The practice of awarding interest during recovery of any debt or damages or in any proceedings is so rightfully common that it has become a legal norm. So common, that we have a specific legislation dedicated to it named the Interest Act, 1978. However, norms are changeable. A question that has evolved with regard to interest over time is whether the Arbitral tribunal has power to award interest on interest for post award period, i.e. between the passing of the award till the enforcement of the same in the absence of an agreement between the parties. It was one of the questions considered by a two judge’s bench of the Hon’ble Supreme Court of India in the case of State of Haryana & Others v. S.L. Arora & Company.

Now, it is exceedingly well known that a party autonomy is the most important characteristic of any mature arbitration system. Despite the fact that the UNCITRAL Model Law on International Commercial Arbitration is silent on the issue of interest in Arbitral matters, it has not kept the Courts and the Arbitral Tribunals from propounding and interpreting the subject of interest by applying applicable laws.

While arbitrators use their discretionary powers and authority in awarding interest, there isn’t in place a uniform approach that is followed around the world. In India, however, an Arbitrator’s power to grant interest is under Section 31(7) of the Arbitration and Conciliation Act, 1996 (“the Act”). As per this provision, the arbitrator has the power to grant interest on the whole or any portion of the money at such rate as is deemed fit and such interest is granted for a period between the dates on which the cause of action arose till the date of the award, which is commonly known as pendente lite interest.

Interestingly, this provision has also opened gateways for discussion on whether the arbitrator is vested with the power to grant post-award interest on interest.

Most matters of commercial nature are referred to arbitration vide the arbitration clause which is present in the Agreement between the parties concerned. The agreements, generally, also specify the interest which shall be charged, if at all, and the situation in which such defaulting party shall be liable to pay interest. The main question which needed introspection was “Does Section 31(7) of the Arbitration and Conciliation Act, 1996 gives the power to the Arbitrator to award post award interest on interest and/or Pendente lite interest?”

To answer this, a three-judge bench of the Hon’ble Supreme Court of India recently passed a judgement in UHL Power Co. Ltd. vs. State of Himachal Pradesh1 and cleared the understanding on this subject. The Sole Arbitrator, who was appointed to resolve the dispute between UHL and the State in relation to a tender which was allotted in favour of UHL Power Co. Ltd., passed an award amounting to a sum of `26,08,89,107.35/- in favour of UHL Power Company Limited towards expenses claimed along with preclaim interest capitalized annually, on the expenses so incurred alongwith compound interest of @ 9% per annum in favour of UHL Power Co. Ltd. till the date of claim. The Arbitrator also stated that in the event the awarded amount is not realized within a period of six months from the date of making the award, future interest would be awarded @ 18% per annum on the principal claim with interest.

An appeal against such order under Section 34 of the Arbitration and Conciliation Act, 1996 was made wherein the entire claim of UHL Power Co. Ltd. was disallowed by the Single Bench of the Hon’ble High Court at Himachal Pradesh. A further appeal under Section 37 of the Arbitration and Conciliation Act, 1996 was preferred by UHL Power Co. Ltd. wherein the Division Bench of the Hon’ble High Court at Himachal Pradesh held that the award passed by the Arbitral Tribunal is in excess to the powers granted to it under Section 31(7) and in the absence of any provision for interest on interest, the Arbitral Tribunal cannot grant such award.

Thereafter, upon further appeal by UHL Power Co. Ltd., the Apex Court observed that the Division Bench had relied on State of Haryana v. S.L. Arora and Co. which has been overruled in Hyder Consulting (UK) Ltd. Vs. Governor, State of Orissa . In light of the above, the Apex Court quashed and set aside the finding of Division Bench and held that- “As the judgment in the case of S.L. Arora (supra), on which reliance has been placed by the Division Bench of the High Court of Himachal Pradesh, has since been overruled by a three Judge Bench of this Court in the case of Hyder Consulting (UK) Ltd. (supra), the findings returned by the Appellate Court in the impugned judgment to the effect that the Arbitral Tribunal is not empowered to grant compound interest or interest upon interest and only simple interest can be awarded in favour of UHL on the principal amount claimed, is quashed and set aside. As a result, the findings returned in para 54(a) of the impugned judgment insofar as it relates to grant of the interest component, are reversed while restoring the arbitral award on the above aspect in favour of UHL.”

The Apex Court, agreeing with the view of the Division Bench, further held that the Single Bench, while considering setting aside the arbitral award under Sec. 34, was at fault by not appreciating the interpretation made by the Arbitral Tribunal as it is a well settled principle that when there are two plausible interpretations in a given scenario, then the Arbitral Tribunal cannot be said to be at fault if the Arbitral Tribunal proceeds to take one interpretation over the other.

The Apex Court further went ahead and restored the order passed by the Learned Arbitral Tribunal and held that-

“21. In the instant case, we are of the view that the interpretation of the relevant clauses of the Implementation Agreement, as arrived at by the learned Sole Arbitrator, are both, possible and plausible. Merely because another view could have been taken, can hardly be a ground for the learned Single Judge to have interfered with the arbitral award. In the given facts and circumstances of the case, the Appellate Court has rightly held that the learned Single Judge exceeded his jurisdiction in interfering with the award by questioning the interpretation given to the relevant clauses of the Implementation Agreement, as the reasons given are backed by logic.”

In view of the above findings, it is plausible to infer that the judgment of UHL Power Co. Ltd. vs. State of Himachal Pradesh has made it trite by way of umpteenth judgments that Courts need to be cautious and should defer to the view taken by the Tribunal even if the reasoning stated in the award is implied unless any perversity is seen in the finding. It has also been stated as a trite law that if the courts were to interfere with Arbitral Award in the usual course on factual aspects, then the commercial wisdom of resorting to ADR mechanisms would be said to be frustrated.