The division judge bench of Justice Dr Dhananjaya Y Chandrachud and Justice AS Bopanna of the apex court in the case of Morgan Securities and Credits Pvt. Ltd V. Videocon Industries Ltd. held that the arbitrator has the discretion to determine the rate of reasonable interest, the sum on which the interest is to be paid, that is whether on the whole or any part of the principal amount, and the period for which payment of interest is to be made - whether it should be for the whole or any part of the period between the date on which the cause of action arose and the date of the award.
BRIEF FACTS
The factual matrix of the case is that the appellant and the respondent entered into an agreement and after that, the appellant issued a notice to the respondent regarding the payment of the principal amount. Thereafter, when the default occurs then, the appellant invoked the arbitration clause of the agreement.
The sole arbitrator rendered an arbitral award in favor of the appellant. The award was corrected and decrees the claim of the appellant in the amount of Rs. 5,00,32,656. Interest at the rate of (i) twenty-one percent per annum has been granted from the date of default to the date of the demand notice; (ii) thirty-six percent per annum with monthly rests from the date of the demand notice to the date of award (“pre-award interest”); and (iii) eighteen percent per annum on the principal amount of Rs. 5,00,32,656 from the date of award to the date of payment (“post-award interest”).
Further, the appellant challenged the arbitral award in the petition under section 34 before the Delhi High Court raising objections to the grant of post-award and pre-award interest. The respondent also filed a petition. The appellant urged before the hon’ble court that the post-award interest of eighteen percent per annum should be granted to on the total sum awarded, inclusive both of principal and pre-award interest. However, the single judge bench of the hon’ble Delhi high court dismissed the petition and stated that the Single Judge held that the Arbitrator had in his discretion restricted the post-award interest to the principal amount and that the court would not interfere with the exercise of discretion. After that, the proceedings under Article 136 of the Indian constitution were initiated before the hon’ble apex court.
The learned counsel for the appellant contended that the according to section 31(7) of the act if pre-award interest is paid on the principal sum, the total of the principal and pre-award interest is the sum on which post-award interest must be paid and if the pre-award interest is granted on the principal sum under section 37(7)(a) of the act, then the interest award losses it’s character and takes the color of the awarded sum. Even, The arbitral award makes no mention of post-award interest on the interest component. As a result, under Section 31(7)(b) of the Act, the appellant is entitled to the statutory rate of interest on the aggregate of the principal and pre-award interest. Further, it was also contended that the arbitrator only has the discretion to determine the rate post-award interest. The Arbitrator does not have the discretion to determine the ‘sum’ on which the post-award interest is to be granted.
The learned counsel for the respondent contended that section 31(7)(b) would only be applicable where an arbitral award is silent on the component of post-award interest. Further, it was further contended that under Section 31(7)(b) of the Act, the arbitrator has the discretion to (a) grant post-award interest; (b) determine the quantum over which the post-award interest should be granted, and (c) determine the rate at which the interest should be calculated.
COURT’S OBSERVATION
The hon’ble court stated that the purpose of granting post-award interest is to ensure that the award debtor does not delay the payment of the award. With the proliferation of arbitration, issues involving both high and low financial implications are referred to arbitration. The arbitrator takes note of various factors such as the financial standing of the award-debtor and the circumstances of the parties in dispute before awarding interest. The discretion of the arbitrator can only be restricted by an express provision to that effect. Clause (a) subjects the exercise of discretion by the arbitrator on the grant of pre-award interest to the arbitral award. However, there is no provision in the Act that restricts the exercise of discretion to grant post-award interest by the arbitrator. The arbitrator must exercise discretion in good faith, must take into account relevant and not irrelevant considerations, and must act reasonably and rationally taking cognizance of the surrounding circumstances.
The hon’ble court further stated that according to Section 31(7)(b), if the arbitrator does not grant post-award interest, the award holder is entitled to post-award interest at eighteen percent. Further, Section 31(7)(b) does not fetter or restrict the discretion that the arbitrator holds in granting post-award interest. The arbitrator has the discretion to award post-award interest on a part of the sum. The arbitrator must exercise the discretionary power to grant post-award interest reasonably and in good faith, taking into account all relevant circumstances and at last, the judgment of the Delhi high court stands dismissed.
CASE NAME- Morgan Securities and Credits Pvt. Ltd V. Videocon Industries Ltd
CITATION- Civil Appeal No. 5437 of 2022
DATED- 1.09.2022
CORUM- Justice Dr Dhananjaya Y Chandrachud and Justice AS Bopanna
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