STATE OF HARYANA & ORS. v.

S.L. ARORA & COMPANY (Civil Appeal No.1094 of 2010)

JANUARY 29, 2010 [R.V. RAVEENDRAN AND K.S. RADHAKRISHNAN, JJ.]

2010 (2) SCR 297

The Order of the Court was delivered by

O R D E R

R.V. RAVEENDRAN J. 1. Leave granted. Heard the parties.

2. The appellants awarded a construction contract to the respondent. The  

work  which  had  to  be  completed  within  18  months  from  18.3.1985,  was  

actually completed on 30.11.1989. The delay led to claims by the contractor  

and counter-claims by the employer (appellants). The disputes were referred  

to  a  sole  Arbitrator  who  made  an  award  dated  22.06.2000.  The  Arbitral  

Tribunal  rejected  the  counter  claims  of  the  appellants.  It  awarded  in  all  

Rs.14,94,000/-  with  interest  to  the  respondent-contractor.  The  operative  

portion of the award is extracted below:

“I award Rs.14.94 lacs (Rupees Fourteen Lacs Ninety Four Thousands  

only) along with interest at the rate of 12% with effect from 19.12.1990 till  

the  date  of  award in  favour  of  M/s.  S.L.  Arora  and Company,  5E-10,  

Bunglow Plot,  N.I.T.,  Faridabad(Claimant)  to  be  paid  by  the  Haryana  

PWD B&R Branch Department (respondent). In case the total amount of  

award together with this interest is not paid within 30 days from the date  

of making this award, future interest shall be paid @ 18% per annum on  

the sums due to the claimant from the date of Award upto the actual date  

of payment …………”

(emphasis supplied)

3. The application filed by the appellants to set aside the said the award,  

under Section 34 of the Arbitration and Conciliation Act 1996 (‘Act’ for short),  

was rejected by the civil  court.  Thereafter,  on 26.10.2004,  the respondent  

levied execution against the appellants, to recover the following amount:

(i) Principal amount : Rs.14,94,000/- (ii) Interest at 12% per annum  

on Rs.14,94,000/- from  19.12.1990 to 22.6.2000 (date of  the award)   : Rs.17,04,879/-

(iii) Interest at 18% per annum on Rs.14,94,000/- from 23.6.2000 to 23.10.2004 (date of  : Rs.11,67,039/- execution  

petition) ——————— TOTAL : Rs.43,65,918/-

============= The  appellants  paid  to  the  respondent,  a  sum  of  Rs.44,59,587/-  on  

1.3.2005, which was made up Rs.14,94,000/- plus interest thereon at the rate  

of 12% per annum from 19.12.1990 to 22.6.2000 plus interest at the rate of  

18% per annum from 23.6.2000 to 28.2.2005. According to the appellants,  

the said payment was in full and final settlement, though full satisfaction of  

the decree was not entered.  

4. On 25.5.2005, the respondent made an application for modification of  

the amount claimed, contending that due to inadvertence, a lesser amount  

had  been  claimed  in  the  execution  petition.  The  respondent  alleged  that  

earlier, due to oversight, it  had calculated the future interest at the rate of  

18% per annum from 23.6.2000 to date of execution petition (24.10.2004),  

only on the principal sum of Rs.14,94,000/-; that the future interest ought to  

have  been  calculated  on  a  higher  sum  of  Rs.31,98,879/=  (made  up  of  

Rs.14,94,000/-  being  the  principal  amount  plus  Rs.17,04,879/-  being  the  

interest at 12% per annum which had accrued due up to the date of Award);  

and that therefore the amount due as on the date of execution petition was  

Rs.56,97,685/-  instead  of  Rs.43,65,918/-  claimed  therein.  The  Executing  

Court  after  hearing  the  parties,  by  its  order  dated  5.9.2007  accepted  the

revised calculation made by the respondent. The revision petition filed by the  

appellants against the said order was dismissed by the High Court by the  

impugned order dated 9.9.2008 without examining the issue on merits, on the  

assumption that what was claimed was the balance of an admitted liability  

under the award.  

