Supreme Court clarifies the scope of “sum” under Section 31(7) of the Arbitration Act: Delhi Airport Metro Express Pvt. Ltd. vs. Delhi Metro Rail Corporation (2022)

Date of the Judgment: May 5, 2022

Citation: [Not Available in Source]

Judges: L. Nageswara Rao J., B.R. Gavai J.

Can the interest accrued during the pendency of a case be included in the “sum” on which post-award interest is calculated? The Supreme Court of India addressed this question in a dispute between Delhi Airport Metro Express Private Limited (DAMEPL) and Delhi Metro Rail Corporation (DMRC), focusing on the interpretation of Section 31(7) of the Arbitration and Conciliation Act, 1996. The core issue revolved around whether the “sum” mentioned in the provision includes interest from the date the cause of action arose until the date of the arbitral award. The bench, comprising Justices L. Nageswara Rao and B.R. Gavai, delivered a unanimous judgment.

Case Background

A Concession Agreement was signed on August 25, 2008, between Delhi Airport Metro Express Private Limited (DAMEPL) and Delhi Metro Rail Corporation (DMRC). According to this agreement, DMRC was responsible for civil works (excluding the Depot), while DAMEPL would handle the remaining tasks, including Depot civil works and project systems. The agreement also stipulated that in case of termination, DMRC would be liable to make a Termination Payment.

A dispute arose between DAMEPL and DMRC during the project’s operation, leading DAMEPL to terminate the agreement on October 8, 2012. Subsequently, DMRC referred the dispute to arbitration on October 23, 2012. The Arbitral Tribunal issued an award on May 11, 2017. DAMEPL paid a stamp duty of Rs. 4,72,20,000 on the award on May 12, 2017.

DMRC challenged the arbitral award in the Delhi High Court under Section 34 of the Arbitration and Conciliation Act, 1996. A single judge of the Delhi High Court upheld the award on March 6, 2018. However, the Division Bench of the Delhi High Court partly allowed DMRC’s appeal on January 15, 2019. DAMEPL then appealed to the Supreme Court, which set aside the Division Bench’s judgment on September 9, 2021, and restored the arbitral award.

Following the Supreme Court’s decision, DAMEPL filed an execution petition on September 12, 2021, in the Delhi High Court. During these proceedings, DAMEPL argued that the “sum” under Section 31(7)(a) of the 1996 Act should include interest from the date the cause of action arose until the date of the award. This contention was rejected by the Delhi High Court, leading to the present appeal before the Supreme Court.

Timeline

Course of Proceedings

The dispute between DAMEPL and DMRC was initially referred to arbitration, resulting in an award on May 11, 2017. DMRC challenged this award under Section 34 of the Arbitration and Conciliation Act, 1996, in the Delhi High Court. The single judge of the High Court upheld the arbitral award on March 6, 2018. However, the Division Bench of the High Court partly allowed the appeal on January 15, 2019. DAMEPL then appealed to the Supreme Court, which set aside the Division Bench’s judgment on September 9, 2021. Subsequently, DAMEPL filed an execution petition in the Delhi High Court, where the dispute regarding the inclusion of interest pendente lite in the “sum” under Section 31(7)(a) arose. The High Court rejected DAMEPL’s claim, leading to the present appeal before the Supreme Court.

Legal Framework

The core legal provision in question is Section 31(7) of the Arbitration and Conciliation Act, 1996, which deals with the power of the Arbitral Tribunal to award interest. The relevant part of the provision states:

“31.(7)(a) Unless otherwise agreed by the parties, where and insofar 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.”

This section allows the Arbitral Tribunal to include interest in the awarded sum for the period between the cause of action and the award date, unless the parties have agreed otherwise. It also mandates that the awarded sum shall carry interest at 18% per annum from the award date until payment, unless the award specifies a different rate.

