Can Courts Award Interest on Equitable Grounds?

Jojy George Koduvath.

Abstract of this Blog:

The Supreme Court, in the significant decision, Dushyant N. Dalal v. Securities and Exchange Board of India, AIR 2018 SC 447; 2017-9 SCC 660, it is held that the Interest Act of 1978 enables the courts and tribunals to award interest ‘in equity’. The Apex Court upheld the view that the words ‘other rule of law or usage having the force of law‘, in Sec. 4 (1) of the Interest Act, 1978, would justify payment of interest, in proper cases, ‘in equity’.

When courts award interest.

In Life Insurance Corporation of India v. S. Sindhu, AIR 2006 SC 2366 : (2006) 5 SCC 258 it is held that interest prior to the date of suit (as contrasted to pendente-lite interest and future interest) is awarded where:

(a) the contract provides;
(b) the statute applicable to the transaction, provides for; or
(c) as per the provisions of the Interest Act, 1978.

Interest Act, 1839 and interest ‘payable by law’ under ‘equity’

Proviso to Section 1 of the Interest Act, 1839 reads as under:

“Provided that interest shall be payable in all cases in which it is now payable by law.”

It was uniformy held that interest was ‘payable by law’ under that Act in ‘equity’. (Bengal Nagpur Railway Co. Ltd. vs. Rultanji Ramji, AIR 1938 PC 67; Satinder Singh v. Umrao Singh, AIR 1961 SC 908; Hirachand Kothari v. State of Rajasthan, 1985 Supp SCC 17.) In Trojan and Co. v. Nagappa Chettiar, 1953 SCR 789, the Supreme Court observed that it was well settled that interest could be allowed by a Court of equity where money was obtained or retained by fraud.

Earlier view: Interest Act, 1978 did not Canvas Interest on Equitable Grounds

In Life Insurance Corporation of India v. S. Sindhu, AIR 2006 SC 2366 : (2006) 5 SCC 258 it is pointed out that the Interest Act, 1978 made a significant departure from the old Interest Act of 1839. It is pointed out that the present Act does not contain the following provision contained in the proviso to section (1) of the old Act:

“Interest shall be payable in all cases in which it is now payable by law”.

Sections 3, 4 and 5 of the Interest Act, 1978 read as follows

3. Power of court to allow Interest.-
(1) In any proceeding for the recovery of any debt or damage or in any proceedings in which a claim for interest in respect of any debt or damages already paid is made, the court may, if it thinks fit, allow interest to the person entitled to the debt or damages or to the person making such claim, as the case may be, at a rate not exceeding the current rate of interest, for the whole or part of the following period, that is to say ;-
- (a) If the proceedings relate to a debt payable by virtue of a written instrument at a certain time, then, from the date when the debt is payable to the date of institution of the proceedings;
- (b) if the proceedings do not relate to any such debt, then, from the date mentioned in this regard in a written notice given by the person entitled or the person making the claim to the person liable that interest will be claimed to the date of institution of the proceedings:
  - Provided that where the amount of the debt or damages has been repaid before the institution of the proceedings, interest shall not be allowed under this section for the period after such repayment.
(2) Where in any such proceedings as are mentioned in sub-section (1),:—
- (a) judgment, order or award is given for a sum which, apart from interest on damages, exceeds four thousand rupees, and
- (b) the sum represents or includes damages in respect of personal injuries to the plaintiff or any other person or in respect of a person’s death, then, the power conferred by that sub-section shall be exercised so as to include in that sum interest on those damages or on such part of them as the court considers appropriate for the whole or part of the period from the date mentioned in the notice to the date of institution of the proceedings, unless the court is satisfied that there are special reasons why no interest should be given in respect of those damages.
(3) Nothing in this Section,—
- (a) shall apply in relation to—
  - (i) any debt or damages upon which interest is payable as of right, by virtue of any agreement; or
  - (ii) any debt or damages upon which payment of interest is barred, by virtue of an express agreement;
- (b) shall affect—
  - (i) the compensation recoverable for the dishonour of a bill of exchange, promissory note or cheque, as defined in the Negotiable instrument Act, 1881 (26 of 1881); or
  - (ii) the provisions of rule 2 of Order II of the First Schedule to the Code of Civil Procedure, 1908 (5 of 1908);
- (c) shall empower to court to award interest upon interest.
4. Interest payable under certain enactments.—
(1) Notwithstanding anything contained in section 3, interest shall be payable in all cases in which it is payable by virtue of any enactment or other rule of law or usage having the force of law.
(2) Notwithstanding as aforesaid, and without prejudice to the generality of the provisions of sub-section (1), the court shall, in each of the following cases, allow interest from the date specified below to the date of institution of the proceedings at such rate as the court may consider reasonable, unless the Court is satisfied that there are special reasons why interest should not be allowed, namely:-
- (a) where money or other property has been deposited as security for the performance of any obligation imposed by law or contract, from the date of the deposit;
- (b) where the obligation to pay money or restore any property arises by virtue of a fiduciary relationship, from the date of the cause of action;
- (c) where money or other property is obtained or retained by fraud, from the date of the cause of action;
- (d) where the claim is for dower or maintenance, from the date of the cause of action.
5. Section 34 of the Code of Civil Procedure, 1908 to apply.—Nothing in this Act shall affect the provisions of section 34 of the Code of Civil Procedure, 1908 (5 of 1908).”