5.  The  appellants  did  not  dispute  their  liability  to  pay  interest.  They  

however contended that Section 31(7) of the Act does not contemplate award  

of interest on interest; that an arbitral tribunal can award future interest only  

on the principal amount but not on the interest thereon which had accrued  

due up to the date of award; and that the Arbitral Tribunal in this case has in  

fact awarded interest only on the principal of Rs.14,94,000/- and not on the  

interest  which  had accrued due up to  the date of  the award.  It  was also  

submitted that even if the Arbitral Tribunal had power to award interest, the  

award could not be interpreted as awarding interest upon interest, unless the  

arbitral tribunal expressly awards interest upon interest.

6.  The  respondent  contended  that  Section  31(7)  authorises  and  

empowers the arbitral tribunal to award interest upon interest from the date of  

the award to date of payment. The respondent submitted that the operative  

portion of the award stated that future interest has been awarded at 18% per  

annum “on the sums due to the claimant” from the date of award to the actual  

date of payment; and that as the interest up to date of award is a ‘sum due’  

on the date of the award, the said amount would also carry interest at 18%  

per annum from the date of the award.

7.  On  the  contentions  urged,  the  following  questions  arise  for  

consideration:

(i) Whether section 31(7) of  the Act authorizes and enables arbitral  

tribunals to award interest on interest from the date of award?

(ii) Whether the Arbitral Award granted future interest from the date of  

award, only on the principal amount found due to the respondent

(that  is  Rs.14,94,000/-)  or  on the aggregate  of  the principal  and  

interest upto the date of award (Rs.31,98,879/-).  

Re : Question (i)

8.  Payment  of  interest  arises in  different  circumstances.  It  can be the  

consideration paid by a borrower to a lender for use of the money lent or  

made available by the lender. It can be the return given by a bank, financial  

institution or a company on amounts deposited or invested with them by a  

customer or constituent. It can be the compensation paid by a person who  

withholds or defaults in paying an amount or in discharging a liability, when it  

is due and payable. Interest may be payable in pursuance of a contract, or a  

provision in a statute, or the fiat of a court of tribunal. It is usually quantified in  

terms of a percentage of the ‘principal’ or the ‘investment’ or the ‘amount of  

liability’. Interest unless otherwise specified, refers to simple interest, that is  

interest paid on only the principal and not on any accrued interest.  

9.  Compound  interest  refers  to  a  method  of  charging  interest  where  

interest is computed not only on the principal, but also the accrued interest.  

For this purpose, periodical rests are provided for computation of interest, say  

yearly,  or  quarterly  or  monthly.  At  the  end  of  the  first  ‘rest’,  the  interest  

accrued till  then is  added to  the principal,  so that  for  the second interest  

bearing period, the aggregate of the original principal and interest thereon  

becomes the enhanced principal. At the end of the second rest, the accrued  

interest on the enhanced principal is added to the enhanced principal so that  

such  further  enhanced  principal  becomes  the  principal  for  charging  the  

interest  for the third period.  It  goes on in this manner until  repayment, by  

progressively  enlarging  the  principal  base  by  adding  interest  at  regular  

intervals.  As a result,  the  debtor  is  made to  pay interest  not  only  on the  

original principal, but on the interest on the principal, and on the interest upon  

the  interest  on  the  principal  and  so  on.  A  variant  of  compound  interest,  

involves limited compounding,  where interest  is not  added to the principal

with periodical rests, but only once or twice at agreed stages. For example,  

where  a  loan is  repayable  within  one  year,  if  a  provision  is  made in  the  

contract that in the event of the loan not being repaid within one year, the  

interest which had accrued during the one year period will be added to the  

principal, and as a consequence, after one year, interest will be payable on  

the aggregate of the principal and the interest for one year, it is a provision for  

interest upon interest. Compound interest can be awarded only if there is a  

specific contract, or authority under a Statute, for compounding of interest.  