Arguments

Appellant (DAMEPL)’s Arguments:

• The appellant argued that the issue is no longer res integra, citing the Supreme Court’s majority judgment in Hyder Consulting (UK) Limited vs. Governor, State of Orissa through Chief Engineer.
• It was contended that a plain reading of Section 31(7)(a) and (b) of the Arbitration and Conciliation Act, 1996, makes it clear that the “sum” for which an award is made includes interest for the pre-award period.
• The appellant submitted that the “sum” under clause (a) of sub-section (7) of Section 31 of the 1996 Act would include the Termination Payment of Rs. 2782.33 crores plus the interest granted by the Arbitral Tribunal from the date of cause of action till the date of the award, which amounts to Rs. 4662.59 crores.
• The appellant argued that this sum should then carry interest from the date of the award until the date of payment.
• It was submitted that the High Court erred in rejecting the claim of the appellant with regard to the inclusion of interest pendente lite in the sum to be arrived at under clause (a) of sub-section (7) of Section 31 of the 1996 Act.

Respondent (DMRC)’s Arguments:

• The respondent argued that the High Court correctly rejected the appellant’s claim.
• It was submitted that clause (a) of sub-section (7) of Section 31 of the 1996 Act begins with the phrase “unless otherwise agreed by the parties”.
• The respondent contended that there is a specific agreement between the parties under Article 29.8 of the Concession Agreement regarding the payment of interest.
• It was argued that since the Arbitral Tribunal awarded interest in accordance with the agreement, the judgment in Hyder Consulting (UK) Limited would not apply to the present case.

Issues Framed by the Supreme Court

The core issue before the Supreme Court was:

1. Whether the “sum” awarded under clause (a) of sub-section (7) of Section 31 of the Arbitration and Conciliation Act, 1996 would include the interest pendente lite or not?

Treatment of the Issue by the Court

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

Authorities

The Court considered the following authorities:

Cases:

• Hyder Consulting (UK) Limited vs. Governor, State of Orissa through Chief Engineer, (2015) 2 SCC 189 – Supreme Court of India: The majority view was that the “sum” awarded may include the principal amount and interest as the Arbitral Tribunal deems fit. It was further held that, if no interest is awarded, the “sum” comprises only the principal amount.
• State of Haryana v. S.L. Arora and Co., (2010) 3 SCC 690 – Supreme Court of India: This case was referred to in the judgment of Hyder Consulting (UK) Limited, where it was concluded that Section 31(7) of the Act does not require that interest which accrues till the date of the award be included in the “sum.” This view was not agreed with in Hyder Consulting (UK) Limited.
• N.S. Nayak & Sons vs. State of Goa, (2003) 6 SCC 56 – Supreme Court of India: This case considered the scope of the phrase “unless otherwise agreed by the parties” in various provisions of the 1996 Act, indicating that parties are free to agree otherwise.
• Sree Kamatchi Amman Constructions vs. Divisional Railway Manager (Works), Palghat and others, (2010) 8 SCC 767 – Supreme Court of India: This case directly considered the phrase in Section 31(7) of the 1996 Act, clarifying that the arbitrator is bound by the contract terms regarding interest from the date of cause of action to the date of award.
• Reserve Bank of India vs. Peerless General Finance and Investment Co. Ltd. and others, (1987) 1 SCC 424 – Supreme Court of India: This case emphasized that interpretation must depend on the text and the context, and that statutes should be construed so that every word has a place.
• Hardeep Singh vs. State of Punjab and others, (2014) 3 SCC 92 – Supreme Court of India: This case held that no word in a statute should be construed as surplusage, and courts must carry out the legislative intent fully.
• Union of India and others vs. Dhanwanti Devi and others, (1996) 6 SCC 44 – Supreme Court of India: This case stated that every judgment must be read as applicable to the particular facts of the case.
• The Regional Manager and another vs. Pawan Kumar Dubey, (1976) 3 SCC 334 – Supreme Court of India: This case held that the ratio decidendi is the rule deducible from the application of law to the facts of a case, not just the conclusion based on similar facts.

