M/S Pt. Munshi Ram & Associates (P) ... vs Dda
2010 Latest Caselaw 3425 Del

        *                 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 _____________________________________________________________________________________________

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. _____________________________________________________________________________________________

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

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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 _____________________________________________________________________________________________

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

_____________________________________________________________________________________________

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

_____________________________________________________________________________________________

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

_____________________________________________________________________________________________

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.

_____________________________________________________________________________________________

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.‖

_____________________________________________________________________________________________

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, _____________________________________________________________________________________________

[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:

[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

_____________________________________________________________________________________________

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.

_____________________________________________________________________________________________

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.

_____________________________________________________________________________________________

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

_____________________________________________________________________________________________

(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

_____________________________________________________________________________________________

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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