Section 31(7) and the Arbitral Tribunal Award of Interest: Probing the Boundaries on Discretion vis-à-vis “Period”

Madhumitha L.

I. Introduction

Section 31(7) of the Arbitration and Conciliation Act, 1996 (‘1996 Act’) enunciates the Indian position on the award of interest in arbitrations. The Arbitration Act, 1940 (‘1940 Act’) was silent on the jurisdiction of the Arbitral Tribunal in awarding pre-reference and pendente lite interest as well as the restrictions, if any, on the exercise of such discretion vis-à-vis the ‘period’ for which interest could be granted. The 1996 Act, however, marked a significant departure on this aspect by dividing the periods of interest into pre-award (31(7)(a)) and post award (31(7)(b)) periods wherein the pre-reference and pendente lite period is subsumed under the pre-award period.

As stated in several judgements including State of Haryana and Others v. S.L. Arora and Company (S.L. Arora) and Buildworth (P) Ltd. v. Bharat Heavy Electrical Ltd. (Buildworth), the Arbitral Tribunal’s discretion under Section 31(7)(a) on the pre-award period is three-pronged; i.e., on:

(i) the rate of interest,

(ii) the sum on which interest would apply, and

(iii) the period for which such interest would apply.

Based on the judicial interpretations so far, the exercise of discretion on the rate and the sum while granting an award of interest has been sufficiently explained. However, the ‘period’ discretion has not been dealt with in detail in India, despite the letter of the Section bestowing such a power. The focus of our analysis would be to analyze this ‘period’ discretion, its existence and extent, while attempting to demarcate it with necessary clarity. Part I discusses how interest periods were viewed in the 1940 Act vs. the 1996 Act; Part II highlights the wide discretion available to the Tribunal with respect to the interest periods; Part III would attempt to interpret the phrase ‘any part of the period’ under Section 31(7)(a) to understand whether this would serve to divide the pre-award period rigidly into pre-reference and pendente lite interest periods or if the pre-award period can be divided any which way depending on the facts and circumstances of each case; Part IV brings in perspectives from U.K and Singapore on the matter.

II. Distinguishing the Interest “Period”: 1940 Act vs. 1996 Act.

The letter of Section 28 of the 1940 Act was largely silent about the jurisdiction of the arbitrator in awarding pre-reference and pendente lite interest, and provided only for interest from the date of the Court decree. The decisions of the Court had however charted out four stages of grant of interest, This is evident from the judgement in Jagdish Rai & Brothers v. Union of India. wherein the four stages of grant of interest were stated to be – Firstly, from the stage of accrual of cause of action till filing of the arbitration proceedings; Secondly, during the pendency of the proceedings before the arbitrator; Thirdly, future interest arising between the date of the award and the date of the decree; and fourthly, interest arising from the date of the decree till realization of the award.

A shift from the 1940 Act was necessary with respect to interest since it did not provide for any prohibitions preventing the arbitrator from granting interest for the pre-reference and pendente lite period. Therefore, as stated in Jaiprakash Associates Limited v. Tehri Hydro Development Corporation Ltd., even in cases where the agreement prohibited the award of interest in the pre-award period, Courts made a distinction between the pre-reference and pendente lite period and exercised discretion to grant interest for the pendente lite period. In light of this confusion, the 1996 Act brought in a clear provision which stressed that the interest discretion of the arbitrator for the entire pre-award period only exists if a contrary intention is not reflected in the agreement between the parties. While detailing this and also seeking to reduce Court intervention in arbitrations, the Act did away with the four-way division in interest periods as under the previous Act and this was confirmed in S.L. Arora. Now, Section 31(7) only recognizes two interest periods, i.e., pre and post-award. It even blurs the difference between the pre-reference period and pendente lite period.

III. Wide Discretion of the Arbitral Tribunal

The Arbitral Tribunal is not ‘bound’ to award interest. It has discretion in deciding whether it has to be awarded or not and as evident from the letter of the section, the discretion accorded to the tribunal is pretty wide. In Oriental Structural Engineers Pvt. Ltd. v. State of Kerala, while deciding what rate of interest must apply in a scenario where the space earmarked for filling rate of interest in the agreement was left blank, it was stated that the Arbitral Tribunal can award interest at such rate it deems reasonable. While delineating the “sum” discretion in Hyder Consulting (UK) Limited v. Governor, State of Orissa, the Supreme Court opined that “sum” could include the aggregate of pre-award interest and principal sum or, if no pre-award interest is granted then the principal sum alone or, only pre-award interest in a scenario where there is no principal sum and this would be left to the arbitrator’s discretion. This wide discretion boils down even to the ‘period’ question. In Delhi Airport Metro Express Private Limited v. Delhi Metro Rail Corporation, it was stated that,

“It is also not necessary for the Arbitral Tribunal to award interest for the entire period between the date on which the cause of action arose and the date on which the award is made, it can grant interest for the entire period or any part thereof or no interest at all”.

