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Thursday, May 26, 2011

Power of Arbitrator to Award Interest : The Law

Justice Varma
The Supreme Court in Indian Hume Pipe Co. Ltd. v. State of Rajasthan & Ors. has summarized the law relating to the powers of the Arbitrator to award interest. While recapitulating the legal position on the aspect the Supreme Court has held that the Arbitrator has the power to award interest for the period from the award to the date of payment, as also for pre-reference, pendente lite and post award. The relevant extracts from the aforesaid judgment are reproduced herein below;

14. By a long catena of cases decided by this Court from time to time, it is too well settled that arbitrators have the competence, jurisdiction and power to award interest for the period from the date of award to date of payment as also for pre-reference, pendente lite and post award. The only caveat is that the amount of interest so awarded should be reasonable and agreement between the parties should not prohibit grant of such interest.

15. In the light of several judgments of this Court, the question projected in this appeal is no more res integra.

16. The question with regard to grant of interest by an arbitrator for the period from the date of award to date of payment stands settled by a judgment of this Court in the case of Hindustan Construction Co. Ltd. Vs. State of Jammu & Kashmir reported in (1992) 4 SCC 217. The aforesaid question has been dealt with by this Court in para 5 of the said judgment reproduced hereinbelow:-

"5. The question of interest can be easily disposed of as it is covered by recent decisions of this Court. It is sufficient to refer to the latest decision of a five Judge bench of this Court in Secretary, Irrigation Department, Govt. of Orissa v. G.C. Roy (1992) 1 SCC 508 : JT (1991) 6 SC 309. Though the said decision deals with the power of the arbitrator to award interest pendente lite, the principle of the decision makes it clear that the arbitrator is competent to award interest for the period commencing with the date of award to the date of decree or date of realization, whichever is earlier. This is also quite logical for, while award of interest for the period prior to an arbitrator entering upon the reference is a matter of substantive law, the grant of interest for the post-award period is a matter of procedure. Section 34 of Code of Civil Procedure provides both for awarding of interest pendente lite as well as for the post- decree period and the principle of Section 34 has been held applicable to proceedings before the arbitrator, though the section as such may not apply. In this connection, the decision in Union of India v. Bungo Steel Furniture (P) Ltd. (1967) 1 SCR 324 : AIR 1967 SC 1032 may be seen as also the decision in Gujarat Water Supply & Sewerage Board v. Unique Erectors (Gujarat) P. Ltd.(1989) 1 SCC 532 : (1989) 1 SCR 318 which upholds the said power though on a somewhat different reasoning. We, therefore, think that the award on Item No. 8 should have been upheld."

17. The other question with regard to grant of interest by the arbitrator at three different stages that is pre-reference, pendente lite and post award also stands settled by judgment of this Court in the case of Bhagawati Oxygen Ltd. etc. v. Hindustan Copper Ltd. etc. reported in (2005) 6 SCC 462. The said question has succinctly been settled in paras 36, 37, 38 and 39 reproduced hereinbelow:-

"36. The last question relates to payment of interest. The arbitrator awarded interest to BOL at the universal rate of eighteen per cent for all the three stages, pre-reference period, pendente lite and post-award period. It is not disputed that in the arbitration agreement there is no provision for payment of interest. The learned Single Judge as well as the Division Bench were right in observing that the arbitrator, in the facts and circumstances, could have awarded interest. The arbitrator had granted interest at the rate of eighteen per cent on the ground of loan so advanced by HCL to BOL at that rate.

37. Now Section 34 of the Code of Civil Procedure has no application to arbitration proceedings since the arbitrator cannot be said to be a "court" within the meaning of the Code. But an arbitrator has power and jurisdiction to grant interest for all the three stages provided the rate of interest is reasonable.

38. So far as interest for pre-reference period is concerned, in view of the conflicting decisions of this Court, the matter was referred to a larger Bench in Executive Engineer, Dhenkanal Minor Irrigation Division v. N.C. Budharaj (2001) 2 SCC 721. The Court, by majority, held that an arbitrator has power to grant interest for pre-reference period provided there is no prohibition in the arbitration agreement excluding his jurisdiction to grant interest. The forum of arbitration is created by the consent of parties and is a substitute for conventional civil court. It is, therefore, of unavoidable necessity that the parties be deemed to have agreed by implication that the arbitrator would have power to award interest in the same way and same manner as a Court.

