In Interstate Construction vs. National Projects Construction Ltd (2025), Supreme Court's Division Bench of Justices Abhay S. Oka and Ujjal Bhuyan directed against the judgment and order dated August 1, 2023 passed by Delhi High Court's Division Bench of Justice Yashwant Varma in FAO (OS) (Comm) No.175 of 2021. The 34-page long judgement was delivered on May 15 2025. It was authored by Justice Ujjal Bhuyan.
Justice Varma had allowed the appeal of National Projects Construction Corporation Limited,(NPCC) or the respondent hereinafter, filed under Section 37 of the Arbitration and Conciliation Act, 1996 after setting aside that part of the judgment and order dated August 2, 2021 passed by a Single Judge of the High Court under Section 34 of the 1996 Act upholding the directions contained in paragraph 58(b) of the award dated October 28, 2020 as well as setting aside the directions of the arbitral tribunal as contained in paragraph 58(b) of the said award.
The respondent had engaged the services of the appellant for executing a contract relating to Ramagundam Super Thermal Power Project, Ramagundam, District Karimnagar in the then composite State of Andhra Pradesh. In this regard, two separate work orders were issued.
Thereafter, contract agreement was entered into between the parties. As per clause 4 of the conditions of contract read with clause 15 of the special conditions attached to the work orders, all the disputes and differences between the parties were to be settled by way of arbitration.
It is stated that appellant had completed the contract work in the year 1987. The respondent had paid the appellant the contractual dues after withholding certain sums on account of recoveries. The appellant disputed such recoveries. The appellant also raised certain claims which were not accepted by the respondent.
In view of such disputes and differences, appellant invoked the arbitration clause by issuing notice dated May 17, 1993.
The respondent did not take immediate steps for appointment of an arbitrator. After considerable delay, by communication dated October 7, 1997, respondent appointed Shivamoy Ghosh, Additional General Manager, NPCC, Madras Sector, Chennai as the sole arbitrator to arbitrate on the subject dispute.
The appellant filed statement of claims before the learned arbitrator on January 20, 1998 claiming an aggregate amount of Rs.4,46,29,404.00 along with pendente lite and future interest at the rate of 24 percent per annum till final realization of the amount.
The appellant sought for a direction from the arbitrator to the respondent to supply various documents related to the dispute. However, arbitrator only permitted the appellant an opportunity to inspect the documents and did not issue any direction to the respondent for supply of copies.
The aggrieved thereby, appellant filed a petition under Section 14 of the 1996 Act before the High Court seeking termination of the mandate of the arbitrator and for appointment of a new arbitrator in his place. This petition was registered as OMP No. 214/2002. By order dated October 11, 2004, Single Judge terminated the mandate of Shivamoy Ghosh and appointed Shri A.S. Chandhiok, Senior Advocate, as the sole arbitrator.
The respondent challenged the said order of the Single Judge dated October 11, 2004 before the Division Bench of the High Court in FAO (OS) No.241/2004. By order dated February 2, 2005, Division Bench appointed Shri L.R. Gupta, retired Director General of CPWD as the sole arbitrator.
Before L.R. Gupta, the arbitrator, respondent while filing its reply to the statement of claims filed by the appellant, also challenged the authority of one Jagdish Raj Yadav to file the claim on behalf of the appellant. In this regard an application dated February 23, 2007 was filed before the arbitrator. The arbitrator dismissed the said application vide the order dated August 3, 2007.
This order was challenged by the respondent before the learned Single Judge of the High Court by filing a petition under Section 34 of the 1996 Act, being OMP No.537/2007.
Notably, L.R. Gupta resigned as the sole arbitrator on June 23, 2008.
By order dated January 30, 2007, Single Judge disposed of the petition filed under Section 34 of the 1996 Act bearing OMP No.537/2007.
The appellant filed a petition under Section 15 of the 1996 Act before the High Court being OMP (T) (Comm) No.30/2018 seeking appointment of an arbitrator in place of L.R. Gupta who had resigned. The said petition was disposed of by the Single Judge of the High Court vide order dated May 31, 2018 reconstituting the arbitral tribunal by appointing Justice R.C. Jain, a former Judge of the High Court, as the sole arbitrator to arbitrate on the disputes between the parties.
