Supreme Court clarifies Post-Award Interest under Arbitration Act: R.P. Garg vs. Telecom Department (2024)

Introduction

Date of the Judgment: 10 September 2024

Citation: 2024 INSC 743

Judges: Pamidighantam Sri Narasimha, J. and Sandeep Mehta, J.

Can a contractual clause override the statutory right to post-award interest in arbitration cases? The Supreme Court of India recently addressed this critical question, clarifying the interplay between contractual agreements and the Arbitration and Conciliation Act, 1996. This judgment clarifies that post-award interest is a statutory right, not subject to contractual prohibitions, thereby ensuring fair compensation to successful parties in arbitration. The judgment was delivered by a two-judge bench comprising Justice Pamidighantam Sri Narasimha and Justice Sandeep Mehta.

Case Background

On 17 October 1997, R.P. Garg (the appellant), a contractor, entered into a contract with the Telecom Department of Haryana (respondents) for trenching and laying underground cables. The contract required the appellant to provide a security deposit of Rs. 10 Lakhs. Disputes arose regarding non-payment of bills submitted by the appellant during the execution of the contract. These disputes were referred to an arbitrator on 24 October 2000, under Section 11 of the Arbitration and Conciliation Act, 1996.

The arbitrator issued an award on 8 March 2001, allowing the appellant’s claim but denying interest, citing a clause in the arbitration agreement that prohibited it. During the execution of the award, the appellant claimed post-award interest, which was initially rejected by the executing court on 10 October 2002. However, the District Court overturned this decision on 4 March 2003, granting 18% post-award interest. The High Court then reversed the District Court’s order, leading to the present appeal before the Supreme Court.

Timeline

Course of Proceedings

The executing court, the Civil Judge, Senior Division, initially dismissed the appellant’s objection for post-award interest on 10 October 2002, affirming the arbitrator’s decision. The District Court, however, allowed the appellant’s appeal on 4 March 2003, directing payment of post-award interest at 18% per annum. The Telecom Department then filed a Civil Revision Petition before the High Court of Punjab and Haryana, which was allowed on 14 May 2019. The High Court set aside the District Court’s order, holding that the contract prohibited post-award interest, leading to the present appeal before the Supreme Court.

Legal Framework

The Supreme Court examined 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 two per cent, higher than the current rate of interest prevalent on the date of award, from the date of award to the date of payment.”

Section 31(7)(a) governs pre-award interest, which is subject to the agreement between the parties. However, Section 31(7)(b) mandates that a sum directed to be paid by an arbitral award shall carry interest from the date of the award to the date of payment, unless the award specifies otherwise. The Court emphasized that the phrase ‘unless the award otherwise directs’ in Section 31(7)(b) pertains to the rate of interest, not the entitlement to interest itself.

Arguments

The appellant argued that the High Court erred in denying post-award interest based on a contractual clause, as Section 31(7)(b) of the Arbitration and Conciliation Act, 1996 mandates such interest. The appellant contended that the clause in the contract prohibiting interest only applied to pre-award interest, not post-award interest.

The respondent, the Telecom Department, argued that the contractual clause prohibiting interest should be applicable to both pre-award and post-award periods. They relied on the High Court’s interpretation of the contract and the decision in Jaiprakash Associates Ltd. v. Tehri Hydro Development Corporation (India) Ltd. [ (2019) 17 SCC 786], to support their claim that interest can be denied when a contractual clause specifically prohibits it.

Issues Framed by the Supreme Court

The Supreme Court framed the following issue:

1. Whether the appellant is entitled to post-award interest on the sum awarded by the Arbitrator.

Treatment of the Issue by the Court

Authorities

The Supreme Court considered the following authorities:

Judgment

The Supreme Court relied on Morgan Securities & Credits (P) Ltd. v. Videocon Industries Ltd. [(2023) 1 SCC 602]*, stating that it had affirmed that post-award interest is not subject to the contract between the parties. The Court held that the High Court erred in relying on Jaiprakash Associates Ltd. v. Tehri Hydro Development Corporation (India) Ltd. [(2019) 17 SCC 786]*, which dealt with pre-award interest and not post-award interest.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the statutory mandate of Section 31(7)(b) of the Arbitration and Conciliation Act, 1996, which ensures that a sum directed to be paid by an arbitral award must carry interest. The Court emphasized that post-award interest is a statutory right and not subject to party autonomy. The Court also considered the distinction between pre-award and post-award interest, as defined in Section 31(7)(a) and 31(7)(b) of the Act, respectively.

The Supreme Court reasoned that the High Court had erred in applying the principle of contractual prohibition to post-award interest. The Court clarified that while pre-award interest is subject to the agreement between the parties, post-award interest is governed by Section 31(7)(b) of the Arbitration and Conciliation Act, 1996, which mandates interest from the date of the award until payment.

The Court emphasized that the phrase “unless the award otherwise directs” in Section 31(7)(b) only pertains to the rate of interest, not the entitlement to interest itself. The Court also noted that the decision in Jaiprakash Associates Ltd. v. Tehri Hydro Development Corporation (India) Ltd. [(2019) 17 SCC 786], which the High Court relied upon, was not applicable to the present case as it dealt with pendente-lite interest, not post-award interest.

The Court quoted from Morgan Securities & Credits (P) Ltd. v. Videocon Industries Ltd. [(2023) 1 SCC 602]:

“The words, “unless otherwise agreed by the parties” occur at the beginning of clause (a) qualifying the entire provision. However, in clause (b), the words, “unless the award otherwise directs” occur after the words “a sum directed to be paid by an arbitral award shall” and before the words “carry interest at the rate of eighteen per cent”. Thereby, those words only qualify the rate of post-award interest.”

The Court further clarified that Section 31(7)(a) confers a wide discretion upon the arbitrator in regard to the grant of pre-award interest, whereas Section 31(7)(b) only contemplates a situation where the arbitration award is silent on post-award interest, in which event the award-holder is entitled to a post-award interest.

Key Takeaways

• Post-award interest is a statutory right under Section 31(7)(b) of the Arbitration and Conciliation Act, 1996.
• Contractual clauses cannot override the statutory right to post-award interest.
• The phrase “unless the award otherwise directs” in Section 31(7)(b) only pertains to the rate of interest, not the entitlement to interest.
• The decision in Jaiprakash Associates Ltd. v. Tehri Hydro Development Corporation (India) Ltd. [(2019) 17 SCC 786], which dealt with pre-award interest, is not applicable to post-award interest.
• The ruling reinforces the principle that arbitration awards must carry interest from the date of the award to the date of payment, ensuring that successful parties are justly compensated.

Directions

The Supreme Court set aside the High Court’s order and restored the District Court’s order, granting interest at 18% per annum from the date of the award until its realization.

Development of Law

The ratio decidendi of this case is that post-award interest under Section 31(7)(b) of the Arbitration and Conciliation Act, 1996, is a statutory right and cannot be contracted out by the parties. This clarifies the position of law that contractual clauses cannot override the statutory mandate for post-award interest. This judgment reinforces the principle that arbitration awards must carry interest from the date of the award to the date of payment, ensuring that successful parties are justly compensated.

Conclusion

The Supreme Court’s judgment in R.P. Garg vs. The Chief General Manager, Telecom Department & Ors. clarifies that post-award interest is a statutory right under Section 31(7)(b) of the Arbitration and Conciliation Act, 1996, and cannot be denied based on contractual clauses. This decision ensures that successful parties in arbitration receive fair compensation, reinforcing the statutory mandate of post-award interest. The Court set aside the High Court’s order and restored the District Court’s order, granting 18% interest per annum from the date of the award until its realization.