15 May 2025 Arbitration Law >> Business & Commercial Law  

In a significant ruling on May 15, 2025, the Supreme Court of India, comprising Justice Abhay S. Oka and Justice Ujjal Bhuyan, addressed a crucial aspect of arbitration law: the power of an arbitral tribunal to award interest. The civil appeal, M/s. Interstate Construction v/s National Projects Construction Corporation Ltd. , challenged a judgment by the Division Bench of the Delhi High Court dated August 1, 2023. The High Court had set aside part of an arbitral award concerning the calculation of interest.

Background of the Dispute:

The dispute originated from a contract between National Projects Construction Corporation Limited (NPCC) and M/s. Interstate Construction for the Ramagundam Super Thermal Power Project. Two work orders were issued in 1984 , and a contract agreement followed, which included an arbitration clause for settling disputes. M/s. Interstate Construction completed the work in 1987 but disputed certain recoveries and raised additional claims, leading to the invocation of the arbitration clause in 1993.

The arbitration process was protracted, involving multiple arbitrator appointments due to delays and resignations. Finally, Justice R.C. Jain was appointed as the sole arbitrator, who pronounced the award on October 28, 2020. While the arbitral tribunal allowed the appellant's claims under several heads, the contentious part of the award related to the payment of interest.

The Arbitral Award on Interest:

The arbitral tribunal awarded interest under three heads:

• Pre-reference/past period interest: At 18% per annum on Rs. 34,43,490.61 from July 1987 until January 19, 1998.
• Pendente lite interest: At 12% per annum from January 20, 1998, until December 31, 2008, and again from January 1, 2017, till the date of the award. This interest was calculated on the total amount (principal + pre-reference interest). The tribunal explicitly excluded interest for the period from January 1, 2009, to December 31, 2016, citing "complete laches" on the part of the appellant in pursuing its claims.
• Future interest: At 18% per annum from the date of the award till payment, on the total amount (principal + pre-reference interest + pendente lite interest).

Delhi High Court's Decision:

NPCC challenged the arbitral award before a Single Judge of the Delhi High Court under Section 34 of the Arbitration and Conciliation Act, 1996. The Single Judge partly allowed the petition, setting aside the award for future interest exceeding 9% per annum.

Aggrieved by this, NPCC appealed to the Division Bench of the High Court under Section 37 of the 1996 Act. The challenge was specifically restricted to the interest part of the award, particularly the directions in paragraph 58(b) that calculated interest on the principal amount inclusive of pre-reference/past period interest.

The Division Bench allowed NPCC's appeal, setting aside the directions in paragraph 58(b). Its reasoning was twofold:

1. Periods for Interest: Section 31(7) of the 1996 Act recognizes only two periods for interest: from the date the cause of action arose till the award, and from the award date till payment. Thus, the arbitral tribunal erred by carving out three periods (pre-reference, pendente lite, and future).
2. Compound Interest: The tribunal committed an illegality by "forging the principal amount with interest" (i.e., levying interest on previously accrued interest), which amounted to impermissible compound interest.

Supreme Court's Analysis:

The Supreme Court found the High Court's reasoning "fallacious".

Interpretation of Section 31(7) of the 1996 Act (Periods for Interest)

The Court referred to Section 31(7) of the 1996 Act, particularly clause (a), which allows an arbitral tribunal to award interest "for the whole or any part of the period between the date on which the cause of action arose and the date on which the award is made". While acknowledging the interpretation in Sayeed Ahmed and Company v. State of Uttar Pradesh , which states that Section 31(7)(a) has integrated pre-reference and pendente lite periods into one , the Supreme Court clarified that this does not preclude an arbitrator from sub-dividing this period.

The Court cited its recent decisions in Pam Developments Private Limited v. State of West Bengal and North Delhi Municipal Corporation v. S.A. Builders Ltd. , which confirmed the arbitrator's power to grant pre-reference, pendente lite, and post-award interest. It emphasized that Section 31(7)(a) provides the arbitral tribunal with discretion to award interest for the "whole or any part of the period" and at "such rate as it deems reasonable". This means an arbitrator can exclude periods (as done for the period of laches) , sub-divide the period between the cause of action and the award, and apply different rates of interest for these sub-divided periods. Therefore, the High Court erred in holding that the arbitral tribunal lacked jurisdiction to award interest for two sub-periods within the pre-award phase.

Compound Interest (Interest on Interest)

On the issue of compound interest, the Supreme Court noted that this matter is "no longer res integra". It highlighted the past conflict between State of Haryana v. S.L. Arora , which held that arbitrators could not award interest upon interest or compound interest , and the subsequent, more authoritative three-Judge Bench decision in Hyder Consulting (UK) Ltd. v. Governor, State of Orissa. Hyder Consulting expressly overruled S.L. Arora, clarifying that the "sum" for which an award is made, as per Section 31(7) of the 1996 Act, includes the principal amount together with the accrued interest. This allows for the calculation of post-award interest on the principal plus pre-award interest. This view has been consistently reiterated in subsequent rulings, including UHL Power Company Ltd. v. State of Himachal Pradesh , Delhi Airport Metro Express Private Ltd. v. Delhi Metro Rail Corporation , and Morgan Securities and Credits Private Ltd. v. Videocon Industries Limited.

The Court reiterated its conclusion from S.A. Builders Ltd. that the "sum" awarded by the arbitral tribunal, which may include interest from the date of the cause of action to the date of the award, would carry further interest from the date of the award to the date of payment.

Conclusion:

Based on this comprehensive analysis, the Supreme Court concluded that the impugned judgment of the Division Bench of the High Court dated August 1, 2023, could not be sustained. The civil appeal was accordingly allowed, and the High Court's judgment was set aside.

Arbitration and Conciliation Act, 1996