Supreme Court clarifies arbitrator’s discretion in awarding post-award interest: Morgan Securities vs. Videocon Industries (2022)

Introduction

Date of the Judgment: 01 September 2022

Citation: 2022 INSC 819

Judges: Dr Dhananjaya Y Chandrachud, J and AS Bopanna, J.

Can an arbitrator, while awarding post-award interest, limit it only to the principal amount, or should it also include the pre-award interest? This crucial question was addressed by the Supreme Court of India in the case of Morgan Securities And Credits Pvt. Ltd. vs. Videocon Industries Ltd. The court examined the extent of an arbitrator’s discretion under Section 31(7)(b) of the Arbitration and Conciliation Act, 1996, specifically regarding the ‘sum’ on which post-award interest is calculated. This judgment clarifies the powers of arbitrators in awarding interest, impacting future arbitration proceedings. The judgment was authored by Dr. Dhananjaya Y Chandrachud, J, with a concurring opinion from AS Bopanna, J.

Case Background

On January 27, 2003, Morgan Securities and Credits Pvt. Ltd. (the appellant) and Videocon Industries Ltd. (the respondent) entered into an agreement where the respondent availed bill discounting facilities from the appellant. The appellant disbursed Rs. 5,00,32,656. However, the dues remained unpaid. On January 10, 2006, the appellant issued a notice to the respondent demanding the principal amount along with overdue interest, calculated from the date of default, April 17, 2003. As the respondent failed to pay, the appellant invoked the arbitration clause on January 31, 2006.

The sole arbitrator issued an award on March 1, 2013, in favor of the appellant, which was later corrected on April 29, 2013. The award included: (i) interest at 21% per annum from the date of default until the demand notice; (ii) interest at 36% per annum with monthly rests from the demand notice to the date of the award (pre-award interest); and (iii) post-award interest at 18% per annum on the principal amount of Rs. 5,00,32,656 from the date of the award until payment. The arbitrator specifically stated that the post-award interest would be only on the principal amount, relying on the decision in State of Haryana v. SL Arora.

Timeline

Course of Proceedings

The appellant challenged the arbitral award under Section 34 of the Arbitration and Conciliation Act, 1996, before the Delhi High Court, raising objections on the grant of post-award and pre-award interest. The respondent also filed a petition. The appellant argued that post-award interest should be granted on the total sum awarded, including both the principal and pre-award interest. The Single Judge of the Delhi High Court dismissed the appellant’s petition on February 7, 2019, stating that the arbitrator had the discretion to restrict post-award interest to the principal amount.

The Division Bench of the High Court dismissed the appeal against the Single Judge’s decision on February 26, 2020. The appellant relied on the Supreme Court’s decision in Hyder Consulting (UK) Limited v. Governor, State of Orissa, arguing that post-award interest should be granted on the total sum, including pre-award interest. The respondent argued against relying on Hyder Consulting, citing that State of Haryana v. SL Arora was the applicable law when the petition was instituted. The Division Bench noted that Hyder Consulting clarified that post-award interest should be payable on the ‘sum’ awarded, which includes both principal and pre-award interest, when the award is silent on post-award interest. However, since the arbitral award in this case was not silent on post-award interest, the court held that Section 31(7)(b) of the Act would not be applicable.

The Supreme Court initiated proceedings under Article 136 of the Constitution, challenging the Division Bench’s judgment. On July 16, 2021, the Supreme Court issued a notice confined to the issue of post-award interest, noting that the arbitrator had based the award on SL Arora, which was overruled in Hyder Consulting.

Legal Framework

The core legal framework for this case is Section 31 of the Arbitration and Conciliation Act, 1996, which deals with the form and content of arbitral awards. Specifically, Section 31(7) addresses pre-award and post-award interest.