Books:

• Maxwell on the Interpretation of Statutes: This was referred to in the judgment of Hyder Consulting (UK) Limited, emphasizing that the Court must give effect to the plain, clear, and unambiguous words of the legislature.

Judgment

How each authority was viewed by the Court?

• Hyder Consulting (UK) Limited vs. Governor, State of Orissa through Chief Engineer [CITATION]: The Court acknowledged the majority view in this case, which held that the “sum” may include principal and interest. However, it distinguished the case based on the presence of a specific agreement between the parties in the present matter, which was absent in Hyder Consulting.
• N.S. Nayak & Sons vs. State of Goa [CITATION]: The Court relied on this case to emphasize that the phrase “unless otherwise agreed by the parties” in the Arbitration Act allows parties to deviate from the standard provisions through mutual agreement.
• Sree Kamatchi Amman Constructions vs. Divisional Railway Manager (Works), Palghat and others [CITATION]: The Court used this case to support the view that the arbitrator is bound by the terms of the contract regarding the award of interest.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the presence of a specific agreement between the parties regarding the payment of interest. The Court emphasized the significance of the phrase “unless otherwise agreed by the parties” in Section 31(7)(a) of the Arbitration and Conciliation Act, 1996. This indicated that the legislative intent was to prioritize party autonomy and contractual agreements over the general provisions of the Act. The Court also noted that the Arbitral Tribunal had correctly applied the terms of the Concession Agreement, which specified the interest rate and the period for which it was to be awarded. The Court’s reasoning was also influenced by the principle that each word and phrase in a statute must be given effect to, and that interpretations should not render any part of the statute redundant or otiose.

The Court’s reasoning was that the phrase “unless otherwise agreed by the parties” in Section 31(7)(a) of the Arbitration and Conciliation Act, 1996, holds significant weight. Since the parties had a specific agreement in Article 29.8 of the Concession Agreement regarding interest, the Arbitral Tribunal was bound by that agreement. Therefore, the “sum” did not include interest pendente lite. The court also emphasized that each word and phrase in a statute must be given effect to, and interpretations should not render any part of the statute redundant or otiose.

The Court considered the interpretation of the term “sum” in Section 31(7)(a) of the Arbitration Act, specifically whether it includes interest for the period between the cause of action and the arbitral award. The Court also examined the impact of a specific contractual agreement between the parties regarding interest on the applicability of the general provision under the Act.

The Court rejected the appellant’s argument that the “sum” should include interest pendente lite, emphasizing the importance of the phrase “unless otherwise agreed by the parties” in Section 31(7)(a) of the Arbitration Act. The Court held that since the parties had a specific agreement in Article 29.8 of the Concession Agreement regarding interest, the Arbitral Tribunal was bound by that agreement. Therefore, the “sum” did not include interest pendente lite.

The Court also clarified that the judgment in Hyder Consulting (UK) Limited, which held that the “sum” may include interest, was not applicable in this case because it did not involve a specific agreement between the parties regarding interest.

The Court quoted the following from the judgment:

“The phrase “unless otherwise agreed by the parties” clearly emphasizes that when the parties have agreed with regard to any of the aspects covered under clause (a) of sub-section (7) of Section 31 of the 1996 Act, the Arbitral Tribunal would cease to have any discretion with regard to the aspects mentioned in the said provision.”

“If the interpretation, as placed by the appellant–DAMEPL is to be accepted, the phrase “unless otherwise agreed by the parties” would be reduced to a “dead letter” or “useless lumber”. In our considered view, such an interpretation would be wholly impermissible.”

“We are therefore of the considered view that in view of the specific agreement between the parties, the interest prior to the date of award so also after the date of award will be governed by Article 29.8 of the Concession Agreement, as has been directed by the Arbitral Tribunal.”

There were no dissenting opinions in this case; the judgment was unanimous.

