Delhi High Court
M/S Pt. Munshi Ram & Associates (P) Ltd vs Dda on 22 July, 2010
Author: Sanjay Kishan Kaul
Bench: Sanjay Kishan Kaul, Valmiki J.Mehta
* IN THE HIGH COURT OF DELHI AT NEW DELHI
Reserved on :15.07.2010
% Date of decision : 22.07.2010
+ Ex.P.No.194/2006
M/S PT. MUNSHI RAM & ASSOCIATES (P) LTD .. DECREE HOLDER
Through : Mr.Rakesh Kumar Garg, Advocate.
-VERSUS-
DDA ...... JUDGMENT DEBTOR
Through : Mr.Deepak Khadaria and Ms.Sangeeta
Chandra, Advocates
CORAM:
HON'BLE MR. JUSTICE SANJAY KISHAN KAUL
HON'BLE MS. JUSTICE VALMIKI J.MEHTA
Whether the Reporters of local papers
may be allowed to see the judgment? YES
To be referred to Reporter or not? YES
Whether the judgment should be YES
reported in the Digest?
SANJAY KISHAN KAUL, J.
1. The present reference arises from the order of the learned Single Judge dated 26.04.2010 raising the issue of authority of an arbitral tribunal to award interest on interest i.e. compound interest from the date of the award under the Arbitration Act, 1940. (‗the old Act' for short).
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2. Our task has been simplified on account of the authoritative pronouncement of the Supreme Court in State of Haryana & Ors. v. S.L.Arora & Company; 2010(2) Scale 541 where it has been held that an arbitral tribunal does not have the power to award such interest on interest under the Arbitration and Conciliation Act, 1996 (‗the new Act' for short) unless the contract so provides for it. The reference in the present case was, however, necessitated on account of the conflicting judicial views of learned Single Judges under the old Act. We thus first proceed to discuss the ratio of the judgment of the Supreme Court in State of Haryana & Ors. v. S.L.Arora & Company's case(supra).
3. The Supreme Court analyzed the plea as to whether under Section 31(7) of the new Act, interest on interest was contemplated in case of an award or whether an arbitral tribunal could award future interest only on the principal amount but not on the interest thereon which had accrued due up to the date of the award. Section 31(7) of the new Act reads as under:
"31. Form and contents of arbitral award ......
......
......
(7)(a) Unless otherwise agreed by the parties, where and in so far as an arbitral award is for the payment of money, the arbitral tribunal may include in the sum for which the award is made interest, at such rate as it deems reasonable, on the whole or any part of the money, for the whole or any part of the period between the date on _____________________________________________________________________________________________ Execution Petition No.194/2006 Page 2 of 17 which the cause of action arose and the date on which the award is made.
(b) A sum directed to be paid by an arbitral award shall, unless the award otherwise directs, carry interest at the rate of eighteen per centum per annum from the date of the award to the date of payment.‖
4. The aforesaid provision on its plain reading thus provides that an arbitral tribunal may include interest at such rate as it deems reasonable for the whole or any part of the period from the date on which the cause of action arose to the date on which the award is made. Clause (b) of Section 31(7) of the new Act deals with future interest and stipulates that unless the award otherwise directs interest would be calculated at 18 per cent per annum from the date of award to date of payment.
5. The respondent before the Supreme Court contended that the aforesaid Section 31(7) of the new Act empowered the arbitral tribunal to award interest on interest from the date of award till date of payment and this is the very question framed by the Supreme Court for consideration in para 7 of the judgment. A discussion of this issue in the judgment shows that the following propositions emerge:
i) Compound interest can be awarded only if there is a specific contract or authority under a statute for compounding of interest. There is no general discretion in courts or arbitral tribunals to award compound interest or interest on interest.
