Civil Revision No. 1857 of 2010 [1] IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH Civil Revision No. 1857 of 2010 (O&M) Date of decision: 9.4.2010 State of Punjab and others .. Petitioners v. M/s Lamba Builders .. Respondent CORAM: HON'BLE MR. JUSTICE RAJESH BINDAL Present: Mr. Navdeep Sukhna, Assistant Advocate General, Punjab for the appellants. Mr. Anupam Singla, Advocate for the respondent. .. Rajesh Bindal J. The State is before this Court challenging the order dated 28.11.2009, passed by the learned court below, whereby in execution of the award of the arbitrator, the learned court below has directed for payment of interest on the interest. Briefly, the facts are that the respondent had entered into an agreement with the State on 27.4.1998 for executing work of construction of Ghaggar Escape Regulator. As there was some dispute regarding the payment, the matter was referred for arbitration. On 26.11.2002, the arbitrator passed the award for a sum of Rs. 8,80,495/- in favour of the respondent and accepted the counter claim of the State to the tune of Rs. 2,50,000/- against the respondent. On 22.11.2007, the petitioners paid a sum of Rs. 21,46,142/- to the respondent, the amount of Rs. 6,30,495/- being the net amount after adjusting the counter claim allowed to the petitioners from the amount awarded to the respondent along with interest of Rs. 15,15,647/- from 20.8.1991 till 21.11.2007. As the amount of counter claim awarded to the petitioners was set aside by this court vide judgment dated 12.2.2008 passed in FAO No. 751 of 2007, further sum of Rs. 9,31,424/- was paid to the respondent as principal being Rs. 2,50,000/- and the balance being interest. The dispute in the present case is regarding calculation of interest. Learned counsel for the petitioners submitted that the manner in which the respondent is seeking to calculate the amount of interest is resulting in payment of compound interest to the respondent, which was not awarded by the Civil Revision No. 1857 of 2010 [2] arbitrator. In the absence of any specific direction of the arbitrator, which is in conformity with the terms of agreement entered into between the parties, no interest on interest can be claimed by a party to the arbitration. On the other hand, learned counsel for the respondent submitted that there is no question of claiming interest on interest. The award of the arbitrator is in clear terms, which provides for payment of interest on the amount awarded from the date of final payment, i.e., 20.8.1991 till the date of award and further interest on the net amount after deducting the counter claim from the date of award till the date of actual payment. Once there is specific direction and the calculation of interest has been divided into two parts, the future interest having been granted on the net amount payable from the date of award, the same would necessarily mean that the interest, which had accrued from the date of final payment to the date of award shall form part of the principal and the future interest from the date of award till its payment has to be calculated on the same. Reliance was placed upon Oil & Natural Gas Commission v. M. C. Clelland Engineers S.A., (1999) 4 SCC 327; Mcdermott International Inc. v. Burn Standard Co. Ltd. and others, (2006) 11 SCC 181 and Uttar Pradesh Cooperative Federation Limited v. Three Circles, (2009) 10 SCC 374 to submit that the impugned order passed by the learned court below while calculating the amount of interest is strictly in conformity with the aforesaid judgment. Heard learned counsel for the parties and perused the paper book. The issue which requires consideration by this court in the present petition is regarding calculation of interest on the amount awarded by the arbitrator. Whether the amount of interest upto the date of award is to be considered as principal for the purpose of calculation of interest from the date of award till the payment of the amount? The issue, in my opinion, is no more res integra, as the same has been gone into in detail in a recent judgment of Hon'ble the Supreme Court in State of Haryana and others v. M/s S.L. Arora and Company, 2010(2) RCR (Civil) 223 after considering the judgments in Oil & Natural Gas Commission's case (supra); Mcdermott International Inc.'s case (supra) and Uttar Pradesh Cooperative Federation Limited's case (supra), as relied upon by the counsel for the respondent. To appreciate the facts of the present case in the light of the aforesaid judgment, it would be relevant to refer to the operative part of the award in the present case, which is extracted as under: “Moreover, the respondent has also claimed interest @ 15% for the counter claim, thus I award interest on the awarded amount for both Civil Revision No. 1857 of 2010 [3] the claimant and respondent from date of final payment which is 20.8.1991 to the date of award. The claimant is also entitled to interest on the net amount after deducting counter claim @ 15% p.a. from the date of award to the date of actual payment.” The operative part of the award in M/s S. L. Arora & Company's case (supra), as was considered in that case, is extracted below: “ I award Rs. 14.94 lacs (Rupees Fourteen Lacs Ninety Four Thousands only) along with interest at the rate of 12% with effect from 19.12.1990 till the date of award in favour of M/s S. L. Arora and Company, 5E-10, Bunglow Plot, N. I. T., Faridabad (claiamant) to be paid by the Haryana PWD B&R Branch Department (respondent). In case the total amount of award together with this interest is not paid within 30 days from the date of making this