In Central Bank of India v. Ravindra 1 (Central Bank case) the Constitutional Bench of the Supreme Court considered the meaning of the phrases “the principal sum adjudged” and “such principal sum” occurring in Section 34 2 of the Code of Civil Procedure, 1908 and held that these phrases refer to an amount being aggregate of principal and the interest accrued until the date of filing of the suit. In a subsequent judgment in Hyder Consulting (UK) Ltd. v. State of Orissa 3 (Hyder Consulting case), a three-Judge Bench of the Supreme Court of India held by a majority of 2:1 that the term “sum” appearing in Section 31(7) 4 of the Arbitration and Conciliation Act, 1996 refers to the aggregate of the amounts that may be directed to be paid by the Arbitral Tribunal and not merely the “principal” sum without interest component.5 This article briefly analyses the two judgments of the Supreme Court of India, more particularly as regards the Court’s looking through the ratio contained in Central Bank case6 and attempts to present a critique of the reasoning given by the majority in Hyder Consulting case7. This article also discusses as to how the reasoning could possibly give rise to the contention that the same is an obiter dictum of the Supreme Court, and thus could result into precedentiary conflicts; as the same would be binding on the High Court and have a persuasive value before the Supreme Court.
Central Bank case
Due to the amendment of the Code of Civil Procedure, 1908 in the year 1956, the issue of interpretation of the phrase “the principal sum adjudged” and “such principal sum” occurring in Section 34 of the Code of Civil Procedure, 1908 had arisen in several suits. In order to give finality to the issue, in Central Bank case8 a three-Judge Bench of the Supreme Court referred it to a Constitutional Bench. The Constitutional Bench of the Supreme Court in Central Bank case9, rendered its judgment on the subject-matter after considering numerous judgments of several High Courts and various judgments rendered by English courts on the subject-matter, some of which for instance, are set out below:
(a) The judgment in Syndicate Bank v. W.B. Cements Ltd.10 wherein it was held that interest can never become principal and the words “principal sum” in Section 34 of the Code of Civil Procedure should be given the ordinary meaning as given in the dictionaries. “It was held that the bank was entitled to the sum claimed as due from and payable by the defendants as the principal sum with future interest on such amount from the date of suit to the date of realisation.”11
(b) The judgment of Sigappi Achi v. N.A.P.A. Palaniappa Chettiar12 wherein the Division Bench decision of the Madras High Court held that the words “principal sum adjudged” (within the meaning of Section 34 of the Code of Civil Procedure) is the amount found due as on the date of the suit.13
In addition to analysing the various judgments of various High Courts with conflicting views, the Supreme Court also referred to principles of interpretation of statutes to interpret the intention of the legislature14 in using the phrases and observed as follows:
- …We are, therefore, of the opinion that the expression “the principal sum adjudged” may include the amount of interest, charged on periodical rests, and capitalised with the principal sum actually advanced, so as to become an amalgam of principal in such cases where it is permissible or obligatory for the court to hold so. Where the principal sum (on the date of suit) has been so adjudged, the same shall be treated as “principal sum” for the purpose of “such principal sum” — the expression employed later in Section 34 CPC. The expression “principal sum” cannot be given different meanings at different places in the language of same section i.e. Section 34 CPC.15
Therefore, the Supreme Court in the Central Bank case16 expounded the meaning to be ascribed to the phrases used in Section 34 of the Code of Civil Procedure, 1908 after detailed discussion and analysis. The judgment in Central Bank case17 has been relied upon by the Supreme Court in various other cases, both in context of the Code of Civil Procedure, 1908 as also in context of other substantive debt laws, thus making it a judgment possessing strong precedentiary value. For instance (a) in Union of India v. Assn. of Unified Telecom Service Providers of India18 in the context of levy of compound interest and penal interest arising out of stipulation in a contract for grant of licence to the telecom service providers19; (b) in Tamil Nadu Generation and Distribution Corpn. Ltd. v. PPN Power Generating Co. (P) Ltd.20 while considering payment of compound interest under the power purchase agreement; and (c) in Punjab and Sind Bank v. Allied Beverage Co. (P) Ltd.21 while deciding an issue pertaining to reduction of rate of interest from the contractual rate by the High Court on the amount decreed to be paid to the Bank; the Supreme Court applied the principles laid down in Central Bank case22.
However, when the Supreme Court was faced with an issue involving the interpretation of the provisions of Section 31(7) of the Arbitration and Conciliation Act, 1996 in Hyder Consulting case23, it is most respectfully submitted that the majority fallaciously refused to follow the decision in Central Bank case24.
