Section 31 (7) of the Arbitration and Conciliation Act, 1996-
The Arbitration and Conciliation Act, 1996 (“the 1996 Act”) provides a clear framework for the award of interest by arbitral tribunals, distinguishing between pre-award and post-award interest under Section 31(7). The provision seeks to protect the interests of the award-holder by ensuring appropriate compensation through interest, both before and after the issuance of an arbitral award.
Section 31(7) of the 1996 Act is divided into two sub-sections:
- Section 31(7) (a) deals with interest for the period between the cause of action and the date of the arbitral award (pre-award interest).
- Section 31(7) (b) addresses interest that accrues after the award (post-award interest).
P. Garg vs The Chief General Manager, Telecom Department and Ors[1].-
In this case, the core legal issue before the Hon’ble Supreme Court was whether the appellant was entitled to post-award interest on the sum awarded by the arbitrator. The arbitrator had denied the appellant post-award interest through the award, holding that the contract between the parties prohibited such an award. The decision was later on upheld by the executing court. However, the District Court reversed the said ruling of the Ld. Civil Judge, Senior Division and awarded the appellant post-award interest at the rate of 18%. An appeal was filed by the Telecom Department against the decision of the District Court before the Hon’ble High Court, which set aside the District Court’s judgment, observing that the contract between the parties explicitly prohibited the grant of post-award interest. The High Court relied on the Hon’ble Supreme Court’s decision in Jaiprakash Associates Ltd. v. Tehri Hydro Development Corporation (India) Ltd.[2], wherein it was held that interest cannot be granted if a contract specifically bars the same.
1 2024 INSC 743
2 (2019) 17 SCC 786.
The observations of the Hon’ble Supreme Court-
An appeal filed against the judgment of the High Court was allowed by the Hon’ble Supreme Court and the appellant was granted with the post-award interest. Referring to the jurisprudence established in Morgan Securities and Credits (P) Ltd. v. Videocon Industries Ltd.[1], the Hon’ble Supreme Court observed that as regards the grant of pre-award interest the tribunal does have wide discretion, which can further be modified or overridden by an agreement between the parties. But clause (b) of section 31 (7) which provides for post-award interest does not give the parties the right to “contract out” interest for the post-award period. The expression ‘unless the award otherwise directs’ in Section 31(7)(b) relates to rate of interest and not entitlement of interest. The only distinction made by Section 31(7)(b) is that the rate of interest granted under the Award is to be given precedence over the statutorily prescribed rate.
The Hon’ble Supreme Court drew a distinction between the discretionary nature of pre-award interest and the mandatory nature of post-award interest. The court held that post-award interest is a statutory safeguard for the award-holder and cannot be waived by an agreement between the parties.
The Hon’ble Court further rejected the High Court’s reliance on the Jaiprakash Associates case, observing that the High Court erred in relying on the Jaiprakash Associates Case as the judgment in Jaiprakash Associates deals with the issue of prohibition of pendente-lite interest and not with the claims of post-award interest. It was further observed that in the subsequent case of Morgan Securities, the Hon’ble Supreme Court had held that though section 31(7) (a) grants the arbitrator broad discretion in awarding pre-award interest, Section 31(7) (b) mandates the award of post-award interest, irrespective of the parties’ agreement. And that any contractual provision barring post-award interest is legally invalid.
Conclusion:
The ruling of the Hon’ble Supreme Court in the R. P. Garg case serves as a significant precedent affirming that post-award interest under Section 31(7) (b) of the 1996 Act is a statutory right, not subject to the party agreements. The judgment underscores the importance of ensuring that the award-holder is compensated through interest for any delay in the realization of the award. The case further clarifies that the arbitrator’s discretion under Section 31(7) (a) for pre-award interest The case further clarifies that the arbitrator’s discretion under Section 31(7) (a) for pre-award interest
3 (2023) 1 SCC 602
does not extend to post-award interest, which is governed by the statute itself. Thus the ruling provides certainty and predictability in arbitration proceedings, ensuring that the statutory rights of the award-holder are not undermined by contractual terms which helps in facilitating India’s aspiration of providing a reliable and developed arbitration regime.
(This article is written by Mokshika, a Third year law student from University School of Law and Legal Studies- GGSIPU who is currently interning at LexMantra, New Delhi Office.)