The new arbitrator held the first hearing on May 3, 2019 and finally pronounced the award on October 28, 2020. While the arbitral tribunal allowed the claims of the appellant under several heads, we are concerned with the contentious part of the award relating to payment of interest (claim No. 7).
The respondent filed a petition under Section 34 of the 1996 Act before the Single Bench of the High Court for setting aside the award dated October 28, 2020. The same was registered as OMP (Comm) No. 78/2021. By the judgment and order dated August 2, 2021, Single Judge partly allowed the petition by setting aside the award with regard to future interest at the rate exceeding 9 percent per annum from the date of the award till the date of payment.
The aggrieved by the judgment and order dated August 2, 2021 passed by the Single Judge, respondent preferred an appeal under Section 37 of the 1996 Act before the Division Bench of the High Court which was registered as FAO (OS) (Comm) No. 175/2021. In the appeal, senior counsel for the respondent (which was the appellant before the Division Bench) clarified that the challenge would be restricted to the directions issued by the arbitral tribunal insofar the issue 9 of interest was concerned. This was further clarified by submitting that the challenge was not with respect to the rate of interest or award of interest for the pre-reference/past period.
Grievance highlighted was against the directions contained in sub-paragraph (b)(i) of paragraph 58 to the extent of the arbitral tribunal stipulating that interest for the period mentioned therein would be leviable not merely on the principal amount as awarded but upon the said amount inclusive of the amount of interest relating to the pre-reference/past period. Likewise, arbitral tribunal awarded interest on identical terms in subparagraph (b)(ii) of paragraph 58 which was objected to. Division Bench of the High Court vide the judgment and order dated August 1, 2023 (impugned judgment) allowed the appeal by setting aside the directions contained in paragraph 58(b).
Aggrieved thereby, the appellant filed the related SLP (C) No.23235/2023 before the High Court. By order dated October 19, 2023, the Court issued notice. In the hearing held on February 25, 2025, leave was granted.
There was no challenge by either parties to the award on merit, challenge of the respondent being confined only to the interest part.
While holding that appellant was entitled to award of interest for the pre-reference period i.e. from the date on which the cause of action arose till filing of the claim before the arbitral tribunal as well as for the pendente lite period and also for the future period, arbitral tribunal agreed with the respondent that no interest should be awarded to the appellant for the period when there was absolute laches on the part of the appellant. The Arbitral tribunal held that for the period from 01.01.2009 till 31.12.2016, that is for a period of about eight years, there was complete laches on the part of the appellant. Therefore, the arbitral tribunal declared that appellant would not be entitled to any interest for the aforesaid period.
The respondent filed a petition under Section 34 of the 1996 Act before the High Court impugning the arbitral award dated 28.10.2020. Vide the judgment and order dated 2.08.2021, Single Judge upheld the claims awarded by the arbitral tribunal. On the question of interest, Single Judge framed the question as to whether interest awarded by the arbitral tribunal was exorbitant and unsustainable. The Single Judge held that arbitral tribunal’s decision to award pre-reference interest at the rate of 18 percent per annum did not warrant any interference. As regards pendente lite interest, Single Judge while noting that arbitral tribunal had awarded 12 percent interest per annum for the period from 20.01.1998 till 31.12.2008 and again from 01.01.2017 till 28.10.2020, justified the decision of the arbitral tribunal not to award interest for the period from 01.01.2009 to 31.12.2016 as during this period the appellant was remiss and did not pursue its claim before the arbitral tribunal diligently. On the rate of interest, Single Judge held that interest at the rate of 12 percent per annum could not by any stretch be considered to be exorbitant or unreasonable but held that 18 percent future interest from the date of the award till the date of payment granted by the arbitral tribunal was ex facie erroneous as according to learned Single Judge the interest rate should have been 2 percent higher than the current rate of interest prevalent on the date of the award.
