Supreme Court Rules Arbitral Tribunals Can Grant Interest on 'Sum' Awarded Under Section 31(7) of the Arbitration Act - 2014-11-25

Unlocking the 'Sum': Landmark Apex Court Ruling Demystifies Arbitral Interest

In a significant judgment regarding the interpretation of the Arbitration and Conciliation Act, 1996, the Supreme Court of India has settled a long-standing debate among legal professionals and arbitrators. The three-judge bench, comprising Chief Justice H.L. Dattu and Justices S.A. Bobde and Abhay Manohar Sapre, addressed whether Section 31(7) of the Act authorizes an arbitral tribunal to award interest on the aggregate amount—the principal sum plus interest accrued till the date of the award.

While Chief Justice Dattu maintained that the Act does not permit "interest on interest," the majority opinion delivered by Justices Bobde and Sapre paved the way for a more flexible interpretation, holding that once the interest is added to the principal to form the "sum" for which an award is made, it loses its identity as separate interest for the purposes of awarding future interest.

The Conflict of Computations

The dispute, stemming from M/S. Hyder Consulting (UK) Ltd. v. Governor, State of Orissa , centered on the "interest on interest" conundrum. Contractors argued that the State of Haryana v. S.L. Arora & Co. judgment, which strictly denied compound interest, failed to account for the commercial reality of arbitration. If an award includes interest accrued pendente lite, preventing the calculation of future interest on that total amount would effectively penalize legitimate claimants for the prolonged duration of arbitral proceedings.

Conversely, the opposing view held that "interest on interest" is impermissible unless explicitly agreed upon by parties in their contract. The debate turned on the precise definition of the word "sum" appearing in Section 31(7) of the 1996 Act.

Legal Analysis: The Anatomy of a 'Sum'

The Court’s analysis relied on a textual reading of the legislation. Justice Bobde noted that Parliament deliberately omitted the word "principal" before "sum" in the Act, suggesting an intent for a broader scope.

1. Section 31(7)(a) : Allows the tribunal to include interest in the "sum" for which the award is made.
2. Section 31(7)(b) : Mandates interest on the "sum directed to be paid" from the date of the award.

The majority reasoned that since the Act allows interest to be "included in the sum," that interest component effectively merges into the principal once the award is issued. Consequently, interest on the post-award period is calculated on this cumulative "sum," not just the original principal.

Key Observations

The Court’s majority provided clarity through the following observations:

> "The 'sum' awarded may be principal amount and such interest as the Arbitral Tribunal deems fit... Parliament has not added a qualification like 'principal' to the word 'sum,' and therefore, the word 'sum' here simply means 'a particular amount of money.'" — Justice S.A. Bobde

> "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." — Justice Abhay Manohar Sapre

> "Where the language of the Act is clear and explicit, the court must give effect to it, whatever may be the consequences, for in that case the words of the statute speak the intention of the Legislature." — Ganga Prasad Verma (Dr.) v. State of Bihar (cited by Justice Bobde)

Final Decision and Implications

The Supreme Court concluded that under Section 31(7) of the 1996 Act, an arbitral award for the payment of money is a singular "sum," and interest can be granted on this total for the period during which the award remains unpaid.

This ruling effectively overrules the restrictive interpretation seen in S.L. Arora . Parties entering into future arbitration agreements should take note: the tribunal is now clearly empowered to grant "interest on interest" via the "sum" mechanism provided the contract does not explicitly forbid it. For businesses engaged in long-term contracts involving complex disputes, this decision serves as a stronger deterrent against the delay of payments once an award has been rendered, ensuring that the "deprivation of the use of money" is adequately compensated.