Claim of Interest under Interest Act, 1978 – equity and common law principles

In Ferro Alloys Corporation Limited v. AP State Electricity Board, AIR 1993 SC 2005, the Supreme Court examined whether interest could be claimed on the basis of the Interest Act, 1978, equity or common law on deposits made with the Electricity Board. The Apex Court observed as under:

“128. If this be the position, could interest be claimed either on equity or common law? The argument on behalf of the consumers is, if money belonging to any person is used by someone else he is obliged to pay interest for the period of its user. Halsbury, Volume 32 (page 53, para 106) defines “interest” as
- “the return or compensation for the use or retention by one person of a sum of money belonging or owed to another….
129. Strictly speaking, the word “interest” would apply only to cases where there is a relationship of debtor and creditor. A lender of money who allows the borrower to use certain funds deprives himself of the use of those funds. He does so because he charges interest which may be described as a kind of rent for the use of the funds. For example, a bank or a lender lending out money on payment of interest. In this case, as already noted, there is no relationship of debtor and creditor.
130. We may now refer to Halsbury, 4th Edn., Vol. 32, para 108:
“108. When interest is payable at common law.”
- At common law interest is payable
  - (1) where there is an express agreement to pay interest;
  - (2) where an agreement to pay interest can be implied from the course of dealing between the parties or from the nature of the transaction or a custom or usage of the trade or profession concerned;
  - (3) in certain cases by way of damages for breach of a contract (other than a contract merely to pay money) where the contract, if performed, would to the knowledge of the parties have entitled the plaintiff to receive interest. Except in the cases mentioned, debts do not carry interest at common law.”
Consumption security deposit does not fall under any of the categories mentioned above. Para 109 says:
- “Equitable right to interest.” In equity interest may be recovered in certain cases where a particular relationship exists between the creditor and the debtor, such as mortgagor and mortgagee, obligor and obligee on a bond, personal representative and beneficiary, principal and surety, vendor and purchaser, principal and agent, solicitor and client, trustee and beneficiary, or where the debtor is in a fiduciary position to the creditor. Interest is also allowed on pecuniary legacies not paid within a certain time, on the dissolution of a partnership, on the arrears of an annuity where there has been misconduct or improper delay in payment, or in the case of money obtained or retained by fraud. It may also be allowed where the defendant ought to have done something which would have entitled the plaintiff to interest at common law, or has wrongfully prevented the plaintiff from doing something which would have so entitled him.”
131. Even a case of wrongful detention of money cannot arise. In Bengal Nagpur Railway v. Ruttanji Ramji the question arose whether interest was payable on damages on account of wrongful detention of money. It was held: (IA pp. 71- 72)
- “The Interest Act, however, contains a proviso that “interest shall be payable in all cases in which it is now payable by law”. This proviso applies to cases in which the Court of equity exercises jurisdiction to allow interest. As observed by Lord Tomlin in Maine and New Brunswick Electrical Power Co. Ltd. v. Alice M. Hart: “In order to invoke a rule of equity, it is necessary in the first instance to establish the existence of a state of circumstances which attracts the equitable jurisdiction, as for example, non-performance of a contract of which equity can give specific performance.” The present case does not however attract the equitable jurisdiction of the Court and cannot come within the purview of the proviso.”

