Arbitration Award Interest Dispute: Supreme Court Upholds 18% Interest Rate Under Arbitration Act

The Supreme Court of India recently ruled in the case of M/S Shahi and Associates vs. State of U.P. & Ors., clarifying the applicability of interest rates on arbitration awards under the Arbitration and Conciliation Act, 1996. The judgment addresses whether state amendments to the repealed Arbitration Act, 1940, could override the statutory provisions of the 1996 Act regarding post-award interest rates.

Background of the Case

The appellant, M/S Shahi and Associates, was a registered partnership firm engaged in civil construction projects for the Government of Uttar Pradesh. On July 8, 1993, the firm entered into a contract with the Superintendent Engineer, Drainage Division, District Gonda, U.P., for constructing the Gola Pump House. Disputes arose between the parties regarding payment for additional work, leading the appellant to invoke arbitration.

Following the invocation, a sole arbitrator, Shri B.M. Arora, was appointed on October 12, 1999, and the arbitration proceedings commenced under the Arbitration and Conciliation Act, 1996. On December 24, 2001, the arbitrator issued an award of Rs. 17,86,339/- in favor of the appellant and directed that the amount would carry interest at 18% per annum as per Section 31(7)(b) of the 1996 Act.

The State of Uttar Pradesh challenged the award before the District Judge, Gorakhpur, under Section 34 of the 1996 Act. The District Judge upheld the awarded sum but reduced the interest rate from 18% to 6%, relying on Section 24 of the Uttar Pradesh Civil Laws (Reforms and Amendment) Act, 1976 (U.P. Amendment Act). On appeal, the High Court of Judicature at Allahabad upheld the District Judge’s ruling, leading the appellant to approach the Supreme Court.

Key Legal Issues

Whether the U.P. Amendment Act, which prescribed a lower interest rate, could override the Arbitration and Conciliation Act, 1996.
Whether the High Court was justified in reducing the post-award interest from 18% to 6%.
Whether the repealed Arbitration Act, 1940, and its amendments had any bearing on disputes governed by the 1996 Act.

Arguments by the Appellant (M/S Shahi and Associates)

The appellant contended:

The arbitration commenced under the 1996 Act, and the provisions of the repealed Arbitration Act, 1940, were not applicable.
The U.P. Amendment Act was introduced as an amendment to the 1940 Act, which had been expressly repealed by Section 85 of the 1996 Act.
Section 31(7)(b) of the 1996 Act expressly provided for an interest rate of 18% per annum, unless otherwise directed by the arbitrator.
The High Court erred in applying a repealed state amendment to a dispute governed by the 1996 Act.

Arguments by the Respondents (State of Uttar Pradesh)

The State defended the High Court’s decision on the following grounds:

The U.P. Amendment Act, which prescribed a lower statutory interest rate, remained applicable to all arbitration proceedings involving the state government.
The High Court was justified in applying a uniform interest rate to avoid excessive financial burdens on the state exchequer.
The arbitrator had discretion to fix an interest rate, and the courts could intervene to ensure fairness.

Supreme Court’s Observations

1. Repeal of the Arbitration Act, 1940

The Court ruled that the Arbitration and Conciliation Act, 1996, had completely replaced the 1940 Act, stating:

“The 1996 Act repealed the Arbitration Act, 1940, in its entirety. Consequently, all provisions, including state amendments, ceased to have any effect on proceedings governed by the 1996 Act.”

2. Mandatory Nature of Section 31(7)(b)

The Court emphasized that the 1996 Act explicitly prescribed an interest rate of 18% per annum unless otherwise directed by the arbitrator:

“Section 31(7)(b) of the 1996 Act clearly mandates that in the absence of any specific direction to the contrary, an arbitral award shall carry interest at 18% per annum.”

3. Inapplicability of the U.P. Amendment Act

The Court held that the U.P. Amendment Act had no application to disputes governed by the 1996 Act, observing:

“The provisions of the U.P. Amendment Act were introduced in the First Schedule of the 1940 Act. Since the 1940 Act was repealed by the 1996 Act, the amendment also became inoperative.”

4. Arbitrator’s Authority to Award Interest

The Court reinforced the arbitrator’s authority to determine post-award interest, ruling:

“The arbitrator had the discretion to award post-award interest, and the courts below erred in interfering with the interest rate fixed in accordance with Section 31(7)(b) of the 1996 Act.”

Final Verdict

The Supreme Court ruled:

The High Court and District Judge erred in applying the repealed U.P. Amendment Act to reduce the interest rate.
The post-award interest rate of 18% per annum, as prescribed under Section 31(7)(b) of the 1996 Act, was restored.
The judgments of the High Court and District Judge were set aside to the extent that they reduced the interest rate.

Conclusion

This judgment reinforces the supremacy of the Arbitration and Conciliation Act, 1996, over repealed state amendments. It ensures that arbitrators retain their discretion to award interest and prevents judicial interference with statutorily prescribed rates. The ruling sets an important precedent in arbitration law, providing clarity on the post-award interest rates applicable to arbitral awards.

Petitioner Name: M/S Shahi and Associates.
Respondent Name: State of U.P. & Ors..
Judgment By: Justice Arun Mishra, Justice S. Abdul Nazeer, Justice M.R. Shah.
Place Of Incident: Uttar Pradesh.
Judgment Date: 08-08-2019.

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