Re-examining Balasamy: Why Courts Should Retain Discretion to Modify Pendente Lite Interest
Background
The Supreme Court’s recent judgment in Gayatri Balasamy v. Novasoft Technologies has laid down the criteria for modification of arbitral awards by the courts. While the judgment has been criticised as reducing the finality of the decisions of the arbitral tribunal, and giving courts excessive power, this article takes a different approach. The article argues that the Court erred not by allowing for judicial modification of an arbitral award in certain circumstances, but by disallowing judicial modification of interest pendente lite.
The majority judgment has elaborated on the post award interest and created an unjustified distinction. The Court held that the pendente lite interest i.e., interest an arbitrator awards for the period while the arbitration case is actually happening until the final award cannot be modified under Section 34 of the Arbitration and Conciliation Act, 1996 (“the Arbitration Act”. Paradoxically, the judgment maintains that post-award interest remains subject to such judicial adjustments. This specific bifurcation of interest types lacks a clear reasoned basis in the judgment, and the Court notably failed to reconcile this new stance with a long line of settled legal precedents. Historically, courts have frequently stepped in to recalibrate pendente lite interest rates to uphold the fundamental principles of equity and fairness in commercial disputes.
This article critically examines the Balasamy judgment, highlighting its inconsistencies with statutory interpretation, judicial precedents, and the fundamental principles of compensatory justice. It argues that courts must retain the power to modify pendente lite interest to uphold the principle of justice.
Legal Framework on Interest in Arbitration
Section 31(7) of the Arbitration Act empowers arbitral tribunals to award interest at various stages of proceedings. Judicial interpretation has firmly established that arbitrators possess the authority to award pre-reference interest, pendente lite interest, and post-award interest under this provision. Under the legal framework of Section 31(7)(a), the law places pre-reference interest and pendente lite interest on equal footing, establishing no meaningful distinction in how these two phases are handled. Hence, unless the parties have specifically prohibited it in their contract, the arbitral tribunal maintains the discretionary authority to grant interest for both periods. This flexibility diverges significantly from the mandate for post-award interest found in Section 31(7)(b), which carries a predetermined statutory rate, while pendente lite interest remains adaptable to the circumstances of each case.
However, the Balasamy judgment creates an arbitrary dichotomy by allowing modification of post-award interest but not pendente lite interest, despite both being components of the same arbitral award. This distinction lacks a statutory basis and ignores the compensatory nature of pendente lite interest, which is meant to reimburse a party for the time value of money lost during litigation. If post-award interest, which is statutorily fixed, can be modified, there is no reason why pendente lite interest, which is discretionary, should be immune from judicial reconsideration.
Precedents supporting the modification of Pendente Lite Interest
Contrary to the restrictive approach in Balasamy, Indian courts have consistently recognized the need to modify pendente lite interest in appropriate cases. For instance, in Krishna Bhagya Jala Nigam Ltd v G Harishchandra Reddy & Ors., the Supreme Courtreduced the pendente lite interest from 18% to 9% recognizing the impact of economic reforms and the consequent decline in interest rates across the country. Similarly, the Madhya Pradesh High Court in M/s Machines India v Chief Engineer, Jabalpur Zonereduced interest from 15% to 9% for the same reason, demonstrating that courts have historically adjusted pendente lite interest where the arbitral tribunal has awarded excessive pendente lite interest. Such instances where the pendente lite interest has been awarded at exorbitant rates are common in the Indian arbitration landscape.
More recently, in Executive Engineer (R and B) and Ors v. Gokul Chandra Kanungo, the Supreme Court invoked its plenary powers under Article 142 to reduce the pendente lite interest to 9% noting that the claimant’s procedural delays had contributed to the prolonged litigation. Likewise, in Ferro Concrete Construction v. State of Rajasthan, the Supreme Courtreduced the interest rate considering the lengthy litigation period and the substantial payments already made by the respondent. These cases illustrate that courts have routinely intervened to modify pendente lite interest in the interest of equity, Balasamy fails to provide an alternate remedy in such situations, leaving the parties helpless before a clearly exorbitant interest rate.
The Way Forward: Why Courts Must Retain Discretion to Modify Pendente Lite Interest
The very foundation of pendente lite interest lies in the principle of compensatory justice, designed to make whole a party who has been deprived of the use of their money during the protracted litigation process. This equitable mechanism serves as financial recompense for the time value of money lost between the accrual of the claim and its ultimate resolution. Section 34 of the Arbitration Act provides courts with the necessary authority to modify or set aside arbitral awards that are found to be “patently illegal” or “in conflict with public policy.” When applied to cases where excessive pendente lite interest rates result in awards that are manifestly unjust or unconscionable, this provision should logically empower courts to intervene and rectify such inequitable outcomes.
The artificial dichotomy created by the judgment between pendente lite interest and post-award interest stands in direct contradiction to the remedial purpose underlying the Arbitration Act. This distinction lacks substantive justification, particularly when considering that both forms of interest serve the same fundamental compensatory function, albeit for different temporal periods of the dispute resolution process. The Supreme Court’s earlier ruling in Rajendra Prasad Gupta v. Prakash Chandra Mishra established the significant legal principle that in the absence of explicit statutory prohibition, all procedural avenues should be deemed permissible. This interpretative approach stems from the fundamental legal maxim that prohibitions cannot be presumed where none have been expressly legislated.
Applying this reasoning to the present context, since the Arbitration Act contains no express bar against the modification of pendente lite interest, the Court in Balasamy erred in imposing such a restriction. The decision fails to account for the numerous instances where courts have rightfully intervened to adjust interest rates to align with contemporary economic realities and principles of equity. A more balanced approach would recognize that the power to modify pendente lite interest is inherent in the court’s supervisory jurisdiction under Section 34, particularly when such modification serves to prevent outcomes that would be contrary to substantive justice. The Arbitration Act’s silence on this specific issue should not be construed as a limitation, but rather as preserving judicial discretion to ensure that arbitral awards remain fair and equitable in their entirety, including their interest components, just as the silence has been interpreted to allow for modification of post-award interest.
Conclusion
The Gayatri Balasamy decision, though intended to protect the finality of arbitral awards, it risks institutionalising financial inequity. By insulating pendente lite interest from judicial review while leaving post-award interest open to modification, the Court has created a legal paradox that lacks both statutory backing and economic logic. Interest is not merely a mathematical add-on; it is a tool of justice meant to compensate, not to provide a windfall or impose a penalty.
The law must remain flexible enough to account for shifting economic realities and procedural delays. If the judiciary loses the power to act upon exorbitant interest rates accrued during litigation, the “compensatory” nature of arbitration risks becoming punitive. To ensure that the Arbitration Act remains a vehicle for fair resolution, the power to modify pendente lite interest must be restored, affirming that finality should never come at the cost of substantive justice.
*Vanshika is a 4th year student from NALSAR University of Law, Hyderabad.