Therefore, this portion of the award was set aside by the Single Judge; instead Single Judge awarded future interest holding that it could not have been in excess of 9 percent per annum. Therefore, Single Judge partly allowed the petition under Section 34 of the 1996 Act to the extent of setting aside the award of future interest at a rate exceeding 9 percent per annum from the date of the award till the date of payment.
This brought the Court to the impugned judgment and order dated 01.08.2023. We have already noted about the limited nature of challenge made by the respondent during the hearing of the appeal filed under Section 37 of the 1996 Act. The senior counsel appearing for the respondent clarified that the challenge to the award stood restricted to the directions issued by the arbitral tribunal insofar the issue of interest was concerned. He clarified that the challenge was not with respect to either the rate at which interest was awarded or the grant of interest for the pre-reference/past period. The grievance was confined to the directions contained in paragraph 58(b)(i) of the award and the similar nature of interest in paragraph 58(b)(ii) inasmuch as the arbitral tribunal proceeded to award interest on identical terms: on the principal amount plus the amount of interest for the pre-reference/past period. Thr Division Bench referred to Section 31(7)(a) and (b) of the 1996 Act as well as placed reliance on the decision of this Court in Sayeed Ahmed and Company Vs. State of Uttar Pradesh lite period have been subjected to further levy (2009) 12 SCC 26 and came to the following two conclusions:
i)Section 31(7) recognizes only two periods for which interest may be awarded. The two periods are, firstly from the date on which the cause of action arose till passing of the award and secondly from the date of the award till actual payment. Therefore, the distinction between pre-reference/past period and pendente lite period no longer existed. The period from the date of cause of action i.e. July, 1987 till the date of the award dated 28.10.2020 would constitute the period contemplated under Section 31(7)(a) of the 1996 Act. The period commencing from the date of award till payment would be the second period within the meaning of Section 31(7)(b) of the 1996 Act.
Therefore, the arbitral tribunal committed an illegality in awarding interest for three periods: pre-reference/past periods, pendente lite and for the future period.
ii) Arbitral tribunal committed further illegality in forging the principal amount with interest as would be evident from paragraph 58(b) of the award. Interest awarded for the pre-reference period as well as for the pendente lite period have been subjected to further levy of interest for the said periods by adding the interest amount with the principal amount awarded. This amounted to levying compound interest which is impermissible. Accordingly, the directions contained in paragraph 58(b) were set aside by the Division Bench.
In the Court's considered view, the reasonings given by the Division Bench are fallacious. We say so for the reasons mentioned hereunder. Section 31 of the 1996 Act is the relevant provision.
It deals with the form and contents of arbitral award. Section 31 has eight sub-sections. Sub-section (7) is central to the debate and after the amendment with retrospective effect from 23.10.2015.
The Court observed:"We are unable to agree with the view expressed by the Division Bench. Even in Sayeed Ahmed and Company (supra) relied upon by the Division Bench, the Bench held that Section 31(7) had carved out two periods, the first period being from the date on which the cause of action arose till the date on which the award is made and the second period being from the date of award till the date of payment. As regards the first period, the Bench clarified that it includes the pre-reference period plus pendente lite period. Though the arbitral tribunal had granted interest for three periods: pre-reference period, pendente lite and post award period, the first two period basically comprises of the period contemplated under clause (a) of sub-section (7) of Section 31. It is another matter that the arbitral tribunal awarded varying degrees of interest for the two sub-periods: 18 percent per annum for the pre-reference period and 12 percent as pendente lite, excluding from the said period, the period of eight years when the appellant was found to be remiss in pursuing its claims before the arbitral tribunal. This is also permissible as we shall explain.
Therefore, Sayeed Ahmed and Company (supra) does not exclude or does not say that interest should not be granted for the pre-reference period. All that it explains is that Section 31(7)(a) has joined the two periods of interest: pre-reference and pendente lite."
It added: "This position has been clarified by a recent decision of the High Court in Pam Developments Private Limited Vs. State of West Bengal (2024) 10 SCC 715 After extracting Section 31(7) of the 1996 Act, the High Court held that power of the arbitrator to grant pre-reference interest, pendente lite interest and post award interest under Section 31(7) of the 1996 is now fairly well settled. The Bench, thereafter, culled out the following legal propositions in this regard highlighting the difference in the position of law qua the Arbitration Act, 1940 vis-à-vis the 1996 Act."
