State of Haryana v. S.L. Arora case on “Award of Interest on Interest” wrongly decided

Supreme Court: In one of the prominent decisions of Supreme Court, the 3 judge bench  decided with a ratio of 2:1 that the decision given in  S.L. Arora Case, (2010) 3 SCC 690, was wrongly decided. The question before the Court was that whether the decision of Supreme Court in State of Haryana  v. S.L. Arora , wherein it was held that an award of interest on interest from the date of award is not permissible Section 31(7) of the Arbitration and Conciliation Act, 1996 , and is in consonance with earlier decisions of this Court. Abhay Manohar Sapre, J opined with the view given by S.A Bobde, J while H.L Dattu, CJ dissented with the majority.

It was decided in S.L Arora case that a  sum directed to be paid by an Arbitral Tribunal and the reference to the Award on the substantive claim does not refer to interest during the actual progress of law suit awarded on thesum directed to be paid upon Awardand that in the absence of any provision of interest upon interest in the contract, the Arbitral Tribunal does not have the power to award interest upon interest, or compound interest either for the pre-award period or for the post-award period.

In this view of the matter, S.A Bobde, J said that it is clear that the interest, the sum directed to be paid by the Arbitral Award under clause (b) of sub-section (7) of Section 31 of the Act is inclusive of interest during the actual progress of a law suit.Critical of the view taken by Supreme Court in S.L Arora case, S.A Bobde, J said that the Parliament has the undoubted power to legislate on the subject and provide that the Arbitral Tribunal may award interest on the sum directed to be paid by the Award, meaning a sum inclusive of principal sum adjudged and the interest, and this has been done by Parliament in plain language.

Dissenting from the majority, H.L Dattu, CJ concluded that the terminterest, appears to be distinct from the principal amount on which it is imposed. According to him, there was no infirmity with the S.L. Arora case, whereby it was held that if the arbitral award is silent about interest from the date of award till the 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 the date of payment.( HYDER CONSULTING (UK) LTD v. GOVERNOR, STATE OF ORISSA2014 SCC OnLine SC 940 Decided on-25/11/2014)

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