Section 31(7) states:

“(7) (a) Unless otherwise agreed by the parties, where and in so far as an arbitral award is for the payment of money, the arbitral tribunal may include in the sum for which the award is made interest, at such rate as it deems reasonable, on the whole or any part of the money, for the whole or any part of the period between the date on which the cause of action arose and the date on which the award is made;

(b) A sum directed to be paid by an arbitral award shall, unless the award otherwise directs, carry interest at the rate of eighteen per centum per annum from the date of the award to the date of payment.”

Section 31(7)(a) allows the arbitral tribunal to include pre-award interest in the sum awarded, at a rate it deems reasonable. Section 31(7)(b) mandates that the sum directed to be paid by an arbitral award shall carry post-award interest at 18% per annum, unless the award directs otherwise.

Arguments

The appellant, Morgan Securities, argued that:

• According to Section 31(7) of the Arbitration and Conciliation Act, 1996, and the Supreme Court’s judgment in Hyder Consulting (UK) Limited v. Governor, State of Orissa, post-award interest should be granted on the aggregate of the principal sum and the pre-award interest.

• The majority opinion in Hyder Consulting establishes that once pre-award interest is awarded, it becomes part of the awarded ‘sum’ for post-award interest calculations.

• Since the arbitral award was silent on post-award interest on the interest component, the appellant is entitled to the statutory rate of interest on the aggregate of the principal and pre-award interest under Section 31(7)(b).

• Even under the decision in State of Haryana v. SL Arora, the arbitrator’s discretion was limited to the rate of post-award interest, not the ‘sum’ on which it is granted. The arbitrator in this case restricted post-award interest to the principal amount solely based on SL Arora.

• The arbitrator’s discretion is limited to determining the rate of post-award interest, not the ‘sum’ on which it is calculated.

• The argument that Section 31(7)(b) does not apply when an arbitrator has exercised discretion in awarding post-award interest is not supported by either SL Arora or Hyder Consulting.

The respondent, Videocon Industries, argued that:

• Section 31(7)(b) is qualified by the phrase “unless the award otherwise directs,” making it applicable only when the arbitral award is silent on post-award interest.

• Under Section 31(7)(b), the arbitrator has the discretion to (a) grant post-award interest, (b) determine the quantum on which it is granted, and (c) determine the rate at which it is calculated.

• While Hyder Consulting overruled SL Arora on the point that an arbitral tribunal cannot award interest on interest, it did not mandate that post-award interest must be granted on the aggregate of the principal and pre-award interest.

Submissions Table

Issues Framed by the Supreme Court

The Supreme Court framed the following issue:

1. Whether the arbitrator has the discretion to grant post-award interest only on the principal sum due under Section 31(7)(b) of the Arbitration and Conciliation Act, 1996.

Treatment of the Issue by the Court

Authorities

The Supreme Court considered the following authorities:

• State of Haryana v. SL Arora [(2010) 3 SCC 690] – Supreme Court of India. This case held that Section 31(7) of the Act does not enable the arbitral tribunal to provide interest on interest from the date of the award. It was held that the phrase “sum directed to be paid by the award” refers to the award of “sums on substantive claims”, that is, the principal amount.
• Hyder Consulting (UK) Limited v. Governor, State of Orissa [(2015) 2 SCC 189] – Supreme Court of India. This case overruled SL Arora and held that post-award interest can be granted on the aggregate of the principal and the pre-award interest.
• Section 31(7) of the Arbitration and Conciliation Act, 1996 – This section deals with pre-award and post-award interest in arbitration.

Authorities Table

Judgment

The Supreme Court analyzed the submissions and authorities as follows:

What weighed in the mind of the Court?

