Introduction

The case of M/S. D. Khosla & Company v. The Union of India (2024 INSC 587) adjudicated by the Supreme Court of India on August 7, 2024, addresses a pivotal issue in arbitration awards concerning the application of interest on awarded sums. The dispute centers around the interpretation of interest calculations stipulated in an arbitration award under the Indian Arbitration Act, 1941, and whether interest can be compounded by including previously awarded interest in subsequent interest calculations.

The parties involved are:

• Petitioner: M/S. D. Khosla & Company
• Respondent: The Union of India

Summary of the Judgment

The Supreme Court upheld the decisions of the lower courts, dismissing M/S. D. Khosla & Company's Special Leave Petition. The core issue revolved around whether the petitioner was entitled to claim compound interest—15% per annum calculated on the principal award plus the pre-award interest of 12% per annum.

The arbitration award explicitly provided for two separate interest rates:

1. 12% simple interest from the completion of work to the date of the award.
2. 15% simple interest from the date of the award until payment or court decree.

Both the Principal Senior Civil Judge, Khambhalia, and the High Court interpreted the award to mean that the 15% interest was applicable solely to the principal amount awarded, without compounding the initial 12% interest. The Supreme Court concurred, emphasizing statutory provisions that limit the ability to award interest on interest unless explicitly stated.

Analysis

Precedents Cited

The judgment extensively referenced several key cases to elucidate the principles governing the award of interest in arbitration:

• Oil and Natural Gas Commission v. M.C. Clelland Engineers S.A. (1999 SCC 27): Affirmed that arbitrators can award interest on interest only if it forms part of the compensation for delayed payment and is explicitly included in the award.
• State of Haryana v. S.L. Arora & Company (2010 SCC 690): Clarified that, in the absence of specific provisions, interest is generally simple and applies only to the principal sum.
• Hyder Consulting (UK) Limited v. Governor, State of Orissa (2015 SCC 189): Distinguished between statutory phrasing in Section 31(7) of the Arbitration Act and Section 34 of the CPC, highlighting that 'sum' includes pre-award interest whereas 'principal sum adjudged' does not.
• UHL Power Company Limited v. State of Himachal Pradesh (2022 SCC 116): Reinforced the interpretation from Hyder Consulting regarding the non-compounding of interest under Section 34 CPC.

These precedents collectively underscore the judiciary’s stance against awarding compound interest unless expressly provided by statute or the contractual agreement.

Legal Reasoning

The Supreme Court's legal reasoning hinged on the following statutory interpretations:

• Section 29 of the Arbitration Act, 1941: Limits the court to awarding interest solely on the principal sum adjudged, precluding the awarding of interest on previously accrued interest unless explicitly stated.
• Section 34 of the Code of Civil Procedure (CPC): Similarly restricts interest to the principal sum, aligning with the principle against compound interest absent specific authorization.
• Section 3(3) of the Interest Act, 1978: Explicitly prohibits the award of compound interest unless provided by statute or contractual terms.

Applying these provisions, the Court determined that the arbitration award's language did not authorize the petitioner to claim 15% interest on the principal plus the pre-award 12% interest. The award distinctly separated the two interest periods, each applicable solely to the principal amount, thereby disallowing compounding.

Impact

This judgment reinforces the principle that interest awarded in arbitration is to be applied strictly as per the award's terms and statutory provisions. It sets a clear precedent that compound interest cannot be assumed or inferred unless explicitly provided for in the award, contract, or relevant statute. This has significant implications for future arbitration awards and contracts, emphasizing the necessity for precise drafting regarding interest calculations.

Litigants and arbitrators must be meticulous in specifying whether interest can be compounded to avoid ambiguities and potential disputes. Additionally, courts are reminded of their limited discretion in altering or extending the terms of arbitration awards concerning interest, ensuring adherence to legislative intent.

Complex Concepts Simplified

Conclusion

The Supreme Court's decision in M/S. D. Khosla & Company v. Union of India serves as a definitive guide on the application of interest in arbitration awards. By meticulously analyzing statutory provisions and existing jurisprudence, the Court reinforced the principle that interest should be awarded on the principal amount unless there is clear legislative or contractual authorization for compounding.

This judgment underscores the importance of explicit terms in arbitration awards regarding interest calculations and cautions against assumptions of compounding. It ensures predictability and consistency in the enforcement of arbitration awards, safeguarding the integrity of the arbitral process and the rule of law.

Stakeholders in arbitration must take heed of this ruling to draft clear and unambiguous clauses pertaining to interest to avoid future disputes and ensure seamless execution of awards.