Courts Cannot Grant Interest On Interest Unless It Is Specifically Provided Under Relevant Statute Or Contract: Supreme Court
The Supreme Court observed courts cannot grant interest on interest unless a statute specifically provides for the same or when specific terms and conditions of the contract stipulate the same.
The Court stated that Section 29 of the Indian Arbitration Act, 1940 (the Act) provided that a court could order for the payment of interest on the principal sum as adjudged by the award, but could not order for payment of interest on interest.
A Bench of Justice Pamidighantam Sri Narasimha and Justice Pankaj Mithal observed, "It is evident that ordinarily courts are not supposed to grant interest on interest except where it has been specifically provided under the statute or where there is specific stipulation to that effect under the terms and conditions of the contract. There is no dispute as to the power of the courts to award interest on interest or compound interest in a given case subject to the power conferred under the statutes or under the terms and conditions of the contract but where no such power is conferred ordinarily, the courts do not award interest on interest."
AOR Jyoti Mendiratta appeared for the petitioner, while ASG Aishwarya Bhati represented the respondent.
An arbitrator had passed an award following a contractual dispute between D. Khosla and Company (the petitioner) and the Union of India (the respondent) under the Indian Arbitration Act, 1940 (the Act). The award became the rule of the court under Section 14 read with Section 17 of the Act, resulting in a decree.
The petitioner argued that the 12% interest per annum awarded for the pre-award period was part of the principal sum and had lost its character as a separate interest. Therefore, the 15% interest per annum awarded for the post-award period was both on the principal sum and the 12% interest inclusive.
The High Court held that the Arbitrator had used the word ‘simple interest’ and had not specifically awarded compound interest, which is why the petitioner was only entitled to simple interest @ 12% per annum on the amount awarded as compensation for the pre-award period and simple interest @ 15% per annum for the post-award period only on the amount of compensation awarded.
The issue for determination before the Supreme Court was whether interest was payable on the interest or 15% interest per annum awarded would be on the principal sum award plus 12% per annum interest for the pre-award period.
The Supreme Court explained that Section 3(3) of the Interest Act, 1978 did not permit the court to award interest upon interest. The Bench further explained that “ordinarily the courts are not entitled to award interest upon interest unless specifically provided either under any statute or under the terms and conditions of the contract.”
The Bench stated that neither did the Act empower the Arbitrator or the court to award interest upon interest or compound interest nor there was any other provision which provided for the grant of compound interest or interest upon interest.
“Even Section 34 CPC is silent in this regard whereas Sub-Section (3) of Section 3 of the Interest Act specifically prohibits the same,” the Court remarked.
Consequently, the Court held, “We do not deem it appropriate under the facts and circumstances of the case to exercise our discretionary jurisdiction under Article 136 of the Constitution of India so as to interfere with the opinion expressed concurrently by the two courts below.”
Accordingly, the Supreme Court dismissed the SLP.
Cause Title: M/S D. Khosla and Company v. The Union of India (Neutral Citation: 2024 INSC 587)
Appearance:
Petitioner: Advocate Sourabh Malhotra; AOR Jyoti Mendiratta
Respondent: ASG Aishwarya Bhati; Advocates Akshaja Singh and Sthavi Asthana; AOR N. Visakamurthy