The Supreme Court’s reasoning was primarily driven by the need to interpret Section 31(7)(b) of the Arbitration and Conciliation Act, 1996, in a manner that upholds the discretion of the arbitrator while also ensuring that the legislative intent behind the provision is not undermined. The court emphasized that the phrase “unless the award otherwise directs” in Section 31(7)(b) only qualifies the rate of interest, and not the ‘sum’ on which the interest is to be calculated. This interpretation was aimed at preserving the arbitrator’s flexibility in deciding post-award interest, while also providing a statutory mandate for post-award interest in cases where the arbitrator does not exercise such discretion. The court also considered the purpose of granting post-award interest, which is to ensure that the award-debtor does not delay the payment of the award.

The court’s reasoning was also influenced by the need to reconcile the conflicting views in SL Arora and Hyder Consulting. While Hyder Consulting had overruled SL Arora on the issue of whether post-award interest could be granted on the aggregate of principal and pre-award interest, the court clarified that Hyder Consulting did not restrict the discretion of the arbitrator in awarding post-award interest.

Logical Reasoning

Judgment Analysis

The Supreme Court’s decision clarifies that while post-award interest can be granted on the aggregate of the principal and pre-award interest, the arbitrator has the discretion to award post-award interest on a part of the ‘sum’. The court emphasized that the phrase “unless the award otherwise directs” in Section 31(7)(b) of the Arbitration and Conciliation Act, 1996, only qualifies the rate of interest and not the ‘sum’ on which it is to be calculated. This interpretation ensures that the arbitrator’s discretion is not fettered in awarding post-award interest.

The court’s reasoning was based on a careful analysis of Section 31(7) and the previous judgments in SL Arora and Hyder Consulting. The court noted that Hyder Consulting overruled SL Arora on the point that post-award interest could not be granted on the aggregate of principal and pre-award interest. However, the court clarified that Hyder Consulting did not restrict the arbitrator’s discretion in awarding post-award interest. The court observed that,

“The arbitrator has the discretion to grant post -award interest. Clause (b) does not fetter the discretion of the arbitrator to grant post -award interest. It only contemplates a situation in which the discretion is not exercised by the arbitrator.”

The court also noted that,

“The purpose of granting post -award interest is to ensure that the award -debtor does not delay the payment of the award.”

The court further clarified that,

“The arbitrator must exercise the discretion in good faith, must take into account relevant and not irrelevant considerations, and must act reasonably and rationally taking cognizance of the surrounding circumstances.”

The Supreme Court’s decision has significant implications for future arbitration proceedings. It clarifies the extent of an arbitrator’s discretion in awarding post-award interest, ensuring that the arbitrator has the flexibility to consider the specific circumstances of each case. The decision also provides clarity on the interpretation of Section 31(7)(b), which will help in avoiding future disputes on the issue of post-award interest.

Key Takeaways

• Arbitrators have the discretion to award post-award interest on a part of the ‘sum’ awarded, not just the principal amount.

• The phrase “unless the award otherwise directs” in Section 31(7)(b) of the Arbitration and Conciliation Act, 1996, only qualifies the rate of interest, not the ‘sum’.

• Arbitrators must exercise their discretion in good faith, considering all relevant circumstances.

• This judgment provides clarity on the interpretation of Section 31(7)(b), reducing the likelihood of future disputes on post-award interest.

Directions

No specific directions were given by the Supreme Court in this judgment.

Specific Amendments Analysis

No specific amendments were analyzed in this judgment.

Development of Law

The ratio decidendi of this case is that an arbitrator has the discretion to award post-award interest on a part of the ‘sum’ awarded, and the phrase “unless the award otherwise directs” in Section 31(7)(b) of the Arbitration and Conciliation Act, 1996, only qualifies the rate of interest, not the ‘sum’. This clarifies the extent of an arbitrator’s discretion under Section 31(7)(b).

This judgment clarifies the position of law by stating that the arbitrator has discretion to award post-award interest on a part of the sumawarded. This is a departure from the previous understanding that post-award interest must be awarded on the entire sum, including the principal and pre-award interest. The judgment also clarifies the interpretation of Section 31(7)(b), which will help in avoiding future disputes on the issue of post-award interest.