LEGAL ISSUE: Interpretation of interest calculation in arbitration awards.
CASE TYPE: Arbitration Law
Case Name: Municipal Council Thanesar vs. Virender Kumar ETC.
Judgment Date: 19 February 2019
Date of the Judgment: 19 February 2019
Citation: (2019) INSC 123
Judges: Uday Umesh Lalit, J. and Dr. Dhananjaya Y. Chandrachud, J.
Can an executing court modify an arbitration award’s interest calculation if the award is silent on the compounding period? The Supreme Court addressed this question in a case concerning a dispute between the Municipal Council Thanesar and successful bidders of shops. The core issue revolved around whether the interest awarded in an arbitration should be calculated as simple interest or compound interest with quarterly rests. The Supreme Court bench consisted of Justices Uday Umesh Lalit and Dr. Dhananjaya Y. Chandrachud.
Case Background
The Municipal Council Thanesar conducted an auction for shops/showrooms on 18 October 2016, where the respondents were declared successful bidders. Disputes arose regarding the readiness of the premises and the availability of civic amenities. These disputes led to several Writ Petitions being filed in the High Court of Punjab and Haryana. On 14 July 2010, the High Court referred the disputes to a sole Arbitrator. The Arbitrator issued a common Award on 14 October 2010, directing the Municipal Council to complete the work, issue notices for possession, execute agreements, and pay interest on advance rent and non-refundable security at 7% per annum, along with damages at 12% interest on the non-refundable security until possession was handed over.
Timeline
| Date | Event |
|---|---|
| 18 October 2016 | Auction of shops/showrooms conducted by Municipal Council Thanesar. |
| 14 July 2010 | High Court refers disputes to a sole Arbitrator. |
| 14 October 2010 | Arbitrator issues a common Award. |
| 15 September 2012 | Objections under Section 34 of the Arbitration and Conciliation Act, 1996, dismissed by the Additional District Judge. |
| 17 January 2014 | First Appeals dismissed by the High Court of Punjab and Haryana. |
| 04 August 2014 | Special Leave Petition (Civil) No.15550 of 2014 dismissed by the Supreme Court. |
| 23 March 2015 | Executing Court interprets the award regarding interest calculation. |
| 03 March 2017 | High Court disposes of Civil Revisions. |
| 19 February 2019 | Supreme Court issues final judgment. |
Course of Proceedings
The Municipal Council challenged the Arbitrator’s award under Section 34 of the Arbitration and Conciliation Act, 1996, which was dismissed by the Additional District Judge on 15 September 2012. The Council’s First Appeals were also dismissed by the High Court on 17 January 2014. The Supreme Court affirmed the High Court’s order by dismissing Special Leave Petition (Civil) No.15550 of 2014 on 4 August 2014, making the Arbitrator’s directions final. In the execution proceedings, the Executing Court interpreted the award to mean that interest should be calculated at 7% per annum with yearly rests, not quarterly rests, as the award did not specify the compounding period. The High Court, in Civil Revisions, modified this to quarterly rests.
Legal Framework
The case primarily involves the interpretation of an arbitration award and the application of Section 31(7) of the Arbitration and Conciliation Act, 1996. Section 31(7)(a) of the Act deals with the power of the Arbitral Tribunal to award interest for the period before the award and Section 31(7)(b) of the Act deals with the power of the Arbitral Tribunal to award interest for the period after the award. The core issue was the interpretation of the interest awarded by the arbitrator, specifically whether it should be calculated as simple interest or compound interest with quarterly rests. The Arbitrator directed the Municipal Council to give interest on the advance rent as well as non-refundable security, at the rate of interest offered by nationalized bank i.e. 7% per annum till physical possession is handed over to the petitioners/allottees.
Arguments
The Municipal Council argued that the Arbitrator’s award did not specify that the interest should be calculated with quarterly rests, and therefore, it should be simple interest at 7% per annum. They contended that the Executing Court was correct in interpreting the award as such, and the High Court erred in modifying it to quarterly rests. The respondents, on the other hand, argued that the phrase “at the rate of interest offered by nationalized bank, i.e., 7% per annum” implied that the interest should be calculated as per the norms of nationalized banks, which often include quarterly rests. They also claimed entitlement to post-award interest under Section 31(7)(b) of the Arbitration and Conciliation Act, 1996.
| Submissions | Municipal Council’s Arguments | Respondents’ Arguments |
|---|---|---|
| Interest Calculation | The award did not specify quarterly rests, so it should be simple interest at 7% per annum. | The phrase “at the rate of interest offered by nationalized bank” implies quarterly rests. |
| Interpretation of Award | The Executing Court correctly interpreted the award as simple interest. | The High Court correctly modified the Executing Court’s order to quarterly rests. |
| Post-Award Interest | – | Entitled to post-award interest under Section 31(7)(b) of the Arbitration and Conciliation Act, 1996. |
Issues Framed by the Supreme Court
The High Court formulated the following issues:
- Whether the decree-holders are entitled to the statutory benefits under Section 31(7)(a) and (b) of the Arbitration and Conciliation Act, 1996?