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ii) Section 3 of the Interest Act, 1978 (‗the Interest Act' for short) enables the courts and the arbitral tribunals to award interest from the date of cause of action to date of institution of legal proceedings or initiation of arbitration proceedings. Sub Section 3(c) of Section 3 of the Interest Act makes it clear that nothing in the said Section shall empower the court or arbitrator to award interest on interest. Section 3 of the Interest Act does not deal with either pendente lite or future interest.
iii) The ratio of the judgment of the Supreme Court in Renusagar Power Co.Ltd v. General Electric Co.; 1994 Supp.(1) SCC 644 is that the award of interest on interest was not opposed to public policy of India but could be awarded only if authorized by contract or statute. This view has been followed in Central Bank of India v. Ravindra; 2002 (1) SCC 367.
iv) The old Act does not have any provision dealing with the power of arbitral tribunal to award interest and Section 29 of the old Act merely provides for post-decree interest and authorizes the court to direct in the decree the payment of interest from date of decree at such rate as the court deems reasonable. The power of an arbitral tribunal to award interest was governed by the _____________________________________________________________________________________________ Execution Petition No.194/2006 Page 4 of 17 provisions of the Interest Act and the law enunciated by the Courts.
The said Section 29 of the old Act reads as under:
"Section 29 Decision Making by Panel of Arbitrators (1) Unless otherwise agreed by the parties, in arbitral proceedings with more than one arbitrator, any decision of the arbitral tribunal shall be made by a majority of all its members.
(2) Notwithstanding sub-section (1), if authorized by the parties or all the members of the arbitral tribunal, questions of procedure may be decided by the presiding arbitrator.‖
v) The new Act unlike the old Act contains specific provision dealing with the power of an arbitral tribunal to award interest incorporated in Section 31(7) of the new Act. This Section makes no reference to payment of compound interest or payment of interest on interest nor does it require the interest which accrues till the date of the award to be treated as a part of principal from date of the award for calculating the post-award interest. The principles relating to award of interest in general are thus no different for courts and arbitral tribunals except to the extent indicated in Section 31(7) of the new Act and Code of Civil Procedure, 1908 (‗the said Code' for short).
vi) The difference between clause (a) and (b) of Section 31(7) of the said Act is that while clause
(a) relates to pre-award period, clause (b) relates _____________________________________________________________________________________________ Execution Petition No.194/2006 Page 5 of 17 to post-award period. In pre-award period, interest has to be awarded as specified in the contract and in the absence of the contract as per discretion of the arbitral tribunal while in regard to the post-
award interest, the same is payable as awarded at the discretion of the arbitral tribunal and in the absence of such discretion, at a mandatory statutory rate of 18 per cent per annum.
vii) In view of what has been observed in the immediate paragraph above, the authority of an arbitral tribunal to award interest under Section 31(7)(a) of the new Act is subject to contract between the parties and the contract would prevail over the provisions of Section 31(7)(a) of the new Act. The arbitral tribunal thus cannot ignore the contract between the parties while dealing with or awarding pre-award interest. In the absence of prohibition to awarding interest, the arbitral tribunal can award interest in accordance with Section 31(7)(a) of the new Act subject to any terms regarding interest in the contract. This flows from the language of Section 31(7)(a) of the new Act which states ―unless otherwise agreed by the parties...‖
viii) If the contract provides for compounding of interest or interest on interest or interest payable on principal up to any specified stage being _____________________________________________________________________________________________ Execution Petition No.194/2006 Page 6 of 17 treated as part of the principal for purposes of charging of interest during any subsequent period, the arbitral tribunal will have to give effect to it. However, if the award is challenged under Section 34 of the new Act and the court finds that the interest awarded is in conflict with or in violation of public policy of India, it may set aside part of the award.
ix) The new Act does away with the distinction and differentiation among the four interest bearing periods i.e. pre-reference period, pendent-lite period, post-award period and post-decree period. The interest bearing period can now be a single continuous period, the outer limits being the date on which the cause of action arose and the date of payment. The provisions of Section 31(7)(b) of the new Act do not mandate that interest must be awarded at the rate of 18 per cent per annum and it is for the arbitral tribunal to specify the rate of interest payable from date of award till date of payment. If the award specifically refuses interest, then no interest is payable. Section 31(7)(b) of the new Act comes into play if the award is silent in regard to interest from the date of award or does not specify the rate of interest from date of award. In such a situation, the succeeding party will be entitled to interest at the rate of 18 per cent per _____________________________________________________________________________________________ Execution Petition No.194/2006 Page 7 of 17 annum from the date of award and this amount can be claimed in execution even though there is no reference to any post-award interest in the award. The objective of this clause is to discourage award debtors from adopting dilatory tactics.