There  is  no  general  discretion  in  courts  or  tribunals  to  award  compound  

interest or interest upon interest.  

10. Section 3 of the Interest Act,  1978 enables the courts and arbitral  

tribunals to award interest from the date of cause of action to the date of  

institution of legal proceedings or initiation of arbitration proceedings. Sub-

section (3)(c) of section 3 of the Interest Act, 1978 makes it clear that nothing  

in the said section shall  empower the Court  or arbitrator to award interest  

upon interest. It should be noted that section 3 of Interest Act does not deal  

with either pendente lite or future interest.  

11.  This Court  in  Renusagar Power Co. Ltd v.  General  Electric  Co.  –  

[1994 Supp.(1)  SCC 644]  held that  award of  interest  on interest  was not  

opposed to the public policy of India, but could be awarded only if authorized  

by contract or statute. This Court observed:  

“Merely because in Section 3(3)(c) of the Interest Act, 1978, the court is  

precluded from awarding interest on interest does not mean that it is not   

permissible to award such interest under a contract or usage or under the   

statute. It is common knowledge that provision is made for the payment of  

compound interest in contracts for loans advanced by banks and financial  

institutions and the said contracts are enforced by courts. Hence it cannot  

be  said  that  award  of  interest  on  interest,  i.e.,  compound  interest,  is  

against the public policy of India. We are, therefore, unable to accept the

contention  that  award of  interest  on  interest  i.e.  compound interest  is  

contrary to public policy of India.”

[emphasis supplied]

In State Bank of India vs. Ganjam District Tractor Owners Association –  

1994  (5)  SCC  238,  this  Court  again  observed  that  in  the  absence  of  a  

provision  for  compound  interest  or  interest  with  periodical  rests  in  the  

agreement between a bank and the borrower, the bank cannot claim such  

interest.  

In Central Bank of India vs. Ravindra – 2002 (1) SCC 367, a constitution  

bench  of  this  Court,  after  exhaustive  consideration  of  the  case  law,  

summarized the legal position regarding compound interest thus:

“The English decisions and the decisions of this Court and almost all the  

High courts of the country have noticed and approved long established  

banking practice of  charging interest  at  reasonable rates on periodical  

rests and capitalising the same on remaining unpaid. Such a practice is  

prevalent  and  also  recognised  in  non-banking  money  lending  

transactions. Legislature has stepped in from time to time to relieve the  

debtors  from hardship  whenever  it  has found the practice of  charging  

compound  interest  and  its  capitalization  to  be  oppressive  and  hence  

needing to  be curbed.  The practice is  permissible,  legal  and judicially  

upheld excepting when superseded by legislation. There is nothing wrong  

in the parties voluntarily entering into transactions, evidenced by deeds  

incorporating covenant or stipulation for payment of compound interest at   

reasonable rates, and authorising the creditor to capitalise the interest on  

remaining unpaid so as to enable interest being charged at the agreed  

rate on the interest component of the capitalised sum for the succeeding  

period. Interest once capitalised, sheds its colour of being interest and  

becomes a part of principal so as to bind the debtor/borrower.”

[emphasis supplied]

12. In the Arbitration Act, 1940 (‘old Act’ for short) there was no provision  

dealing with the power of arbitral tribunals to award interest. Section 29 of the  

old Act merely provided for post-decree interest and authorized the court to  

direct in the decree, where the award was for payment of money, payment of  

interest from the date of decree at such rate as the court deemed reasonable,  

to be paid on the principal sum as adjudged by the award and confirmed by  

the decree. The power of arbitral tribunals to award interest was governed by  

the provisions of Interest Act, 1978 and the law enunciated by courts.

