Supreme Court Clarifies Post-Award Interest Calculation in Arbitration: North Delhi Municipal Corporation vs. S.A. Builders Ltd. (2024)

Introduction

Date of the Judgment: 17 December 2024
Citation: 2024 INSC 988
Judges: Abhay S. Oka, J. and Ujjal Bhuyan, J.

Can interest on an arbitral award include interest on the pre-award interest? The Supreme Court of India recently addressed this question, clarifying how post-award interest should be calculated in arbitration cases. This judgment clarifies the interpretation of Section 31(7) of the Arbitration and Conciliation Act, 1996, specifically regarding the calculation of interest on the awarded sum. The bench, comprising Justices Abhay S. Oka and Ujjal Bhuyan, delivered the judgment.

Case Background

The case involves a dispute between the North Delhi Municipal Corporation (appellant) and M/s. S.A. Builders Ltd. (respondent) concerning a contract for the construction of approaches to a flyover. The contract, entered on 11 November 1983, faced delays due to site unavailability, leading to incomplete work by March 1990. The respondent submitted its final bill, which the appellant failed to pay, resulting in a dispute. The last payment to the respondent was made on 09.02.1988.

The respondent initiated arbitration proceedings under Section 20 of the Arbitration Act, 1940. An arbitrator was appointed, who passed an award on 16 December 1997, granting the respondent Rs. 1,70,70,720.80 with 18% simple interest from 01 April 1990, excluding claim 23(b). A corrigendum on 18 December 1997, revised the amount to Rs. 1,70,40,720.80. The respondent sought execution of the award under Section 36 of the Arbitration and Conciliation Act, 1996, while the appellant challenged the award under Section 34 of the same Act, which was dismissed on 08 January 2002. The appellant’s appeal against this dismissal was also rejected on 14 March 2002, and a subsequent special leave petition was dismissed on 03 February 2010.

Timeline:

Course of Proceedings

The Single Judge of the High Court, during the execution of the award, referred the issue of post-award interest calculation to a Division Bench. The Division Bench allowed the respondent to seek clarification from the arbitrator regarding whether the interest was awarded under Section 31(7)(a) of the Arbitration and Conciliation Act, 1996. The arbitrator clarified that post-award interest would be payable on the awarded sum, including pre-reference and pendente lite interest. The Single Judge later set aside this clarification, stating that the arbitrator had become functus officio. This decision was upheld by the Division Bench, which also cited the case of State of Haryana vs. S.L. Arora, stating that compound interest could not be granted under the 1996 Act.

The respondent then filed a special leave petition before the Supreme Court, which was tagged with another case. The Supreme Court, in its order dated 12 March 2015, overruled S.L. Arora, stating that the interest should be calculated based on the principles laid down in M/s. Hyder Consulting (UK) Ltd. vs. Governor, State of Orissa. The court clarified that the sum directed to be paid by the award would include the principal amount and the interest thereon. The matter was remanded back to the Single Judge for calculation of the amount payable.

Legal Framework

The core legal framework for this case is Section 31(7) of the Arbitration and Conciliation Act, 1996, which deals with interest on arbitral awards. Section 31(7) states:

“31. Form and contents of arbitral award –
(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 award to the date of payment.”

This section allows the arbitral tribunal to include interest in the awarded sum from the date of the cause of action to the date of the award (pre-award interest) and stipulates that the awarded sum shall carry interest from the date of the award to the date of payment (post-award interest). The Supreme Court’s interpretation of this section, particularly regarding the inclusion of pre-award interest in the sum on which post-award interest is calculated, is central to this case.

Additionally, Section 33 of the Arbitration and Conciliation Act, 1996, which deals with the correction and interpretation of the award, is also relevant. It states:

“33. Correction and interpretation of award; additional award. —(1) Within thirty days from the receipt of the arbitral award, unless another period of time has been agreed upon by the parties —
(a) a party, with notice to the other party, may request the arbitral tribunal to correct any computation errors, any clerical or typographical errors or any other errors of a similar nature occurring in the award;
(b) if so agreed by the parties, a party, with notice to the other party, may request the arbitral tribunal to give an interpretation of a specific point or part of the award.”