x) A reading of the judgment in Mcdermott International Inc. v. Burn Standard Co.Ltd and Ors; (2006) 11 SCC 181 shows that there is no reference to awarding of compound interest or interest from the date of the award on the interest that had accrued, due up to the date of the award. The said judgment only dealt with the rate of interest and jurisdiction was exercised under Article 142 of the Constitution to set right anomalies in regard to rate of interest.
xi) The judgment in Uttar Pradesh Cooperative Federation Limited v. Three Circles; (2009) 10 SCC 374 related to the award under the old Act. The said Judgment has observed that Mcdermott International Inc. v. Burn Standard Co.Ltd and Ors's case (supra) recognized interest awarded on the principal amount up to the date of award to be a part of principal from date of award. It was explained that actually the portion of the judgment in Mcdermott International Inc. v. Burn Standard Co.Ltd and Ors's case (supra) extracted in Uttar Pradesh Cooperative Federation Limited v. Three _____________________________________________________________________________________________ Execution Petition No.194/2006 Page 8 of 17 Circles's case (supra) is neither a finding or conclusion of the Supreme Court nor the ratio decidendi of the case, but is only a reference to the contention of the respondent in Mcdermott International Inc. v. Burn Standard Co.Ltd and Ors's case (supra). Thus, the observations in Uttar Pradesh Cooperative Federation Limited v. Three Circles's case (supra) based on Mcdermott International Inc. v. Burn Standard Co.Ltd and Ors's case (supra) are per incuriam due to an inadvertent erroneous assumption.
6. We thus find ourselves greatly assisted by the authoritative conclusions drawn by the Supreme Court under the new Act as they are, in our considered view, germane for interpreting the question of award of interest under the old Act even though the provisions may be different. This is so as the provisions of the new Act specifically provide for payment of interest while the only provision under the old Act dealing with the aspect of interest is Section 29 of the Old Act which deals with interest from date of decree to be awarded by the Court. Insofar as the other three periods are concerned, the grant of interest has been dependent on judicial pronouncements based on incorporation of principles for such grant of interest under Section 34 of the said Code r/w Section 41 of the old Act and Section 3 of the Interest Act.
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7. In Secretary, Irrigation Department, Govt. of Orissa and Ors. v. G.C.Roy; (1992) 1 SCC 508, the authority of an arbitrator to award interest pendente lite was upheld for doing complete justice between the parties where the claim as to interest is made and the agreement does not contain anything to the contrary. The Constitution Bench overruled the earlier judgment of the Division Bench in Executive Engineer (Irrigation) Balimela v. Abhaduta Jena; (1988) 1 SCC 418 where it had been held that an arbitrator to whom a reference is made without the intervention of the Court does not have jurisdiction to award pendente lite interest. It was observed that a reading of the provisions of Section 41 of the old Act shows that the said Section makes the provisions of the said Code applicable to all proceedings. The said Section reads as under:
―41. Procedure and powers of the Court - Subject to the provisions of this Act and of rules made thereunder:
a) the provisions of the Code of Civil Procedure, 1908 (5 of 1908) shall apply to all proceedings before the Court and to all appeals, under this Act; and
b) the Court shall have, for the purpose of, and in relation to, arbitration proceedings, the same power of making orders in respect of any of the matters set out in the Second Schedule as it has for the purpose of, and in relation to, any proceedings before the Court:
Provided that nothing in clause (b) shall be taken to prejudice any power which may be vested in an arbitrator or umpire for making orders with respect to any of such matters.‖ _____________________________________________________________________________________________ Execution Petition No.194/2006 Page 10 of 17
8. The court was concerned with only two periods i.e. a) date of entering upon reference till date of award and b) date of award till the award was made rule of the Court or till the date of realization whichever is earlier. It is, however, not necessary to go into further discussion of this judgment and it would suffice to just note the conclusion as aforesaid.
9. The concept of the authority of the arbitrator to grant interest under the old Act is thus well-established. The question which thus only arises is whether such a power would include the power to grant compound interest.