13. The Arbitration and Conciliation Act 1996, on the other hand, contains  

a specific provision dealing with the power of the arbitral tribunal to award  

interest. The said provision is incorporated in sub-section (7) of Section 31  

which deals with the form and contents of  arbitral  awards.  The said Sub-

section (7) is extracted below:-

“31(7)(a) Unless otherwise agreed by the parties, where and insofar as an  

arbitral  award  is  for  the  payment  of  money,  the  arbitral  tribunal  may  

include in the sum for which the award is made, interest, at such rate as it  

deems reasonable, on the whole or any part of the money, for the whole  

or any part of the period between the date on which the cause of action  

arose and the date on which the award is made.

(b) A sum directed to be paid by an arbitral award shall, unless the award  

otherwise  directs,  carry  interest  at  the  rate  of  eighteen  per  cent  per  

annum from the date of the award to the date of payment.”

14. Section 31(7) makes no reference to payment of compound interest  

or payment of interest upon interest. Nor does it require the interest which  

accrues till the date of the award, to be treated as part of the principal from  

the  date  of  award for  calculating  the  post-award  interest.  The use of  the  

words “where and in so far as an arbitral award is for the payment of money”  

and use of the words “the arbitral tribunal may include in the sum for which  

the award is made, interest…… on the whole or any part of the money”  in

clause (a) and use of the words “a sum directed to be paid by an arbitral   

award shall carry interest” in clause (b) of sub-section (7) of section 31 clearly  

indicate that the section contemplates award of only simple interest and not  

compound interest or interest upon interest. ‘A sum directed to be paid by an  

arbitral  award’ refers to the award of sums on the substantive claims and  

does not refer to interest awarded on the ‘sum directed to be paid by the  

award’.  In  the  absence  of  any  provision  for  interest  upon  interest  in  the  

contract, the arbitral tribunals do not have the power to award interest upon  

interest, or compound interest, either for the pre-award period or for the post-

award period.

15.  There  is  a  tendency  among  contractors  to  elevate  the  claims  for  

interest and costs to the level of substantive disputes by describing them as  

separate and independent heads of claim. The long pendency of arbitration  

matters either due to prolonged arbitration proceedings or due to litigations  

(both intervening and post-arbitral), has the unfortunate effect of swelling the  

interest  payable  on  the  amount  awarded  and  costs  to  very  substantial  

amounts.  In  many  arbitral  awards  for  money,  the  interest  awarded  often  

exceeds  the  amount  awarded,  by  several  times.  Leisurely  arbitrations,  

avoidable judicial  interventions,  and indecisiveness on the part  of  decision  

makers in government and statutory bodies in accepting and settling genuine  

claims either at the stage when the claim is made or at least at the stage  

when the award is made have resulted in undue emphasis and importance  

being bestowed upon interest and costs. However substantial their quantum  

may be in a given case, interest, in particular interest from the date of the  

award, and costs are ancillary issues and are not substantive disputes.  

16. Some Arbitral Tribunals have misconstrued clause (b) of section 31(7)  

of the Act and assumed that the said provision requires the rate of post-award  

interest in all arbitral awards should be 18% per annum, and that they do not  

have  any  discretion  in  regard  to  post-award  interest.  Some  have  

misconstrued it  further to infer the rate of interest mentioned therein is an

indication that invariably the rate of interest in arbitrations, either pre-award or  

post-award, should be 18% per annum. Both these assumptions are baseless  

and erroneous. If that was the legislative intention, there would have been no  

need  for  vesting  discretion  in  Arbitral  Tribunals,  in  the  matter  of  interest,  

under section 31(7)(a). The principles relating to award of interest, in general,  

are not different for courts and arbitral tribunals, except to the extent indicated  

in section 31(7) of the Act and CPC. A comparatively high rate of post-award  

interest is provided in section 31(7)(b) of the Act, not because 18% is the  

normal rate of interest to be awarded in arbitrations, but purely as a deterrent  

to award-debtors from avoiding payment or using delaying tactics. In fact a  

provision similar to section 31(7)(b) of the Act, if  provided in section 34 of  

Code of Civil Procedure, will considerably reduce the travails of plaintiffs in  

executing their decrees in civil cases. Be that as it may.  

