Suggested Amendments to be Re-visited?

Much before the Law Commission’s 246th Report on the suggested amendments to the Arbitration and Conciliation Act, 1996 would be considered/notified by the Parliament, the Supreme Court’s observation in a recent judgment delivered by it requires immediate attention of the law makers and even the Law Commission..In M/s Hyder Consulting (UK) Ltd v Governor, State of Orissa Through Chief Engineer (‘Hyder Consulting’) a three judge bench of the Supreme Court had to decide, whether an arbitral tribunal had the power to award compound interest, under Section 31 of the Arbitration and Conciliation Act 1996 (‘1996, Act’)..While the Law Commission in its aforesaid Report concluded that, the issue on whether future interest is payable not only on the principal sum but also on the interest accrued till the date of the award remains controversial notwithstanding the clear wording of section 31(7). The reasoning given were that, initially the position under the 1940 Act was that there was an express bar on awarding compound interest. The same was evident in reading section 3(3)(c) of the Interest Act, 1978, section 29 of the Arbitration Act, 1940 and section 34 of the Civil Procedure Code, 1908. However, the Supreme Court in Renusagar Power Co Ltd v. General Electric, held that awarding compound interest was not a violation of public policy of India. It is pertinent to note that these observations were made in the context of a case where the arbitral tribunal had expressly pointed out that they were not concerned with a contract to pay compound interest but were awarding compound interest as a remedy for a breach of contract in order to put the injured party in the same economic position it would have been in if the contract had been duly performed. This award was held to be in consonance with the public policy of India. Furthermore, as set out above, it was explicitly stated that compound interest can be awarded when it is permissible to do so under the statute..Under the 1996 Act, the words that have been used are of far wider import and the scheme of the relevant provisions indicates that award of interest on interest is not only permitted but also the norm. Yet, a two-judge bench of the Supreme Court, in State of Haryana v. L. Arora & Co., held that section 31(7) makes no reference to payment of compound interest or payment of interest upon interest. Nor does it require the interest, which accrues till the date of the award, to be treated as part of the principal from the date of award for calculating the post-award interest..Apart from being contrary to the statutory scheme of the Act, the decision in Arora is also against the decision of (co-ordinate) two judge benches of the Supreme Court in ONGC v. M.C. Clelland Engineers S.A, Cooperative Federation Ltd v. Three Circles. Recognising this conflict of judicial opinion, the Supreme Court, in HyderConsulting (U.K.) v. Governor of Orissa, – 2013 had referred this issue for determination to a three-judge bench..It is in this context that the Commission has recommended amendments to section 31 to clarify the scope of powers of the arbitral tribunal to award compound interest, as well as to rationalize the rate at which default interest ought to be awarded and move away from the existing rate of 18% to a market based determination in line with commercial realities did mention that the issue of awarding compound interest has remained controversial..At the time the Report was published this decision of the larger bench in Hyder Consulting was still awaited. However, the aforesaid reliance by the Law Commission in its Report on the two decisions passed by the Supreme Court in ONGC and Three Circles under the Arbitration Act, 1940, to come to its conclusions, might have been wrong is the view of the top court..In Hyder Consulting a majority decision by Justice’s Mr.Bobde and Mr.Sapre, held that within the 1996 Act, the term ‘sum’ means a particular amount of money. Since Section 31(7) of the 1996 act adds no additional qualification (eg, ‘principal’) to the word ‘sum’, this particular amount of money includes interest from the date of the cause of action to the date of the award. Further, by definition, the term ‘sum’ simply means an amount of money, whatever this may include (eg, principal, interest or both)..Thus, according to Section 31(7)(b) of the 1996 Act – where it provides that the sum to be paid by an arbitral award “shall carry interest” from the date of the award to the date of the payment (ie, the relevant sum post-award) – the term ‘sum’ must be read to mean the aggregate of the principal and interest amounts. The majority decision went on to state that Section 31(7)(b) of the 1996 Act mandates that the awarded sum, whether inclusive or exclusive of interest, carry interest at the rate of 18% per year for the post-award period, unless otherwise ordered. When Section 31 of the 1996 Act is contrasted with Section 34(6) of the Civil Procedure Code – wherein courts can award compound