In H.P. State Financial Corporation, Shimla v. Prem Nath Nanda, (2000) 8 SCC 528, the Supreme Court rejected claim for interest on the ground that there was no statutory provision or agreement to pay interest. However, the Court noticed that in appropriate cases interest may be awarded in lieu of compensation or damages for wrongly retaining a amount payable to a party. For this, the Supreme Court relied upon Satinder Singh v. Umraon Singh, AIR 1961 SC 908 and Laxmichand v. Indore Improvement Trust, (1975) 1 SCC 565.

In Soviltorg (India) Ltd. v. State Bank of India, (1999) 6 SCC 406, the Delhi High Court observed as under:

“6. Relying upon the province of Section 34 of the Civil Procedure Code, the learned counsel for the appellant submitted that the appellant was entitled to the payment of interest at the rate at which moneys are lent or advanced by Nationalised Banks in relation to commercial transactions. Referring to IA No. 2 filed in this Court and Banking Law and Practice in India issued in 1991, she had contended that the appellant was entitled to the payment of interest minimum at the rate of 19.4 per cent per annum. The general submission made in this behalf cannot be accepted in view of the provision of Section 14 of the Act. There was no contract between the parties regarding payment of interest on delayed deposit or on account of delay on the part of the opposite party to render the services. Interest cannot be claimed under Section 34 of the Civil Procedure Code as its provisions have not been specifically made applicable to the proceedings under the Act. We, however, find that the general provision of Section 34 being based upon justice, equity and good conscience would authorise the Redressal Forums and Commissions to also grant interest appropriately under the circumstance of each case. Interest may also be awarded in lieu of compensation or damages in appropriate cases. The interest can also be awarded on equitable grounds…”

All these decisions are referred to in Ritu Sengupta v. Municipal Corporation of Delhi, 2008-152 DLT 68; 2008-106 DRJ 54; ILR 2009-1 Del 586.

SIGNIFICANT CHANGE IN LAW By AIR 2018 SC 447; 2017-9 SCC 660

“Other rule of law .. having the force of law” canvases ‘equity’

Section 4(1) of the Interest Act, 1978 provides that notwithstanding anything contained in section 3, interest shall be payable in all cases in which it is payable by virtue of any enactment or other rule of law or usage having the force of law.

In Dushyant N. Dalal v. Securities and Exchange Board of India, AIR 2018 SC 447; 2017-9 SCC 660, the Apex Court upheld the decision of the Bombay High Court in Prabhavati Ramgarib B. v. Divisional Railway Manager, (2010) 4 Mah LJ 691. The Bombay High Court held as under:

“35. The petitioner’s claim for interest would fall within the ambit of the words “or other rule of law“ in section 4(1). The other rule of law being on grounds of equity. Even under the Interest Act, 1839, interest was payable under the proviso to section 1 which reads: “Provided that interest shall be payable in all cases in which it is now payable by law.” Interest was payable by law under that Act in equity. This was recognized in a series of judgments. For instance in Trojan and Co. v. Nagappa Chettiar, 1953 SCR 789, the Supreme Court, in paragraph 23, observed that it was well settled that interest is allowed by a Court of equity in the case of money obtained or retained by fraud. Interest was, therefore, awarded in equity. …. ..
36. The position is not different under the Interest Act, 1978. The words, in section 4(1) “or other rule of law” would include interest payable in equity. In fact, interest has been awarded by our Courts in equity as well as on principles analogous to section 34 of the Code of Civil Procedure on the basis that section 34 is based upon principles of justice, equity and good conscience.”

After quoting the aforesaid passage from the Bombay decision it is held in Dushyant N. Dalal v. Securities and Exchange Board of India, AIR 2018 SC 447; 2017-9 SCC 660 as under:

“We agree with the aforesaid statement of the law. It is clear, therefore, that the Interest Act of 1978 would enable Tribunals such as the SAT to award interest from the date on which the cause of action arose till the date of commencement of proceedings for recovery of such interest in equity.”

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Can Courts Award Interest on Equitable Grounds?

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