Supreme Court Upholds Arbitrator's Award of Interest on Interest

The Supreme Court of India has delivered a significant ruling on the issue of interest on interest in arbitration awards, overturning a High Court decision that reduced the interest awarded by a sole arbitrator to Indian Oil Corporation (IOC). The case, involving FAO Nos. 2345 and 4000 of 2006, clarified the interpretation of Section 31(7) of the Arbitration and Conciliation Act, 1996.

Case Background

Indian Oil Corporation (IOC) had initiated arbitration proceedings, resulting in an award of Rs. 3,08,32,448.30 as principal and Rs. 2,27,58,137.08 as interest at 18% p.a. The High Court of Punjab and Haryana subsequently modified the award, reducing the interest rate to 9% and disallowing interest on the interest component. Aggrieved by this decision, IOC appealed to the Supreme Court.

The Supreme Court's Decision

The Supreme Court, in its judgment, addressed two key issues: the legality of awarding interest on interest and the appropriateness of reducing the interest rate from 18% to 9%.

Interest on Interest

The Court relied on its previous decision in Hyder Consulting (UK) Limited vs. Governor, State of Orissa , (2015) 2 SCC 189. Quoting paragraphs 27-32 of that judgment, the Supreme Court emphasized that Section 31(7)(a) of the Arbitration and Conciliation Act allows the Arbitral Tribunal to include interest as part of the "sum" awarded. Once included, the interest component becomes indistinguishable from the principal, and the concept of "interest on interest" does not apply in the context of pre-award interest. Therefore, the High Court's decision to disallow interest on the interest component was deemed unsustainable.

The court stated: "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."

Interest Rate

Regarding the reduction of the interest rate from 18% to 9%, the Supreme Court cited its ruling in Bharat Heavy Electricals Limited vs. Globe Hi-fabs Limited (2015) 5 SCC 718. The Court highlighted that Section 31(7)(b) mandates an interest rate of 18% p.a. post-award unless the award specifies otherwise. Since the arbitrator had awarded 18% interest, the High Court's reduction was deemed an impermissible amendment of the law.

The Court forcefully asserted: "Judges cannot legislate or amend the law by judicial decisions. They have to maintain judicial discipline and give their decisions in accordance with law."

Conclusion

The Supreme Court quashed the High Court's order, restoring the arbitrator's original award. This judgment reinforces the authority of arbitrators to award interest on interest and underscores the statutory mandate for a post-award interest rate of 18% under Section 31(7)(b) of the Arbitration and Conciliation Act, 1996. The decision offers significant clarity for parties involved in arbitration concerning the award of interest. The Court also noted that IOC would need to comply with the Insolvency and Bankruptcy Code (IBC) procedures given that the respondent was under liquidation.