Post-award interest okayed in arbitration awards

Post-award interest okayed in arbitration awards

In a recent ruling, the Supreme Court reaffirmed that post-award interest can be granted by an arbitrator even on the interest component in the award.

In arbitration between UHL Power Company Limited (UHL) and the State of Himachal Pradesh (HP), the arbitrator awarded UHL INR261 million (USD3.5 million) for the claim, together with pre-claim interest. Compound interest was awarded in favour of UHL at 9% per annum up to the claim, and interest at 18% per annum on the principal claim and the interest on it if the award was not paid within six months.

The award was challenged by HP under section 34 of the Arbitration and Conciliation Act, 1996 in the high court. The judge disallowed the entire claim of UHL, and that judgment was in turn challenged by UHL under section 37 of the act.

The appellate bench of the high court held that the arbitral tribunal had no power to grant compound interest or interest upon interest — only simple interest. The appellate bench relied on the Supreme Court case of State of Haryana v S.L. Arora and Co, which held that compound interest can be awarded only if there is a specific contractual provision or statutory authority allowing the compounding of interest. There is no general discretion to award compound interest.

It was further held that in the absence of any provision for interest upon interest in the contract, arbitral tribunals do not have the power to award interest upon interest or compound interest, either for pre-award or post-award periods. The appellate bench therefore ordered HP under section 37 of the act to pay INR91 million, being the principal amount, together with simple interest at 6% per annum from the date of filing the claim until payment.

UHL appealed the judgment of the appellate bench under section 37 of the act to the Supreme Court, which allowed the appeal as to the judgment on interest by the appellate court. The Supreme Court therefore restored the arbitral award on that aspect in favour of UHL, and in doing so held that the appellate bench had wrongly relied on the decision in State of Haryana v S.L. Arora and Co, as that case had been overruled by a three-judge bench of the Supreme Court in Hyder Consulting (UK) Ltd. v Governor, State of Orissa. The majority in Hyder Consulting held that post-award interest can be granted by the arbitrator on the interest amount awarded.

The dispute digest is compiled by Numen Law Offices, a multidisciplinary law firm based in New Delhi & Mumbai. The authors can be contacted at Readers should not act on the basis of this information without seeking professional legal advice.