17. The difference between clauses (a) and (b) of section 31(7) of the Act  

may conveniently be noted at this stage. They are :  

(i) Clause (a) relates to pre-award period and clause (b) relates to post-

award period. The contract binds and prevails in regard to interest during  

the pre-award period. The contract has no application in regard to interest  

during the post-award period.

(ii) Clause (a) gives discretion to the Arbitral Tribunal in regard to the rate,  

the period, the quantum (principal which is to be subjected to interest)  

when  awarding  interest.  But  such  discretion  is  always  subject  to  the  

contract  between  the  parties.  Clause  (b)  also  gives  discretion  to  the  

Arbitral  Tribunal  to  award  interest  for  the  post-award  period  but  that  

discretion  is  not  subject  to  any  contract;  and  if  that  discretion  is  not  

exercised by the arbitral Tribunal, then the statute steps in and mandates  

payment of interest, at the specified rate of 18% per annum for the post-

award period.

(iii) While clause (a) gives the parties an option to contract out of interest,  

no such option is available in regard to the post-award period.  

In a nutshell, in regard to pre-award period, interest has to be awarded as  

specified in the contract and in the absence of contract as per discretion of  

the Arbitral Tribunal. On the other hand, in regard to the post-award period,  

interest is payable as per the discretion of the Arbitral  Tribunal and in the  

absence of exercise of such discretion, at a mandatory statutory rate of 18%  

per annum.  

18. As there is some confusion as to what section 31(7) authorizes and  

what  it  does  not  authorize,  we  will  attempt  to  set  out  the  legal  position  

regarding award of interest by the arbitral tribunals, as emerging from section  

31(7) of the Act.  

(18.1)  The provision for  interest  in  the  Act  is  contained  in  section  31  

dealing with the form and contents of arbitral award. It employs two significant  

expressions  “where the arbitral  award is  for  payment  of  money”  and “the  

arbitral  tribunal  may  include  in  the  sum  for  which  the  award  is  made,  

interest….. on the whole or any part of the money”. The legislature has thus  

made it clear that award of interest under sub-section (7) of section 31 (and  

award of costs under sub-section (8) of Section 31 of the Act) are ancillary  

matters to be provided for by the award, when the arbitral tribunal decides the  

substantive  disputes  between the  parties.  The  words  ‘sum for  which  the  

award  is  made’ and  ‘a  sum  directed  to  be  paid  by  an  arbitral  award’   

contextually  refer  to  award on the substantive claims and not  ancillary  or  

consequential directions relating to interest and costs.  

(18.2.)  The  authority  of  the  arbitral  tribunals  to  award  interest  under  

section  31(7)(a)  is  subject  to  the  contract  between  the  parties  and  the  

contract will prevail over the provisions of section 31(7)(a) of the Act. Where  

the contract between the parties contains a provision relating to, or regulating  

or prohibiting interest, the entitlement of a party to the contract to interest for

the period between the date on which the cause of action arose and the date  

on  which  the  award  is  made,  will  be  governed  by  the  provisions  of  the  

contract, and the arbitral tribunal will have to grant or refuse interest, strictly in  

accordance with the contract. The arbitral tribunals cannot ignore the contract  

between  the  parties,  while  dealing  with  or  awarding  pre-award  interest.  

Where the contract does not prohibit award of interest, and where the arbitral  

award is for  payment of  money, the arbitral  tribunal  can award interest  in  

accordance with Section 31(7) (a) of the Act, subject to any term regarding  

interest in the contract.  