award, future interest shall be paid @ 18% per annum on the sums due to the claimant from the date of Award upto the actual date of payment.....” (emphasis supplied). Hon'ble the Supreme Court in M/s S. L. Arora & Company's case (supra) considered the following two questions, namely,: “(i) Whether Section 31(7) of the Act authorises and enables arbitral tribunals to award interest on interest from the date of award? (ii) Whether the Arbitral Award granted future interest from the date of award, only on the principal amount found due to the respondent (that is Rs. 14,94,000/-) or on the aggregate of the principal and interest upto the date of award (Rs. 31,98,879/-)?” The issue was discussed in detail in paragraphs 13 to 21 thereof. The same are extracted below: “13. The Arbitration and Conciliation Act, 1996, on the other hand contains a specific provision dealing with the power of the arbitral tribunal to award interest. The said provision is incorporated in sub-section (7) of Section 31 which deals with the form and contents of arbitral awards. The said sub-section (7) is extracted below: “31(7)(a) Unless otherwise agreed by the parties, where and insofar as an arbitral award is for the payment of money, the arbitral tribunal may include in the sum for which the award is Civil Revision No. 1857 of 2010 [4] 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 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 percent per annum from the date of the award to the date of payment.” 14. 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. The use of the words “where and in so far as an arbitral award is for the payment of money” and use of the words “the arbitral tribunal may include in the sum for which the award is made, interest'.......on the whole or any part of the money” in clause (a) and use of the words “a sum directed to be paid by an arbitral award shall carry interest” in clause (b) of sub-section (7) of Section 31 clearly indicate that the section contemplates award of only simple interest and not compound interest or interest upon the interest. `A sum directed to be paid by the award' refers to the award of sums on the substantive claims and does not refer to interest awarded on the `sum directed to be paid by an award'. In the absence of any provision for interest upon interest in the contract, the arbitral tribunals do not have the power to award interest upon interest, or compound interest, either for the pre-award period or the post-award period. 15. There is a tendency among contractors to elevate the claims for interest and costs to the level of substantive disputes by describing them as separate and independent heads of claim. The long pendency of arbitration matters either due to prolonged arbitration proceedings or due to litigations (both intervening and post-arbitral), has the unfortunate effect of swelling the interest payable on the amount awarded and costs to very substantial amounts. In many arbitral awards for money, the interest awarded Civil Revision No. 1857 of 2010 [5] often exceeds the amount awarded, by several times. Leisurely arbitrations, avoidable judicial interventions, and indecisiveness on the part of decision makers in government and statutory bodies in accepting and settling genuine claims either at the stage when the claim is made or at least at the stage when the award is made have resulted in undue emphasis and importance being bestowed upon interest and costs. However, substantial their quantum may be in given case, interest in particular interest from the date of the award, and costs are ancillary issues and are not substantive disputes. 16. Some Arbitral Tribunals have misconstrued clause (b) of section 31 (7) of the Act and assumed that the said provision requires the rate of post-award interest in all arbitral awards should be 18% per annum, and that they do not have any discretion in regard to post award interest. Some have misconstrued it further to infer the rate of interest mentioned therein is an indication that invariably the rate of interest in arbitrations, either, pre-award or post-award, should be 18% per annum. Both these assumptions are baseless and erroneous. If that was the legislative intention, there would have been no need for vesting discretion in Arbitral Tribunals, in the matter of interest, under section 31(7)(a). The principles relating to award of interest, in general, are not different for courts and arbitral tribunals, except to the extent indicated in section 31(7) of the Act and CPC. A comparatively high rate of post-award interest is provided in section 31(7)(b) of the Act, not because 18% is the normal rate of interest to be awarded in arbitrations, but purely as a deterrent to award-debtors from avoiding payment or using delaying tactics. In fact a provision similar to section 31(7)(b) of the Act, if provided in section 34 of Code of Civil Procedure, will considerably reduce the travails of plaintiffs in executing their decrees in civil cases. Be that as it may. 17. The difference between clauses (a) and (b) of section 31(7) of the Act may conveniently be noted at this stage. They are: (i) Clause (a) relates to pre-award period and clause (b) relates to post-award period. The contract binds and prevails in regard to interest during the pre-award period. The contract has no application in regard to interest during the post-award period. Civil Revision No. 1857 of 2010 [6] (ii) Clause (a) gives discretion to the Arbitral Tribunal in regard to the rate, the period, the quantum (principal which is to be subjected to interest) when awarding interest. But