10. In Central Bank of India v. Ravindra and Ors.; (2002) 1 SCC 367 while examining Section 34 of the said Code, it was observed that charging of interest at reasonable rates on periodical rests which is really compound interest was permissible subject to the terms of voluntary contract or established practice or usage and subject to any legislative restriction. The principal sum as on the date of the suit would accordingly be construed. For convenience of reference, we re- produce Section 34 of the said Code as under:
"34. Interest (1) Where and in so far as a decree is for the payment of money, the Court may, in the decree, order interest at such rate as the Court deems reasonable to be paid on the principal sum adjudged, from the date of the suit to the date of the decree, in addition to any interest adjudged on such principal sum for any period prior to the institution of the suit, _____________________________________________________________________________________________ Execution Petition No.194/2006 Page 11 of 17 2 [with further interest at such rate not exceeding six per cent, per annum as the Court deems reasonable on such principal sum from] the date of the decree to the date of payment, or to such earlier date as the Court thinks fit:1
[Provided that where the liability in relation to the sum so adjudged had arisen out of a commercial transaction, the rate of such further interest may exceed six per cent, per annum, but shall not exceed the contractual rate of interest or where there is no contractual rate, the rate at which moneys are lent or advanced by nationalised banks in relation to commercial transactions.
Explanation I.-In this sub-section, "nationalised bank" means a corresponding new bank as defined in the Banking Companies (Acquisition and Transfer of Undertakings) Act 1970 (5 of 1970).
Explanation II.-For the purposes of this section, a transaction is a commercial transaction, if it is connected with the industry, trade or business of the party incurring the liability.] (2) Where such a decree is silent with respect to the payment of further interest 3[on such principal sum] from the date of the decree to the date of payment or other earlier date, the Court shall be deemed to have refused such interest, and a separate suit therefore shall not lie.‖
11. Section 34 of the said Code deals with interest to be paid on the principal sum adjudged from date of suit to date of decree and from date of decree to date of payment. The judgment in Central Bank of India v. Ravindra and Ors.'s case (supra) referred to how the principal sum had to be adjudged where there was a _____________________________________________________________________________________________ Execution Petition No.194/2006 Page 12 of 17 contract providing for compound interest and thereafter the pendente lite and future interest to be calculated thereon. Section 3 of the Interest Act deals with the period from the date when the debt is payable to date of institution of the proceedings. Neither Section 34 of the said Code nor Section 3 of the Interest Act use the expression ‗compound interest' but both refer to the concept of interest which has to be understood as simple interest in view of the judgment in State of Haryana & Ors. v. S.L.Arora & Company's case(supra).
12. We find that the legal position is quite clear in view of this judgment that unless there is a contract providing for compound interest or a statute there can be no question of payment of compound interest. We may note that in the facts of the present case, it is undisputed that the contract does not provide for compound interest. It really also cannot be disputed that neither Section 29 of the old Act (which deals with post-decree interest) nor the judicial pronouncements which assisted in holding that the arbitral tribunal has the authority to grant interest for other three periods in view of the provisions of Section 34 of the said Code r/w Section 41 of the old Act and Section 3 of the Interest Act give any authority for charging such compound interest. The position thus is no different under the old Act in this behalf.
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13. Rajiv S. Endlaw, J., a learned Judge of this Court, in Jai Prakash Narain Singh v. NBCC Ltd.; 2009 (9) AD Delhi 23 has examined this issue. It has been noticed that Section 29 of the old Act is concerned with interest from date of decree only and does not apply to the previous periods. Compound interest was not granted in the said case.
