1. Arbitration award dispute — Calculation of post-award interest — Whether interest is payable on the principal sum alone or includes pre-award interest under the Indian Arbitration Act, 1940. (Para 2 , 3 , 4 , 5 , 6 , 7 , 8 , 9 , 10 )
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2024 Supreme(SC) 653
SUPREME COURT OF INDIA
PAMIDIGHANTAM SRI NARASIMHA, PANKAJ MITHAL, JJ.
M/s D. Khosla and Company – Petitioner
Versus
The Union of India – Respondent
Special Leave Petition (Civil) No. 812 of 2014
Decided On : 07-08-2024
Important Points
Interest can only be awarded on the principal sum adjudged and not on interest accrued unless specifically provided in the award or contract.
Subject
Civil Law - Arbitration
Act Referred
Headnote
[INTEREST] - [ARBITRATION AND CIVIL PROCEDURE] - [Indian Arbitration Act, 1940 - Sections 14, 17, 29; Code of Civil Procedure - Section 34; Interest Act, 1978 - Section 3(3)] - [The court interpreted the provisions of the Indian Arbitration Act, 1940, and the Code of Civil Procedure regarding the award of interest. It emphasized that interest can only be awarded on the principal sum adjudged and not on interest accrued, unless specifically provided. The court concluded that the arbitrator's award did not grant compound interest or interest on interest, leading to the dismissal of the petitioner's claim for additional interest.]
Fact of the Case:
The petitioner entered into a contract with the Union of India, resulting in an arbitration award in 1997 that specified interest rates for pre-award and post-award periods. The petitioner was dissatisfied with the execution of the award, claiming that the post-award interest should also apply to the pre-award interest amount.
Finding of the Court:
The court upheld the decisions of the lower courts, which ruled that the arbitrator had only awarded simple interest and did not provide for interest on interest. The court found no basis in the award or the decree for the petitioner's claim for additional interest.
Issues: Whether the petitioner is entitled to claim 15% interest on the principal amount plus the 12% interest awarded for the pre-award period.
Ratio Decidendi: The court reiterated that interest can only be awarded on the principal sum as adjudged by the award, and not on any interest accrued unless explicitly stated in the award or contract. The provisions of the Indian Arbitration Act and the Code of Civil Procedure do not allow for the awarding of interest on interest.
Final Decision: The Special Leave Petition was dismissed, affirming the lower courts' decisions that denied the claim for additional interest.
Legal Category Hierarchy
Advocates appeared:
For the Petitioner(s): Mr. Sourabh Malhotra, Adv. Ms. Jyoti Mendiratta, AOR
For the Respondent(s): Ms. Aishwarya Bhati, ASG Mr. Akshaja Singh, Adv. Ms. Sthavi Asthana, Adv. Dr. N. Visakamurthy, AOR.
For the Petitioner(s): Mr. Sourabh Malhotra, Adv. Ms. Jyoti Mendiratta, AOR
For the Respondent(s): Ms. Aishwarya Bhati, ASG Mr. Akshaja Singh, Adv. Ms. Sthavi Asthana, Adv. Dr. N. Visakamurthy, AOR.
Table of Contents
2. Petitioner claims post-award interest applies to principal plus pre-award interest — Respondent contends compound interest requires specific statutory or contractual authorization or express award. (Para 11 , 12 )
3. Analysis of Section 29 of the Act, Section 34 CPC, and Section 3(3) of the Interest Act, 1978, confirming interest is generally payable only on the principal sum. (Para 13 , 14 , 15 , 16 , 17 , 19 , 21 , 22 , 25 , 26 , 27 )
4. Interest upon interest or compound interest cannot be granted unless specifically provided for under a statute or the terms and conditions of the contract. (Para 18 , 20 , 23 , 24 )
5. Special Leave Petition dismissed — Concurrent findings of the lower courts regarding the award of simple interest upheld. (Para 28 )
6. Can a court award interest upon interest (compound interest) in the absence of a specific agreement?
No. Ordinarily, courts are not entitled to award interest upon interest unless specifically provided under a statute or the terms and conditions of the contract. (Para 18 , 20 , 23 , 24 )
