In civil suits, parties quite often claim for interest on payments due or on damages for breach of contract. The language being almost verbatim in all petitions, with a request for the court to grant pre-reference, pendente lite and future interest. In my experience, as a legal assistant to an arbitrator, I realized that similar claims were being made by Advocates and parties in arbitration cases as well and the same was quantified at 18% per annum. Many also specifically claimed compound interest. In this article I shall deal with the provisions of the Arbitration and Conciliation Act, 1996 regarding claims for interest and discuss two cases of the Supreme Court of India and thereupon advise the appropriate strategy for claims of interest in arbitration matters.
PROVISIONS OF THE ARBITRATION AND CONCILIATION ACT, 1996
Primarily, it has to be noted that in arbitration the division of period for claim of interest can be only split into two parts; pre award and post award. The same is evident from the provisions of the Act which deals with interest namely Section 31(7)(a) and (b) and they are extracted as hereunder:
Section 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 two per cent, higher than the current rate of interest prevalent on the date of award, from the date of award to the date of payment.
Explanation. - The expression "current rate of interest" shall have the same meaning as assigned to it under clause (b) of section 2 of the Interest Act, 1978 (14 of 1978).
Section 31(7)(a) gives parties the right to make provisions for payment of interest for delayed payments under the contract. If such a provision exists, the arbitral tribunal will be bound by the same with regard to rate of interest to be awarded for any period prior to the award. Although this section does not mention, whether the interest is to be given is simple or compound, the Supreme Court has held in State of Haryana v. S.L. Arora (2010) 3 SCC 690 that unless the parties have agreed that the pre-award period the interest would be compoundable, the arbitral Tribunal cannot award compound rate of interest for any pre-award period.
If such a provision does not find place in the contract, the arbitral tribunal will have the power to levy pre-award simple interest which is reasonable. The manner in which the rest of the sub-section is drafted, I am of the opinion that interest rates can only be given for payments which had become due and not been paid under the contract. Such kind of interest however should not be payable for damages determined by the arbitral tribunal for the breach of the contract by one of the parties. In my opinion damages for breach of contract should not carry pre-award interest. However, the clause does give enough leeway for the arbitral tribunal to decide the rate of interest to be applicable and on what amount of money and for what time.
POST AWARD INTEREST
As far as post award interest is concerned, Section 31(7)(b) provides a very unique opportunity for the parties to gain considerable interest. This provision provides that the principal amount. The word sum used in this subsection allows the principal to be the actual amounts awarded plus the pre-award interest. Which essentially allows interest upon the pre-award interest amount as well. The Supreme Court has held as much in Hyder Consulting v. State of Orissa (2015) 2 SCC 189. It held that the word “sum” in Section 31(7)(b) of the Arbitration and Conciliation Act, 1996 includes not only the principal amount awarded but also the interest awarded by the arbitral Tribunal.
CONCLUSION AND SUGGESTIONS
Hence, parties while claiming interest in an arbitration should position themselves in such a manner that they are able to pinpoint the actual date on which the opposite party has committed the breach. Accordingly, they should also argue that the damages are due since the date of breach and that pre-award simple interest should be awarded from the date of breach till the date of award. Thereafter, the Claimant should seek post award interest on this entire “sum” i.e., damages + pre-award interest based on the language of Section 31(7)(b) and the judgment of the Supreme Court in Hyder Consulting v. State of Orissa.
Further, this should not be limited to just claims in the Claim Petition but the Advocates should devote sufficient time during their arguments as well. Quite often Advocates spend their entire time on proving the breach and do not devote time on quantification of damages and the claim for interest. The result being that even if the arbitral tribunal holds in favor of the Claimant that a breach has been committed by the opposite party, due to lack of evidence on quantification, the damages awarded are nominal in nature and the award of interest, if any, do not do justice to the claims of the Claimant.