The Supreme Court ruled against awarding interest on interest in the absence of a statutory or contractual provision.
The Supreme Court Bench of Justice Pamidighantam Sri Narasimha and Justice Pankaj Mithal addressed a Special Leave Petition and observed that courts cannot award interest on interest unless explicitly provided for by statute or the terms of the contract, and in the absence of such provisions, post-award interest is payable only on the principal sum adjudicated, not including any pre-award interest.
The Supreme Court addressed a Special Leave Petition challenging concurrent decisions of the Principal Senior Civil Judge, Khambhalia, and the Gujarat High Court concerning the interpretation of interest provisions in an arbitration award. The case stemmed from a contract between the petitioner and the Union of India for the financial year 1984-85. Following a dispute, an arbitrator passed an award under the Indian Arbitration Act, 1940, on September 17, 1997, which became a court decree. The award granted simple interest at 12% per annum for the period from the completion of work until the date of the award and 15% per annum from the date of the award until payment or decree, whichever was earlier.
The petitioner contended that the post-award interest of 15% should apply to the principal amount and the pre-award interest of 12%. The Principal Senior Civil Judge rejected this claim, holding that the arbitrator had not explicitly awarded compound interest or interest on interest. The High Court upheld this view, emphasizing that, in the absence of specific language in the award or relevant statutory provisions, the interest awarded must be interpreted as simple interest.
The Supreme Court examined whether the award or the subsequent decree permitted compound interest. It referred to Section 29 of the Arbitration Act, Section 34 of the Code of Civil Procedure, 1908, and Section 3(3) of the Interest Act, 1978, all of which preclude courts from granting interest on interest unless explicitly authorized by statute or contractual terms. Citing precedents, including Oil and Natural Gas Commission v. M.C. Clelland Engineers S.A., and State of Haryana v. S.L. Arora and Co., the Court reaffirmed that compound interest could only be granted where explicitly provided for by law or contract.
The Court also analyzed the language of the award, which separately stipulated pre-award and post-award interest on the "amount awarded," meaning the principal sum of ₹21,56,745, without any reference to accrued interest. It noted that the absence of specific terms in the award or contract precluded the petitioner’s interpretation. Further, it found no statutory or contractual basis to justify compounding interest or awarding post-award interest on the principal sum inclusive of pre-award interest.
Concluding that the concurrent findings of the lower courts were consistent with statutory provisions and legal principles, the Supreme Court declined to interfere. The Special Leave Petition was dismissed, solidifying the principle that courts cannot grant compound interest or interest on interest absent explicit statutory or contractual authorization.
Smt. Jyoti Mendiratta, Advocate represented the Petitioner.
Subscribers can access the Case, including Case Analysis, Ratio Decidendi, Headnotes, Briefs, Case Research, Cited Case Laws, Case Law Cross-references, and the latest updates on Statutes, Notifications, Circulars, Guidelines, Press Releases and more.
Click on the Citation/Link to access these resources
Comments