Supreme Court Upholds Arbitrator’s Discretion On Interest Award | Compound Interest Permissible Under Section 31(7) Of Arbitration Act
Kiran Raj
The Supreme Court of India Division Bench of Justice Abhay S. Oka and Justice Ujjal Bhuyan held that an arbitral tribunal has express discretion under Section 31(7)(a) of the Arbitration and Conciliation Act, 1996 to award interest across segmented periods, including both pre-reference and pendente lite. The Court allowed the civil appeal challenging the Delhi High Court Division Bench’s interference with an arbitral award, and conclusively restored the tribunal’s grant of interest across specified periods and rates. It declared the High Court’s interpretation to be legally unsound and inconsistent with the statutory framework and precedent.
The case stems from a dispute concerning civil works executed at the Ramagundam Super Thermal Power Project, Karimnagar, Andhra Pradesh. The respondent, National Projects Construction Corporation Ltd. (NPCC), awarded two contracts dated 19.06.1984 to the appellant for excavation and foundation work at the power station. The appellant completed the work by 1987 and raised final bills. However, NPCC made recoveries from the payment which the appellant contested, also raising additional claims.
A notice invoking arbitration was issued on 17.05.1993. After a significant delay, NPCC appointed its official, Shri Shivamoy Ghosh, as sole arbitrator on 07.10.1997. The appellant filed claims aggregating to ₹4,46,29,404, inclusive of interest at 24% per annum. Dissatisfied with the arbitral process and discovery limitations, the appellant sought termination of Shri Ghosh’s mandate under Section 14 of the 1996 Act. The Delhi High Court’s Single Judge acceded, appointing Shri A.S. Chandhiok as arbitrator.
NPCC appealed the appointment; eventually, a Division Bench appointed Shri L.R. Gupta, retired DG, CPWD, as sole arbitrator. Proceedings under him failed to progress, prompting another Section 15 application which led to the appointment of Justice R.C. Jain (retired) in 2018.
The arbitral proceedings under Justice Jain culminated in an award dated 28.10.2020, wherein multiple claims were allowed. The tribunal awarded interest under the following heads:
- Pre-reference Interest: 18% per annum on ₹34,43,490.61 from July 1987 to 19.01.1998.
- Pendente Lite Interest (First Phase): 12% per annum from 20.01.1998 to 31.12.2008 on the sum comprising principal plus accrued pre-reference interest.
- No Interest Period: 01.01.2009 to 31.12.2016 due to appellant's laches.
- Pendente Lite Interest (Second Phase): 12% per annum from 01.01.2017 to date of award.
- Future Interest: 18% per annum from award date until payment, on the entire accrued sum.
NPCC filed a Section 34 petition challenging the award only with respect to interest, particularly the tribunal’s decision to compute interest on an aggregated sum that included prior interest. The Single Judge partly allowed the petition, modifying only the future interest to 9% per annum and rejecting the challenge on segmentation.
Aggrieved, NPCC preferred an intra-court appeal under Section 37, limited to interest-related directions. The Division Bench of the High Court set aside the award’s directions on grounds that the tribunal erred in dividing the interest into three periods and awarding what it considered to be compound interest—interest upon interest.
The appellant approached the Supreme Court in Civil Appeal No. 3461 of 2025.
The Supreme Court critically analyzed the interpretation of Section 31(7) of the Arbitration and Conciliation Act, 1996. The Court stated: “Section 31(7)(a) has joined the two periods of interest: pre-reference and pendente lite. Though the arbitral tribunal had granted interest for three periods... the first two period basically comprises of the period contemplated under clause (a) of sub-section (7) of Section 31.”
The Bench rejected the view that segmented interest periods violate the statutory scheme: “Even in Sayeed Ahmed and Company... the Bench held that Section 31(7) had carved out two periods... As regards the first period, the Bench clarified that it includes the pre-reference period plus pendente lite period.”
The Court underscored the tribunal’s discretion: “It can be a composite period or the said period can be further sub-divided... There can be one rate of interest for the whole period or one or more rates of interest for the sub-divided periods as has been done in the instant case.”
The Court examined the historical context, noting that: “There was a vacuum in the Arbitration Act, 1940 as there was no such provision for granting pre-reference interest... Now under Section 31(7)(a) of the 1996 Act, such power is statutorily recognized.”
On the alleged illegality of awarding interest on interest, the Court recorded: “This aspect of the matter is no longer res integra... In Hyder Consulting (UK) Ltd. v. Governor, State of Orissa... this Court clarified that the ‘sum’ includes principal plus interest awarded for the pre-award period.”
It concluded that: “The sum awarded in Section 31(7)(a) would mean principal amount plus the interest awarded.”
Therefore, the computation of post-award interest on the aggregated sum was legally permissible.
The Court also noted the importance of compensating claimants for monetary deprivation: “Intention behind awarding pre-award interest is primarily to compensate the claimant for the pecuniary loss... Post-award interest acts as a disincentive to the award debtor not to delay payment.”
The Supreme Court allowed the civil appeal, setting aside the impugned judgment dated 01.08.2023 of the Division Bench of the Delhi High Court. It held: “Impugned judgment and order dated 01.08.2023 passed by the Division Bench of the High Court is hereby set aside.”
The Court held that: “The arbitral tribunal has statutory discretion to grant interest under Section 31(7)(a) for the whole or any part of the period between cause of action and award date, including the power to segment the interest periods.”
Additionally, the Court affirmed that: “Interest awarded for the pre-reference period as well as pendente lite period having been merged into the principal sum does not violate the law where the tribunal exercises discretion to compute post-award interest on such aggregate.”
Consequently, the arbitral award as originally passed was restored in full.
Advocates Representing the Parties
For the Appellants: Ms. Madhu Moolchandani, AOR
Case Title: M/s. Interstate Construction v. National Projects Construction Corporation Ltd.
Neutral Citation: 2025 INSC 699
Case Number: Civil Appeal No. 3461 of 2025
Bench: Justice Abhay S. Oka, Justice Ujjal Bhuyan
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