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Award of Interest in Decree

In this article the author intends to have a detailed discussion on the award of interest and division of interest as provided under section 34 of the code. "There is no definition of "interest" in the Code. It could refer to "a fee paid to borrow money for usage."

If the decree calls for the payment of money, the court may provide interest on the "principal sum awarded" at any rate it deems appropriate. The individual who has been denied the opportunity to utilise the money to which he was entitled is therefore entitled to compensation under the law, and it emphasises the many circumstances under which various sorts of awards may be made by the courts.
  • Interest prior to filing of suit
  • Interest pendente lite, i.e., from the date of the suit to the date of the decree.
  • Interest from the date of decree till the payment.

Interest meaning a compensation allowed by the law to the person who has been prevented to use the money which he has been entitled to.

Then the author would also discuss about the different situations in which the court can award Interest i.e.
  • When provided under statute
  • When there is an agreement between the parties.[1]
  • Customs and usages of business allow interest.[2]

The author then shifts the emphasis to the courts' discretion in awarding interest, and with the aid of pertinent case laws, also discusses the interest threshold level. The rate of interest is up to the court's discretion, as it was in the case of TVC Sky Shop Ltd v. Reliance Communication & Infrastructure Ltd.

Unless there are compelling grounds to deviate from it, the court will often uphold a party's agreement and award interest as agreed upon.[3] Then the situation in which the compound interest may be awarded will also be discussed.

Scope of the Section
Only in cases where the decree calls for the payment of "money," does this clause apply. As used in this section, the phrase "decree for the payment of money" encompasses a claim for unliquidated damages. Where a mortgage or charge enforcement decree is in place, this clause is not applicable. Interest given under this provision cannot be compared to mesne profit[4]

Section 34 contemplates interest payable

  • From the date of the institution of the suit to the date of decree; and
  • Date of decree to the date of realisation.[5]

Exceptional Situations:
  • An illiterate lady sued and got a decree for cancellation of a sale deed on the ground of fraud. It was held that the defendant cannot claim interest on the money advanced.[6]
  • Interest can't be allowed by way of damages for breach of contract.[7]

The three divisions of Interest

According to the time period for which it is permitted, interest that may be awarded to a plaintiff in a lawsuit for money may be divided into three categories:
  1. interest accrued prior to the filing of the lawsuit on the principal sum allowed, i.e. adjudged (as opposed to the principal sum claimed);
  2. additional interest on the principal amount awarded from the filing date of the lawsuit until the date of the decree, "at such rate as the court deems reasonable";
  3. additional interest on the principal amount awarded from the filing date of the decree until the date of payment or until such earlier date as the court deems appropriate, at a rate not to exceed 6% per year.
"Interest Prior to the Date of Suit - In accordance with section 34 of the Code, no interest rate has been set for the interest due on the principal amount adjudged prior to the institution of the suit and the interest due on the principal amount from the date of the suit to the date of the decree. Six percent interest has only been set in relation to additional interest due on the principal amount awarded from the decree's date until the payment."[8]

Interest may be granted in accordance with the law, a contract between the parties, or established use and custom. The plaintiff will not be able to recover the interest from the defendant if the claim does not fit into one of these categories.[9]

Sub- Heads of pre-suit interest:
  • Where there is a stipulation for payment of interest at a fixed rate.
  • Where there is no such stipulation.
  • Stipulation to Pay Interest:
    If interest payment terms have been agreed upon, the court must honour those terms through the date of the lawsuit, no matter how high they may be, with the following two exceptions:
    1. if the interest rate is penal, the court may award interest at such rate as it deems reasonable;
    2. even if the interest rate is not penal, the court may reduce it if the interest is excessive and the transaction was materially unfair.
    The courts may step in if the circumstance qualifies for an exception, but they must always treat the parties' agreement as sacred and with the highest respect.[10]
     
  • No stipulation to pay Interest:
    The plaintiff is not entitled to interest if there is no prior understanding between the parties on the payment of interest, with the exception of the following circumstances:
    • Mercantile Usages:
      When it is permitted by commercial usages, but such usages must be contended and shown.
    • Statutory right to interest:
      Interest is paid when a legislation grants a right to it or authorises its permission or payment. Under section 61(2)(a) of the Sale of Goods Act of 1930, the vendor is entitled to interest from the date of payment of the price to the date of the suit, even if the contract stipulates no interest to be paid.
    • Implied Agreement:
      From the course of the parties' dealings, it is possible to infer an agreement to pay interest. The Supreme Court summarised the law in Mahavir Prasad v. Durga Dutto.[11]
    Under an agreement, a custom of trade, a legislative provision, or the Interest Act, interest for a time anterior to the start of the suit may be claimed for a certain amount if notice is given. Courts of equity may also award interest in certain circumstances.

    In the case of Bengal Nagpur Railway Co. Ratanji Ramji it was held that interest cannot be given by way of damages for detention of a debt.
     
  • Interest from the date of the suit till the date of the decree:
    In the case of Mangni Ram V. Dhowat Roy the court held that the court has discretion over the rate of interest from the filing date of the lawsuit until the date of the decree, and this power is not excluded even if the interest for the aforementioned contract has been specified as due till realisation.[12].

    Although the court has discretion over the rate of interest during the aforementioned period, it is best practise to award interest at the agreed-upon rate, unless doing so would be unfair.[13] Up until its nature is changed into a decretal obligation, a debt advanced against a negotiable instrument is controlled by the Negotiable Instruments Act, 1881.

