Grant of Post-Award Interest - Does the Award Dictate the Outcome?

The concept of interest and the liability to pay interest in relation to arbitral awards and judicial decrees is founded in the doctrine of compensation. While the Arbitration Act, 1940 did not empower the arbitrator to grant interest, the Arbitration and Conciliation Act, 1996 (Act) equips arbitrators with this power.

Under Section 31(7) of the Act, arbitrators may grant interest under the Act at three stages of the proceedings i.e., the period from:

- the cause of action to the filing of the claim before the arbitrator;

- the filing of the claim to the date of the arbitral award (pendente lite interest); and

- the date of the award to the actual payment of the sum awarded.

Accordingly, the grant of interest under Section 31(7) is divided into two parts - Clause (a) deals with interest before the award is passed (pre-award interest), and Clause (b) deals with interest after the award is passed (post-award interest). Pre-award interest is built into the Act to ensure that proceedings reach their conclusion without unnecessary delay, while post-award interest is to ensure that amounts granted under the award are paid in a speedy manner.¹

• What is post-award interest – the debate surrounding this expression

  Post-award interest is awarded purely as a deterrent against award-debtors avoiding payment or using delay tactics², once an award has been made against a party.

  While the legislature has, under Clause (a) of Section 31(7) of the Act, expressly provided an arbitrator with wide discretion (subject to any agreement between the parties as provided in the arbitration agreement) in respect of granting pre-award interest, Clause (b) of Section 31(7) does not elaborate on the discretion available to an arbitrator while granting post-award interest in express terms.

  Under Clause (a) the arbitrator has the discretion, in so far as pre-award interest is concerned, to decide (i) the rate of interest applicable to the sum awarded; (ii) the sum on which such interest would be payable (whether full award or part); (iii) the period for which the interest is to be paid on the sum awarded.

  Unlike Clause (a), Clause (b) only specifies that the sum awarded shall carry interest at the rate of 2% higher than the prevalent rate of interest, unless the arbitral award directs otherwise. Therefore, Clause (b) kicks in if the award is silent as to the grant of post-award interest.

  Historically, there has been a controversy over what constitutes the ‘sum’, on which post-award interest is granted, under the arbitral award. Previously, courts had interpreted the ‘sum’ to mean only the principal amount. The position has recently changed with the Supreme Court holding that the ‘sum’ awarded can include the total of the principal amount plus any pre-award interest. This, however, raises another question - does post-award interest therefore have to be granted on the entire 'sum' i.e., the principal plus the interest, or only on a part thereof? We explore this question in detail below.

• Key decisions of the Supreme Court before 2022

  In 2010, a division bench of the Supreme Court, in the matter of State of Haryana v S.L. Arora (S.L. Arora), was faced with the following questions of law in respect of Section 31(7):

  • whether the arbitrator has the power to grant post-award interest on interest; and
  • what component should the post-award interest be granted on (i.e., does the ‘sum’ referred to in Section 31(7)(b) mean interest on the principal amount, or interest on the aggregate of the principal amount and pre-award interest, taken together).

  In this case, the Supreme Court concluded that the ‘sum’ referred to in Section 31(7)(b) of the Act would mean the principal amount granted under the arbitral award i.e., the total of the amounts awarded on substantive claims but excluding the claims related to interest. The Court, therefore, concluded that Section 31(7) does not authorise the arbitrator to grant interest on interest from the date of the arbitral award but only interest on the principal awarded. It was also observed under S.L. Arora that the arbitrator in Section 31(7)(b) has the power to determine the rate of post-award interest.

  In a subsequent decision in 2015, a three-judge bench of the Supreme Court, in the matter of Hyder Consulting (UK) Ltd. v State of Orissa (Hyder Consulting) overruled the decision of the Court in the S.L. Arora case to the extent of its determination of the word ‘sum’. It concluded that the provisions under Section 31(7) were clear and unambiguous and that the word ‘sum’ referred to in Section 31(7)(a) would essentially mean ‘an amount of money’, which could be principal plus interest or just principal, awarded as per the discretion of the arbitral tribunal. Once the ‘sum' is decided by the arbitral award, at the post-award stage (where Section 31(7)(b) comes into play) interest is to be awarded on such 'sum' as directed in the arbitral award. Further, the Court observed that what was being granted under Section 31(7) (b) of the Act cannot be called ‘interest on interest’ as the 'sum' granted in the award loses the character of principal or interest, after subsuming into one amount. Post-award interest is then granted on this whole 'sum'. Hyder Consulting however confirmed the position in S.L. Arora to the extent that the arbitrator has the discretion to decide the rate of post-award interest.

• Supreme Court's recent decision in Morgan Securities

  In 2022, in the matter of Morgan Securities and Credits Pvt. Ltd. v Videocon Industries Ltd. (Morgan Securities), a division bench of the Supreme Court had the opportunity to analyse the extent of the discretion enjoyed by an arbitrator while granting post-award interest under Section 31(7)(b) of the Act. In this case, the arbitral award passed in favor of Morgan granted post-award interest only on the principal amount and not on the entire awarded amount (i.e., the aggregate of the principal amount and the pre-award interest).

