SCOPE OF SECTION 31 (7) OF ARBITRATION AND CONCILIATION ACT, AND

WHAT ARE THE CONSIDERATIONS FOR GRANTING INTEREST?

The right of the Arbitrator to assign post-award interest on the cumulative amount of
principal plus interest paid has a tumultuous past in the judiciary, stretching back to rulings
under the 1940 Arbitration Act ("1940 Act"). Hyder Consulting (UK) Ltd. v. State of Orissa 1
was recently decided by a three-judge court. The Supreme Court was asked to determine if its
earlier decision in the State of Haryana v. S.L. Arora and Company2 was right. In these two
cases, the question was whether the term "amount" in section 31(7)(b) of the Arbitration and
Conciliation Act, 1996 (hereinafter "1996 Act") should be understood to include pre-award
interest in the principal sum of the arbitral award for the purposes of awarding post-award
interest. Though SL Arora had ruled that it did not, the three-judge bench (by a 2:1 majority)
has ruled that it does, allowing post-award interest to be calculated on the total principal and
pre-award interest.

Section 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.

1[(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.

Explanation.—The expression “current rate of interest” shall have the same meaning as
assigned to it under clause (b) of section 2 of the Interest Act, 1978 (14 of 1978).]

According to the aforementioned clause, the time for awarding interest has been divided into
two stages: from the date that the cause of action occurred to the date of award, and from the
date of award to the date of payment. The issue that has come up for debate was whether,

1
2014 (13) SCALE 169
2
(2010) 3 SCC 690
under section 31(7)(b), the arbitrator may grant interest from the date of award till the date of
payment on the principal sum together with interest awarded under section 31(7)(a).

There were no express clauses in the 1940 Act giving arbitrators the right to grant interest,
either before or after the award. It just said that after the court has decreed the grant, the court
may award interest on the principal amount from the date of the decree until payment is
made3. Nonetheless, the arbitrator was found to have the authority to grant interest under the
Interest Act of 1978 and Section 34 of the Code of Civil Procedure, 1908 ("CPC") – the same
rules that enabled courts to grant interest.4 As a result, the authority of arbitrators and judges
to grant interest in civil cases was interchangeable under the former arbitration system.

The court will award interest for three different dates under Section 34 of the CPC: prior to
the institution of the suit, pendete lite interest, and interest from the date of the decree. It has
long been established by numerous judicial pronouncements that Section 34 of the CPC does
not grant power to reward compound interest or interest on interest. 5 However, a dispute
about whether post-decree interest should be paid on pre-decree interest – the argument being
that doing so would lead to enabling 'interest on interest' – was settled by holding that the pre-
decree interest was to be found subsumed in the principal balance, and thus post-decree
interest could be paid on it. Before the 1996 Act was enacted, it was largely assumed that
section 31(7) was merely a codification of the S. 34 CPC powers as defined by courts over
time and extended to arbitrators. The Supreme Court, on the other hand, held in the S.L.
Arora case that S. 31(7) was a deliberate deviation and an exhaustive clause in terms of
arbitrator jurisdiction, and that judgments made under the 1940 Act were incidental to its
reading.

S.L. ARORA’S CASE:

In the S.L. Arora case, the arbitrator awarded the Respondent INR 14.94 lakh plus interest up
to the date of award, and the award specified that "future interest shall be charged @ 18
percent per annum on the amounts owed to the appellant from the date of award up to the
actual date of payment" if the cumulative amount of award plus interest was not paid within
30 days from the date of award. The Respondent claimed that the term "sums owed to the
nominee" meant that post-award interest was due on the cumulative amount, which included
the award amount plus interest before the date of award. The Appellants, on the other hand,
3
Section 29, Arbitration Act, 1940
4
State of Rajasthan v. Ferro Concrete Construction Pvt. Ltd. (2009) 3 Arb LR 140
5
State of Maharashtra v. Saifuddin Mujjaffarali Saifi AIR 1994 Bom 48
argued that Section 31(7) of the 1996 Act allows an arbitrator to pay future interest only on
the principal sum, not the interest accumulated on it.

After examining the language of Section 31(7) of the 1996 Act, the Court held that the
section expressly contemplates only the grant of basic interest, not compound or interest on
interest. It went on to say that the said segment doesn't specifically include payment of
compound interest or payment of interest on interest, implying that arbiters don't have that
authority. The Court, on the other hand, determined that compound interest should be
awarded for the pre-award duration only if the contract specifically provided for it, but not
otherwise.

The Court further discussed McDermott International Inc. v. Burn Standard Co. Ltd., 6 U.P.
Coop. Federation Ltd. v. Three Circles7, and Oil & Natural Gas Commission v. M.C. Clelland
Engineers S.A.8, which were cited by the Respondent's counsel. The judgement of M.C.
Clelland was found to be irrelevant in this case because it was made under the 1940 Act.
Furthermore, because McDermott did not address the arbitrator's right to award interest on
interest, and because Three Circles incorrectly relied on a provision of the McDermott
decision that registered parties' claims rather than the court's decision – the Three Circles
decision was considered to be per incuriam.

