1. Dispute over non-payment of bills under a contract — Arbitral award granted principal sum but denied interest based on a contractual prohibition clause. (Para 3 , 4 )
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2024 Supreme(SC) 838
SUPREME COURT OF INDIA
PAMIDIGHANTAM SRI NARASIMHA, SANDEEP MEHTA, JJ.
R.P. Garg – Appellant
Versus
The Chief General Manager, Telecom Department & Ors. – Respondent
Civil Appeal No. 10472 of 2024 (Arising out of SLP (C) No. 2792 of 2020)
Decided on : 10-09-2024
Important Points
IMPORTANT POINT
Post award interest – Granting post-award interest is not subject to contract between parties – Rate of interest can be provided by Arbitrator and in default statutory prescription will apply.
Post award interest – Granting post-award interest is not subject to contract between parties – Rate of interest can be provided by Arbitrator and in default statutory prescription will apply.
Subject
Arbitration - Post-award Interest
Act Referred
Headnote
Arbitration and Conciliation Act, 1996 – Section 31(7) – Post award interest – Denial of – Statutory scheme relating to grant of interest provided in Section 31(7) creates distinction between interest payable before and after award – Granting post-award interest is not subject to contract between parties – Rate of interest can be provided by Arbitrator and in default statutory prescription will apply – Judgment of High Court in Civil Revision set-aside and decision of First Appellate Court granting interest @ 18% p.a. restored. (Paras 9, 11, 12 and 14)
Facts of the case:
Short question is whether appellant is entitled to post award interest on sum awarded by Arbitrator. Arbitrator denied payment of such interest under misplaced impression that contract between parties prohibited it.
Findings of Court:
Assumption of High Court that payment of interest for post award period is subject to contract is a clear error.
Result : Appeal allowed.
Judgement Key Points
Key Points: - Post-award interest shall be payable on sums directed by an arbitral award; rate can be provided by the Arbitrator and in default statutory prescription will apply. (!) - Post-award interest is not subject to contract between the parties; a contractual prohibition does not bar post-award interest. (!) (!) - Section 31(7)(a) governs pre-award interest, which is subject to the arbitration agreement unless otherwise agreed by the parties. (!) (!) - Section 31(7)(b) provides post-award interest on sums directed to be paid, with the rate determined by the arbitrator or by statutory prescription if not specified; it is not contractually overridable. (!) (!) - The award in question should carry post-award interest from the date of the award to realization, at the rate determined (default 18% per the appellate decision). (!) (!) - High Court’s interpretation that contract prohibition defeats post-award interest is erroneous; post-award interest depends on statutory framework, not contract. (!) (!) - The decision restores the appellate court’s grant of 18% post-award interest and reverses the High Court’s revision. (!) - The parties shall bear their own costs. (!)
What is the entitlement to post-award interest under Section 31(7) of the Arbitration and Conciliation Act?
What is the effect of contractual clauses on post-award interest versus statutory entitlement under Section 31(7)?
What is the correct interpretation of Section 31(7)(a) and Section 31(7)(b) regarding pre-award and post-award interest?
Legal Category Hierarchy
Advocates appeared:
For the Petitioner(s): Mr. Parikshit Mahipal, Adv. Mr. Vaibhav Kumar Garg, Adv. Ms. Savita Garg, Adv. Ms. Shivani Mahipal, Adv. Ms. Bushra Parveen, AOR
For the Respondent(s): Mr. Pradeep Kumar Mathur, AOR Chiranjeev Johri, Adv. Mr. M.K. Tiwari, Adv.
For the Petitioner(s): Mr. Parikshit Mahipal, Adv. Mr. Vaibhav Kumar Garg, Adv. Ms. Savita Garg, Adv. Ms. Shivani Mahipal, Adv. Ms. Bushra Parveen, AOR
For the Respondent(s): Mr. Pradeep Kumar Mathur, AOR Chiranjeev Johri, Adv. Mr. M.K. Tiwari, Adv.
Table of Contents
2. Whether a contractual clause prohibiting the payment of interest precludes the grant of post-award interest under the Arbitration and Conciliation Act, 1996. (Para 2 , 7 , 8 )
3. Section 31(7) distinguishes between pre-award interest, which is subject to party agreement, and post-award interest, which is a statutory entitlement not subject to contractual prohibition. (Para 9 , 10 , 11 )
4. Post-award interest under Section 31(7)(b) of the Arbitration and Conciliation Act, 1996 is a statutory right that parties cannot contractually exclude. (Para 11 , 12 )
5. Appeal allowed — High Court order set aside — District Court order granting post-award interest restored. (Para 14 )
6. What is the distinction between pre-award and post-award interest under Section 31(7) of the Arbitration and Conciliation Act, 1996?