such discretion is always subject to the contract between the parties. Clause (b) also gives discretion to the Arbitral Tribunal to award interest for the post-award period but that discretion is not subject to any contract; and if that discretion is not exercised by the arbitral Tribunal, then the statute steps in and mandates payment of interest, at the specified rate of 18% per annum for the post-award period. (iii) While clause(a) gives the parties an option to contract out of interest, no such option is available in regard to the post-award period. In a nutshell, in regard to pre-award period, interest has to be awarded as specified in the contract and in the absence of contract as per discretion of the Arbitral Tribunal. On the other hand, in regard to the post-award period, interest is payable as per the discretion of the Arbitral Tribunal and in the absence of exercise of such discretion, at a mandatory statutory rate of 18% per annum. 18. As there is some confusion as to what section 31(7) authorizes and what it does not authorize, we will attempt to set out the legal position regarding award of interest by the arbitral tribunals, as emerging from section 31(7) of the Act. 18.1 The provision for interest in the Act is contained in section 31 dealing with the form and contents of arbitral award. It employs two significant expressions “ where the arbitral award is for payment of money” and “the arbitral tribunal may include in the sum for which the award is made, interest..... on the whole or any part of the money”. The legislature has thus made it clear that award of interest under sub-section (7) of section 31 (and award of costs under sub-section (8) of Section 31 of the Act) are ancillary matters to be provided for by the award, when the arbitral tribunal decides the substantive disputes between the parties. The words 'sum for which the award, is made' and 'a sum directed to be paid by an arbitral award' contextually refer to award on the substantive claims and not ancillary or consequential directions relating to interest. Civil Revision No. 1857 of 2010 [7] 18.2 The authority of the arbitral tribunals to award interest, under section 31(7)(a) is subject to the contract between the parties and the contract will prevail over the provisions of section 31(7)(a) of the Act. Where the contract between the parties contains a provision relating to, or regulating or prohibiting interest, the entitlement of a party to the contract to interest for the period between the date on which the cause of action arose and the date on which the award is made, will be governed by the provisions of the contract, and the arbitral tribunal will have to grant or refuse interest, strictly in accordance with the contract. The arbitral tribunals cannot ignore the contract between the parties, while dealing with or awarding pre-award interest. Where the contract does not prohibit award of interest, and where the arbitral award is for payment of money, the arbitral tribunal can award interest in accordance with Section 31(7)(a) of the Act, subject to any term regarding interest in the contract. 18.3 If the contract provides for compounding of interest, or provides for payment of interest upon interest, or provides for interest payable on the principal upto any specified stage/s being treated as part of principal for the purpose of charging of interest during any subsequent period, the arbitral tribunal will have to give effect to it. But when the award is challenged under section 34 of the Act, if the court finds that the interest awarded is in conflict with, or violating the public policy of India, it may set aside that part of the award. 18.4 Where an arbiral tribunal awards interest under section 31 (7)(a) of the Act, it is given discretion in three areas to do justice between the parties. First is in regard to rate of interest. The Tribunal can award interest at such rate as it deems reasonable. The second is with reference to the amount on which the interest is to be awarded. Interest may be awarded on the whole or any part of the amount awarded. The third is with reference to the period for which the interest is to be awarded. Interest may be awarded for the whole or any part of the period between the date on which cause of action arose and the date on which the award is made. Civil Revision No. 1857 of 2010 [8] 18.5 The Act does away with the distinction and differentiation among the four interest bearing periods, that is, pre-reference period, pendente lite period, post-award period and post-decree period. Though a dividing line has been maintained between pre- award and post-award periods, 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, subject to however the discretion of the arbitral tribunal to restrict the interest to such period as it deems fit. 18.6 Clause (b) of Section 31(7) is intended to ensure prompt payment by the award-debtor once the award is made. The said clause provides that the “sum directed to be paid by an arbitral award” shall carry interest at the rate of 18% per annum from the date of award to the date of payment if the award does not provide otherwise in regard to the interest from the date of award. This makes it clear that if the award grants interest at a specified rate up to the date of payment, or specifies the rate of interest payable from the date of award till date of payment, or if the award specifically refused interest, clause (b) of Section 31 will not come into play. But if the award is silent in regard to the interest from the date of award, or does not specify the rate of interest from the date of award, then the party in whose favour an award for money has been made, will be entitled to interest at 18% per annum from the date of award. He may claim the said amount in execution even though there is no reference to any post award interest in the awards. Even if the pre-award interest is at much lower rate, if the award is silent in regard to post-award interest, the claimant will be entitled to post-award interest at the higher rate of 18% per annum. The higher rate of interest is provided in clause (b) with the deliberate intent of discouraging award-debtors from adopting dilatory tactics and to persuade them to comply with the award. 