interest – the word ‘sum’ has deliberately not been qualified by using the word ‘principal’ before it; therefore, ‘sum’ refers to the aggregate of the amounts that the arbitral tribunal directs to be paid, not merely the principal sum without interest..According to the majority’s view, no distinction exists between a sum with interest and a sum without interest. Once interest is included in an awarded sum, the original sum and the interest cannot be segregated or seen as independent of one another. The interest component loses its character, as interest simply becomes the sum for which the award was made. Further, the majority held that in terms of post-award interest, Section 31(7)(b) of the 1996 Act uses the phrasing “a sum directed to be paid by an arbitral award”. Sub-clause (b) uses the words ‘arbitral award’, not arbitral tribunal. The arbitral award is made in respect of a sum that includes interest. Therefore, under Section 31(7)(b) of the 1996 Act, only the sum is “directed to be paid by an arbitral award”, not any other amount, including interest. In such a situation, what is being granted under Section 31(7)(b) is not compound interest; instead, interest is granted on the sum directed to be paid by an arbitral award, wherein the sum is nothing more than what is arrived at under Sub-clause (a)..Chief Justice Mr.Dattu’s judgment formed the minority view. It was held by Justice Dattu that the word ‘sum’, as per its most common usage, means ‘money’. In Section 31(7) of the 1996 Act, the term ‘money’ is used interchangeably with the word ‘sum’. The sum for which the arbitral award was made could thus be read as allowing interest to be awarded on the money for which the arbitral award was made; therefore, the term ‘money’ refers to the money that is the result of adjudication by the arbitral tribunal, based on the claims of the parties, to be paid under the award. In other words, it refers to the principal amount so awarded and not interest, which is merely a consequence, not a result of an adjudication..According to the minority view, interest is imposed in order to compensate for a party’s refusal to pay money that rightfully belongs to another party under the agreement governing the arbitration proceedings; therefore, the term ‘interest’ is distinct from the principal amount on which it is imposed..Under Section 31(7)(a)(b) of the 1996 Act, the word ‘sum’ is used in the context of what is to be paid per the arbitral award. In the minority’s opinion, in order for interest to be merged with the principal amount, it must be within the physical and actual possession of the party so entitled to it; only then can interest be said to have merged with the principal amount. Both the decisions of the Supreme Court in Oil & Natural Gas Commission and Three Circles pertain to awards given under the Arbitration Act 1940. As the 1940 Act contains no specific provision regarding an arbitrator’s power to grant interest, these cases do not apply to arbitration held under the 1996 Act..Further, the minority view held that the decision in Central Bank of India relied upon by the petitioner dealt with Section 34 of the Civil Procedure Code; therefore, it did not wholly apply to cases under the 1996, Act. Even if the principle in Central Bank of India was applicable to the 1996, Act, it would support only the view endorsed in Arora. Thus, the minority found that the Law Commission (in its 246th report) should not have relied on Oil & Natural Gas Commission and Three Circles to conclude that Arora was wrongly decided. Since both cases involved an interpretation of the 1940 Act, they could not be relied on while interpreting the 1996 Act..The Supreme Court was right to nullify the earlier decision in Hyder while ruling in Arora that once an arbitral tribunal reaches a decision with regard to the liability of the payee under an arbitral award, any delay in satisfying that arbitral award must also attract interest. Further, interest awarded from the cause of action until the date of award is considered, from a commercial standpoint, as the natural compensation for the beneficiary of the award on its principal amount so blocked by the payee. The court rightly held that the natural compensation (ie, the interest merged with the principal amount) is what should be due to the successful party. The minority view reasoned that interest was a separate sum – one that did not merge with the principal sum and thus retained a separate identity. The minority supported its view by holding that interest is awarded for wrongful retention of a principal sum and not on the interest accrued on such principal sum; therefore, granting compound interest is not permissible. However, the majority view used a literal interpretation to conclude that interest merges with a principal sum and that such compounded sum is due and, in aggregate, can attract further interest..M.Rishi Kumar practices in the Madras High Court. Prior to his independent practice he was in the chamber of Senior Advocate Arvind P. Datar.