Judgment: National Highways Authority of India v BSC-RBM-PATI Joint Venture
Citation: O.M.P. No. 518/2016
Court: The High Court of Delhi
Coram: Deepa Sharma, J.
Date: 22 September 2019
Overview: A petition was filed against an interim award passed by an arbitrator whereby; a certain sum was payable along with interest at 12% per annum compounded monthly. It was alleged that the award interim award suffered from patently illegalityand hence, was against the public policyof India.
Issue: (1) Whether the Order of the Arbitrator amounts to granting interest upon interest?
(2) Whether an Arbitrator can grant compound interest?
(3) Whether grant of compound interest is against the public policy?
Factual Background: The petitioner had entered into a contract with the respondent for strengthening of an existing two-lane pavement. During the execution of the work, certain disputes arose between the parties and the arbitration clause was invoked by the Respondent for non-payment of certain sums. The petitioner admitted that certain amount was payable to the respondent. On the basis of this admission, the arbitral Tribunal passed an interim award by virtue of which the petitioner was to pay a certain sum to the respondent along with an interest of 12 per cent per annum compounded monthly from the due date till the date of payment. The award has been challenged by the petitioner on the ground that it was impermissible to award interest on interest, as it is violative of section 31(7) of the Arbitration and Conciliation Act, 1996 (hereinafter referred to as “the Act”) and section 3(3) of the Interest Act, 1978 (hereinafter referred to as “the Interest Act”).
(1) The court first assessed section 31(7) of the Act as decided in the case of State of Haryana v M/s. S.L. Arorawhere the Supreme Court held that clause (a) and (b) of section 31(7) are independent of each other. In regard to pre-award period, interest has to be awarded as specified in the contract and in the absence of contract as per discretion of the Arbitral Tribunal. Whereas, in regard to the post-award period, interest is payable as per the discretion of the Arbitral Tribunal and in the absence of exercise of such discretion, at a mandatory statutory rate of 18 per cent per annum.
The court held that, in the present case the parties had agreed to payment of 12% per annum interest compounded monthly in case of default in payment as per the contract. Hence, the learned arbitrator was bound by the covenant of the agreement. This interest was levied on the admitted principal amount for pre-award period. Further, since the interest is awarded as principle sum, it could not be said that interest upon interest was awarded. This part of the award therefore does not suffer with any illegality.
The petitioner has also disputed the illegality of amount of interest at the rate of 12 per cent per annum compounded monthly for the post-award period. In this regard, the court held that it is a well settled principle of law is that Arbitrator is empowered under section 31(7)(b) of the Act to grant interest for the post-award period as per his discretion even in the absence of any agreement for grant of interest. The arbitrator is not bound by the terms of agreement between parties while exercising this discretion. However, the discretion of the arbitrator has to be guided by some principal of law and if the Arbitrator takes cue from the agreed terms between the parties, it cannot be said he has improperly exercised his jurisdiction.
(2) The learned counsel for the petitioner argued that the arbitrator cannot award compound interest and has placed reliance on section 3 of the Interest Act. The court dismissed this contention on the ground that section 3 of the Interest Act deals with the grant of interest for the period from the date of cause of action to the date of institution of the proceedings and does not deal with the period for grant of interest during post-award period.
The court stated that section 28(3) of the Act clearly stipulates that arbitrators while passing an award shall give due credence to the terms of the agreement as well as the usage of the trade. In the present case as per terms of agreement, parties had agreed to the payment of interest at the rate of 12 per cent per annum compounded monthly. It further noted that section 34 of the Civil Procedure Code, 1908clearly lays down that in commercial transactions, while awarding the interest for post-decree period, the courts can grant the interest as per the contractual rate not exceeding the contractual rate of interest.
The arbitral award is also a decree under the amended Arbitration Act of 1996. Therefore, in this case the learned Arbitrator while exercising its discretion for grant of post-award interest had based its discretion on the contractual obligation regarding rate of interest, and thus this exercise of discretion is in consonance of provisions of Section 34 of the Civil Procedure Code, 1908.Therefore, there is no prohibition under the law upon Arbitrator to grant post-award interest on the basis of agreed contractual rate of interest.
(3) The court took que from the case of Central Bank of India v Ravindra, where the Constitution Bench of the Supreme court, summarised the legal position regarding compound interest. The Supreme court held that the practice is permissible, legal and judicially upheld excepting when superseded by legislation. Since there is no legislation against the levy of compound interest, it follows that the interim award does not suffers from any illegality.
Thecourt dismissed the petition as it was devoid of any merit. This case holds that a contract for compound interest is not against the public policy of India as levy of compound interest in itself is not patently illegal.
(2010) 3 SCC 690
2002 (1) SCC 367