A) ABSTRACT / HEADNOTE

This case examines whether interest on interest or compound interest could be awarded in arbitration disputes absent explicit statutory or contractual provisions. The Supreme Court upheld the decisions of the High Court and Civil Court, confirming that simple interest at 12% for the pre-award period and 15% for the post-award period could be granted only on the principal amount awarded. The petitioner’s claim for interest on the principal plus accrued pre-award interest was denied. The judgment clarified the interpretation of sections under the Arbitration Act, 1940, Interest Act, 1978, and Code of Civil Procedure, 1908 (CPC) in relation to awarding compound interest in arbitration awards.

Keywords:

1. Arbitration
2. Compound Interest
3. Simple Interest
4. Pre-award and Post-award Interest
5. Principal Amount

B) CASE DETAILS

i) Judgment Cause Title
M/s D. Khosla and Company v. The Union of India

ii) Case Number
Special Leave Petition (Civil) No. 812 of 2014

iii) Judgment Date
07 August 2024

iv) Court
Supreme Court of India

v) Quorum
Justice Pamidighantam Sri Narasimha and Justice Pankaj Mithal

vi) Author
Justice Pankaj Mithal

vii) Citation
[2024] 8 S.C.R. 113 : 2024 INSC 587

viii) Legal Provisions Involved

• Arbitration Act, 1940: Sections 14, 17, and 29
• Interest Act, 1978: Section 3(3)
• Code of Civil Procedure, 1908: Section 34

ix) Judgments overruled by the Case (if any)
None.

x) Case is Related to which Law Subjects

• Arbitration Law
• Interest Law
• Civil Procedure

C) INTRODUCTION AND BACKGROUND OF JUDGMENT

The dispute arose from a contractual engagement between M/s D. Khosla and Company and Union of India for works completed in 1984–85. An arbitration award was issued in 1997 granting compensation and bifurcating interest into two periods: pre-award (12% simple interest) and post-award (15% simple interest). The petitioner contested the calculation of post-award interest, claiming it should include pre-award interest as part of the principal sum. The lower courts disagreed, leading to the present appeal.

D) FACTS OF THE CASE

1. The petitioner and respondent entered into a contract in 1984–85.
2. A dispute arose, culminating in an arbitration award in 1997.
3. The award provided:
   • Simple interest at 12% per annum on the principal for the pre-award period.
   • Simple interest at 15% per annum for the post-award period.
4. The petitioner received payments but claimed additional post-award interest on the principal plus pre-award interest.
5. The executing court and the Gujarat High Court ruled against the petitioner, leading to this appeal.

E) LEGAL ISSUES RAISED

1. Can interest on interest or compound interest be awarded in arbitration without explicit provisions?
2. Does the phrase “principal sum adjudged” in Section 34 of CPC include pre-award interest?
3. What are the boundaries of arbitrators’ and courts’ power under relevant statutes?

F) PETITIONER/APPELLANT’S ARGUMENTS

1. The 12% pre-award interest became part of the principal sum after the award.
2. The 15% post-award interest should apply to this enhanced amount, i.e., principal plus pre-award interest.
3. Denial of this interpretation contradicts the intent of equitable compensation.

G) RESPONDENT’S ARGUMENTS

1. The arbitrator did not specifically award compound interest or interest on interest.
2. The Interest Act, 1978 prohibits interest on interest without statutory or contractual authorization.
3. The phrase “principal sum adjudged” in Section 34 CPC refers strictly to the original principal amount awarded, excluding pre-award interest.

H) JUDGMENT

a. RATIO DECIDENDI

1. Courts and arbitrators lack the authority to grant compound interest or interest on interest without explicit authorization from statutes or contracts.
2. Section 3(3) of the Interest Act, 1978, explicitly prohibits awarding interest on interest.
3. Section 34 CPC allows interest only on the principal sum adjudged, not on accrued interest.

b. OBITER DICTA

The Court observed that statutory provisions governing arbitration awards should be interpreted strictly to maintain the sanctity of contractual terms and equitable compensation principles.

c. GUIDELINES

1. Interest Act, 1978, governs the award of interest and disallows compound interest unless explicitly provided.
2. Courts must differentiate between simple interest (default) and compound interest (exception).
3. Arbitrators’ awards must clearly articulate interest terms to avoid ambiguity.

I) CONCLUSION & COMMENTS

This case reinforces the strict boundaries on awarding interest in arbitration disputes. It underscores the principle that compound interest must have explicit statutory or contractual authorization. The decision aligns with earlier rulings such as State of Haryana v. S.L. Arora and Hyder Consulting v. State of Orissa, further clarifying the interpretation of Sections 34 CPC and 3(3) Interest Act, 1978.

J) REFERENCES

Important Cases Referred

1. Oil and Natural Gas Commission v. M.C. Clelland Engineers S.A. (1999) 4 SCC 327
2. State of Haryana v. S.L. Arora and Company (2010) 3 SCC 690
3. Hyder Consulting v. Governor, State of Orissa (2015) 2 SCC 189
4. UHL Power Company v. State of Himachal Pradesh (2022) 4 SCC 116

Important Statutes Referred

1. Arbitration Act, 1940
2. Interest Act, 1978
3. Code of Civil Procedure, 1908