Compound interest

Power of arbitrators to award interest on interest or compound interest for a future period, in the absence of a contract between the parties – Litigation, mediation and arbitration

Introduction:

Whether the arbitral tribunal will have the power to award interest on the interest for the period after the award, in the absence of agreement between the parties, was one of the questions considered by a bench of two justices of the Supreme Court of India in the case of Haryana State & Others v. SL Arora & Company1. After careful consideration of the relevant legal provisions as well as judicial precedents, the Hon’ble Apex Court reached the following conclusion:

Section 31 (7) makes no reference to the payment of compound interest or the payment of interest on interest. It also does not require that interest accrued up to the grant date be treated as part of the principal from the grant date for the calculation of post-grant interest. The use of the words “where and to the extent that an arbitration award is for the payment of money” and the use of the words “the arbitral tribunal may include in the sum for which the award is made, interest … … on all or part of the money “in clause (a) and the use of the words” an amount ordered to be paid by an arbitration award bears interest “in clause (b) of subsection (7) of article 31 make it clear that the article contemplates the allocation of simple interest and not compound interest or interest on interest. “An amount ordered to be paid by an arbitration award” refers to the award of sums on substantive claims and does not refer to interest awarded on the “amount ordered to be paid by the award”. In the absence of any provision relating to interest on interest in the contract, arbitral tribunals do not have the power to award interest on interest, or compound interest, either for the period before or for the period after the date of the contract. attribution.

The Apex Court concluded that in the absence of any agreement between the parties providing for the payment of compound interest, the court will have the power to award simple interest for the prior and future period.

The correctness of the rulings in the SL Arora case (supra) became the subject of a subsequent case heard by two justices of the Honorable Supreme Court in the case of Hyder Consulting (UK) Ltd. vs. Governor, State of Orissa2. As the decision in the case of SL Arora was also a bench judgment of two judges, the same could not have been overturned by another bench of co-equal force. As a result, the issue in Hyder Consulting (supra) was referred to a larger panel of three judges with a referral order dated 13.3.2012. The larger bench decided the case by a 2: 1 majority, ultimately ruling that the ruling in SL Arora was in error and that the arbitrators have the power to award compound interest for the post-award period. Interestingly, the three honorable justices wrote their own judgments, with two honorable justices writing the majority decision and the then honorable chief justice writing the minority decision. Therefore, after Hyder Consulting, the net result was that the judgment in SL Arora was overturned by a wider bench but by a majority decision of two judges. A question which must be considered here is whether a legal requirement of a decision of a bench of two judges being overruled only by a larger bench and not by another bench of two judges, was fulfilled in the letter and the ‘spirit ?

While it is true that in the event of a difference of opinion between the two judges hearing a case, it must be submitted to a larger panel of three judges and their decision, even if it is taken by majority of 2: 1, will be final and binding. However, can the same logic be applied in a situation where the correctness of a previous decision of a panel of two judges becomes a matter before a panel of three judges and said panel of three judges decides the issue by majority? In such a situation, where the earlier decision is confirmed, either unanimously or by majority, it can always be said that the matter has become final. However, in the event that the earlier decision is overturned, as was done in Hyder Consulting (supra), the situation is that of two judges sitting at different times, taking opposing views leading to an obvious lack of consistency. It is also an established position in law that there must be consistency and certainty in order to create trust, as held by the Supreme Hon’ble Court in the case of the government of Andhra Pradesh and Ors. against AP Jaiswal and Ors.3 :

“Consistency is the cornerstone of the administration of justice. It is consistency that creates confidence in the system and this consistency can never be achieved without respecting the rule of finality. changes the rule of precedents, the principle or the stare decisis, etc. These rules and principles are based on public order and if they are not followed by the courts, then there will be chaos in the administration of justice … “

It can arguably be said that the legal requirement was met by the judgment of Hyder Consulting, however, on a more pragmatic consideration, it is noted that the issue still lacks certainty. A legalistic way of looking at the situation created by the Hyder Consulting judgment is that three benches have ruled that arbitrators have the power to award interest on interest, but this is not a realistic approach as one of the honorable judges took a completely opposite point of view and continued to consider the decision in SL Arora (supra) to be a correct statement of the law. Therefore, out of a total of five judges (two in SL Arora and three in Hyder Consulting), all of coordinated jurisdiction, three judges ruled that the decision in SL Arora is correct while two argued otherwise. Seen in this light, the question that arises is whether the quashing of a decision of the Supreme Court depends solely and solely on the number of judges seized of the last question concerning the correctness of the first?

It appears that the issue of the power of the arbitrator to award compound interest for a future period has yet to be decided by another bench, possibly a bench of five judges of the Supreme Court of India. In addition to deciding the said question conclusively, the question which must be debated in the future is whether a concurring / majority decision in the following case must necessarily be composed of a greater number of judges than those who ruled. in the previous case. The only court ruling highlighting this issue was in the Emperor v Ningapa Ramappa Kurbar case.4 where the Bombay High Court appears to have addressed a somewhat related issue while ruling under:

“Apparently it was considered that five judges, by a majority of four to one, could overrule a unanimous decision of four judges, with the net result being that the opinion of four judges prevailed over the opinion of five judges of coordinated jurisdiction. . seems to have very little authority over the powers and constitution of a full bench. There is no doubt that a full bench can prevail over a division bench, and that a full bench must consist of three or more judges; but it would seem abnormal to argue that a later full bench may override an earlier full bench, simply because the later full bench consists of more judges than the first. If this were the rule, it would mean that a panel of seven judges, with a majority of four to three, could overrule a unanimous decision of a panel of six judges, although all the judges were of coordinated jurisdiction.. “

Conclusion:

The law established by the Apex Court in Hyder Consulting is final and binding and therefore the judgment of SL Arora is set aside, although in view of the issues explained above, the legal requirement cannot be considered to have been fulfilled in the mind. Hopefully the Apex Court will reconsider its decision in Hyder Consulting in the near future and resolve the issue of the power of arbitrators to award compound interest for a future period, with a carefully considered and authoritative decision.

Footnotes

1 (2010) 3 SCC 690

2 AIR 2015 CS 189

3 (2001) SCC (LS) 316.

4 (1941) 43 BOMLR 864

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.


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