1. Arbitration award modification — Dispute over post-award interest on the total sum and the applicable rate of interest under the Arbitration and Conciliation Act, 1996. (Para 2 , 3 )
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2022 Supreme(SC) 1410
SUPREME COURT OF INDIA
M.R. Shah, B.V. Nagarathna, JJ.
Indian Oil Corpn. Limited – Appellant
Versus
U. B. Engineering Limited & Anr. – Respondents
Civil Appeal Nos. 2921-2922 of 2022 (Arising Out of SLP (C) Nos. 24912-24913 of 2013)
Decided On : 12-04-2022
Important Points
The main legal point established is that interest on the interest component and the interest rate should be determined in accordance with the statutory provisions of the Arbitration and Conciliation Act, 1996.
Subject
Arbitration Law - Interest on Interest
Act Referred
Headnote
Interest on Interest - Arbitration - Section 31(7)(a), Section 31(7)(b) of the Arbitration and Conciliation Act, 1996 - [SUMMARY OF ACT SECTIONS]
Fact of the Case:
The appellant, original Claimant, submitted a claim and counter-claim was submitted on behalf of the respondent. The learned Arbitrator awarded a sum towards the principal claim and interest. The High Court modified the award by reducing the interest rate and denying interest on the interest component. The appellant appealed against this decision.
Finding of the Court:
The court held that the interest on the interest component from the date of award till realization should be awarded and the interest rate should be 18% as per the statutory provision.
Issues: The issues involved were the entitlement to interest on the interest component and the reduction of interest rate from 18% to 9% by the High Court.
Ratio Decidendi: The court applied the interpretation of Section 31(7)(a) and Section 31(7)(b) of the Arbitration and Conciliation Act, 1996, as established in previous decisions, to restore the award passed by the Arbitrator.
Final Decision: The court allowed the appeals, quashed the High Court's decision, and restored the award passed by the Arbitrator. The appellant was directed to submit the claim before the liquidator for payment as per the Insolvency and Bankruptcy Code (IBC).
Legal Category Hierarchy
Advocates appeared:
Mr. V.N. Koura, Advocate, Mrs. Paramjeet Benipal, Advocate, Mr. Avneesh Arputham, Advocate, for M/s. Arputham Aruna and Co, Advocate, For the Appellant / Mr. Dhaval Deshpande, Advocate, Mr. Amir Arsiwala, Advocate, Mr. Gaurav Kejriwal, Advocate, For the Respondent.
Mr. V.N. Koura, Advocate, Mrs. Paramjeet Benipal, Advocate, Mr. Avneesh Arputham, Advocate, for M/s. Arputham Aruna and Co, Advocate, For the Appellant / Mr. Dhaval Deshpande, Advocate, Mr. Amir Arsiwala, Advocate, Mr. Gaurav Kejriwal, Advocate, For the Respondent.
Table of Contents
2. Whether post-award interest is payable on the combined principal and pre-award interest and whether the statutory interest rate of 18% p.a. can be judicially reduced. (Para 4 )
3. Pre-award interest merges into the total sum awarded; post-award interest is calculated on this total sum, and statutory interest rates cannot be reduced by judicial discretion. (Para 6 , 7 , 8 , 10 , 11 )
4. Post-award interest under Section 31(7)(b) applies to the total sum including pre-award interest, and the statutory rate of 18% p.a. must be maintained unless otherwise directed. (Para 6 , 8 , 10 )
5. Appeals allowed — High Court order quashed — Arbitrator's award regarding interest rate and interest on interest restored — Claims to be processed under IBC. (Para 12 , 13 , 14 )
6. Does granting post-award interest on a sum that includes pre-award interest constitute prohibited interest on interest?
No. Pre-award interest is included in the total sum for which the award is made under Section 31(7)(a). Post-award interest under Section 31(7)(b) is then granted on this total sum, meaning the interest component loses its separate character and becomes part of the principal sum. (Para 6 )
7. Can a court reduce the 18% p.a. post-award interest rate specified in Section 31(7)(b) of the Arbitration and Conciliation Act, 1996?
No. If the arbitrator has awarded the statutory rate of 18% p.a., the court cannot reduce it, as judges cannot legislate or amend the law by judicial decisions and must maintain judicial discipline. (Para 8 , 10 )
8. How is an arbitral award realized when the respondent is undergoing liquidation under the Insolvency and Bankruptcy Code (IBC)?
The claimant must submit their claim before the appointed liquidator, and the payment will be dealt with in accordance with the provisions of the IBC, specifically Section 53. (Para 14 )
ORDER
1. Leave granted.
2. Feeling aggrieved and dissatisfied with the impugned judgment and order passed by the High Court of Punjab and Haryana at Chandigarh in FAO Nos. 2345 and 4000 of 2006 by which the High Court has modified the award passed by the sole Arbitrator to the extent awarding the interest @ 18% post-Award only upon the principal amount awarded and even reducing the rate of interest from 18% p.a. from 9% p.a., the original Claimant-IOC has preferred the present Appeals.
3. The issue involved in the present Appeals lies in a very narrow compass. The dispute was referred to the sole Arbitrator. The appellant herein-original Claimant submitted the claim and even the counter-claim was submitted on behalf of the respondent. Ultimately, the learned Arbitrator awarded a sum of Rs.3,08,32,448.30 towards the principal claim and Rs. 2,27,58,137.08 towards the interest. The learned Arbitrator awarded the interest from the date of the claim till the award @ 18% p.a. Thus, the learned Arbitrator awarded a total sum of Rs.5,35,91,262.00. In appeal by the respondent, the High Court has observed and held that the appellant-original Claimant shall be entitled to the interest only upon the principal amount so awarded and shall not be entitled to the interest on interest that is interest @ 18% p.a. on Rs. 2,27,58,137.08 (the interest component). The High Court, by the impugned order, has also reduced the rate of interest from 18% p. a. to 9% p. a. even with respect to the principal amount so awarded by the Arbitral Tribunal.
4. Feeling aggrieved and dissatisfied with the impugned judgment and order passed by the High Court in not awarding the interest @ 18% p.a. on the interest component of Rs. 2,27,58,137.08 from the date of award till realization and even awarding the interest @ 9% upon the principal amount awarded, the original Claimant - IOC has preferred the present Appeals.
5. We have heard Mr. V.N. Koura, learned counsel appearing for the appellant-IOC and Mr. Dhaval Deshpande, learned counsel appearing for the respondent-liquidator.
6. The issue whether the learned Arbitrator could have awarded the interest on the interest of Rs. 2,27,58,137.08 from the date of award till realization and whether the same can be said to be interest on interest is now not res integra in view of the decision of this Court in the case of Hyder Consulting (UK) Limited vs. Governor, State of Orissa, (2015) 2 SCC 189. In paras 27-32, it is observed and held as under:-
"27. 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.
28. Therefore, for the purposes of an award, there is no distinction between a "sum" with interest, and a "sum" without interest. Once the interest is "included in the sum" for which the award is made, the original sum and the interest component cannot be segregated and be seen independent of each other. The interest component then loses its character of an "interest" and takes the colour of "sum" for which the award is made.
29. 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 awarded and the interest component in it.
30. Therefore, I am inclined to hold that the amount awarded under Section 31(7)(a) of the Act, whether with interest or
