Clarifying Interest in Arbitration: Supreme Court Ruling on Interest on Interest.


07 August 2024 Arbitration Law >> Business & Commercial Law  

In a recent legal dispute stemming from a 1984-85 contract between the petitioner and the respondent, the Supreme Court addressed a critical issue concerning the nature of interest awarded under an arbitration award. The Arbitrator issued a decision on September 17, 1997, under the Indian Arbitration Act, 1940, which was subsequently made a court decree. This decree included provisions for two separate interest rates on the awarded compensation.

The arbitration award specified that the Union of India was to pay M/s D Khosla & Company simple interest at 12% per annum on the principal amount from the date of work completion until the award's date. Following the award, interest was set at 15% per annum until the amount was fully paid or until the court decree was realized. The petitioner received both the principal amount and the respective interest but sought further compensation, claiming that the 15% interest should apply not just to the principal amount but also include the 12% interest awarded for the pre-award period.

 
 

Initially, the Principal Senior Civil Judge, Khambhalia, denied the petitioner's request, asserting that the Arbitrator did not expressly grant interest on interest. This view was upheld by the High Court, which stated that the Arbitrator's use of "simple interest" implied that the petitioner was only entitled to the awarded interest rates on the principal amount, not compounded.


In pursuing the matter further, the petitioner argued that the 12% interest should be considered part of the principal sum, thus entitling them to claim 15% interest on the combined amount. However, the respondent's counsel countered this claim, maintaining that the Arbitrator's award did not provide for interest on the interest.

The Supreme Court underscored a fundamental principle regarding the awarding of interest: unless specifically stated, interest typically applies solely to the principal amount, not on previously accrued interest. Relevant statutory provisions, including Section 29 of the Arbitration Act and Section 34 of the Civil Procedure Code (CPC), support this interpretation, indicating that courts generally cannot award interest on interest.

The Court further emphasized that while arbitrators have the authority to grant interest, this authority is limited by the express terms of the award. The distinction between the terms used in different legal provisions was highlighted, particularly between the terms "principal sum adjudged" under the CPC and "sum directed to be paid" in the Arbitration and Conciliation Act, 1996.

The judgment reaffirmed the notion that courts should not award compound interest or interest on interest unless explicitly stipulated in the applicable statutes or contracts. In this case, the lack of such stipulations led to the dismissal of the Special Leave Petition.

In conclusion, the Supreme Court's ruling serves as a significant reminder of the need for clarity in arbitration awards and the importance of precise language in legal contracts. As the legal landscape continues to evolve, understanding these intricacies becomes essential for all parties involved in contractual agreements.

  Arbitration and Conciliation Act, 1996    Code of Civil Procedure, 1908