be awarded Jaiprakash Associates Limited v. Tehri Hydro Development Corporation India Limited, (2019) 17 SCC 786, para 13.2.

In Central Bank of India v. Ravindra (2002) 1 SCC 367, para 39 it is held that While pendente lite interest is a matter of procedural law, pre reference interest is governed by substantive law. Therefore, the grant of pre-reference interest cannot be sourced solely in Section 31(7)(a) (which is a procedural law), but must be based on an agreement between the parties (express or implied), statutory provision (such as Section 3 of the Interest Act, 1978), or proof of mercantile usage.

The basic law is that contract clauses in arbitral proceedings shall speak for themselves. The Arbitrator should examine the contract in totality. It is the duty of every Arbitral Tribunal and Court alike and without exception, for contract is the foundation of the legal relationship. Thus, what is prohibited in the contract cannot be awarded by the arbitrator. If the Arbitrator did not refer to the contractual provisions and publish award contrary to the provisions of contract, and, if the District Court dismissed the objections under Section 34 with a notion that the objection u/s 34 is not an appellate remedy , rather, the periphery of objection is circumscribed, the same shall be the contrary to the terms of contract and prohibition contained therein.

When the agreement does not prohibit the grant of interest and a party claims interest, it is presumed that interest is an implied term of the agreement, and therefore, the Arbitrator has the power to decide the same.

It is held in Secretary, Irrigation Department Government of Orissa Vs. G.C. Ray (1992) 1 SCC 508 that there is no prohibition in the contract for payment of interest on blocked capital. The claimant is otherwise entitled to receive payment on account of interest on blocked capital.

The power of the Arbitrator to grant pre-reference interest, pendente lite interest, and post-award interest under Section 31(7) of the Act is fairly well-settled. The judicial determinations also highlight the difference in the position of law under the Arbitration Act, 1940.

The Supreme Court in the most recent judgment captioned as PAM DEVELOPMENTS PRIVATE LIMITED Vs THE STATE OF WEST BENGAL & ANR bearing Civil Appeal Nos. 9781-9782 of 2024 @ SLP (C) Nos. 8128 -8129 of 2021 has held that the power of the Arbitrator to grant pre-reference interest, pendente lite interest, and post-award interest under Section 31(7) of the Act is fairly well-settled. The judicial determinations also highlight the difference in the position of law under the Arbitration Act, 1940. The following propositions can be summarised from a survey of these cases:

I.      Under the Arbitration Act, 1940, there was no specific provision that empowered an Arbitrator to grant interest. However, through judicial pronouncements, this Court has affirmed the power of the Arbitrator to grant pre-reference, pendente lite, and post-award interest on the rationale that a person who has been deprived of the use of money to which he is legitimately entitled has a right to be compensated for the same. Secretary, Irrigation Department, Government of Orissa v. G.C. Roy, (1992) 1 SCC 508, para 43(i)  When the agreement does not prohibit the grant of interest and a party claims interest, it is presumed that interest is an implied term of the agreement, and therefore, the Arbitrator has the power to decide the same.

II.     Under the 1940 Act, this Court has adopted a strict construction of contractual clauses that prohibit the grant of interest and has held that the Arbitrator has the power to award interest, unless, there is an express, specific provision that excludes the jurisdiction of the Arbitrator4 from awarding interest for the dispute in question (Ref: State of U.P. v. Harish Chandra and Co., (1999) 1 SCC 63).

III.     Under the 1996 Act, the power of the Arbitrator to grant interest is governed by the statutory provision in Section 31(7). This provision has two parts. Under sub-section (a), the Arbitrator can award interest for the period between the date of cause of action to the date of the award, unless otherwise the award directs otherwise, the sum directed to be paid by an arbitral award shall carry interest at the rate of 2% higher than the current rate of interest, from the date of the award to the date of payment.

IV.    The wording of Section 31(7)(a) marks a departure from Arbitration Act, 1940 in two ways: first, it does not make an explicit distinction between pre-reference and pendente lite interest as both of them are provided for under this subsection; second, it sanctifies party autonomy and restricts the power to grant pre-reference and pendente lite interest the moment the agreement bars payment of interest, even if it is not a specific bar against the Arbitrator.

V.      The power of the Arbitrator to award pre-reference and pendente lite interest is not restricted when the agreement is silent on whether interest can be awarded7 or does not contain a specific term that prohibits the same8.

VI.    While pendente lite interest is a matter of procedural law, pre reference interest is governed by substantive law.9 Therefore, the grant of pre-reference interest cannot be sourced solely in Section 31(7)(a) (which is a procedural law), but must be based on an agreement between the parties (express or implied), statutory provision (such as Section 3 of the Interest Act, 1978), or proof of mercantile usage10.

Thus, it is no longer ambiguous that the arbitrator shall be empowered to grant interest as per the terms of the agreement and if there is specific embargo or prohibition, then, no interest can be granted. Yet again, there may be instances, where there may not be prohibition in granting interest in the agreement, but there may not be any speci9ifc mention of that  and I such a situation, the arbitrator can grant interest and the judicial precedents discussed above are a reflection on that.

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                                  Anil K Khaware

Founder & Senior Associate

Societylawandjustice.com