    In light of the above, section 79 of the Negotiable Instruments Act of 1881 rather than this section would regulate interest for the period between the date of the suit and the decree. Concerning compound interest and the situations stated below. Even when interest is not directly requested in the plaint, the court may award interest in a money dispute under this heading.

Interest from the date of decree to the date of payment:

Discretion of Courts
According to section 34 of the law, In the case of State of Bihar V. Mijaj International it was reiterated that the court has a great deal of discretion when it comes to ordering interest on the main sum adjudicated. It may order interest to be paid from the date of the action until the date of payment at whatever rate the court considers appropriate.

The court has the option to award interest.[14].

The clause was amended in 1976, changing clause 2 to read:
"In case of pendente lite, the interest ordinarily does not exceed 6 percent cap, but in case of commercial transaction, it may exceed the rate of 6 percent per annum, but it may not exceed the contractual rate or in case of absence of any contractual agreement between the parties, the interest may not exceed 6 percent per annum" (the rate at which they lend the money in cases of commercial transactions)

The aforementioned clause does not, however, suggest or state that the court must automatically give interest at the agreed-upon rate from the date of the lawsuit until the date of the decree or from the date of the decree until payment of it. Union Bank of India V. Chhatarpur Siliment Sales Corporation [15]

But it's extremely intriguing to notice that there have been numerous occasions when the court has allowed a far greater rate of interest than what is specified in section 34, and it has occasionally gone over the maximum rate of interest for Nationalized Banks.

In the case of Alok Shankar Pandey V. Union of India, involving the return of instalments paid by the intended buyer for the purchase of a flat, the Supreme Court determined that since the interest had not been granted to the party along with the principal amount, he would also be entitled to interest at the same rate that had previously been denied to him. It was noted that this was the way things were being arranged because interest is neither a fine or a punishment but rather a natural component of capital.[16]

In the case of Rakesh Kumar Jain V. State of U.P, The Supreme Court ordered the payment of interest at the rate of 18% per year when the Development Authority issued an assurance to pay compensation to landowners within two months in a case where an injunction was requested against forceful eviction by the Development Authority. It was noted that the landowners were not permitted to spend their money profitably.[17]

In the case of O. Sreenivasulu V. P. Santhi, A matter that must be pled and resolved by the court in the actual lawsuit is the payment of interest on an amount claimed by the plaintiff or a sum that the court has determined is payable. If, despite the fact that it has been pled, the Court has not determined that any interest is payable on the principle amount or has refused to issue the interest, then, in execution.[18]

Compound Interest
The court has the authority to permit compound interest beginning on the date the lawsuit was instituted. The Bombay High Court granted compound interest starting on the date of suit in cases where compound interest was charged during the course of the parties' transactions. It is very evident from reading the draught lease agreement that the parties exchanged and other communications that there is absolutely no provision for compound interest to be charged on loan advances or in the event that any installment is late.

Consequently, it follows that compound interest could never be recouped. The customers were medicine manufacturing businesses, and the government regulated the price of medications. In a contract to provide gas, whose price was increased by ONGC, the purchaser demanded a reduction in supply and filed allegations based on force majure. According to these circumstances, it was decided that simple interest, rather than compound interest, would be due.

Conclusion:
After going through the provisions of the code and by analyzing various judgments the author is of the view that the provision in the section 34 of the code are very wide and discretionary and it provides a vide discretionary powers to the courts in deciding the interest on a particular sum adjudged as discussed above that there are numerous stances in which the court has granted an interest rate which is much higher than 6%, it is sometimes as higher as 18 % also, the court also in some special circumstances awards compound interest as discussed above on the principle sum adjudged. In the appropriate context, a writ court may grant interest as part of its authority under Articles 32, 226, 227, and 136 of the Constitution.

End-Notes:
  1. Union of India V. Watkins Mayor & Co. AIR 1966 SC 275
  2. State of India V. B Gupta Tea Limited, AIR 1987, Cal 64(DB)
  3. (2013) 11 SCC 754
  4. Dwarkanath V. Debendra, 1906 ILR 33 Cal 1232
  5. Government of Andhra Pradesh V. Gammon India Limited Bombay, AIR 1984 Andh Pra 230
  6. Siya Ram V. Lilawati, 1990 ILR All 75
  7. Andard Mount (London) Ltd. V. Creswell (India) Ltd., AIR 1985 Del 45
  8. APSRTC V. B. Vijaya, AIR 2002 A.P 441 (FB)
  9. New India Assurance Ltd. V. Chinar Goods Carrier. AIR 1998 Del 392
  10. K. Pushpangadan V. Federal Bank Ltd., AIR 1999 Ker 421 (DB)
  11. AIR 1961 SC 990
  12. Mangni Ram V. Dhowat Roy, 1886 ILR 12 Cal 569
  13. Orde V. Skinner, 1880 ILR 3 All 91
  14. State of Bihar V. Mijaj International, AIR 2004 Jhar 29.
  15. Union Bank of India V. Chhatarpur Siliment Sales Corporation., AIR 2002 MP 145
  16. Alok Shankar Pandey V. Union of India, AIR 2007 SC 1198
  17. Rakesh Kumar Jain V. State of U.P., AIR 2007 SC 917
  18. O. Sreenivasulu V. P. Santhi, AIR 2007 AP 115

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