Pre-award interest under Section 31(7)(a) is subject to the agreement between the parties. In contrast, post-award interest under Section 31(7)(b) is a statutory entitlement from the date of the award until realization and is not subject to party autonomy. (Para 9 , 10 , 11 )
7. Can parties contractually exclude the payment of post-award interest in an arbitration agreement?
No. Parties cannot contract out of post-award interest. The phrase unless the award otherwise directs in Section 31(7)(b) relates only to the rate of interest and not to the entitlement of interest itself. (Para 11 , 12 )
8. What is the applicable rate of post-award interest if the arbitral award is silent on the matter?
If the award does not specify a rate, the statutory prescription applies, which is a rate two per cent higher than the current rate of interest prevalent on the date of the award. (Para 10 , 11 , 12 )
JUDGMENT :
PAMIDIGHANTAM SRI NARASIMHA, J.
1. Leave granted.
2. The short question before us is whether the appellant is entitled to post award interest on the sum awarded by the Arbitrator. The Arbitrator denied payment of such interest under a misplaced impression that the contract between the parties prohibited it. The executing Court1[Order in M.A No. 19 of 2001 dated 10.10.2002.] affirmed the finding of the Arbitrator and rejected the prayer. However, allowing the appeal, the District Court2[Order passed by the District Judge in Civil Appeal no.86 of 11.11.2002 dated 04.03.2003] held that the appellant will be entitled to post award interest. By the order impugned before us, the High Court3[Order dated 14.05.2019 passed by the High Court of Punjab and Haryana in Civil Revision No. 2561 of 2003] allowed the revision and set aside the District Court order while holding that the contract between the parties did not permit grant of post award interest.
2.1 For the reasons to follow, while allowing the appeal we have held that as this is a case arising out of the Arbitration and Conciliation Act, 19964[Hereinafter referred to as ‘the Act’], by operation of Section 31(7)(b), the sum directed to be paid under the Arbitral Award shall carry interest. This is a first principle. A sum directed to be paid by an Arbitral Award must carry interest. In this view of the matter, we have restored the judgment of the District Court granting 18% interest from the date of the award to its realization. The short facts are as under:
3. A contract was executed on 17.10.1997 between the appellant contractor, and the Telecom Department of Haryana, Respondents 1 and 2 herein, for trenching and laying of underground cables. Terms of the contract required the appellant to furnish a security of Rs. 10 Lakhs. Disputes that arose with respect to non-payment of bills submitted by the appellant during execution of the contract were referred to Arbitrator appointed under Section 11 of the Act on 24.10.2000.
4. The Arbitrator passed the Award on 08.03.2001. In the said Award, though the claim of the appellant was allowed, his plea for interest was denied on the ground that there is a specific clause in the Arbitration Agreement prohibiting the same.
5. During execution of the Award, the appellant claimed payment of post award interest on the Award by raising a specific objection to that effect. However, the learned Civil Judge, Senior Division vide his order dated 10.10.2002 dismissed the objection and affirmed the original award.
6. Aggrieved, the appellant filed an appeal. The District Judge allowed the appeal and by Order dated 04.03.2003 directed payment of post award interest at the rate of 18% on the Award amount. The appellant was also directed to approach the trial court for recovery of the same.
7. Being aggrieved, the Telecom Department, the respondent herein, filed a Civil Revision Petition before the High Court which was allowed by the High Court by the order impugned before us. The High Court looked into sub-clause (iv) of Clause 1 of the Contract entered between parties which provides for the scope of the grant of interest on certain payment. The sub clause is as under:-
“No interest will be payable on the earnest money or security deposit amount or any amount payable to the contractor under the contract.”
8. Assuming that the above referred clause of interest is an agreement between the parties prohibiting the grant of interest, the High Court proceeded to allow the Revision and set aside the grant of interest. The High court referred to the decision of this Court in Jaiprakash Associates Ltd. v. Tehri Hydro Development Corporation (India) Ltd., (2019) 17 SCC 786. and came to the conclusion that the Supreme Court has laid down a precedent that interest cannot be paid when a contractual clause specifically prohibits it.
9. We are of the opinion that the judgment of High Court is clearly erroneous. Firstly, the interest granted by the First Appellate Cour