This position has been further explained by a recent decision of this Bench in North Delhi Municipal Corporation vs. S.A. Builders Ltd. (2024) SCC Online SC 3768. After adverting to Section 31(7) of the 1996. Section 31(7) of the 1996 Act, the Supreme Court explained it as under:
36.1. From a minute reading of sub-section (7), it is seen that it has got two parts: the first part i.e. clause (a) deals with passing of award which would include interest up to the date on which the award is made. The second part i.e. clause (b) deals with grant of interest on the ‘sum’ awarded by the arbitral tribunal.
The Court noted that the Bench had observed that under Section 31(7) of the 1996 Act, an arbitral tribunal has the power to grant – (i) pre-award (ii) pendente lite (iii) post-award interest. The Bench explained the reason for award of such interest in the following manner:
From the provisions contained in Section 31(7) of the 1996 Act, it is evident that an arbitral tribunal has the power to grant (i) pre-award (ii) pendente lite (iii) post-award interest. Intention behind awarding pre-award interest is primarily to compensate the claimant for the pecuniary loss suffered from the time the cause of action arose till passing of the arbitral award.
Further, this is also to ensure that the arbitral proceeding is concluded within a reasonable period to minimise the impact of the pre-award interest as well as interest pendente lite; thereby promoting efficiency in the arbitration process. Similarly, grant of post-award interest also serves a salutary purpose. It primarily acts as a disincentive to the award debtor not to delay payment of the arbitral amount to the award holder.
Thus, what Section 31(7)(a) has done is that there is now a statutory recognition of the power of the arbitral tribunal to grant pre-reference interest from the date on which the cause of action arose till the date on which the award is made. There was a vacuum in the Arbitration Act, 1940 as there was no such provision for granting pre-reference interest. It was through judicial pronouncements that such power of the arbitrator to grant pre-reference interest was conferred. Now under Section 31(7)(a) of the 1996 Act, such power is statutorily recognized.
A careful and minute reading of clause (a) of sub-section (7) of Section 31 of the 1996 Act makes it clear that the arbitral tribunal has the discretion to include in the sum awarded interest at such rate as it deems reasonable on the whole or any part of the money awarded for the whole or any part of the period from the date on which the cause of action arose till the date on which the award is made.
The Supreme Court excluded that part of the sentence ‘on the whole or any part of the money’ from its analysis since it thought it was not relevant to the controversy. If we exclude this portion, what then becomes discernible is that the arbitral tribunal has the discretion to include in the sum awarded : firstly, interest at such rate as it deems reasonable; and secondly, 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. This would mean that the arbitral tribunal can exclude a period from the date on which the cause of action arose till the date on which the award is made for the purpose of grant of interest, as has been done in the present case. It would also mean that the arbitral tribunal can grant interest 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. It can be a composite period or the said period can be further sub-divided, as done in the present case i.e. from the date of cause of action to filing of the claim and from the date of filing of the claim till the date of the award excluding the period when the appellant was found to be remiss. It would also mean that there can be one rate of interest for the whole period or one or more rates of interest for the sub-divided periods as has been done in the instant case.
In Court's opinion, this would be the correct approach to interpret Section 31(7)(a), given the scheme of the 1996 Act.
That being the position, we are of the view that the Division Bench had fallen in error by holding that the arbitral tribunal had no jurisdiction to award interest for two periods i.e.pre-reference and pendente lite when the statute provides for only one period viz. from the date when the cause of action arose till the date of the award. The view expressed by the High Court is not the correct interpretation of Section 37(1)(a) of the 1996 Act as explained by us supra as well as in Pam Developments Private Limited (supra) and S.A. Builders Ltd. (supra).
