1. Overview of Section 49 of the Arbitration Act 1996
Section 49 of the Arbitration Act 1996 deals with interest in arbitration awards. It grants arbitral tribunals the power to award interest on sums claimed or awarded, both before and after the award is made.
This provision ensures that a successful claimant is compensated not only for the principal amount owed but also for the loss of use of money during the period of dispute. It reflects the idea that a party deprived of its money should receive a fair financial return for that deprivation.
2. Text and Meaning of Section 49(3)(b)
Section 49(3) provides two key powers to the arbitral tribunal. It allows the tribunal, unless otherwise agreed by the parties, to award interest:
- (3)(a) On the whole or any part of any amount awarded, in respect of any period up to the date of the award.
- (3)(b) On the whole or any part of any amount claimed in the arbitration and outstanding at the commencement of the arbitral proceedings but paid before the award was made, in respect of any period up to the date of payment.
Subsection (3)(b) specifically addresses situations where the respondent pays part or all of the claimed amount before the award is delivered. It gives the tribunal discretion to award interest for the time between the start of the arbitration and the date of payment.
3. Purpose of Section 49(3)(b)
The intent behind Section 49(3)(b) is to ensure fair compensation to the claimant for any delay in payment during the arbitration process. Even if the respondent eventually pays the amount before the final award, the claimant may have been deprived of the use of that money for a period of time.
This provision prevents the respondent from avoiding financial consequences by paying late but before the award is rendered. It ensures that both parties remain incentivized to resolve their disputes promptly.
4. When Section 49(3)(b) Applies
Section 49(3)(b) applies in cases where:
- A claim for a monetary amount has been submitted in arbitration.
- The amount was still unpaid when arbitration began.
- The respondent paid the amount (or a portion of it) before the tribunal issued its award.
- The claimant seeks interest for the period between the commencement of arbitration and the payment date.
The tribunal may then, at its discretion, grant interest for that period.
5. Example Scenarios
To understand how Section 49(3)(b) works, consider the following examples:
Example 1: Partial Payment During Arbitration
A claimant begins arbitration to recover £100,000. Six months after the proceedings begin, the respondent pays £60,000. The tribunal may award interest on that £60,000 from the start of arbitration to the date of payment.
Example 2: Full Payment Before Award
A respondent pays the entire claimed amount before the final award is issued. Even though the dispute is effectively settled, the tribunal may still award interest on the amount for the period it remained unpaid after arbitration commenced.
Example 3: No Payment Before Award
If no payment is made until after the award, Section 49(3)(b) does not apply. Instead, interest is typically awarded under Section 49(3)(a) or Section 49(4), which covers post-award interest.
6. Tribunal’s Discretion Under Section 49(3)(b)
The arbitral tribunal has full discretion to decide:
- Whether to award interest at all.
- The rate of interest (for example, simple or compound).
- The period for which interest is payable.
- The basis for calculating it, including any rests or compounding frequency.
The guiding principle is that the tribunal must act in a way that meets the justice of the case.
7. Relationship Between Section 49(3)(a) and Section 49(3)(b)
While both provisions concern interest before the award, they apply to different circumstances:
- Section 49(3)(a) deals with interest on amounts awarded up to the date of the award.
- Section 49(3)(b) applies to sums claimed and later paid before the award date.
The tribunal must ensure that there is no double recovery of interest for the same sum or time period.
8. Interaction with Section 49(4)
Section 49(4) allows the tribunal to award interest from the date of the award until payment. Together, subsections (3)(a), (3)(b), and (4) cover three distinct periods:
- Interest before the award (on unpaid sums).
- Interest on sums paid before the award but after arbitration began.
- Interest after the award until final payment.
This comprehensive approach ensures that the claimant is compensated for every relevant stage of delay.
9. Importance of the “Commencement of Arbitral Proceedings”
Section 49(3)(b) specifically uses the phrase “outstanding at the commencement of the arbitral proceedings.” This is significant because it establishes a fixed reference point for calculating interest.
Interest can only be granted on amounts that were outstanding when the arbitration officially started, not on sums that became due later during the proceedings.
10. Interaction with Party Agreements
Section 49 operates subject to the agreement of the parties. If the parties have expressly agreed on how interest should be handled — for example, excluding it entirely or specifying a fixed rate — their agreement takes precedence over the Act.
In the absence of such an agreement, the tribunal relies on its statutory powers under Section 49.
11. Practical Implications
In practice, Section 49(3)(b) ensures:
- Fairness: Prevents respondents from benefiting by paying late but before the award.
- Compensation: Restores the claimant to the financial position they would have been in had payment been made on time.
- Deterrence: Discourages unnecessary delay in payments once arbitration has begun.
It also provides flexibility to tribunals in tailoring awards to reflect the specific facts and equities of each case.
12. Limits of Section 49(3)(b)
While broad, the tribunal’s power under Section 49(3)(b) is not unlimited. It cannot:
- Award interest beyond the amounts claimed or periods supported by evidence.
- Grant overlapping interest under multiple subsections for the same period.
- Ignore party agreements that limit or exclude interest.
The tribunal’s discretion must always be exercised reasonably and transparently.
13. Relationship to English Law Principles
Section 49(3)(b) reflects general principles of English commercial law, which recognize a party’s entitlement to compensation for being deprived of money due. It codifies what courts have long treated as an equitable principle — that late payment should attract interest to reflect time value and fairness.
14. Illustrative Impact on Business Disputes
In business contexts, Section 49(3)(b) is particularly useful in:
- Construction contracts: Where interim payments are often delayed.
- Commercial sales disputes: When partial payments are made during arbitration.
- Insurance or financial claims: Where settlements occur before the award.
In all these cases, it ensures claimants receive fair compensation for the period they were out of funds.
15. Summary and Key Takeaways
Section 49(3)(b) of the Arbitration Act 1996 grants arbitral tribunals the power to award interest on any amount claimed in arbitration that was unpaid at the start of proceedings but later paid before the award. Its key features include:
- Applies only to sums paid before the award.
- Covers the period from the commencement of arbitration to the date of payment.
- Empowers tribunals to ensure equitable compensation.
- Operates subject to party agreement.
This provision ensures that arbitration remains not only efficient but also fair, preventing undue advantage to parties who delay payment until late in the process.