Supreme Court Rules Arbitral Tribunals And Courts Cannot Grant Interest On Interest

Supreme Court Rules Arbitral Tribunals And Courts Cannot Grant Interest On Interest

The Supreme Court has ruled that an Arbitral Tribunal does not have the authority to grant interest upon interest in its awards, as the Arbitration & Conciliation Act, 1996, does not explicitly provide for such a provision.

The bench, consisting of Justices P.S. Narasimha and Pankaj Mithal, emphasized that ordinarily, courts are not permitted to grant interest on interest unless specifically authorized by statute or stipulated in the contract terms. “In the light of the above legal provisions and the case law on the subject, it is evident that ordinarily courts are not supposed to grant interest on interest except where it has been specifically provided under the statute or where there is specific stipulation to that effect under the terms and conditions of the contract. There is no dispute as to the power of the courts to award interest on interest or compound interest in a given case subject to the power conferred under the statutes or under the terms and conditions of the contract, but where no such power is conferred ordinarily, the courts do not award interest on interest.”.

The Court further clarified that neither the Arbitration Act nor Section 34 of the Civil Procedure Code (CPC) empowers an arbitrator or court to award interest upon interest. Section 3(3) of the Interest Act also specifically prohibits such grants.

In the case at hand, the arbitrator had awarded interest for two periods: (i) 12% per annum from the date of completion of the work up to the date of the award, and (ii) 15% per annum from the date of the award until payment or the court decree. The issue was whether the 15% interest per annum should be applied to the principal sum plus the 12% interest for the pre-award period.

The petitioner argued for 15% interest per annum on the total amount awarded, including the pre-award interest. The Court ruled that once interest has been granted for the pre-award period, additional interest cannot be granted on the award amount for the post-award stage. The Court reasoned that the Arbitral Tribunal is not empowered to grant interest upon interest because

"Section 29 of the Act provides that the court may, in the decree, order interest at the rate deemed reasonable to be paid on the principal sum as adjudged by the award, meaning thereby, in drawing the decree, the court may order payment of interest on the principal sum as adjudged by the award. In other words, the court cannot order payment of interest on interest but only on the principal sum adjudged." the Court clarified.

The judgment explained that the arbitral award’s two parts, pre-award interest at 12% and post-award interest at 15%, both refer to the principal amount of Rs. 21,56,745. The award did not specifically contemplate granting 15% interest on the principal amount inclusive of the pre-award interest, and there was no contractual provision or statutory basis for such an arrangement.

Ultimately, the Supreme Court dismissed the special leave petition, choosing not to interfere with the concurrent findings of the Civil Court and High Court. Justice P.S. Narasimha’s judgment underscored that there was no provision in the statutes or the contract for granting 15% interest per annum on the amount awarded, including the pre-award interest.