Arbitration & Conciliation Act Allows Tribunal To Award Interest At Reasonable Rate Only For Two Periods, Pendente Lite & Future: Delhi HC

The Delhi High Court has observed that Section 31 (7) clauses (a) and (b) of the Arbitration and Conciliation Act, 1996 (Act) conferred the power to the Arbitration Tribunal (tribunal) to award interest at a reasonable rate between the date when the cause of action arose and when the award is given. The section only recognizes two periods for which interest can be awarded: first, the period from the date the cause of action occurred until the award is rendered, and second, from the date of the award until the actual payment of the sums. This indicates a clear deviation from the regime that was in place under the Arbitration Act of 1940 which indicated three distinct periods; pre-reference/past period, pendente lite and future period. 

“Section 31(7) of the Act thus in unequivocal terms recognizes only two periods for which interest may be awarded. These have been spelt out to be the period falling between the date on which the cause of action arose till the Award is made and the second comprising of the period starting from the date of the Award till the actual payment of the sums that the AT may have found the respondent liable to pay. This thus constitutes a clear departure from the interest regime which prevailed under the Arbitration Act, 1940 and where three distinct periods- pre-reference/past period, pendente lite and future period were recognized to exist”, the bench comprising Justice Yashwant Varma and Justice Dharmesh Sharma noted.

Senior Advocate Dhruv Mehta appeared for the Appellant and Advocate M. Lall appeared for the Respondent.

An Appeal was filed under Section 37 of the Act challenging the impugned judgement and order and sought partial setting aside [para 58(b)] of the impugned Award by the Tribunal. The Tribunal had granted directions stating that interest would be charged not only on the awarded principal amount but also on that amount plus the interest from the previous period. The Appellant contended that the Tribunal had erred, committed a manifest illegality and awarded interest contrary to the provisions of Section 31(7) of the Act.

The Bench placed reliance on Sayeed Ahmed and Company vs. State of Uttar Pradesh and Others [(2009) 12 SCC 26] and noted that there is no longer a clear distinction between the pre-reference/past period and pendente-lite period in arbitrations governed by the Act. Therefore, the Tribunal was not allowed to issue directions for interest payment as outlined in Para 58(b). As a result, the period between July 1987 and the date of the Award, would have fallen under Section 31(7)(a) of the Act, and the period from the date of the Award until the appellant actually paid the amounts would fall within the net of Section 31(7) clause (b) of the Act.

In this context, the Court held, “Sayeed Ahmed clearly holds that the distinction between the pre-reference/past period and pendente-lite period has clearly vanished and is inapplicable to arbitrations governed by the Act. It was thus not open for the AT to have framed the directions for payment of interest in the manner as specified in Para 58(b). The period falling between July 1987 till the date of Award would have constituted the period contemplated under Section 31(7)(a) of the Act and the period commencing from the date of Award till the amounts were actually paid by the appellant being the period which would fall within the net of Section 31(7)(b) of the Act”.

The Court asserted that the Tribunal made two errors: first by combining principal and interest, and levying interest on a compounded basis. Second, it also directed payment of interest on the total amount, including both principal and interest for the pre-reference period.

Additionally, the Court emphasised that the inclusion of interest for the pre-reference period with the principal amount was illegal. As per Section 31(7), the principal amount remains static and interest can be prescribed later. The interest resumes from the date the cause of action arises and ends at the date of the Award.

The Court emphasised, “Not only are the aforenoted directions contrary to the plain and unambiguous language of Section 31(7) of the Act, they are in evident violation of the principles laid down by the Supreme Court in Sayeed Ahmed. The AT has thus clearly committed a manifest illegality in proceeding to include the amount of interest determined as payable for the pre-reference/past period to be added to the principal amount. In terms of the statutory scheme underlying Section 31(7) of the Act, the principal amount remains static and as determined by the AT”.

Accordingly, the Court allowed the appeal, set aside paragraph 58(b) of the impugned award and released the balance held in deposit in the Court in favour of the appellant.

Cause Title: National Projects Constructions Corporation Ltd v M/S Interstate Construction (2023 DHC 5312-DB)

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