The Supreme Court dealt with the second issue on which the High Court set aside the directions of the arbitral tribunal contained in paragraph 58(b) of the award. According to the Division Bench, the arbitral tribunal had committed an illegality in forging the principal amount with interest while computing the awarded amount on which future interest is to be paid. Interest awarded for the past period could not have been subjected to further levy of interest during the pendente lite or post award period on merger with the principal amount as this would amount to levy of compound interest.
This aspect of the matter is no longer res integra.
In State of Haryana vs. S.L. Arora (2010) 3 SCC 690, a 2-Judge Bench of the Supreme Court observed that as regards pre-award period,interest has to be awarded as specified in the contract and in the absence of any contract, as per the discretion of the arbitral tribunal. However, with regard to the post-award period, the interest is payable as per the discretion of the arbitral tribunal and in the absence of exercise of such discretion, at the mandatory statutory rate of 18 percent per annum. Award of interest like award of cost are ancillary matters. Therefore, the expressions sum for which the award is made and the sum directed to be paid by an arbitral award contextually refers to the award on the substantive claims and not ancillary or consequential directions relating to interest or cost. It was held that arbitral tribunals did not have the power to award interest upon interest or compound interest either for the pre-award period or for the post-award period.
A 3-Judge Bench of the Supreme Court in Hyder Consulting (UK) Ltd. vs. Governor, State of Orissa (2015) 2 SCC 189 opined that it was not possible to agree with the conclusion in S.L.Arora (supra) that Section 31(7) of the 1996 Act does not require that interest which accrues till the date of the award be included in the sum from the date of the award for calculating the post award interest. Justice Bobde (as His Lordship then was) authoring the majority opinion was of the view that the conclusion reached in S.L. Arora (supra) did not seem to be in consonance with the clear language of Section 31(7) of the 1996 Act. Hyder Consulting (UK) Ltd. (supra) declared that S.L.Arora (supra) was wrongly decided in that it held that a sum directed to be paid by an arbitral tribunal and the reference to the award on the substantive claim did not refer to interest pendente lite awarded on the sum directed to be paid upon award and that in the absence of any provision of interest upon interest in the contract, the arbitral tribunal did not have the power to award interest upon interest or compound interest either for the pre-award period or for the post-award period. It has been clarified that the ‘sum’ includes the principal as adjudged together with the interest granted.
A three-Judge Bench of this Court in UHL Power Company Ltd. vs. State of Himachal Pradesh (2022) 4 SCC 116 declared that the judgment in S.L. Arora (supra) has since been overruled by a three-Judge Bench of this Court in Hyder Consulting (UK) Ltd. (supra). The majority view in Hyder Consulting (UK) Ltd. (supra) is that post-award interest can be granted by an arbitrator on the interest amount awarded.
This view was reiterated by the Supreme Court in subsequent decisions (please see Delhi Airport Metro Express Private Ltd. vs. Delhi Metro Rail Corporation (2022) 9 SCC 286 and Morgan Securities and Credits Private Ltd. vs. Videocon Industries Limited (2023) 1 SCC 602.
In S.A. Builders (supra), this very Bench of the Court after a thorough analysis of Section 31(7)(a) and Section 31(7)(b) of the 1996 Act had come to the following conclusion:
It emerged from the analysis that "the ‘sum’ so awarded by the arbitral tribunal which may include interest from the date when the cause of action arose to the date of the award, would carry further interest of 18 percent from the date of the award to the date of payment unless the arbitral award otherwise directs (referring to the pre 23.10.2015 position). Thus, the legislative intent is that the awarded sum whether inclusive of interest or not, in case included, then from the date of cause of action to the date of award, would carry further interest from the date of the award to the date of payment."
The Court concluded: "It has been held that the sum awarded would mean the principal amount plus the interest awarded from the date of cause of action upto the date of the award. The sum awarded in Section 31(7)(a) would mean principal amount plus the interest awarded. Thereafter, as per Section 31(7)(b) of the 1996 Act, the sum (principal amount + interest) would carry further interest at the rate of 2 per cent higher than the current rate of interest prevalent on the date of the award to the date of payment. Therefore, in view of the clear legal position delineated as above, impugned judgment of the Division Bench dated 01.08.2023 cannot be sustained."
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