Begging the question
S.A. Bobde, J. (as His Lordships then was) being one of the two Judges holding the majority view in his judgment and speaking for the majority observed that as Central Bank case25 arose under Section 34 of the Code of Civil Procedure, 1908 it cannot be treated as an authority relating to questions of award of interest under Section 31(7) of the Arbitration and Conciliation Act, 1996.26 Therefore, it may be pertinent to note that the Supreme Court speaking through S.A. Bobde, J. sought to distinguish the decision in Central Bank case27 for the mere reason that the decision was rendered in the context of Section 34 of the Code of Civil Procedure, 1908. However, it may also be pertinent to note that, while arriving at the conclusion in Hyder Consulting case, it has been observed:
- At this juncture, it may be useful to refer to Section 34 CPC, also enacted by Parliament and conferring the same power upon a court to award interest on an award i.e. post-award interest. While enacting Section 34 CPC, Parliament conferred power on a court to order interest “on the principal sum adjudged” and not on merely the “sum” as provided in the Arbitration Act. (emphasis in original) The departure from the language of Section 34 CPC in Section 31(7) of the 1996 Act is significant and shows the intention of Parliament.28
And further, the following conclusion has been arrived at:
- 12. … In the Arbitration Act, the word “sum” has deliberately not been qualified by using the word “principal” before it. If it had been so used, there would have been no scope for the contention that the word “sum” may include “interest.” In Section 31(7) of the Act, Parliament has deliberately used the word “sum” to refer to the aggregate of the amounts that may be directed to be paid by the Arbitral Tribunal and not merely the “principal” sum without interest.29
Judicial comity demands that a binding decision to which attention has been drawn should neither be ignored nor overlooked.30 Whilst drawing an analogy with Section 34 of the Code of the Civil Procedure, 1908, the Supreme Court in Hyder Consulting case31, ignored the decision of its Constitutional Bench in Central Bank case32 wherein a particular meaning to the phrases “the principal sum adjudged” and “such principal sum” occurring in Section 34 of the Code of Civil Procedure, 1908 was ascribed; and further, observed that the language of Section 31(7) of the Arbitration and Conciliation Act, 1996 is plain and unambiguous33; and therefore the intention of the legislature is expressed in plain language34 which needed to be given effect to. The test of plain meaning interpretation was applied based on the aforesaid analogy and thus formed the basis of the reasons of the majority view in Hyder Consulting case35. After having held that the ratio of Central Bank case36 was inapplicable to Hyder Consulting case37 due to the reason that Central Bank case38 was based on Section 34 of the Code of Civil Procedure, 1908 and not on Section 31 of the Arbitration and Conciliation Act, 1996; it is humbly submitted that it was erroneous either to refer to or draw any analogy with Section 34 of the Code of Civil Procedure, 1908, and in the same breath to set out reasons for differently interpreting the word “sum” occurring in Section 31 of the Arbitration and Conciliation Act, 1996 and interpreting it the way it has been interpreted in Hyder Consulting39 judgment. In order to interpret the word “sum” in Section 31 of the Arbitration and Conciliation Act, 1996, the Court ought not have interpreted the word “principal sum adjudged” in Section 34 of the Code of Civil Procedure, 1908 to understand the intention of Parliament and whilst completely disregarding the ratio of Central Bank case40.
In the author’s humble opinion, the observations made by S.A. Bobde, J. in paras 11 and 12 of Hyder Consulting case41 stand in teeth of the judgment in Central Bank case42 decided by a Constitutional Bench. Nevertheless, the aforesaid findings form an integral part of the reasoning of the judgment of a Judge forming part of a majority 2:1 decision.
Just an obiter?
Obiter dicta is more or less presumably unnecessary to the decision.43 In Hyder Consulting case44 the Supreme Court was dealing with the question pertaining to power of arbitrator under Section 31(7) of the Arbitration and Conciliation Act, 1996. Therefore, it may be well said that the observations of the Supreme Court speaking through S. A. Bobde, J. whilst drawing an analogy with Section 34 of the Code of Civil Procedure, 1908 in paras 11 and 12 was obiter dictum of the Supreme Court.
Judicial propriety, dignity and decorum demand that being the highest Judicial Tribunal in the country even obiter dictum of the Supreme Court should be accepted as binding.45 The Supreme Court in Oriental Insurance Co. Ltd. v. Meena Variyal,46 has observed on the pertinence and force of obiter dicta of the Supreme Court in the following words:
- … An obiter dictum of this Court may be binding only on the High Courts in the absence of a direct pronouncement on that question elsewhere by this Court. But as far as this Court is concerned, though not binding, it does have clear persuasive authority.47
Therefore, even the observations made by the Supreme Court being at the least obiter dicta, would require to be followed by various High Courts and would have a persuasive value in subsequent matters before the Supreme Court.
In the author’s humble opinion while the conclusion arrived at in Hyder Consulting case48 is desirable, the reason for arriving at the conclusion is a non sequitur. The very analogy based on the basis of which the literal rule test49 has been applied to interpret Section 31(7) of the Arbitration and Conciliation Act, 1996 is fallacious.
Pertinently, the Supreme Court in Hyder Consulting case50 through S.A. Bobde, J. overruled51 its previous decision in State of Haryana v. S.L. Arora and Co.52 (S.L. Arora case) wherein the Supreme Court had held that in the absence of a contract between the parties, the Arbitral Tribunal cannot award interest upon interest either for pre-award or post-award period.53 So to say the Supreme Court through S.A. Bobde, J. distinguished an earlier decision rendered by the Constitutional Bench in Central Bank case54 and overruled a Division Bench judgment in S.L. Arora case55 in the course of 21 paras in Hyder Consulting case56. As a result of the abovementioned fallacy in the reasoning of the majority in Hyder Consulting case57, the Supreme Court arrived at a conclusion in a matter having far-reaching consequences in respect of arbitration awards, particularly regarding interest awardable thereon, by erroneously looking through the Constitutional Bench decision in Central Bank case58. One can only express hope that a larger Bench of the Supreme Court would sometime in the near future have an opportunity to decide on the issues involved therein and iron out the creases.
[The author is grateful to Dr. Rahela Khorakiwala (Senior Resident Fellow at Vidhi Centre for Legal Policy), Mr. Murtuza Federal (Partner at Federal and Company), and Mr. Sougat Pati (Advocate at Federal and Company) for their valuable inputs and suggestions for this article. All opinions on the subject matter are personal and errors, if any, are attributable to me.]
15 Ibid para 44.
19 Id., para 196.
34 Ibid, para 21.
47 Ibid at p. 444
49 While interpreting S. 31(7) of the Arbitration and Conciliation Act, 1996 in Hyder Consulting case, the Supreme Court referred to various judgments on literal rule of interpretation of statutes.