Executing Court Cannot Add Interest on Capital Expenditure If Arbitral Award Is Silent: MP High Court

The Madhya Pradesh High Court has held that courts enforcing arbitration awards cannot add interest on capital expenditure by default when the arbitral award is silent and there is no delay in payment.

It also ruled that courts enforcing arbitration awards cannot redo the electricity pricing formula used to calculate payments to power distributors once an arbitral award has become final.

A Division Bench of Justice Vivek Rusia and Justice Pradeep Mittal said an executing court has a limited role.

“The controversy is about entitlement to get an amount of interest under Section 31(7)(b) of the A&C Act, 1996, by the Executing court, as the Award is silent about it. It is correct that the said section mandates imposition of interest @ of 18% (now 2%) on a sum directed to be paid by an arbitration award unless the award otherwise directs carry interest at some other rate. Admittedly, the learned Arbitral Tribunal had not awarded any interest on this CAPEX amount, and even the Tender Document nowhere provides reimbursement of CAPEX with interest” the court observed.

"Hence, the rate calculated by Deepak Kumar Soni and Associates submitted vide its report dated 26.03.2024 to the Managing Director of the Electricity Company, is liable to be accepted as the input rate difference amount of Rs. 2,92,67,252/-, not the calculation submitted by the C.A. appointed by the decree holder Jain Gupta and Associates", it added. 

The pricing formula in question is the Input Rate Formula, or IRF. It is used in electricity distribution contracts to fix the rate at which power is supplied to a private distributor. When consumer tariffs are revised by the regulator, IRF adjusts the input cost by factoring in changes across domestic, agricultural, commercial, and industrial users.

The case involved Shyam Indus Power Solutions, which entered into a 2007 agreement with the state-run Madhya Pradesh Madhya Kshetra Vidyut Vitaran Company to distribute electricity in parts of Bhopal. Disputes arose over how IRF was applied and how Capital Expenditure, or CAPEX, meaning long-term investment in infrastructure such as cables and equipment, was to be reimbursed.

The dispute went to arbitration. In 2012, the arbitral tribunal ruled in favour of Shyam Indus. It upheld the IRF contained in the tender documents and rejected the formula relied on by the power company. It also held that Shyam Indus was entitled to CAPEX reimbursement under the tender terms but did not award any interest on that amount. The award later became final.

During execution proceedings, Shyam Indus asked the court to recalculate IRF and grant post-award interest on CAPEX. The High Court rejected both. On interest, the court said post-award interest is meant to ensure prompt payment and cannot be granted where there is no delay.

“There was no delay on the part of the MPMKVVCL/Judgment Debtor to make a payment of the CAPEX amount; hence, the question of grant of interest on this amount does not arise,” the court said.

The court directed the executing court to calculate the dues strictly as per the arbitral award, without reopening its merits.