Supreme Court Grants Post-Award Interest in Arbitration Dispute

The case of R.P. Garg vs. The Chief General Manager, Telecom Department & Ors. centered around whether the appellant was entitled to post-award interest on the sum awarded by an arbitrator. The Supreme Court, in its judgment dated September 10, 2024, overturned the Punjab and Haryana High Court’s decision and restored the District Court’s ruling, granting post-award interest at 18% per annum.

The judgment clarifies the interpretation of Section 31(7)(b) of the Arbitration and Conciliation Act, 1996, and establishes that an arbitral award directing payment must carry interest unless explicitly excluded by the arbitrator.

Background of the Case

The dispute arose from a contract dated October 17, 1997, between the appellant, a contractor, and the Telecom Department of Haryana, for trenching and laying underground cables. The appellant furnished a security deposit of ₹10 lakhs.

During contract execution, disputes arose concerning non-payment of bills, leading to arbitration under Section 11 of the Arbitration Act on October 24, 2000. The arbitrator issued an award on March 8, 2001, allowing the appellant’s claim but denying post-award interest, citing a contract clause that allegedly prohibited interest payments.

Legal Proceedings

Objections Before the Civil Judge (Senior Division)

The appellant filed objections seeking post-award interest.
On October 10, 2002, the Civil Judge dismissed the objection, affirming the arbitrator’s finding that the contract barred interest.

Appeal Before the District Judge

The District Judge, on March 4, 2003, allowed the appeal and granted post-award interest at 18% per annum.
The appellant was directed to approach the trial court for recovery.

Revision Before the High Court

The Telecom Department challenged the District Court’s ruling before the Punjab and Haryana High Court.
On May 14, 2019, the High Court set aside the District Court’s decision, citing Clause 1(iv) of the contract, which stated:

“No interest will be payable on the earnest money or security deposit amount or any amount payable to the contractor under the contract.”

It relied on Jaiprakash Associates Ltd. v. Tehri Hydro Development Corporation (India) Ltd. (2019) to hold that interest cannot be granted where a contract explicitly prohibits it.

Appeal Before the Supreme Court

The appellant challenged the High Court’s decision, arguing:

Section 31(7)(b) of the Arbitration Act mandates that a sum awarded must carry post-award interest unless the arbitrator directs otherwise.
The contract clause barring interest applied only to pre-award interest, not to post-award interest.
The High Court misinterpreted Jaiprakash Associates, which dealt with prohibitions on pendente lite interest, not post-award interest.

Supreme Court’s Observations

The Supreme Court, comprising Justices P.S. Narasimha and Sandeep Mehta, ruled in favor of the appellant.

1. Distinction Between Pre-Award and Post-Award Interest

The Court ruled that Section 31(7) distinguishes between pre-award interest (sub-section (a)) and post-award interest (sub-section (b)).
While pre-award interest depends on the agreement between parties, post-award interest is statutorily mandated unless the arbitrator specifies otherwise.

2. Parties Cannot Contract Out of Post-Award Interest

The Court held that the contract clause barring interest applied only to amounts payable under the contract, not to arbitral awards.
It cited Morgan Securities & Credits (P) Ltd. v. Videocon Industries Ltd. (2023), which held:

“Section 31(7)(b) ensures that a sum directed to be paid by an arbitral award shall carry interest unless the award directs otherwise. This clause is not subject to party autonomy.”

3. High Court’s Interpretation Was Erroneous

The Supreme Court ruled that the High Court misapplied Jaiprakash Associates, which dealt with prohibitions on pre-award interest.
It clarified that even if a contract prohibits interest, Section 31(7)(b) overrides such provisions for post-award interest.

Final Judgment

The Supreme Court ruled:

The appeal was allowed, and the High Court’s decision was set aside.
The District Court’s ruling granting 18% post-award interest was restored.
The Telecom Department was directed to pay the awarded sum with interest from the date of the award until realization.

Implications of the Judgment

This ruling has significant implications for arbitration law:

Clarification on Post-Award Interest: The judgment establishes that post-award interest is mandatory unless explicitly denied by the arbitrator.
Limited Scope of Contractual Clauses: Even if a contract bars interest, such clauses do not apply to post-award interest.
Protection for Contractors and Suppliers: The ruling ensures that claimants awarded sums through arbitration are compensated for delays in payment.
Judicial Oversight: Courts must ensure that High Court rulings align with statutory principles under the Arbitration Act.

The Supreme Court’s decision reinforces that post-award interest is a statutory right and prevents judgment-debtors from using contract clauses to delay rightful payments.

Petitioner Name: R.P. Garg.
Respondent Name: The Chief General Manager, Telecom Department & Ors..
Judgment By: Justice P.S. Narasimha, Justice Sandeep Mehta.
Place Of Incident: Haryana, India.
Judgment Date: 10-09-2024.

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