14. Another learned judge of this Court Manmohan, J. in Munshi Ram & Asso. P.Ltd.(M/S Pt.) v. Delhi Development Authority; 2009 X AD(Delhi) 174, in execution proceedings, again held that there was no compound interest to be granted nor was it admissible unless there was a provision in the contract for the said purpose. The judgment has noted the pronouncement in Central Bank of India v. Ravindra and Ors.'s case (supra) to the effect that 1956 amendment to Section 34 of the said Code was intended to deprive the Court of its power to award interest on interest i.e. compound interest and relied upon para 45 of the judgment in Central Bank of India v. Ravindra and Ors.'s case (supra). The said para 45 is once again reproduced as under:
―45. The 1956 amendment serves a twofold purpose. Firstly, it prevents award of interest on the amount of interest so adjudged on the date of suit. Secondly, it brings the last clause of Section 34, by narrowing down its ambit, in conformity with the scope of the first clause insofar as the expression ―the principal sum adjudged‖ occurring in the first part of Section 34 is concerned which has been left untouched by amendment. The meaning to be assigned to this expression in the first part remains the same as it was even before the amendment.
_____________________________________________________________________________________________ Execution Petition No.194/2006 Page 14 of 17 However, in the third part of Section 34 the words used were ―on the aggregate sum so adjudged‖. The judicial opinion prevalent then was (to wit, see Prabirendra Mohan v.
Berhampore Bank Ltd.51 AIR at p. 295) that ―aggregate sum‖ contemplated the aggregate of (i) the principal sum adjudged, (ii) the interest from the date of the suit to the date of decree, and (iii) the pre-suit interest. Future interest was capable of being awarded also on the amount of pre-suit interest -- adjudged as such, that is, away from such interest as was adjudged as principal sum having amalgamated into it by virtue of capitalisation. The amendment is intended to deprive the court of its pre-amendment power to award interest on interest i.e. interest on interest adjudged as such. The amendment cannot be read as intending, expressly or by necessary implication, to deprive the court of its power to award future interest on the amount of the principal sum adjudged, the sense in which the expression was understood, also judicially expounded even before 1955; the expression having been left untouched by the 1956 amendment.‖
15. We may note that the same learned Judge has in fact made the reference in the present case.
16. We are of the view that these two judgments correctly lay down the proposition of law that no compound interest or interest on interest is admissible under the old Act unless there is specific provision in the contract and even there the court is not denuded of the authority not to grant such interest which is in conflict with or in violation of the public policy of India.
17. We are thus of the considered view that the contra view taken in Kali Charan Sharma(since deceased) v. New Okhla Industrial Development Authority; 149 (2008) DLT 244 and M/s Saraswati Construction Co. v. DDA;112 _____________________________________________________________________________________________ Execution Petition No.194/2006 Page 15 of 17 (2004) DLT 736 does not correctly reflect the legal position.
18. Learned counsel for the decree holder relied upon the observations in ONGC v. M.C.Clelland Engineers S.A.; (1999) 4 SCC 327 = AIR 1999 SC 1614. There is undisputedly a passing reference in the said judgment to the power of the arbitrators to grant compound interest. However, the same is really an order passed in the facts of the case and in view of what has been discussed above and the authoritative pronouncement of Supreme Court in the subsequent judgment in State of Haryana & Ors. v. S.L.Arora & Company's case(supra), there can be little doubt about the general principle.
19. The reference really arises only in respect of the entitlement of an arbitral tribunal to award interest on interest from date of award under the old Act, but we have explained the legal position aforesaid to set at rest the controversy in respect of the grant of interest.
20. We are unequivocally of the view that the authority of an arbitrator to grant compound interest can only be under a contract as the applicable statutes, as interpreted by the Supreme Court, permitting grant of interest by an arbitrator being Section 29 of the old Act, Section 34 of the said Code r/w Section 41 of the old Act and Section 3 of the Interest Act do not permit specifically the grant of such compound interest. The position is thus same in respect of the authority to grant _____________________________________________________________________________________________ Execution Petition No.194/2006 Page 16 of 17 compound interest under the new Act and the old Act. We also make it clear that even where there is such a provision in the contract, the authority of the Court is not taken away not to grant such compound interest if it is in conflict with or in violation of the public policy of India as observed in para 18.3 of State of Haryana & Ors. v. S.L.Arora & Company's case(supra). As for the facts of the present case are concerned, as already noticed, there is no contract for compound interest and thus compound interest cannot be awarded.
21. The reference is answered accordingly.
SANJAY KISHAN KAUL, J.
JULY 22, 2010 VALMIKI J.MEHTA, J.
dm
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