Case Note & Summary
The dispute arose from an arbitration award dated 17.09.1997 under the Indian Arbitration Act, 1940, between M/s D. Khosla and Company (petitioner) and the Union of India (respondent) concerning a contract of 1984-85. The arbitrator awarded Rs.21,56,745 as compensation with simple interest @12% per annum from the date of completion of work up to the date of award (pre-award period) and @15% per annum from the date of award till payment or court decree, whichever earlier (post-award period). The award was made rule of court and a decree was drawn accordingly. The petitioner was paid the principal amount and interest as per the award but claimed that the 15% post-award interest should be calculated on the principal amount plus the 12% pre-award interest, i.e., interest on interest. The executing court (Principal Senior Civil Judge, Khambhalia) rejected this contention, and the High Court affirmed, holding that only simple interest on the principal sum was payable. The petitioner appealed to the Supreme Court. The Supreme Court framed the issue as whether interest is payable on interest. It examined Section 29 of the Indian Arbitration Act, 1940, Section 34 CPC, and Section 3(3) of the Interest Act, 1978, which prohibit interest on interest unless specifically provided by statute or contract. The court distinguished the case from Hyder Consulting (UK) Limited v. State of Orissa (under the 1996 Act) where the term 'sum' includes pre-award interest, noting that under the 1940 Act and CPC, the phrase 'principal sum adjudged' limits interest to the principal amount. The court held that the award and decree clearly granted interest on the 'amount awarded' (the principal compensation), not on accrued interest. No statutory or contractual provision allowed compound interest. Therefore, the petitioner was not entitled to interest on interest. The Supreme Court dismissed the special leave petition, affirming the decisions of the executing court and the High Court.
Headnote
A) Arbitration Law - Interest on Interest - Section 29 of Indian Arbitration Act, 1940 - The court held that under Section 29 of the Act, interest is payable only on the principal sum adjudged by the award, not on interest. The award and decree granted simple interest @12% pre-award and @15% post-award on the 'amount awarded', which refers to the principal compensation amount only. No provision for compound interest or interest on interest existed in the Act, CPC, or contract. (Paras 15-27) B) Civil Procedure - Interest on Principal Sum - Section 34 CPC - Section 34 CPC provides for interest on the 'principal sum adjudged', which does not include accrued interest. The court distinguished Section 31(7) of the Arbitration and Conciliation Act, 1996 (which uses 'sum') from Section 34 CPC, holding that post-award interest under the 1940 Act is limited to the principal sum. (Paras 16-17, 21) C) Interest Act - Prohibition on Interest upon Interest - Section 3(3) Interest Act, 1978 - Section 3(3) of the Interest Act, 1978 expressly prohibits courts from awarding interest upon interest unless specifically provided by statute or contract. No such provision existed in the present case. (Para 18) D) Precedent - Interest on Interest - Oil and Natural Gas Commission v. M.C. Clelland Engineers S.A., (1999) 4 SCC 327 - The Supreme Court held that arbitrators have power to grant interest akin to Section 34 CPC, but interest is not permissible upon interest awarded unless the interest forms part of damages or compensation. In this case, the pre-award interest was separate and not part of the principal. (Para 19) E) Precedent - Simple vs Compound Interest - State of Haryana v. S.L. Arora and Company, (2010) 3 SCC 690 - The court reiterated that interest unless specified means simple interest, payable only on principal amount. Compound interest requires specific statutory or contractual provision. (Para 20)
Issue of Consideration
Whether interest awarded for post-award period under an arbitration award is payable on the principal sum only or on the principal sum plus pre-award interest.
Final Decision
The Supreme Court dismissed the Special Leave Petition, affirming the decisions of the executing court and the High Court. The court held that the petitioner is entitled only to simple interest on the principal sum of Rs.21,56,745, and not interest on interest.
Law Points
- Interest on interest not permissible unless specifically provided by statute or contract
- Section 29 of Indian Arbitration Act
- 1940
- Section 34 CPC
- Section 3(3) Interest Act
- 1978
- Simple interest on principal sum adjudged only.
