In arbitration matters, granting of interest is always a matter which creates doubt and confusions in the minds of the Arbitrators, counsels and parties to the arbitration. The arbitrator handling an arbitration seated in India should take into consideration the contract provisions relating to interest, Interest Act 1978, Code of Civil Procedure1908 and Arbitration and Conciliation Act,1996 (Procedural law of India), before taking a decision about the applicable types of interest and its calculation. There are three types ofinterest which can be awarded in an arbitration proceedingswhich include Pre-reference interest, pendent lite interest and future interest. In each case, the arbitrator requires to consider the applicability of each one of them. Now let us see the types of interest and their distinct features:
This is a type of interest claimed by the parties on either the amount due or damages payable by the opposite party, for the period normally starting from the date it became due until the initiation of arbitration proceedings. It is important to note that prior to Interest Act, till the quantification of the amounts payable by way of damages or amount due, interest cannot be charged. But after the said Act, the interest for the pre-reference period can be claimed and granted by an arbitrator. As per Section. 3(1) of the above said interest Act 1978, interest can be granted for the period from the date on which it became payable (in case of a debt payable by virtue of a written instrument at a certain time) till the institution of the proceedings and if the proceedings does not relate to any such debt, then from the date mentioned in this regard in a written notice given by the person entitled or the person making the claim to the person liable that interest will be claimed, to the institution of proceedings.
Hence the claim for interest can be made from the date the bill or invoice became payable of due as per the contract or from the date on which the first claim was made by the Claimant. For example, if a contract provides for payment of a running bill in thirty days from the date of receipt, then the interest can be claimed only after 30 days from the date of receipt of the bill by the opposite party.The said provision also makes it clear that the section does not empower a court or Arbitrator to impose interest on interest payable. Moreover, if there is an express provision in the contract either providing a bar to grant any interest or specifying a specific rate of interest, then to that extent, interest Act shall not apply. But such a bar or limitation is applicable, only during the contract period. After the conclusion of the contract period interest can be claimed as per the interest Act, if delay is attributable to the other party. S.31(8) of the Arbitration and Conciliation Act also empowers the arbitrator to grant interest from the date on which cause of action arose till the date of award, which includes Prereference interest. The said Act allows the arbitrator to decide the rate of interest at his discretion.
This is a type of interest claimed by the parties for the period starting from the date of institution of the legal proceedings until the date of the arbitration award. The pendent-lite interest is not governed by the above said interest Act. It will be governed either by the S.34 of the Code of Civil Procedure or the Arbitration and Conciliation Act,1996 (Procedural law of India).S.31(8) of the Arbitration and Conciliation Act empowers the arbitrators to determine the grant of interest and the rate of interest at their discretion. Hence Arbitrators may or may not choose to grant the interest, based on the facts and circumstances of each case.
Future interest is the interest claimed by the parties and granted by the parties for the period starting from the date of arbitration award until payment by the party. This interest is also governed by the Arbitration and Conciliation Act, 1996 and not by the Interest Act,1978. S.31(8) of the Arbitration and Conciliation Act,1996 grants interest from the date of award until the payment at the rate of two percent more than the current rate of interest. Even though courts do not normally interfere in an arbitration award on interest issues, sometimes courts have reduced the rate of interest to 12-15% when the Arbitrator chose to grant higher rate of interest.
If the matters were referred to an Arbitrator under MSMED Act by a reference under S.18 by the Facilitation Council, thenthe rate of interest shall be applied as per S.16 of the said Micro Small Medium Enterprises Development Act. The said interest shall be calculated from the date; the said amount became payable.
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