The Supreme Court therefore held that:

1. Arbitrator's power to grant interest is contained exhaustively in Section 31(7) of the

1996 Act and decisions under the 1940 Act are not relevant.
2. Arbitrator has complete discretion in granting simple interest for pre-award and post-
award period. This discretion applies to the period for which interest is to be allowed,
the sum on which interest is to be allowed, and the rate of interest.
3. Arbitrator has no power to grant compound interest except if the contract between
parties contains a specific provision for the same, compound interest can be allowed
for pre-award period.
4. Pre-award interest does not subsume into the principal sum awarded for the purposes
of calculation of post-award interest. Therefore, post-award interest can only run on

6
(2006) 11 SCC 181
7
(2009) 10 SCC 371
8
(1999) 4 SCC 327
 the principal sum awarded and not on the sum granted as interest on such principal
sum for the pre-award period.

HYDER CONSULTING:

Following the S.L. Arora case, a number of high court rulings have held that when granting
post-award interest, interest cannot be attached to the principal amount 9. However, it was
believed that the SL Arora decision established an arbitrary divide between the powers of the
court and arbitrators by allowing arbitrators to give post-award interest on the amount granted
as interest for the pre-award duration. S.L. Arora was incorrectly determined on this basis,
according to a division bench of the Apex Court, with the key argument being that it failed to
obey the Three Circle and McDermott rulings on equivalent benches. The division bench saw
enough substance in the argument to refer the case to a three-judge panel to address the
obvious discrepancies between the rulings of different Apex Court equivalent benches. The
reference resulted in the three-judge bench decision mentioned in this note.

The decision in Hyder Consulting was a 2:1 majority overruling the S.L. Arora case, with
Justice Bobde and Justice Sapre rendering separate but concurring decisions, and Chief
Justice Dattu giving a dissenting opinion. Justice Bobde, in his majority judgment, overruled
the S.L. Arora case on the limited point of whether interest awarded for the pre-award period
can be said to be subsumed in the principal sum for the purposes of awarding post-award
interest. He held that it does, since the power of the arbitrator to grant interest is synonymous
with S. 34 of the CPC, concluding that arbitrators have the power to award post-award
interest on the total sum of principal amount awarded along with pre-award interest. After
analyzing the decisions in McDermott, Three Circles and M.C.Clelland, he agreed with the
conclusion in S.L. Arora that these decisions were inapplicable to the present issue. However,
thereafter he differed with the conclusion in S.L. Arora, and opined that since Section 37(1)
gives the arbitrator the discretion to award interest on the principal sum, or to not award any
interest at all, this would imply that the term 'sum' in Section 37(1)(a) could either mean only
a principal amount or amount plus interest. Likewise, under Section 37(1)(b), the same
meaning should be attributed to the word sum – either only the principal amount or the
principal amount plus interest, depending on the award rendered by the arbitrator. The Court
explained that this conclusion is especially obvious since the legislature has not chosen to
9
Indian Farmers Fertiliser Cooperative Ltd. v. Duggal Constructions (India) Ltd. 186 (2012) DLT 658; Zenith
Ropes Pvt. Ltd. v. Union of India, 2013(1) ARB LR 27 (Delhi); Pt. Munshi Ram and Associates (P) Ltd. v.
DDA, (2011) 163 PLR 20
prefix the term 'sum' with the word 'principal' or any other qualifying term, which implies that
'sum' only means 'a particular amount of money'.

Justice Sapre, in his separate but concurring judgment, further opined that once interest is
granted in the award by the arbitrator, it becomes a part of the "sum" and there is no
distinction between "sum" with interest and without interest. He concluded that, therefore, it
was not even appropriate to term arbitrator's award of future interest on the sum as 'interest
on interest', since the future interest is on the 'sum' which includes interest.

In his dissenting judgment, Chief Justice Dattu, while holding that the S.L. Arora was rightly
decided, opined that the word 'sum' in its most common usage would mean 'money' and
hence, when the clause states that interest may be awarded on the "sum" for which the award
is made, the same would mean that interest may be awarded on the "money" for which the
award is made. The Court held that "money" in this case can only mean the principal sum
awarded. It went on to say further that 'interest' is an amount that is awarded by way of
compensation for withholding the money that rightfully belongs to the other party. In the case
of an award, the principal sum is the amount that has been withheld by one party from
another under the relevant contract and hence interest can be awarded only on that amount.
He thus concluded that Section 31(7) should not be construed as vesting an arbitrator with
power to grant interest on interest.

Hyder Consulting has now settled the inherent anomaly in favour of the arbitrator's right to
assign post-award interest on the pre-award interest. With this ruling, the jurisdiction of
courts and arbitrators has once again become synonymous, making the right to restore interest
independent of the forum in which the case is heard. Except for the fact that arbitrators
cannot grant compound interest for the pre-award duration unless the contract expressly
allows it, the arbitrator's ability to grant interest in India is now comparable to transnational
norms in other leading arbitral seats.