7. How does the phrase principal sum adjudged in Section 34 of the CPC affect the award of interest?
The phrase principal sum adjudged indicates that interest is payable only on the principal amount awarded and not on the interest component of the award. (Para 17 , 21 )
8. What is the distinction between the term sum under the 1996 Act and principal sum adjudged under the CPC?
The term sum under Section 31(7) of the Arbitration and Conciliation Act, 1996, refers to the aggregate amount including pre-award interest, whereas principal sum adjudged under Section 34 CPC refers only to the amount awarded. (Para 21 , 22 )
JUDGMENT :
PANKAJ MITHAL, J.
1. Heard Smt. Jyoti Mendiratta, learned counsel for the petitioner and Smt. Aishwarya Bhati, learned A.S.G. for the Union of India.
2. In connection with a contract of 1984-85 between the petitioner and the respondent, an award came to be passed by the Arbitrator on 17.09.1997 under the Indian Arbitration Act, 1940.1 [hereinafter referred to as ‘the Act’] It was made the rule of the court under Section 14 read with Section 17 of the Act and a decree was accordingly drawn.
3. The award vide its paragraph 12 provided for the interest on the amount awarded. The interest was awarded for two periods viz. (i) from the date of completion of the work up to the date of the award @ 12% per annum (simple interest) and (ii) @ 15% per annum from the date of the award till the date of its payment or the date of the court decree, whichever is earlier.
4. The portion of the award which is relevant for our purpose concerning interest is reproduced herein-below:
“12. Interest: The Union of India shall pay to M/s D. Khosla and Company simple interest @ 12% per annum on the amount awarded from the date of completion of work upto the date of award and 15% from the date of award to the date of its payment or date of court decree whichever is earlier.”
(Emphasis supplied)
5. The decree of the court that was drawn according to the award reads as under:
“(02) Decree for Rs. 21,56,745 (Rupees Twenty One Lac Fifty Six thousands seven hundred and forty five) in terms of Arbitration Award to be drawn on payment of the Court Fees by the Opponent no. 1. Opponent no. 2-Union of India is hereby ordered to pay interest @ 12% p.a. on the awarded amount up to the date of the award and interest @ 15% p.a. from the date of award till the realization of the decreetal amount as per the terms of award.”
(Emphasis supplied)
6. A simple reading of the aforesaid decree reveals that interest has been awarded in two parts on the amount of Rs. 21,56,745/- i.e. (i) 12% per annum on the awarded amount up to the date of award and (ii) 15% per annum from the date of award till the realization of the decretal amount.
7. It appears that the petitioner was paid the principal amount of compensation awarded and interest of 12% and 15% for the two periods i.e. pre-award and post-award on the principal amount awarded. However, petitioner was not satisfied and he moved execution for the realization of certain amount as shortfall of the interest. The petitioner contended that insofar as 15% interest is concerned, it is payable on the principal amount of compensation awarded plus 12% simple interest on the said amount. In other words, petitioner sought to include 12% interest in the principal amount of compensation awarded for the purposes of claiming 15% simple interest for the post-award period.
8. The Principal Senior Civil Judge, Khambhalia, in Execution Petition No. 9 of 2006 preferred by the petitioner, refused to accept the contention of the petitioner so as to award 15% interest on the principal amount of compensation awarded plus 12% simple interest thereof. In a way, he declined to grant interest upon interest for the reason that the Arbitrator has not awarded it in so many words.
9. In the petition preferred by the petitioner before the High Court, the same view was adopted by the High Court vide its judgment and order dated 06.09.2013. It held that as the Arbitrator had used word ‘simple interest’ and had not specifically awarded compound interest, therefore, the petitioner is only entitled to simple interest @ 12% per annum on the amount awarded as compensation for the pre-award period and simple interest @ 15% per annum for the post-award period only on the amount of compensation awarded.
10. Aggrieved by the judgment and order of the High Court dated 06.09.2013 and that of the Principal Senior Civil Judge, Khambhalia, dated 29.08.2008, the petitioner has preferred this Special Leave Petition.
11. Ms. Mendiratta, learned counsel for the petitioner argued that