(18.3) If the contract provides for compounding of interest, or provides for  

payment  of  interest  upon interest,  or  provides for  interest  payable  on the  

principal upto any specified stage/s being treated as part of principal for the  

purpose of  charging of  interest  during any subsequent  period,  the arbitral  

tribunal will have to give effect to it. But when the award is challenged under  

Section 34 of the Act, if the court finds that the interest awarded is in conflict  

with, or violating the public policy of India, it may set aside that part of the  

award.  

(18.4) Where an arbitral tribunal awards interest under section 31(7)(a) of  

the Act, it is given discretion in three areas to do justice between the parties.  

First is in regard to rate of interest. The Tribunal can award interest at such  

rate as it deems reasonable. The second is with reference to the amount on  

which the interest is to be awarded. Interest may be awarded on the whole or  

any part of the amount awarded. The third is with reference to the period for  

which the interest is to be awarded. Interest may be awarded for the whole or  

any part of the period between the date on which cause of action arose and  

the date on which the award is made.  

(18.5) The Act does away with the distinction and differentiation among  

the four interest bearing periods, that is, pre-reference period, pendente lite  

period, post-award period and post-decree period. Though a dividing line has

been  maintained  between pre-award  and  post-award  periods,  the  interest  

bearing period can now be a single continuous period the outer limits being  

the date on which the cause of action arose and the date of payment, subject  

however to the discretion of the arbitral tribunal to restrict the interest to such  

period as it deems fit.  

(18.6) Clause (b) of Section 31(7) is intended to ensure prompt payment  

by the award-debtor once the award is made. The said clause provides that  

the “sum directed to be paid by an arbitral award” shall carry interest at the  

rate of 18% per annum from the date of award to the date of payment if the  

award does not provide otherwise in regard to the interest from the date of  

the award. This makes it clear that if the award grants interest at a specified  

rate up to the date of payment, or specifies the rate of interest payable from  

the date of award till  date of payment, or if  the award specifically refused  

interest, clause (b) of Section 31 will not come into play. But if the award is  

silent in regard to the interest from the date of award, or does not specify the  

rate of interest from the date of award, then the party in whose favour an  

award for  money  has  been  made,  will  be  entitled  to  interest  at  18% per  

annum from the date of award. He may claim the said amount in execution  

even though there is no reference to any post award interest in the award.  

Even if the pre-award interest is at much lower rate, if the award is silent in  

regard to post-  award interest,  the claimant will  be entitled to post-  award  

interest at the higher rate of 18% per annum. The higher rate of interest is  

provided in clause (b) with the deliberate intent of discouraging award-debtors  

from adopting dilatory tactics and to persuade them to comply with the award.

19. We will  next deal  with the three cases relied upon by the learned  

counsel for the respondent to contend that this Court  has recognized and  

accepted the power of the arbitral tribunals to award interest upon interest:  

Oil & Natural Gas Commission v. M.C. Clelland Engineers S.A.  - (1999) (4)  

SCC 327, Mcdermott International Inc. vs. Burn Standard Co. Ltd and Others  

- (2006) 11 SCC 181, and Uttar Pradesh Cooperative Federation Limited vs.  

Three Circles - (2009) 10 SCC 374. But out of these three decisions only the  

decision  in  Mcdermott  relates  to  an  award  under  the  Arbitration  and  

Conciliation Act, 1996. The other two decisions relate to awards under the old  

Act (Arbitration Act,  1940) and are of no assistance in interpreting section  

31(7) of the new Act.

20. In Mcdermott, paras 154 to 159 of the judgment deal with the issue of  

interest. Relevant portions thereof are extracted below in entirety:  

“The  power  of  the  arbitrator  to  award  interest  for  pre-award  period,  

interest  pendent  lite  and  interest  post-award  period  is  not  in  dispute.  

