The Supreme Court of India, in a significant ruling on arbitration law, has held that when an arbitral award, guided by the agreement between parties, explicitly provides for interest to be paid from the cause of action until the date of repayment, no additional or compound interest can be claimed at the execution stage under Section 31(7)(b) of the Arbitration and Conciliation Act, 1996.
The judgment was delivered by a bench of Justice Manoj Misra and Justice Ujjal Bhuyan in the case of HLV Limited (Formerly known as Hotel Leelaventure Pvt. Ltd.) vs. PBSAMP Projects Pvt. Ltd. The Court set aside a Telangana High Court order that had remanded the matter back to the executing court for reconsideration of interest, thereby restoring the executing court’s original order which had closed the execution proceedings.
Case Background
The dispute arose from a Memorandum of Understanding (MoU) dated April 9, 2014, between HLV Limited (vendor) and PBSAMP Projects Pvt. Ltd. (purchaser) for the sale of approximately 3 acres and 28 guntas of land in Banjara Hills, Hyderabad. The respondent, PBSAMP, paid an advance of Rs. 15.5 crores. After differences emerged, the MoU was terminated, and the dispute was referred to a three-member arbitral tribunal.
The tribunal passed an award on September 8, 2019, directing HLV Limited to repay the advance. The operative part of the award stated: “The claimant is entitled to Rs. 15.5 crores with interest at 21% p.a. from the date it was given to the date it is repaid.”
The award was challenged by HLV Limited under Section 34 of the 1996 Act but was dismissed by the Special Court in Hyderabad on March 19, 2021, making the award final. Subsequently, PBSAMP initiated execution proceedings. During these proceedings, HLV Limited paid a total of Rs. 44,42,05,254.00, which it claimed was in full satisfaction of the award.
However, PBSAMP filed a calculation sheet claiming compound interest, asserting that a further sum of over Rs. 13 crores was outstanding. The Executing Court, on November 2, 2023, rejected this claim, holding that it could not go beyond the award, and closed the execution petition. PBSAMP challenged this order before the Telangana High Court, which set aside the executing court’s order and remanded the matter for fresh consideration, leading to the present appeal before the Supreme Court.
Arguments of the Parties
HLV Limited (Appellant), represented by Senior Counsel Mr. Hemendranath Reddy, argued that the arbitral tribunal had awarded a composite simple interest of 21% per annum covering the entire period from when the payment was due until its repayment. It was contended that the award did not grant compound interest or separate post-award interest. The appellant submitted that the respondent’s claim amounted to an impermissible modification of the award at the execution stage. Reliance was placed on the Supreme Court’s decision in Morgan Securities and Credits Private Limited Vs. Videocon Industries Limited, which clarified that an arbitrator has the discretion to grant post-award interest on the whole or part of the ‘sum’.
PBSAMP Projects Pvt. Ltd. (Respondent), represented by Senior Counsel Mr. P.B. Suresh, countered that the interest for the pre-award period must be capitalized and become part of the ‘sum’ under Section 31(7)(a) of the 1996 Act. On this capitalized sum, post-award interest at 21% was payable until the date of payment. The respondent heavily relied on the three-judge bench decision in Hyder Consulting (UK) Limited Vs. Governor, State of Orissa to argue their entitlement to compound interest under Section 31(7)(b).
Supreme Court’s Analysis and Decision
The Supreme Court, in its judgment authored by Justice Ujjal Bhuyan, meticulously analyzed Section 31(7) of the Arbitration and Conciliation Act, 1996. The Court emphasized the significance of the phrase “Unless otherwise agreed by the parties” at the beginning of Section 31(7)(a), which deals with pre-award interest.
The Court observed that this phrase underscores the legislative intent to prioritize party autonomy. “Therefore, party autonomy takes precedence over the discretion of the arbitral tribunal,” the judgment noted.
The bench referred to Clause 6(b) of the MoU between the parties, which explicitly stipulated that upon termination, the advance would be refunded with “21% interest per annum from the respective dates of disbursement of the advances till actual date of payment of the same.”
The Court found that the arbitral tribunal had faithfully applied this clause. Justice Bhuyan wrote, “As the arbitral tribunal had expressly provided interest till the date of repayment, question of additional or compound interest under clause (b) of sub-section (7) of Section 31 of 1996 Act would not arise.”
The judgment clarified the legal position established in previous cases, including Hyder Consulting, Delhi Airport Metro Express Private Limited, and Morgan Securities. It held that the principle laid down in Hyder Consulting—allowing for interest on the aggregate sum (principal plus pre-award interest)—would apply “only when the arbitral tribunal leaves a matter unqualified or is silent.”
In the present case, the tribunal was not silent. It was bound by the MoU and had exercised its discretion to specify both the interest rate (21%) and the duration (until repayment). The Supreme Court stated, “…once parties agree on the interest regime, the arbitrator’s role is confined to enforcing it and the courts would not rewrite or enlarge the award by introducing further interest at the execution stage.”
The Court concluded that since the MoU did not stipulate compounding of interest and the tribunal did not award it, the respondent’s claim at the execution stage was an impermissible attempt to rewrite the award.
Holding that the High Court was not justified in setting aside the Executing Court’s order, the Supreme Court allowed the appeal. The judgment set aside the High Court’s order dated April 22, 2024, and restored the order of the Executing Court dated November 2, 2023, which had declared the appellant’s payment to be in full satisfaction of the arbitral award.