39. Regarding interest pendente lite also, there was cleavage of opinion. The question was, therefore, referred to a larger Bench in Secy., Irrigation Deptt., Govt. of Orissa v. G.C. Roy (1992) 1 SCC 508. The Court considered several cases and laid down the following principles: (SCC pp. 532- 33, para 43)

"43. The question still remains whether arbitrator has the power to award interest pendente lite, and if so on what principle. We must reiterate that we are dealing with the situation where the agreement does not provide for grant of such interest nor does it prohibit such grant. In other words, we are dealing with a case where the agreement is silent as to award of interest. On a conspectus of aforementioned decisions, the following principles emerge:

(i) A person deprived of the use of money to which he is legitimately entitled has a right to be compensated for the deprivation, call it by any name. It may be called interest, compensation or damages. This basic consideration is as valid for the period the dispute is pending before the arbitrator as it is for the period prior to the arbitrator entering upon the reference. This is the principle of Section 34, Civil Procedure Code and there is no reason or principle to hold otherwise in the case of arbitrator.

(ii) An arbitrator is an alternative forum for resolution of disputes arising between the parties. If so, he must have the power to decide all the disputes or differences arising between the parties. If the arbitrator has no power to award interest pendente lite, the party claiming it would have to approach the court for that purpose, even though he may have obtained satisfaction in respect of other claims from the arbitrator. This would lead to multiplicity of proceedings.

(iii) An arbitrator is the creature of an agreement. It is open to the parties to confer upon him such powers and prescribe such procedure for him to follow, as they think fit, so long as they are not opposed to law. (The proviso to Section 41 and Section 3 of the Arbitration Act illustrate this point.) All the same, the agreement must be in conformity with law. The arbitrator must also act and make his award in accordance with the general law of the land and the agreement.

(iv) Over the years, the English and Indian courts have acted on the assumption that where the agreement does not prohibit and a party to the reference makes a claim for interest, the arbitrator must have the power to award interest pendente lite, Thawardas Pherumal v. Union of India (1955) 2 SCR 48 : AIR 1955 SC 468 has not been followed in the later decisions of this Court. It has been explained and distinguished on the basis that in that case there was no claim for interest but only a claim for unliquidated damages. It has been said repeatedly that observation in the said judgment were not intended to lay down any such absolute or universal rule as they appear to, on first impression. Until Executive Engineer (Irrigation) v. Abhaduta Jena case (1988) 1 SCC 418 almost all the courts in the country had upheld the power of the arbitrator to award interest pendente lite. Continuity and certainty is a highly desirable feature of law.

(v) Interest pendente lite is not a matter of substantive law, like interest for the period anterior to reference (pre-reference period). For doing complete justice between the parties, such power has always been inferred."


  1. This is a judgement under 1940 Act. I wish this should be mentioned under Arbitration Act, 1940, to avoid possible confusion with provisions and judgements under A&C Act, 1996. Under 1996 Act, unless agreed by the terms of the agreement, arbitrator is not empowered to award interest for pre reference, pendente lite periods. Statute provides for Post award interest. See S.L.Arora's judgement.

  2. Thanks for pointing it out. We would be examining SL Arora's judgment and post it here soon!

  3. Civil court has power to reduce the rate of interest passed by the arbitrator? if some one can give me some citation on this, i ll be obliged thank you

  4. i would be really interested to see the analysis of SL Arora judgement. as far as i know the SC has conclusively said that the arbitrator has no power to grant compound interest because the scheme of the act only permits grnt of simple interest. however as far as i understand the act says that the arbitrator can grant any reasonable interest from the date of cause of action to date of award [31(7)(a)] and same principle applies from the date of award till final payment. however if the arbitrator does not grant any interest than the COURT can grant interest to the tune of 18% p.a. i fail to understand how the SC has come to such a conclusion.

    many a foreign arbitral tribunals abroad have consistently held the position that if the aggrieved party has obtained a loan for the purposes of the disputed project, in such a case the tribunal must grant compund interest. i am constrained to say that the supreme court's jusgement is not in tune with the latest position held by arbitral tribunals in commercial arbitration cases. moreover the proposed amendments to the arbitration act also stipulated payment of interest at 1% above the existing rate.

    1. the propsed amendments states interest at 1% above the existing bank rate

  5. Can Facilitator under Micro small medium enterprises development act,2006 can be consider as arbitrator in itself and on its failure to reach out to conclusion can he transfer the case to arbitration proceeding ? isn't it a misuse of power of arbitrator?

  6. under sec 20 of MSMED Act the Council/arbitral tribunal is constituted comprising of about five members. Under 18 Council is empowered to act as conciliator and then as arbitrator (dual role). There is misuse of power.



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