Section 31(7) (a) provides that the arbitral tribunal may award interest, at  

such rate as it deems reasonable, on the whole or any part of the money,  

for the whole or any part of the period between the date on which the  

cause of action arose and the date on which award is made, i.e.,  pre-

award period. This, however, is subject to the agreement as regard the  

rate of interest on unpaid sum between the parties. The question as to  

whether interest  would be paid on the whole or part  of  the amount or  

whether  it  should be awarded in the pre-  award period would depend  

upon the facts and circumstances of each case. The arbitral tribunal in  

this behalf will have to exercise its discretion as regards (i) at what rate  

interest should be awarded; (ii) whether interest should be awarded on  

whole or part of the award money; and (iii)  whether interest should be  

awarded for whole or any part of the pre-award period.”  

“The 1996 Act provides for award of 18% interest. The arbitrator in his  

wisdom has granted 10% interest both for the principal amount as also for  

the interim. By reason of the award, interest was awarded on the principal  

amount. An interest thereon was upto the date of award as also the future  

interest at the rate of 18% per annum.

However,  in  some  cases,  this  Court  was  resorted  to  exercise  its  

jurisdiction under Article 142 in order to do complete justice between the

parties………. In  this  case,  given  the  long  lapse  of  time,  it  will  be  in  

furtherance of justice to reduce the rate of interest to 7 1/2%. ”  

A  careful  reading  of  the  same  shows  that  there  is  no  reference  to  

awarding of compound interest or interest from the date of the award on the  

interest that had accrued due up to the date of award. The decision dealt with  

the  rate  of  interest  and  exercise  of  jurisdiction  under  Article  142  of  the  

Constitution  to  set  right  anomalies  in  regard  to  rate  of  interest.  The said  

decision is therefore, of no assistance.

21. Learned counsel for the respondent submitted that in  Three Circles,  

this Court has observed that Mcdermott recognized that interest awarded on  

the principal amount upto the date of the award becomes part of the principal  

from the date of the award. We extract below the relevant portion of  Three  

Circles relied upon by the respondent :

“Now the question comes which is  related to awarding of  `interest  on  

interest’.  According  to  the  appellant,  they  have  to  pay  interest  on  an  

amount  which was inclusive  of  interest  and the principal  amount  and,  

therefore,  this  amount  to  a  liability  to  pay  `interest  on  interest.  This  

question is no longer res integra at the present point of time. This Court in  

McDermott International Inc. v. Burn Standard Co. Ltd, and Ors.-  2006  

(11)  SCC 181  has  settled  this  question  in  which  it  had  observed  as  

follows:

The Arbitrator  has awarded the  principal  amount  and  interest  thereon  

upto the date of award and future interest thereupon which do not amount  

to  award  of  interest  on  interest  as  interest  awarded  on  the  principal  

amount upto the date of award became the principal  amount which is  

permissible in law.”

[emphasis supplied]

But a careful reading of the decision in Mcdermott, shows that the portion of  

Mcdermott extracted in Three Circles, assuming it to be the law laid down in

Mcdermott, is not a finding or conclusion of this court, nor the ratio decidendi  

of the case, but is only a reference to the contention of the respondent in  

Mcdermott. Paras 1 to 27 (of the SCC report) in Mcdermott state the factual  

background. Paras 28 and 29 contain the submissions of the learned counsel  

for BSCL, the respondent therein. Paras 30 to 44 contain the submissions  

made by the learned counsel for Mcdermott, the appellant therein, in reply to  

the submissions made on behalf of BSCL. The passage that is extracted in  

Three  Circles is  part  of  para  44  of  the  decision  which  contains  the  last  

submission of the learned counsel for Mcdermott on the question of interest.  

The reasoning in the decision starts from para 45. This Court considered the  

several  questions  seriatum  in  paras  45  to  160.  The  question  relating  to  

interest was considered in paras 154 to 159 relevant portions of which we  

have  extracted  above.  Therefore,  the  observation  in  Three  Circles that  

Mcdermott held that interest awarded on the principal amount upto the date of  

award becomes the principal amount and therefore award of future interest  

therein does not amount to award of interest on interest, is per incuriam due  

to an inadvertent erroneous assumption.