19. We will next deal with the three cases relied upon by the learned counsel for the respondent to contend that this Court has recognized and accepted the power of the arbitral tribunals to award interest upon interest: Oil & Natural Gas Commission v. Civil Revision No. 1857 of 2010 [9] M. C. Clelland Engineers S.A. - (1999) (4) SCC 327, Mcdermott International Inc. v. Burn Standard Co. Ltd and Others – (2006) 11 SCC 181, and Uttar Pradesh Cooperative Federation Limited v. Three Circles – (2009) 10 SCC 374. But out of these three decisions only the decision in Mcdermott relates to an award under the Arbitration and Conciliation Act, 1996. The other two decisions relate to awards under the old Act (Arbitration Act, 1940) and are of no assistance in interpreting section 31 (7) of the new Act. 20. In Mcdermott, paras 154 to 159 of the judgment deal with the issue of interest. Relevant portions thereof are extracted below in entirety: “The power of the arbitrator to award interest for pre-award period, interest pendent lite and interest post-award periods is not in dispute. Section 31(7)(a) provides that the arbitral tribunal may award 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 which the cause of action arose and the date on which award is made, i.e., pre-award period. This, however, is subject to the agreement as regard the rate of interest on unpaid sum between the parties. The question as to whether interest would be paid on the whole or part of the amount or whether it should be awarded in the pre-award period would depend upon the facts and circumstances of each case. The arbitral tribunal in this behalf will have to exercise its discretion as regards (i) at what rate interest should be awarded; (ii) whether interest should be awarded on whole or part of the award money; and (iii) whether interest should be awarded for whole or any part of the pre-award period.” “The 1996 Act provides for award of 18% interest. The arbitrator in his wisdom has granted 10% interest both for the principal amount as also for the interim. By reason of the award, interest was awarded on the principal amount. An interest thereon was upto the date of award as also the future interest at the rate of 18% per annum. Civil Revision No. 1857 of 2010 [10] However, in some cases, this Court was resorted to exercise its jurisdiction under Article 142 in order to do complete justice between the parties........ In this case, given the long lapse of time, it will be in furtherance of justice to reduce the rate of interest to 7-1/2%”. A careful reading of the same shows that there is no reference to awarding of compound interest or interest from the date of award on the interest that had accured due up to the date of award. The decision dealt with the rate of interest and exercise of jurisdiction under Article 142 of the Constitution to set right anomalies in regard to rate of interest. The said decision is therefore, of no assistance. [Emphasis supplied] 21. Learned counsel for the respondent submitted that in Three Circles, this Court has observed that Mcdermott recognized that interest awarded on the principal amount upto the date of the award becomes part of the principal from the date the award. We extract below the relevant portion of Three Circles relied upon by the respondent: “ Now the question comes which is related to awarding of 'interest on interest'. According to the appellant, they have to pay interest on an amount which was inclusive of interest and the principal amount and, therefore, this amount to a liability to pay interest on interest. This question is no longer res integra at the present point of time. This Court in McDermott International Inc. v. Burn Standard Co. Ltd, 2006 (11) SCC 181 has settled this question in which it had observed as follows: The Arbitrator has awarded the principal amount and interest thereon upto the date of award and future interest thereupon which do not amount to award of interest on interest as interest awarded on the principal amount upto the date of award became the principal amount which is permissible in law.” [emphasis supplied] Civil Revision No. 1857 of 2010 [11] But a careful reading of the decision in Mcdermott, shows that the portion of Mcdermott extracted in Three Circles, assuming it to be the law laid down in Mcdermott, is not a finding or conclusion of this court, nor the ratio decidendi of the case, but is only a reference to the contention of the respondent in Mcdermott. Paras 1 to 27 (of the SCC report) in Mcdermott state the factual background. Paras 28 and 29 contain the submissions of the learned counsel for BSCL, the respondent therein. Paras 30 to 44 contain the submissions made by the learned counsel for Mcdermott, the appellant therein, in reply to the submissions made on behalf of BSCL. The passage that is extracted in Three Circles is part of para 44 of the decision which contains the last submission of the learned counsel for