Post-Award Interest Under Section 31(7)(B) Of The Arbitration And Conciliation Act, 1996 Is Mandatory And Cannot Be Contractually Excluded By The Parties In Arbitral Proceedings

Summary:

[1]In the recent Supreme Court judgment, the bench comprising Hon’ble Justice Pamidighantam Sri Narasimha and Hon’ble Justice Pankaj Mithal, addressed a statutory appeal regarding post-award interest. The primary issue revolved around whether the contractual prohibition on interest applied to post-award interest granted by the arbitrator. The Court ruled that post-award interest is not subject to contractual limitations, reaffirming an 18% post-award interest on the sum awarded by the arbitrator.

Facts:

The central issue revolved around a contract executed between R.P. Garg, the appellant, and the Telecom Department of Haryana for the trenching and laying of underground cables. After completing the work, Garg claimed payment for unpaid bills, leading to arbitration. In an award dated March 8, 2001, the Arbitrator granted Garg’s claims but denied interest based on a contractual clause that prohibited interest on amounts payable under the contract. During execution proceedings, Garg sought post-award interest, which the District Court granted at 18% per annum. However, the High Court later overturned this decision, upholding the Arbitrator’s denial of interest. This prompted Garg to appeal to the Supreme Court, seeking to reinstate the District Court’s ruling on post-award interest.

Issues:

Whether the prohibition of interest under the contract applied to post-award interest

Judgement:

The Court held that while pre-award interest (under Section 31(7)(a)) may be excluded by contractual agreement, post-award interest (under Section 31(7)(b)) is mandatory unless otherwise directed by the arbitrator. Thus, parties cannot “contract out” of post-award interest. The Court cited its earlier judgment in Morgan Securities & Credits (P) Ltd. vs. Videocon Industries Ltd. to reinforce the principle that the arbitrator’s discretion regarding post-award interest applies only to the rate, not the entitlement itself. The Court concluded that the contract’s prohibition of interest on security deposits and payments did not apply to post-award interest, which is a statutory right under Section 31(7)(b).

Accordingly, the Supreme Court restored the District Court’s decision, granting 18% interest from the date of the award until realization. The Supreme Court reaffirmed that post-award interest is governed by statutory provisions and cannot be overridden by contractual agreements. This ruling ensures that award-holders are compensated for the time taken to realize the award, reinforcing the distinction between pre-award and post-award interest under arbitration law.

Analysis:

The Supreme Court’s ruling affirms the mandatory nature of post-award interest under Section 31(7)(b) of the Arbitration and Conciliation Act, 1996, stating that any amount directed by an arbitral award must carry interest unless explicitly stated otherwise. The judgment criticizes the High Court’s misinterpretation of a contractual clause that prohibited interest on certain payments, clarifying that such prohibitions apply only to pre-award interest and that post-award interest is governed by statutory provisions. The Court distinguishes between pre-award and post-award interest, emphasizing that while the former can be excluded by agreement, the latter is a statutory right. The Supreme Court restores the District Court’s decision granting the appellant 18% post-award interest from the date of the award until realization, thereby reinforcing statutory adherence in arbitration matters and clarifying award-holders’ rights. This ruling promotes certainty in arbitration outcomes and encourages parties to utilize arbitration for dispute resolution without the fear of lengthy litigation, enhancing confidence in the arbitration process.

[1] https://ksandk.com/wp-content/uploads/413392019144855551judgement10-sep-2024-565590_compressed.pdf

BEFORE THE HON’BLE SUPREME COURT

R.P. Garg Versus The Chief General Manager, Telecom Department & Ors.

CIVIL APPEAL NO. 10472 OF 2024  

Judgment dated 10th September, 2024