No claim for compound interest could be made in an arbitral award where MoU between the parties did not stipulate compounding of interest.
In a recent judgment, the Hon’ble Supreme Court has held that no claim for compound interest could be made in an arbitral award where MoU between the parties did not stipulate compounding of interest but for simple interest.
ABCAUS Case Law Citation:
4755 (2025) (09) abcaus.in SC
In the instant case, the Appellant had challenged the order passed by the Division Bench of the High Court setting aside the order passed by the Special Court which rejected the petition filed by the respondent for enforcement of the arbitral award on the ground that respondent was not entitled to compound interest and the amount paid was in full satisfaction of the arbitration award.
The question before the Hon’ble Supreme Court was whether in the facts and circumstances of the case, the decree holder (respondent) was entitled to compound interest in terms of Section 31(7)(b) of the Arbitration and Conciliation Act, 1996 (the 1996 Act) or the interest awarded by the arbitral tribunal in terms of the memorandum of understanding (MoU) entered into between the appellant and the respondent fulfil the requirement of Section 31(7)(a) and (b) of the said Act?
The both parties had entered into a MoU with regard to sale and transfer of land. As differences arose between the parties, the MoU was terminated on and the dispute was referred to arbitration.
The arbitral tribunal awarded compensation to the respondent with interest at the rate of 21 percent per annum from the date it was given to the date it is repaid.
Against the order of the arbitral tribunal, the Appellant filed a petition u/s 34 of the 1996 Act before the Special Court which was dismissed.
Thereafter, respondent filed execution petition before the executing court for execution of the arbitral award. The Appellant in the course of hearing, paid sums on various dates and claimed that it was in full compliance to the award including interest. However, the respondent claimed compound interest over and above the rate of interest i.e. 21 percent as awarded by the arbitral tribunal. The executing court held that claim of the respondent for compound interest on the awarded amount was not sustainable. The executing court cannot go beyond the award passed by the arbitral tribunal. It was held that the amount paid by the appellant to the respondent was in full satisfaction of the arbitral award.
The respondent challenged the order of the executing court before the High Court in a proceeding under Article 227 of the Constitution of India. The High Court was of the view that the executing court had reached the conclusion in a cryptic and cavalier manner. Therefore, the order was set aside and the matter was remitted back to the executing court to reconsider the issue of interest under the award.
The Hon’ble Supreme Court observed that Section 31(7) of the 1996 Act has two clauses: clause (a) and clause (b). Clause (a) empowers the tribunal to include interest in the ‘sum’ for which the award is made. The arbitral tribunal is further conferred the discretion to award interest on the principal sum awarded at such rate as it deems reasonable. However, this discretion of the arbitral tribunal is subject to any decision which is agreed upon by the parties. Clause (b), as it stood at the relevant time provided for award of interest by the arbitral tribunal on the ‘sum’ adjudged under clause (a). It says that ‘unless the award otherwise directs’, a sum directed to be paid by an award shall carry interest at the rate of 18% per annum from the date of the award to the date of payment. In other words, clause (b) is subject to the interest that may be awarded by the arbitral tribunal.
The Hon’ble Supreme Court noted that insofar award of interest from the date on which the cause of action arose till the date of the award is concerned, the legislative intent is that the parties possess the autonomy to determine the interest and the rate of interest for the aforesaid period. Clause (a) i.e. discretion of the arbitral tribunal to award interest is subject to agreement by and between the parties. Therefore, party autonomy takes precedence over the discretion of the arbitral tribunal. However, clause (b) is subject to award of interest by the arbitral tribunal. In other words, as per clause (b), the ‘sum’ directed to be paid under an arbitral award shall carry interest at the rate of 18% per annum from the date of the award to the date of payment ‘unless the award otherwise directs’. Therefore, this provision is subject to award of interest by the arbitral tribunal. If it awards interest, then the same shall be applicable from the date of the award till the date of payment; if not, then the ‘sum’ as adjudged under clause (a) shall carry interest at the rate of 18%.
The Hon’ble Supreme Court observed that the MoU entered by the parties gave discretion to the respondent to terminate the MOU in which event it would be entitled to refund of the advance paid together with interest at the rate of 21% per annum from the respective dates of disbursement of the advances till the actual date of repayment.
The Hon’ble Supreme Court observed that it Bench had held that Section 31(7) merely authorizes the arbitral tribunal to award interest in accordance with the contract and in the absence of any prohibition in the contract and in the absence of specific provision relating to interest in the contract, to award simple interest at such rates as it deems fit from the date on which the cause of action arose till the date of payment. If the award is silent about interest from the date of award till the date of payment, the person in whose favour the award is made will be entitled to interest at 18% per annum on the principal amount awarded from the date of award till the date of payment.
The Hon’ble Supreme Court further noted that the question as to whether the ‘sum’ awarded under clause (a) of sub-section (7) of Section 31 of the 1996 Act would include interest pendente lite or not again came up for consideration before a two-Judge Bench which held that that power of the tribunal to award interest would operate if it is not otherwise agreed by the parties. If there is an agreement between the parties to the contrary, the arbitral tribunal would lose its discretion to award interest and will have to be guided by the agreement between the parties.
The Hon’ble Supreme Court held that the discretion to grant interest would be available to the arbitral tribunal under clause (a) of sub section (7) of Section 31 only when there is no agreement to the contrary between the parties. When the parties agree with regard to any of the aspects covered under clause (a) of subsection (7) of Section 31, the arbitral tribunal would cease to have any discretion with regard to the aspects mentioned in the said provision. Only in the absence of such an agreement, the arbitral tribunal would have the discretion to exercise its powers under clause (a) of sub-section (7) of Section 31 of the 1996 Act.
The Hon’ble Supreme Court noted that the MoU expressly provided that in the event of termination of the MoU, the appellant must refund all advances with interest at the rate of 21% per annum from the respective dates of disbursement till repayment. Thus, the arbitral tribunal awarded interest in terms of the MoU from the date of the cause of action till the date of repayment. As the arbitral tribunal had expressly provided interest till the date of repayment, question of additional or compound interest under clause (b) of sub-section (7) of Section 31 of 1996 Act would not arise.
The Hon’ble Supreme Court held that the MoU did not stipulate compounding of interest; the arbitral tribunal did not award compound interest; therefore, respondent cannot at the stage of execution seek to introduce claim of compound interest by drawing on general principles. Allowing such a claim would amount to rewriting the award at the stage of execution which is impermissible.
Accordingly, the impugned judgment and order of the High Court was set aside and order of the executing court was restored.
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