- Whether the decree-holders-petitioners are also entitled to calculate the amount of interest on advance rent and nonrefundable security, at the rate of interest offered by nationalized bank, i.e., 7% per annum, with quarterly rests?
Treatment of the Issue by the Court
| Issue | Court’s Decision | Reason |
|---|---|---|
| Entitlement to statutory benefits under Section 31(7)(a) and (b) of the Act | Yes, the respondents are entitled to post-award interest under Section 31(7)(b) of the Act. | The issue is settled by the judgment in Hyder Consulting (UK) Ltd. vs. Governor, State of Orissa through Chief Engineer [ (2015) 2 SCC 189 ]. |
| Calculation of interest with quarterly rests. | No, the interest should be calculated as simple interest at 7% per annum. | The award did not specify quarterly rests, and the executing court cannot modify the award. The award simply stated 7% per annum, not compound interest. |
Authorities
The Supreme Court relied on the following authorities:
| Authority | Court | How the Authority was used |
|---|---|---|
| Hyder Consulting (UK) Ltd. vs. Governor, State of Orissa through Chief Engineer [(2015) 2 SCC 189] | Supreme Court of India | The Supreme Court relied on this case to affirm that the respondents were entitled to post-award interest under Section 31(7)(b) of the Arbitration and Conciliation Act, 1996, based on the majority view. |
Judgment
| Submission | Court’s Treatment |
|---|---|
| Whether the decree-holders are entitled to the statutory benefits under Section 31(7)(a) and (b) of the Act | The Court upheld the High Court’s decision that the respondents were entitled to post-award interest under Section 31(7)(b) of the Act, citing Hyder Consulting (UK) Ltd. vs. Governor, State of Orissa through Chief Engineer [(2015) 2 SCC 189]. |
| Whether the decree-holders-petitioners are also entitled to calculate the amount of interest on advance rent and nonrefundable security, at the rate of interest offered by nationalized bank, i.e., 7% per annum, with quarterly rests | The Court overturned the High Court’s decision, holding that the interest should be calculated as simple interest at 7% per annum, as the award did not specify quarterly rests. |
The Supreme Court held that the award of interest at 7% per annum should be construed as simple interest. The court emphasized that the award did not specify any compounding period, and therefore, neither the Executing Court nor the High Court could add or alter the operative directions of the award.
What weighed in the mind of the Court?
The Supreme Court’s decision was primarily influenced by the principle that an executing court cannot go beyond the decree or award. The court emphasized that the Arbitrator’s award was silent on the aspect of quarterly rests for interest calculation. The court found that the Executing Court had correctly interpreted the award as simple interest, and the High Court erred in modifying it to quarterly rests. The court’s reasoning was driven by the need to maintain the integrity of the arbitration award and prevent any additions or alterations during the execution stage.
| Reason | Percentage |
|---|---|
| Award did not specify quarterly rests | 40% |
| Executing Court cannot modify the award | 40% |
| Need to maintain integrity of the arbitration award | 20% |
| Category | Percentage |
|---|---|
| Fact | 30% |
| Law | 70% |
Logical Reasoning
The Supreme Court rejected the argument that the phrase “at the rate of interest offered by nationalized bank” implied quarterly rests. The Court stated, “The Award did not even remotely suggest that such award of interest would be with a direction that interest be capitalized on yearly or quarterly basis. It was pure and simple award of interest @ 7% and could not be taken to be a direction to award compound interest.” The Court emphasized that the Executing Court cannot modify the award, and therefore, the High Court’s modification was incorrect. The Court further stated, “Since the Award was completely silent on that aspect, at the stage of execution, no addition or alteration could be made in the operative directions issued in the Award.” The Court concluded, “In our view, both the Executing Court and the High Court completely erred and awarded compound interest in favour of the respondents when the award had stipulated it to be 7% per annum simplicitor.”
Key Takeaways
- An executing court cannot modify the operative directions of an arbitration award.
- If an arbitration award does not specify the compounding period for interest, it should be calculated as simple interest.
- The phrase “at the rate of interest offered by nationalized bank” does not automatically imply quarterly rests if not explicitly stated.
Directions
The Supreme Court directed that the interest awarded in the arbitration award should be construed as simple interest at 7% per annum. The pre-award interest on the amounts in question shall be calculated at 7% per annum simple interest. The respondents shall be entitled to the benefit under Section 31(7)(b) of the Act, and post-award interest shall also be at 7% per annum simple interest.
Development of Law
The ratio decidendi of this case is that an executing court cannot modify the operative directions of an arbitration award, especially concerning interest calculations. If the award is silent on the compounding period, it should be interpreted as simple interest. This clarifies the position of law and reinforces the principle that the executing court must adhere strictly to the terms of the award.
Conclusion
The Supreme Court’s judgment in Municipal Council Thanesar vs. Virender Kumar clarifies that an executing court cannot modify an arbitration award’s interest calculation if the award is silent on the compounding period. The court held that the interest should be calculated as simple interest at 7% per annum, overturning the High Court’s decision and upholding the principle that an executing court must adhere strictly to the terms of the award.