Similarly, in McDermott International Inc. v. Burn Standard Co. Ltd. and Others, the Court stated that the Arbitral Tribunal would also have to exercise its discretion on whether interest should be awarded for the whole or any part of the pre-award period. Of course, as clarified in Hyder Consulting, such discretion must necessarily be exercised as per the facts and circumstances of each case, be within the parameters of the statute and in accordance with the rule of law.

IV. Interpreting the Phrase “Any Part of the Period”

1. That the word “Part” further divides the pre-award interest period rigidly into pre-preference and pendent lite.

a. Judicial Interpretation

The most common approach taken by Arbitral Tribunals and thereafter, the Courts, has been to either disallow claims of pre-award interest entirely or to allow it for the entire pre-award period comprising of both pre-reference and pendente lite interest. This can be illustrated through Hyder Consulting, S.L. Arora, and . Modi Construction Company v. Ircon International Limited where interest had been granted for the entire pre-award period. In Gail (India) Ltd. v. Triveni Engineering and Industries Ltd., the Arbitral Tribunal had granted interest at 15% each for the pre-arbitration (pre-reference) period and pendente lite period, on all claims. However, in MCD v. Modern Food Industries (India) Ltd and Buildworth, the Arbitral Tribunal had refused to grant pre-reference interest and only pendente lite interest was awarded.

On a close look at these judgements, it can be seen that the pre-award period is either viewed as one continuous interest period or rigidly as two at the most – pre-reference period and pendente lite period, for the purpose of exercise of discretion regarding the period for which interest can be awarded.

b. Logical inference from the CrPC

Section 34 of the Code of Civil Procedure, 1908 is the corresponding provision regarding grant of interest in a payment of money decree. The letter of Section 34 has already demarcated three interest periods, i.e., (i) from the date of the suit to the date of the decree (pendente lite), (ii) for any period prior to the institution of the suit (pre-reference) and, (iii) from the date of the decree to the date of payment (post-decree). Apart from this, a significant difference from Section 31(7) is the absence of the word ‘part’ with reference to the interest periods.

As stated in V. Jagannadha Rao and Others v. State of A.P. and Others, while interpreting a statute, attention should be paid to what has been said as also to what has not been said. In Grasim Industries Ltd. v. Collector of customs, it was stated that every provision and every word must be looked at generally and in the context in which it is used and not in isolation. If one is to subscribe to the argument that the pre-award interest period can only be rigidly divided into two, it can be stated that the reason behind the absence of the word ‘part’ in Section 34 CPC is because the pre-decree period is already distinguished into pre-reference and pendente lite. Therefore, the true intention of the legislature being only to divide the pre-decree period further into two, the insertion of the word ‘part’ was deemed unnecessary. Similarly, only because the pre-award period is continuous in Section 31(7)(a), the word ‘part’ is present in the Arbitration Act.

2. That the pre-award interest period can be divided in multiple ways based on the Tribunal’s discretion

a. Judicial discretion (if any)

In KMC Construction Ltd. v. NHAI (KMC Construction), the Arbitral Tribunal held that only for the period when the arbitration proceedings were at a standstill and the parties attempted to resolve their disputes amicably through conciliation (a part of the pendente lite period), interest could not be awarded to the petitioner. However, this exercise in discretion was considered erroneous since the amicable discussions were conducted without prejudice to the rights and contentions of both the parties. In light of these, we are left with little to zero examples of judicial interpretations of a more flexible ‘period’ discretion by the arbitrator.

b. Interpretation of the word ‘any’ in the phrase “any part of the period”

The word ‘any’ pre-supposes the idea that an Arbitral Tribunal can exercise further discretion in dividing the pre-award period as per the facts and circumstances of the case. In Union of India v. Hansoli Devi, Nathi Devi v. Radha Devi Gupta and Promoters & Builders Assn. of Pune v. Pune Municipal Corporation and Others, it was stressed that effort should be made to give effect to each and every word used by the legislature. Further, in RBI v. Peerless General Finance & Investment Co. Ltd., it was aptly stated that,

“That interpretation is best which makes the textual interpretation contextual. A statute is best interpreted when we know why it was enacted. With this knowledge, the statute must be read, first as a whole, and then section by section, clause by clause, phrase by phrase and word by word…statutes have to be construed so that every word has a place and everything is in its place”.

Therefore, the use of the word “any” cannot go ignored. Secretary Irrigation Department, Govt of Orissa v. G.C. Roy contextualized that interest is granted in consonance with a person’s right to be compensated when deprived of the use of money to which he is legitimately entitled to. The case also emphasized that this basic consideration must be valid for the period the dispute is pending before the arbitrator as it is for the period prior to the arbitrator entering upon reference. With this context, the word ‘any’ must be interpreted such that the compensatory objective of the provision is not diminished. As a consequence, the Arbitral Tribunal must be given wider discretion to divide the pre-award interest period not along the rigid lines of pre-reference and pendente lite but for truly ‘any period’, in a manner which does complete justice to the parties entering upon reference in the facts of the case.

