Interest and costs: what a tribunal or a commercial court can grant

Section 3(1) of the Interest Act, 1978 lets a court, in proceedings to recover a debt or damages, allow interest at a rate not exceeding the current rate of interest. For a debt payable under a written instrument at a certain time, interest runs from the date it was payable to the date the proceedings were instituted. For any other claim it runs from the date stated in a written notice that interest will be claimed. Section 2(a) defines court to include a tribunal and an arbitrator, and section 2(b) defines the current rate as the highest maximum rate on classes of deposits that scheduled banks may pay under the Reserve Bank's directions.

Section 3(3)(a) takes two cases out of the section entirely: debts or damages on which interest is payable as of right under an agreement, and those on which interest is barred by an express agreement. The contract therefore comes first. Section 4 makes interest payable wherever an enactment, rule of law or usage having the force of law requires it, and directs the court to allow interest, unless there are special reasons, on money deposited as security, on obligations arising from a fiduciary relationship, and on money obtained or retained by fraud. Section 5 preserves section 34 of the Code.

Section 31(7)(a) of the Arbitration Act allows the tribunal, unless otherwise agreed by the parties, to include in a money award interest at a reasonable rate on the whole or any part of the money for the whole or any part of the period between the cause of action and the award. The opening words make the parties' agreement decisive. In Jaiprakash Associates the general conditions of contract barred interest, and the Supreme Court upheld the High Court's order setting aside the award so far as it granted interest. Garg Builders v. Bharat Heavy Electricals Ltd. (2022) 11 SCC 697 applied the same reasoning to pendente lite interest and held that a clause barring interest is not void under section 28 of the Indian Contract Act, 1872.

A claimant facing such a clause should read it closely for what it bars, interest on delayed payment, on security deposits, or on any amount at all, and frame the claim for the period and the head the clause does not reach. A respondent should plead the clause in the statement of defence.

Section 31(7)(b) says a sum directed to be paid by an award shall, unless the award otherwise directs, carry interest at two per cent higher than the current rate of interest prevalent on the date of the award, from the date of the award to the date of payment. The Explanation gives current rate of interest the meaning in section 2(b) of the Interest Act.

Morgan Securities and Credits Pvt. Ltd. v. Videocon Industries Ltd. (2023) 1 SCC 602 held that the words unless the award otherwise directs qualify the rate, and that the arbitrator also has discretion to award post-award interest on only a part of the sum, such as the principal. An award that confines post-award interest to the principal is therefore not open to challenge on that ground alone. Where the award says nothing about post-award interest, the statutory rate in section 31(7)(b) applies by default. Nor does a clause barring interest carry over into that period. In R.P. Garg v. The Chief General Manager, Telecom Department [2024] 9 S.C.R. 763 the arbitrator had refused post-award interest believing the contract prohibited it, and the High Court set the interest aside on the strength of Jaiprakash Associates. The Supreme Court called the assumption that post-award interest is subject to the contract a clear error: the words unless the award otherwise directs in section 31(7)(b) go to the rate rather than to the entitlement, and the District Court's award of interest at eighteen per cent from the date of the award to realisation was restored.

Section 3(3)(c) of the Interest Act says nothing in that section gives a court power to award interest upon interest. That limit applies to the statutory power. Where the contract provides for compound interest, the Act does not apply to it at all, because section 3(3)(a)(i) excludes debts on which interest is payable as of right under an agreement.

In arbitration the question turns on section 31(7). UHL Power Company Ltd. v. State of Himachal Pradesh (2022) 4 SCC 116 restored a tribunal's award of pre-claim interest that the High Court had disallowed on the strength of State of Haryana v. S.L. Arora, holding, on the basis of the later three-judge decision in Hyder Consulting, that S.L. Arora was wrongly decided and that the sum directed to be paid under section 31(7) includes interest. Post-award interest under section 31(7)(b) can therefore run on a sum that already includes pre-award interest. That is as far as Hyder Consulting goes. The same three-Judge Bench held that where the contract has no term providing for interest upon interest, the tribunal cannot award compound interest for the pre-award period or the post-award period; its point was that the sum directed to be paid takes in the principal as adjudged together with the interest granted on it.

Section 29A requires a domestic award within twelve months from completion of pleadings, extendable by six months by consent and then only by the court. If the award is made within six months of the tribunal entering on the reference, section 29A(2) entitles the tribunal to additional fees as the parties agree. If the court extends the period and finds the delay attributable to the tribunal, it may reduce the arbitrator's fees by up to five per cent for each month of delay, after hearing the arbitrator, and section 29A(8) lets it impose actual or exemplary costs on any party.

Pre-award interest under section 31(7)(a) can run up to the date of the award, so a respondent who seeks extensions of the mandate should count the interest that accrues in the meantime.

Section 31A(1) gives the court or tribunal discretion to decide whether costs are payable, how much, and when, notwithstanding the Code. Costs means reasonable costs of the arbitrators', courts' and witnesses' fees and expenses, legal fees and expenses, any administration fees of a supervising institution, and other expenses of the proceedings and the award. Section 31A(2) sets the general rule that the unsuccessful party pays the successful party's costs, with a different order allowed for recorded reasons. Section 31A(3) lists what is weighed, including conduct, partial success, a frivolous counter-claim and a reasonable offer to settle that was refused, and section 31A(4) allows orders for a proportion, a stated amount, costs from or until a date, and interest on costs. Section 31(8) requires the tribunal to fix costs in accordance with section 31A.

Section 38 lets the tribunal fix a deposit as an advance for costs, payable in equal shares, with separate deposits for claim and counter-claim. If one party does not pay its share the other may, and if neither pays, the tribunal may suspend or terminate the proceedings on that claim or counter-claim. Section 39(1), subject to any provision to the contrary in the arbitration agreement, gives the tribunal a lien on the award for any unpaid costs of the arbitration, and section 39(2) lets the court order the award delivered on payment of the demanded costs into court, which it then apportions.

Section 35 of the Code, as substituted for commercial disputes, gives the court discretion over whether costs are payable, the quantum and when, and defines costs to include witnesses' fees and expenses, legal fees and expenses, and other expenses of the proceedings. The unsuccessful party ordinarily pays the successful party, and a departure needs reasons in writing. The illustration in the section lets the court impose costs even on a successful plaintiff for a frivolous claim for damages.

Section 35B lets the court, for recorded reasons, order a party who fails to take a step or obtains an adjournment to pay the other side's costs of attending, and makes payment a condition precedent to further prosecution of the suit or defence. Section 35A allows compensatory costs, after recording reasons, for a claim or defence found false or vexatious to the knowledge of the party who put it forward, but caps the amount at three thousand rupees or the court's pecuniary limit, whichever is less.

Plead the rate and the period for each head of interest. For pre-suit interest under section 3 of the Interest Act on a claim that is not under a written instrument, send a written notice that interest will be claimed, since that notice fixes the start date. In arbitration, claim pre-reference, pendente lite and post-award interest separately, identify the contract clause on interest, and ask the tribunal to state the rate and the sum on which post-award interest runs.

Keep a running record of legal fees, arbitrators' fees, institution charges and expenses, because section 31A and section 35 award reasonable costs that the claimant must show. An award that fixes interest or costs without reasons is exposed under section 34, so the request should give the tribunal the material to reason on.