Arguments

Appellant’s Arguments:

• The appellant argued that the arbitrator became functus officio after passing the award on 16 December 1997 and therefore lacked jurisdiction to issue a clarification on 15 March 2005.
• The clarification issued by the arbitrator substantially modified the original award by changing simple interest to compound interest, which was beyond the scope of Section 33 of the Arbitration and Conciliation Act, 1996.
• The appellant contended that the Supreme Court had not previously examined the issue of the arbitrator’s jurisdiction while issuing the clarification.
• The appellant submitted that the direction to compute interest as per M/s. Hyder Consulting (UK) Ltd. does not mean that compound interest must be granted if it was not granted in the original award.
• The appellant argued that the arbitrator had already granted past, pendente lite, and future interest in terms of Section 31(7) of the Arbitration and Conciliation Act, 1996.
• The appellant relied on Gyan Prakash Arya vs. Titan Industries Ltd. to argue that the arbitrator cannot modify the award beyond the scope of Section 33(1)(a) of the 1996 Act.
• The appellant cited Harshad Chiman Lal Modi vs. DLF Universal Ltd. to argue that any order passed by a tribunal lacking inherent jurisdiction is a nullity.

Respondent’s Arguments:

• The respondent argued that the issue of the arbitrator’s jurisdiction was already decided in its favor by the Supreme Court on three previous occasions.
• The respondent contended that the appellant did not raise any objection regarding the arbitrator’s jurisdiction before the arbitrator during the clarification proceedings.
• The respondent relied on Mohan Lal Goenka vs. Benoy Kishna Mukherjee to argue that the principle of constructive res judicata applies to execution proceedings.
• The respondent cited Gas Authority of India Limited vs. Keti Construction (I) Limited, stating that if an objection to jurisdiction is not raised before the Arbitral Tribunal, it cannot be raised later in subsequent proceedings.
• The respondent argued that the clarification issued by the arbitrator was in consonance with the law laid down in M/s. Hyder Consulting (UK) Ltd. and did not modify the original award.
• The respondent argued that the arbitrator had the power to issue the clarification under Section 33(2) of the Arbitration and Conciliation Act, 1996.
• The respondent submitted that the appellant had waived its right to challenge the clarification by not filing a petition under Section 34 of the Arbitration and Conciliation Act, 1996.
• The respondent relied on Delhi Airport Metro Express Private Limited vs. Delhi Metro Rail Corporation to support the view that the amount awarded under Section 31(7)(a) includes the principal and pendente lite interest.

Issues Framed by the Supreme Court

The Supreme Court did not explicitly frame issues in a separate section. However, the core issue before the court was:

1. Whether the arbitrator had the jurisdiction to issue the clarification dated 15 March 2005, considering the arbitrator had passed the award on 16 December 1997.
2. Whether post-award interest should be calculated on the principal amount alone or on the principal amount plus pre-award interest, as per Section 31(7) of the Arbitration and Conciliation Act, 1996.

Treatment of the Issue by the Court

“The following table demonstrates as to how the Court decided the issues”

Authorities

The Supreme Court considered the following authorities:

Judgment

How each submission made by the Parties was treated by the Court?

How each authority was viewed by the Court?

• The Supreme Court followed M/s. Hyder Consulting (UK) Ltd., citing it as the correct interpretation of Section 31(7) of the Arbitration and Conciliation Act, 1996.
• The Supreme Court expressly overruled State of Haryana vs. S.L. Arora.
• The Supreme Court distinguished Gyan Prakash Arya vs. Titan Industries Ltd. and Harshad Chiman Lal Modi vs. DLF Universal Ltd., stating that they were not applicable to the facts of this case.
• The Supreme Court relied upon Mohan Lal Goenka vs. Benoy Kishna Mukherjee and Gas Authority of India Limited vs. Keti Construction (I) Limited.
• The Supreme Court also relied upon Delhi Airport Metro Express Private Limited vs. Delhi Metro Rail Corporation.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the need to uphold the principles established in M/s. Hyder Consulting (UK) Ltd., which clarified the calculation of post-award interest. The Court emphasized that the “sum” on which post-award interest is calculated includes both the principal amount and the pre-award interest. The Court also considered the procedural history of the case, noting that the issue of the arbitrator’s jurisdiction had been raised and decided in favor of the respondent multiple times. The Court also noted that the appellant had participated in the clarification proceedings before the arbitrator without raising objections on jurisdiction. The Court also relied on the interpretation of Section 33(1) of the Arbitration and Conciliation Act, 1996, to hold that the 30-day limitation period was not inflexible.