V. Perspectives from Singapore and U.K.

In Singapore, Section 12(1) of the Civil Law Act (Civil Law Act) is pari materia to Section 31(7)(a), wherein any court of record can award interest “for the whole or any part of the period between the date when the cause of action arose and the date of judgement”. Section 12(1) is again substantially similar to Section 35 of the Arbitration Act, 2001 , except that the latter is wider in that it provides for interest “from such date… for any period ending not later than the date of payment” and not for any period ending on date of the judgement/award. This provides scope for the arbitrator to grant interest on sums paid after the commencement of proceedings but before the award or, after the award i.e. until the date of payment, whenever that may be. Despite this difference, both the provisions on interest give wide discretion to the arbitrator to decide on the period for which interest is to be granted.

In Grains and Industrial Products Trading Pte Ltd v. Bank of India and another, it was rightly pointed out that:

“The object of leaving it (interest) to judicial discretion as opposed to laying down a fixed rule making interest payable as of right is to enable the courts to achieve justice across the infinite range of factual permutations that may confront the court by tailoring the award to fit the unique circumstances of each case. Such discretion would extend to a determination of whether to award interest at all;…and the period for which interest should be awarded”.

Delving again into the discussion on whether the rigid lines between the pre-reference period and pendente lite period must be adhered to, it can be seen that in Robertson Quay Investment Pte Ltd. v. Steen Consultants Pte Ltd. (Robertson Quay), pre-reference interest was denied. Further, after making several amendments to the original writ, the SOC was also filed after an unjustifiable delay. Therefore, the Court granted interest only from the date of service of SOC and not even from the date of filing of the amended writ. Herein, interest began to run mid-way in the pendente lite period.

In LW Infrastructure Pte Ltd. v. Lim Chin San Contractors Pte Ltd and another appeal, the arbitrator awarded pre-award interest through an additional award. While holding that the principles of natural justice were breached and the plaintiff was not given an opportunity to be heard on the issue of pre-award interest, the Court made an important observation stating that the Plaintiff could have made arguments that the period of pre-award interest should have been reduced since the defendant was guilty of inordinate delay in prosecuting the arbitration. Here, the Defendant had confirmed the arbitrator’s appointment with a three and a half years delay. Therefore, the Court consequentially provided scope for the possibility that a part of the pendente lite period (from the Notice of Arbitration to Appointment of arbitrator) could have been excluded from the period for which pre-award interest was granted. Both these cases lend support to the argument that rigidly dividing the pre-award interest period into pre-reference and pendente lite might not do complete justice in the unique facts of each case and that arbitrators should be given more wiggle room to exercise discretion on the interest periods.

In the U.K., Section 35A(1) of the Senior Courts Act 1981 (SCA) amalgamates the positions taken by Section 31(7) of the Indian Act and Section 35 of the Singaporean Arbitration Act 2001 and states that interest could be awarded for all or any part of the period between the date when the cause of action arose and the date of payment or the date of judgment, depending on whether a party makes payment before judgment or not. That being said, again, the scope of the period discretion is wide.

In Kaines (UK) Ltd. v. Osterreichische Warrenhandelsgesellshaft Austrowaren Gesselschaft mbH (Kaines), the buyers accepted the contractual breach of the sellers and subsequently procured substitute goods at a price higher than the contract price. The English Court of Appeal held that interest was to run, not from the time when the breach occurred (when the cause of action accrued), but rather from the time when the buyers were required to make payment for the substitute goods (which took place after the buyers had issued the writ). Only at the latter point in time, the buyers could be said to be out of pocket. Here, interest began to accrue in the middle of the pendente lite period, quite similar to Robertson Quay.

VI. Conclusion

The dilemma on ‘period’ discretion i.e., (a) whether the interest periods are demarcated, if so, into how many and, (b) whether the discretion given to the arbitrator is wide enough to move beyond these rigidly defined periods in granting interest – is still not sufficiently addressed in the Indian scenario. As was discussed, the letter of the Section divides the interest periods broadly into two, i.e., pre-award and post-award. An overview of judgements has lent support to dividing the pre-award period further into two, i.e., pre-reference and pendente lite. However, the question still remains – Can an arbitrator decide that interest would commence mid-way from the pre-reference period after the date of cause of action accrued or, that it would commence from a date after the arbitral proceedings began, in the midst of the pendente period? There is not much clarity on this aspect. Judgements like Asco Engineering and KMC Construction have come close to answering this question but, however, fell a little short.

In jurisdictions like Singapore and U.K, the non-rigid ‘period’ discretion has been practiced by Courts and Arbitral Tribunals alike wherein interest has commenced in the mid-pendente lite period. Keeping in view that the provisions on grant of interest in these jurisdictions is similar to that of Section 31(7), at least with respect to the discretion on period, it is argued that a true reflection of the phrase “any part of the period” contained in Section 31(7)(a) can be seen in Singapore and the U.K. Therefore, it is urged that clarity on the bounds and extent of the ‘period’ discretion on interest, to be exercised by the Arbitral Tribunal, need further necessary deliberation in India.

The author is a graduate from Symbiosis Law School, Pune and an advocate practising in Delhi.