Interest on Arbitral Awards Post Gayatri Balswamy v. ISG Novasoft 

The Majority view of Constitutional Bench of the Supreme Court in the case of Gayatri Balasamy v ISG Novasoft Technologies has held that post-award interest can be modified (to both increase or decrease) [¶77] by courts exercising jurisdiction under Section 34 of The Arbitration and Conciliation Act (hereinafter referred to as ‘The Act’). Furthermore, it was also held that if the award did not specify any post-award interest, the court would even have the power to award the same [¶74]. The court also confirmed that Article 142 can be used to modify arbitral awards as long as it does not amount to complete rewriting of the award [¶58].

While the judgment goes a long way in clarifying the powers of courts to modify interest rates attached to Arbitral Awards, serious ambiguities in the law remain. These can be primarily covered under two heads-

A. To what extent can a Section 34 court delve into the merits of the case while modifying post-award interest?

B. Whether there is any scope for courts to modify pre-reference and pendente lite interest under Article 142 post this judgement?

To what extent can the court delve into the merits of the case while modifying post-award interest?

The court at the very outset recognises the fact, that The Act does not expressly provide for powers of modification under Section 34 [¶3] and a careful balancing act needed to be carried out between “equity and justice” on one hand and “limitations on the court’s jurisdiction” on the other [¶25]. It was held that any power of modification recognised by it must be such that it would not entail delving into the merits of the dispute [¶36].

This position needs to be interpreted harmoniously with the court’s reasoning dealing specifically with modification of post-award interest. Herein, the court held that such modification may be carried out “where the facts justify such modification” [¶74]. Therefore, it must be delineated what relevant factors would be considered to decide upon modification of post-award interest without delving into the merits of the dispute.

The court has relied heavily upon the fact that Section 31(7)(b) prescribes a standard rate in the absence of the award specifying the interest rate. It was emphasised that there was no analogous provision for the same in the UNICTRAL model law, and it was a specific addition by the Indian legislature. Based on this, the court held that the standard rate would guide the arbitrator’s discretion while awarding interest. Therefore, while the Arbitrator has full discretion to decide upon the rate of interest and is not bound by the standard rate in any manner, it does impose a duty to provide reasoning for the rate prescribed.

This follows well-settled law that an arbitral award must provide proper, intelligible, and adequate reasoning. This naturally flows from Section 31(3) of the Act, which requires an arbitral award to be reasoned. It has been repeatedly held that the arbitrator has to prescribe an interest rate which is reasonable and to assign reasons justifying the rate of interest awarded. In the case of Shenzhen Shandong It was expressed in the following words-

“9. The discretion of the arbitrator to award interest must be exercised reasonably. An Arbitral Tribunal while making an award for interest must take into consideration a host of factors, such as : (i) the “loss of use” of the principal sum; (ii) the types of sums to which the interest must apply; (iii) the time period over which interest should be awarded; (iv) the internationally prevailing rates of interest; (v) whether simple or compound rate of interest is to be applied; (vi) whether the rate of interest awarded is commercially prudent from an economic standpoint; (vii) the rates of inflation; (viii) proportionality of the count awarded as interest to the principal sums awarded.”

Additionally, the court reasons that modification of post-award interest must be guided by practical consideration as post-award interest is “future oriented” and the appropriate rate of interest would primarily depend on events post rendering of the award [¶76]. Locating this in the context of previous decisions by various courts, it suggests courts should look into factors such as prevailing market rates, commercial realities, etc. Instances of parties attempting to frustrate the enforcement of the award and other similar actions would also be of relevance. Furthermore, in several cases the court has considered the elapse of a long period of time as a valid ground to reduce the rate of interest awarded. Lastly, variable interest rates that increase sharply within the limitation period to challenge the award have been set aside as being arbitrary and contrary to the rights of the party to challenge the award.

Thus, what can be inferred is that while the court cannot delve into the merits of the case itself, two things are to be principally considered before modifying post-award interest-

i. The Adequacy of the Reasoning provided by the Arbitral Tribunal for the rate of interest prescribed and

ii. The conduct of the parties and intervening circumstances after the passing of the award that may justify raising or lowering of the interest rate based on commercial realities.

Can Pre-reference and Pendente Lite interest be modified?

The judgment only grants section 34 courts the power to modify post-award interest but not pre-reference or pendente lite interest. It has held that in cases where these are awarded contrary to contractual provisions, section 34 court will have two options- (i) To set aside the rate of interest or (ii) To take recourse may be had to the powers of remand under Section 34(4).

This diverges from existing jurisprudence where the Supreme Court has, in several judgments, upheld Section 34 orders modifying pre-reference and pendente lite interest or itself modified the same in appeals under Article 136.

Furthermore, there is well-established precedent for the Supreme Court to utilise its powers under Article 142 to modify both pre-reference and pendente lite interest, in Gokul Chandra it was held as follows-

“…. we find that the present case is also a fit case wherein this Court needs to exercise its powers under Article 142 of the Constitution of India to reduce the rate of interest. As already discussed hereinabove, taking into consideration the conduct of the respondent in delaying the proceedings at every stage which led to a long pendency of the dispute, we are of the view that, though it will not be in the interest of justice to interfere with the principal award, this is a fit case wherein the interest at all the three stages, that is pre-reference period, pendente lite and post-award period, requires to be reduced.”

Similarly, in McDermott the court exercised its powers under 142 to modify the interest rate (pre-reference, pendente lite and post-award) while relying upon similar previous decisions.

The present judgement confirms the power of the Supreme Court to modify Arbitral Awards by exercising its powers under Article 142 to do complete justice and lays emphasis on the wide scope of the powers under this article. Furthermore, unlike Section 34 courts, no express limitations have been prescribed for the exercise of these powers, except that they should not amount to complete rewriting of the award. Therefore, the Supreme Court will likely continue to have the power to modify even pre-reference and pendente lite interest while exercising its powers under Article 142.

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