Sentiment Analysis of Reasons Given by the Supreme Court:

Fact:Law Ratio:

Logical Reasoning:

The Supreme Court rejected the appellant’s argument that the arbitrator lacked jurisdiction, stating that the clarification was within the scope of Section 33(1) of the Arbitration and Conciliation Act, 1996. The court also rejected the argument that post-award interest should not include pre-award interest, stating that the “sum” on which post-award interest is calculated includes both the principal amount and the pre-award interest. The court’s reasoning was based on the interpretation of Section 31(7) of the Arbitration and Conciliation Act, 1996, and the principles laid down in M/s. Hyder Consulting (UK) Ltd.

The court emphasized that the legislative intent was to encourage early payment of the awarded sum and to discourage delay. The court also noted that the appellant had participated in the clarification proceedings before the arbitrator without raising objections on jurisdiction and that the issue of the arbitrator’s jurisdiction had been raised and decided in favor of the respondent multiple times.

The Supreme Court’s decision was unanimous, with both Justices Abhay S. Oka and Ujjal Bhuyan agreeing on the judgment. The court’s reasoning was based on the interpretation of the relevant legal provisions and the principles laid down in previous judgments, particularly M/s. Hyder Consulting (UK) Ltd.

“…the clarification sought for and issued by the learned Arbitrator would be covered by the expression unless another period of time has been agreed upon by the parties appearing in Section 33 (1) of the 1996 Act.”

“…it is not the case of the appellant that the interest portion is covered by the contract agreement between the parties. In the absence thereof, Section 31(7) (a) as well as Section 31(7)(b) of the 1996 Act would have their full effect.”

“The sum awarded would mean the principal amount plus the interest awarded from the date of cause of action upto the date of the award. Thereafter, as per Section 31(7)(b) of the 1996 Act, the sum ( principal plus interest) would carry interest @ 18% from the date of the award to the date of payment.”

Key Takeaways

• Post-award interest on arbitral awards is calculated on the sum that includes both the principal amount and the pre-award interest.
• The arbitrator has the power to clarify the award even after the 30-day period specified in Section 33(1) of the Arbitration and Conciliation Act, 1996, if the parties agree to extend the period.
• Objections to the arbitrator’s jurisdiction must be raised before the arbitrator and cannot be raised later in subsequent proceedings.
• The principle of constructive res judicata applies to execution proceedings.

Directions

The Supreme Court dismissed the appeal, upholding the impugned order of the Division Bench of the High Court. The matter was remitted back to the Single Judge for calculation of the amount payable to the respondent.

Development of Law

This judgment reinforces the principle established in M/s. Hyder Consulting (UK) Ltd. regarding the calculation of post-award interest. It also clarifies the scope of Section 33 of the Arbitration and Conciliation Act, 1996, regarding the arbitrator’s power to clarify the award. This ruling provides certainty and consistency in the interpretation of the Arbitration and Conciliation Act, 1996, particularly concerning the calculation of interest on arbitral awards. The judgment also reinforces the principle that objections to the arbitrator’s jurisdiction must be raised in a timely manner and cannot be raised later in subsequent proceedings. The court’s decision to overrule State of Haryana vs. S.L. Arora further solidifies the legal position on the calculation of post-award interest.

Conclusion

The Supreme Court’s judgment in North Delhi Municipal Corporation vs. M/s. S.A. Builders Ltd. provides a clear and definitive interpretation of Section 31(7) of the Arbitration and Conciliation Act, 1996, regarding the calculation of post-award interest. The court has firmly established that post-award interest is to be calculated on the entire sum awarded, which includes both the principal amount and the pre-award interest. The judgment also reinforces the principle that objections to the arbitrator’s jurisdiction must be raised promptly and cannot be raised later in subsequent proceedings. This ruling will have a significant impact on the way post-award interest is calculated in arbitration cases in India, providing clarity and consistency in the application of the law. The judgment also clarifies that the 30 day period under Section 33(1) of the Act is not inflexible. This ruling will be a guiding light for all future arbitrations.