Key Takeaways

• The phrase “unless otherwise agreed by the parties” in Section 31(7)(a) of the Arbitration and Conciliation Act, 1996, is crucial. It allows parties to contractually agree on how interest is to be awarded, overriding the general provision of the Act.
• When parties have a specific agreement on the payment of interest, the Arbitral Tribunal is bound by that agreement and cannot exercise discretion under Section 31(7)(a).
• The “sum” mentioned in Section 31(7)(a) does not automatically include interest pendente lite if there is a specific agreement between the parties on interest.
• The judgment emphasizes the importance of party autonomy and the sanctity of contracts in arbitration proceedings.

Directions

There were no specific directions given by the Supreme Court in this judgment other than the dismissal of the appeal.

Development of Law

The ratio decidendi of this case is that the phrase “unless otherwise agreed by the parties” in Section 31(7)(a) of the Arbitration and Conciliation Act, 1996, holds significant weight. When parties have a specific agreement on the payment of interest, the Arbitral Tribunal is bound by that agreement, and the “sum” under Section 31(7)(a) does not automatically include interest pendente lite. This clarifies that party autonomy and contractual agreements take precedence over the general provisions of the Act regarding interest calculation. This judgment reinforces the principle that specific contractual terms agreed upon by the parties must be respected in arbitration proceedings.

Conclusion

The Supreme Court dismissed the appeal, holding that the “sum” awarded under Section 31(7)(a) of the Arbitration and Conciliation Act, 1996, does not include interest pendente lite when there is a specific agreement between the parties regarding interest. The Court emphasized the importance of the phrase “unless otherwise agreed by the parties” and upheld the Arbitral Tribunal’s decision to follow the terms of the Concession Agreement. This judgment reinforces the principle that contractual agreements take precedence over general provisions in arbitration law.

Category

Parent Category: Arbitration and Conciliation Act, 1996

Child Categories:

• Section 31, Arbitration and Conciliation Act, 1996
• Interest in Arbitration
• Party Autonomy in Arbitration
• Interpretation of Statutes
• Contract Law
• Arbitral Award
• Arbitration Proceedings

FAQ

Q: What is the main issue in this case?

A: The main issue was whether the “sum” awarded under Section 31(7)(a) of the Arbitration and Conciliation Act, 1996, includes interest for the period between the cause of action and the arbitral award (interest pendente lite).

Q: What did the Supreme Court decide?

A: The Supreme Court decided that the “sum” does not include interest pendente lite in this case because the parties had a specific agreement regarding interest in their Concession Agreement.

Q: What is the significance of the phrase “unless otherwise agreed by the parties” in Section 31(7)(a)?

A: This phrase allows parties to contractually agree on how interest is to be awarded, overriding the general provision of the Act. It emphasizes party autonomy in arbitration.

Q: What was the impact of the specific agreement between the parties?

A: The specific agreement in Article 29.8 of the Concession Agreement regarding interest payment was crucial. It dictated how interest was to be calculated and awarded, and the Arbitral Tribunal was bound by it.

Q: How did the Court treat the judgment in Hyder Consulting (UK) Limited?

A: The Court distinguished the Hyder Consulting case, noting that it did not involve a specific agreement between the parties regarding interest, which was present in this case.

Q: What is the key takeaway from this case?

A: The key takeaway is that party autonomy and contractual agreements take precedence over the general provisions of the Arbitration Act regarding interest calculation. If there is a specific agreement on interest, the Arbitral Tribunal must adhere to it.

Q: What is the ratio decidendi of this case?

A: The ratio decidendi is that the phrase “unless otherwise agreed by the parties” in Section 31(7)(a) of the Arbitration and Conciliation Act, 1996, holds significant weight. When parties have a specific agreement on the payment of interest, the Arbitral Tribunal is bound by that agreement, and the “sum” under Section 31(7)(a) does not automatically include interest pendente lite.