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M/S. D. Khosla and Company vs. The Union of India

Not available · 2024 INSC 587Decided 7 Aug 2024
Not available
Justice Pamidighantam Sri Narasimha · Justice Pankaj Mithal

Background

In a 1984-85 government contract dispute, an arbitrator awarded the contractor (D. Khosla and Company) a sum with simple interest at 12% per annum for the period before the award and 15% per annum for the period after the award until payment. A court decree was drawn on this basis. After being paid the principal plus interest, the contractor filed an execution petition claiming a shortfall, arguing the post-award 15% interest should be calculated on the principal amount plus the pre-award 12% interest (i.e., interest on interest). Both the executing court and the High Court rejected this claim, holding only simple interest was payable on the principal sum.

Decision Breakdown

The Supreme Court dismissed the petition, holding that "interest on interest" (compound interest) cannot be awarded unless specifically permitted by the statute or the contract terms. Under the Arbitration Act, 1940, the Code of Civil Procedure, and the Interest Act, 1978, courts and arbitrators may only order interest on the principal sum adjudged, not on previously accrued interest, absent a specific enabling provision. The Court found that the award and decree in this case referred to the same "amount awarded" (the principal compensation) in both interest periods, and neither document indicated that post-award interest should be computed on the principal plus pre-award interest. The Court also distinguished this case from certain arbitration cases under the newer 1996 Act where the word "sum" (as opposed to "principal sum adjudged") has been read more broadly.

Lesson Learnt

When a court or arbitral award grants interest for two separate periods, the second period's interest is ordinarily calculated only on the original principal amount, not on the principal plus the interest already accrued: compound interest can be claimed only if the award, decree, statute, or contract expressly says so.

Official source (sci.gov.in)View Judgment (PDF)

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