07 August 2024 Arbitration Law >> Business & Commercial Law  

In a recent legal case of M/s D. Khosla And Company v/s The Union Of India involving a contract from the fiscal year 1984-85, a dispute arose between the petitioner and the respondent, leading to an arbitration award on September 17, 1997. This award, governed by the Indian Arbitration Act, 1940, was made a rule of the court under Section 14 read with Section 17, and a corresponding decree was issued.

Details of the Award and Decree:

The arbitrator's award specified interest payments in two distinct phases:

1. Pre-Award Interest: 12% per annum simple interest on the awarded amount from the completion of work until the date of the award.
2. Post-Award Interest: 15% per annum on the awarded amount from the date of the award until either the payment date or the court decree, whichever is earlier.

The court decree, following the award, reflected these terms:

• Interest at 12% per annum on the principal amount up to the date of the award.
• Interest at 15% per annum from the date of the award until realization of the decretal amount.

Contention and Legal Dispute:

The petitioner, dissatisfied with the execution of the decree, argued that the 15% interest should be calculated on the principal sum plus the pre-award interest, essentially seeking interest on interest. The Principal Senior Civil Judge, Khambhalia, and later the High Court, rejected this claim, ruling that interest was only applicable to the principal amount without considering the pre-award interest for the post-award period.

The petitioner then appealed to the Supreme Court via a Special Leave Petition.

Supreme Court’s Analysis:

The Supreme Court's analysis revolved around whether the 15% interest per annum awarded should cover not only the principal amount but also the 12% pre-award interest. Key points of consideration included:

1. Statutory Provisions: Section 29 of the Arbitration Act and Section 34 of the Code of Civil Procedure (CPC) generally allow interest to be paid on the principal amount adjudged by the award or decree, not on accrued interest. This principle is reinforced by the Interest Act, 1978, which prohibits awarding interest on interest unless specifically authorized by statute or contract.

2. Judicial Precedents: Previous cases, including Oil and Natural Gas Commission vs. M.C. Clelland Engineers S.A. and State of Haryana and Others vs. S.L. Arora and Company, established that interest typically applies to the principal amount only, and compound interest or interest on interest is not ordinarily permitted unless explicitly stated.

3. Interpretation of Award and Decree: The Court observed that the award and decree in question did not specify compound interest or interest on the pre-award interest amount. Both documents clearly delineated interest for pre-award and post-award periods separately, without combining these components.

Conclusion:

The Supreme Court upheld the concurrent findings of the lower courts, affirming that interest was only to be calculated on the principal sum and not on the interest accrued during the pre-award period. The Court's decision aligns with the prevailing legal principles that typically prevent the awarding of interest on interest unless explicitly provided for by contract or statute. In summary, this case reaffirms the traditional legal stance that post-award interest is computed solely on the principal amount, without incorporating pre-award interest into the calculation for subsequent interest accrual.

Arbitration and Conciliation Act, 1996