  Morgan argued that on the basis of the Hyder Consulting decision, the arbitrator had to award post-award interest on the entire principal plus interest – that is, the arbitrator could not have granted post-award interest only on a portion of the awarded amount. Morgan first filed proceedings before a single bench and thereafter in appeal before the division bench of the Delhi High Court which was also dismissed. Aggrieved by this dismissal, Morgan filed a special leave petition before the Supreme Court contending that in light of both S.L. Arora and Hyder Consulting, the arbitrator’s discretion under Clause (b) of Section 31(7) is limited to determining the rate of post-award interest and the arbitrator does not have the discretion to determine the ‘sum’ on which the post-award interest is to be granted.

  The Court, after examining both S.L. Arora and Hyder Consulting, came to the conclusion that the arbitrator enjoys wide discretion in so far as granting post-award interest is concerned under Clause (b) of Section 31(7) of the Act. It held that Clause (b) does not limit the discretion of the arbitrator to grant post-award interest, rather it only prescribes a rate where the discretion of granting post-award interest is not exercised by the arbitrator. Therefore, a court of law may only grant post-award interest in the manner prescribed under Clause (b) of Section 31(7) of the Act, if the arbitral award is silent on post-award interest on the sum awarded.

  The Court observed that considering the fact that the legislature had contemplated a wide discretion to be enjoyed by an arbitrator under Clause (a) of Section 31(7), it would be against the spirit of the statute to assume otherwise in the case of the discretion enjoyed by an arbitrator under Clause (b) while granting post-award interest. If the arbitral tribunal grants post-award interest on the awarded sum, however high or low, so long as the tribunal has acted reasonably and taken into account relevant circumstances, no interference by the courts is permitted under Clause (b) of Section 31(7). The Court therefore held that the arbitrator had the power to grant post-award interest on even a part of the awarded amount.

• Analysis of Morgan Securities

  The Morgan Securities case has taken the debate on post-award interest further and given the arbitrator wide discretion in exercising the power to grant post-award interest - now the arbitrator may grant post-award interest on part of the sum and not necessarily on the whole. While S.L. Arora restricted the ‘sum’ to only the principal amount and Hyder Consulting expanded the ‘sum’ to mean a composite of principal plus pre-award interest, Morgan Securities gives wide discretion to the arbitrator to determine whether post-award interest could be granted on the whole or a part of the sum awarded.

  Some would argue that this goes against the principle of strict construction of a statute even if that may lead to unjust results. While Section 31(7)(a) uses the words ‘whole or any part’ when speaking of pre-award interest, Section 31(7)(b) does not use any such words in a post-award scenario. It merely states that a sum to be paid in the award would, ‘unless the award otherwise directs’, carry an interest rate of 2% higher than the current rate. It may therefore be contended that the words in Clause (b) are consciously limited by the legislature as opposed to the words in Clause (a) and inferring a wider discretion in Clause (b) would amount to reading words into the provision that are not present.

  The Morgan Securities case has taken the debate on post-award interest further and given the arbitrator wide discretion in exercising the power to grant post-award interest - now the arbitrator may grant post-award interest on part of the sum and not necessarily on the whole.

  On the other hand, it can also be argued that there is no prohibitory language present in Section 31(7)(b) and the arbitral tribunal does in fact enjoy wide discretion under the section and within such discretion, it may determine post-award interest to be payable on only a part of the sum. This reasoning could also logically be extended to argue that the decision in Morgan Securities allows the arbitrator the discretion to grant no interest at all i.e., the discretion to decide whether to grant interest on whole or part of the sum necessarily includes the discretion to decide whether to grant post-award interest at all.

  Another debate that arises from the language in Section 31(7)(b) – which states that a sum to be paid in the award would, 'unless the award otherwise directs', carry an interest rate of 2% higher than the current rate - is whether the words 'unless the award otherwise directs' pertain to the rate of interest or even to the discretion in respect of what part of the sum the interest is to be granted upon. In Morgan Securities, the Court was of the view that these words pertain to the rate of interest to be awarded. However, the Court held that much like Section 31(7)(a), the arbitral tribunal has wide discretion under Section 31(7)(b) as well and therefore this includes the power to determine the part of the sum on which interest is to be awarded.

  The decision in Morgan Securities reinforces that arbitrators are afforded wide discretion to exercise their powers and to the extent possible, no limitations on such power should be read into the statute. This view brings clarity to the powers of an arbitrator in granting post-award interest, aligns with the legislature’s attempt to empower arbitrators with independence and also signals that there will be only limited judicial intervention in respect of the reliefs granted in an arbitral award.

  Arbitral tribunals are expected to be commercially savvy and award the party that succeeds amounts that are commensurate to what may have been lost due to prolonged non-payment. At the same time, arbitral tribunals are expected to protect parties from being unjustly enriched. The decision in Morgan Securities affirms the arbitrator’s ability to maintain such balance. This should also boost the confidence of businesses in receiving monies owed, with interest – which often becomes a sunk cost after prolonged litigation - while also solidifying the expectation of award-holders to receive at least the appreciated value of money which would otherwise be lost in the dispute.

^[1] Hyder Consulting (UK) Limited v State of Orissa, (2015) 2 SCC 189
^[2] State of Haryana v S.L. Arora, (2010) 3 SCC 690

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