-Report by Khushi Neb
The Delhi High Court in a recent judgment in Morgan Securities And Credits Pvt. Ltd. vs Videocon Industries Ltd held that The arbitrator must exercise the discretionary power to grant post-award interest reasonably and in good faith, taking into account all relevant circumstances.
A contract between the appellant and the respondent was signed on January 27, 2003, and it allowed the respondent to use the appellant’s bill-discounting services. In accordance with the contract, the appellant paid out Rs. 5,00,32,656. The fees were still owed. On 10 January 2006, the appellant served a notice on the respondent requesting payment of the principal sum of Rs. 5,00,32,656 as of the default date of 17 April 2003, as well as past-due interest. The appellant sent out a notification on January 31, 2006, invoking the arbitration provision of the contract because the respondent had not made the required payment. The sole arbitrator rendered an arbitral award in favor of the appellant on 1 March 2013 stating interest at the rate of (i) 21% per annum has been granted from the date of default to the date of the demand notice; (ii) 36% per annum with monthly rests from the date of the demand notice to the date of award (“pre-award interest”); and (iii) 18% per annum on the principal amount of Rs. 5,00,32,656 from the date of award to the date of payment (“post-award interest”). The appellant challenged the said award in Delhi High court where the petition was dismissed holding that the Arbitrator had in his discretion restricted the post-award interest to the principal amount and that the court would not interfere with the exercise of discretion. Following this, the appellant filed an appeal in the Supreme Court.
Quoting the Hyder Consulting case if pre-award interest is awarded on the principal sum, the aggregate of the principal and the pre-award interest is the ‘sum’ on which post-award interest must be granted and once pre-award interest is granted on the principal sum under Section 31(7)(a) of the Act, the interest award loses its character as interest and takes the color of the awarded ‘sum’ for post-award interest under Section 31(7)(b) of the Act. Also, since the arbitral award is silent on post-award interest on the component of interest, the appellant is entitled to the statutory rate of interest on the aggregate of the principal and pre-award interest under Section 31(7)(b) of the Act.
Quoting the SL Arora case the discretion of the arbitral tribunal under Section 31(7)(b) of the Act was only with respect to the rate of the post-award interest and here the arbitrator has awarded post-award interest only on the principal sum solely in view of the judgment in SL Arora. The arbitrator only has the discretion to determine the rate post-award interest. The Arbitrator does not have the discretion to determine the ‘sum’ on which the post-award interest is to be granted; and The contention that Section 31(7)(b) of the Act would be inapplicable in cases where the arbitrator has awarded post-award interest by exercising discretion is not borne out of the decisions in SL Arora or Hyder Consulting (supra).
Section 31(7)(b) is qualified by the phrase “unless the award otherwise directs and would only be applicable where an arbitral award is silent on the component of post-award interest. Under Section 31(7)(b) of the Act, the arbitrator has the discretion to (a) grant post-award interest; (b) determine the quantum over which the post-award interest should be granted; and (c) determine the rate at which the interest should be calculated; and In Hyder Consulting, a three-Judge Bench of this Court overruled SL Arora to the extent that the latter decision held that the arbitral tribunal does not have the power to award interest over interest. However, in Hyder Consulting, it was not held that it is mandatory that the post-award interest ought to only be granted on the aggregate of the principal and the pre-award interest.
Keeping in view Justice Bobde’s opinion in the Hyder Consulting case, held that the arbitrator may grant post-award interest on the aggregate of the principal and the pre-award interest.
“According to Section 31(7)(b), if the arbitrator does not grant post-award interest, the award holder is entitled to post-award interest at eighteen percent. Section 31(7)(b) does not fetter or restrict the discretion that the arbitrator holds in granting post-award interest. The arbitrator must exercise the discretionary power to grant post-award interest reasonably and in good faith, taking into account all relevant circumstances. In view of, the above discussion, the arbitrator has the discretion to award post-award interest on a part of the ‘sum’; the ‘sum’ as interpreted in Hyder Consulting. Thus, the award of the arbitrator granting post-award interest on the principal amount does not suffer from an error apparent. Hence, the appeal is dismissed.”