Report No. 246
Interest on Sums Awarded
65. The issue on whether future interest is payable not only on the principal sum but also on the interest accrued till the date of the award remains controversial notwithstanding the clear wording of section 31(7). Initially, the position under the 1940 Act was that there was an express bar on awarding compound interest. This was evident in reading section 3(3)(c) of the Interest Act, 1978, section 29 of the Arbitration Act, 1940 and section 34 of the CPC, 1908.
66. However, the Supreme Court in Renusagar Power Co Ltd v. General Electric, 1994 Supp (1) SCC 644, held that awarding compound interest was not a violation of public policy of India. It is pertinent to note that these observations were made in the context of a case where the arbitral tribunal had expressly pointed out that they were not concerned with a contract to pay compound interest but were awarding compound interest as a remedy for a breach of contract in order to put the injured party in the same economic position it would have been in if the contract had been duly performed.
This award was held to be in consonance with the public policy of India. Furthermore, as set out above, it was explicitly stated that compound interest can be awarded when it is permissible to do so under the statute.
67. Under the 1996 Act, the words that have been used are of far wider import and the scheme of the relevant provisions indicates that award of interest on interest is not only permitted but also the norm. Yet, a two judge bench of the Supreme Court, in State of Haryana v. L. Arora & Co., (2010) 3 SCC 690, held as follows "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." Apart from being contrary to the statutory scheme of the Act, the decision in Arora is also against the decision of (co-ordinate) two judge benches of the Supreme Court in ONGC v. M.C. Clelland Engineers S.A, (1999) (4) SCC 327 and UP Cooperative Federation Ltd v. Three Circles, (2009) 10 SCC 374.
68. Recognising this conflict of judicial opinion, the Supreme Court, in Hyder Consulting (U.K.) v. Governor of Orissa, (2013) 2 SCC 719 has referred this issue for determination to a three judge bench.
69. It is in this context that the Commission has recommended amendments to section 31 to clarify the scope of powers of the arbitral tribunal to award compound interest, as well as to rationalize the rate at which default interest ought to be awarded and move away from the existing rate of 18% to a market based determination in line with commercial realities