The Supreme Court of India addressed the issue of whether compound interest could be awarded on an arbitration award. The case involved M/s D. Khosla and Company and the Union of India. The court ruled that, in the absence of specific statutory provision or contractual agreement, compound interest or interest upon interest cannot be granted. The judgment reaffirmed the principle that interest should be calculated only on the principal amount awarded unless explicitly stated otherwise in the arbitration agreement or statutory law.

1. Introduction

The Supreme Court examined the legal provisions related to the award of interest in arbitration cases, specifically focusing on whether compound interest can be awarded.

2. Background of the Case

• Contractual Agreement (1984-85): The dispute originated from a contract between M/s D. Khosla and Company and the Union of India.
• Arbitration Award (1997): The Arbitrator awarded interest for two distinct periods - 12% per annum for the pre-award period and 15% per annum for the post-award period.

3. Court Proceedings and Rulings

• Trial Court Decree: The trial court awarded simple interest on the principal amount for both periods as per the arbitration award.
• Execution Petition: The petitioner sought compound interest, arguing that post-award interest should be calculated on the principal plus pre-award interest.
• High Court Judgment: The High Court upheld the trial court’s decision, denying the compound interest claim.

4. Legal Principles and Analysis

• Section 29 of the Arbitration Act: Allows courts to order reasonable interest on the principal sum adjudged by the award.
• Section 34 of the CPC: Permits interest on the principal sum but not on accrued interest.
• Interest Act, 1978: Explicitly prohibits the awarding of interest upon interest unless specified by statute or contract.

5. Supreme Court Judgment

• No Provision for Compound Interest: The court emphasized that neither the Arbitration Act nor the CPC provides for compound interest.
• Award and Decree Interpretation: Both the arbitration award and the subsequent court decree awarded simple interest on the principal amount.
• Conclusion: The Special Leave Petition was dismissed, reaffirming that compound interest cannot be awarded without explicit statutory or contractual provisions.

6. Significance of the Judgment

This judgment clarifies the legal position on awarding interest in arbitration cases, reinforcing that compound interest requires specific authorization either through legislation or contractual terms.