Re : Question (ii)

22. The operative portion of an arbitral award dealing with several claims  

on which separate decisions have been recorded, is really an abstract of the  

decisions/awards  on  each  of  the  claims.  Therefore,  the  findings/award  

reached by the Arbitrator on claim No. (8) relating to interest, have to be read  

with  the  operative  portion  to  know  what  is  directed  by  the  award.  We  

therefore extract  below the reasoning,  finding and award on claim No. (8)  

relating to interest:

“Claim 8 : Payment on account of interest at the rate of 30% per annum  

with effect from 18.8.1990 till final payment.  

The claimant has claimed interest  @ 30% per annum with  effect  from  

18.8.1990 till final payment of Award. Keeping in view the reasonability of

the  claim,  I  allow interest  @ 12% per  annum  on the  total  amount  of   

Award  i.e.  on  Rs.14.94  lacs with  effect  from 19.12.1990 (date  of  first  

reference of Arbitrator) upto the date of making this award. In case the  

total amount of award together with this interest is not paid within 30 days  

from the date of making this award, future interest shall be paid @ 18%  

per annum on the  entire Award from the date of Award upto the actual  

date of payment”.

(emphasis supplied)

The above portion of the award when read with the operative portion of the  

award shows that the words ‘entire award’ used in the para dealing interest  

and the words ‘sums due’ used in the operative portion of the award refer to  

the ‘total amount of award’ referred to earlier in the said two portions relating  

to interest.  

23. The Arbitrator allowed interest at the rate 12% per annum on the total  

amount of the award, that is Rs.14,94,000/-, with effect from 19.12.1990 up to  

the date of the Award. He further directed that in case the “total amount of the  

award together with this interest” is not paid within 30 days from the date of  

making the award, future interest shall be paid at the rate 18% per annum on  

the entire Award from the date of Award upto the actual date of payment. The  

words “total amount of the Award together with interest” makes it clear that  

the Arbitrator has used the words “total amount of the Award” as referring to  

the  total  or  aggregate  of  the  awards  on  the  substantive  claims  of  the  

contractor (claims 1 to 7) excluding the ancillary claims (claim No.8) relating  

to interest. The Arbitrator has also used the words “entire award” and “sums  

due”  synonymous  with  the  words  “total  amount  of  the  award”.  Therefore,  

when the operative portion states that future interest is awarded on the “sums  

due”, it refers to the “total amount of the award”, that is total of the amounts  

awarded on substantive claims (that  is claims (1)  to (7)  of  the contractor)  

excluding the claim relating interest.  Therefore,  what was awarded by the

Arbitrator was future interest at the rate of 18% per annum on the amounts  

awarded on various claims (that  is  Claim No.1 to  7)  in  all  aggregating to  

Rs.14,94,000/- and not upon the interest awarded thereon upto to date of the  

award. It should be noted that the difference in the interest awarded for the  

pre-award period and post-award period, is only with reference to the rate of  

interest and not the quantum of principal (that bears interest).

Conclusion

24.  Thus  it  is  clear  that  section  31(7)  merely  authorizes  the  arbitral  

tribunal to award interest in accordance with the contract and in the absence  

of  any prohibition in  the contract  and in the absence of  specific  provision  

relating to interest in the contract, to award simple interest at such rates as it  

deems fit from the date on which the cause of action arose till  the date of  

payment. It also provides that if the award is silent about interest from the  

date of award till date of payment, the person in whose favour the award is  

made will be entitled to interest at 18% per annum on the principal amount  

awarded, from the date of award till date of payment. The calculation that was  

made  in  the  execution  petition  as  originally  filed  was  correct  and  the  

modification by the respondent increasing the amount due under the award  

was contrary to the Award.  

25. In view of the above, we allow this appeal, set aside the judgment of  

the Executing Court dated 5.9.2007 and the order of the High Court 9.9.2008  

and hold that the respondent was entitled only to simple interest on the  

principal amount as per original calculation shown in the Execution Petition.