Court’s Decision
The Supreme Court set aside the judgment dated 01.08.2023 passed by the Division Bench of the Delhi High Court under Section 37 of the Arbitration and Conciliation Act, 1996. The High Court had erroneously held that the arbitral tribunal committed illegality by awarding interest in three segments (pre-reference, pendente lite, and future) and by levying post-award interest on the sum inclusive of interest, treating it as compound interest. The Supreme Court held that:
“Statute recognizes the power of the arbitral tribunal to grant pre-reference interest from the date on which the cause of action arose till the date on which the award is made.”
and further clarified that:
“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.”
Accordingly, the appeal was allowed.
Facts
The respondent had engaged the appellant to execute works at Ramagundam Super Thermal Power Project in Andhra Pradesh through two work orders dated 1984. A contract was signed incorporating an arbitration clause. The appellant completed the work in 1987, but certain dues were withheld, and additional claims were disputed by the respondent. Arbitration was invoked in 1993.
The arbitration process experienced substantial delays and arbitrator changes over the years. Ultimately, the final arbitrator issued an award on 28.10.2020, allowing various claims and awarding interest under the following three heads:
- Pre-reference interest: 18% per annum from July 1987 to 19.01.1998;
- Pendente lite interest: 12% per annum in two separate blocks — from 20.01.1998 to 31.12.2008, and again from 01.01.2017 to the date of award;
- Future interest: 18% per annum on the cumulative sum from date of award till realization.
The respondent challenged only the interest component under Section 34, partly succeeding. The Single Judge reduced future interest to 9% per annum. The Division Bench further held that awarding compound interest and splitting the interest periods violated Section 31(7) of the 1996 Act.
Issues
- Whether the arbitral tribunal was legally empowered under Section 31(7) of the 1996 Act to award interest in three parts — pre-reference, pendente lite, and future.
- Whether the tribunal could grant post-award interest on a cumulative amount that includes pre-award interest (i.e., compound interest).
Petitioner’s Arguments
The petitioner contended that:
- Section 31(7)(a) of the 1996 Act allows tribunals to grant interest for “the whole or any part” of the period from the cause of action to the award.
- The bifurcation into pre-reference and pendente lite interest periods is permissible.
- Compound interest is valid as per precedents, including Hyder Consulting (UK) Ltd. and UHL Power Company Ltd.
Respondent’s Arguments
The respondent, in its limited challenge, argued:
- That the tribunal wrongly awarded compound interest by calculating pendente lite and post-award interest on a sum that already included pre-award interest.
- That under Section 31(7), only two periods — pre-award and post-award — are recognized for awarding interest.
- That the direction in paragraph 58(b) of the award should be struck down as illegal.
Analysis of the Law
The Court interpreted Section 31(7)(a) to mean that:
“The arbitral tribunal has the discretion to award interest at such rate as it deems reasonable for the whole or any part of the period between the date of cause of action and the date of the award.”
The Court held that this provision permits segmentation of the interest period into smaller phases, each with different rates, as long as it falls within the permissible period.
With respect to post-award interest, the Court cited Hyder Consulting (UK) Ltd. and UHL Power Company Ltd., affirming that:
“The ‘sum’ includes the principal as adjudged together with the interest granted.”
Hence, awarding post-award interest on the entire amount (principal + pre-award interest) is lawful.
Precedent Analysis
- Sayeed Ahmed and Co. v. State of U.P. (2009) 12 SCC 26: Distinguished by the Court. It held that pre-reference and pendente lite form one composite period under Section 31(7)(a), but did not prohibit sub-divisions or varying interest rates.
- Hyder Consulting (UK) Ltd. v. State of Orissa (2015) 2 SCC 189: Held that interest awarded up to the date of the award forms part of the sum on which post-award interest can be levied.
- UHL Power Co. Ltd. v. State of H.P. (2022) 4 SCC 116: Affirmed the legality of awarding post-award interest on a cumulative sum.
- Pam Developments Pvt. Ltd. v. State of W.B. (2024) 10 SCC 715 and S.A. Builders Ltd. v. NDMC (2024): Clarified that arbitral tribunals can award interest for sub-divided periods and on composite sums.
Court’s Reasoning
The Court held that:
- Clause (a) of Section 31(7) empowers the tribunal to award interest for any part of the pre-award period.
- It allows for different interest rates for sub-divided periods — such as pre-reference and pendente lite — based on facts.
- The arbitral tribunal was justified in excluding interest for the period 2009–2016 due to the appellant’s laches.
- As clarified in Hyder Consulting, the “sum” includes pre-award interest; hence, awarding post-award interest on it does not amount to impermissible compound interest.
Conclusion
The Supreme Court set aside the Delhi High Court’s judgment dated 01.08.2023 and restored the arbitral award in full. The Division Bench’s interpretation of Section 31(7) was held to be flawed and contrary to binding precedent.
Implications
- Arbitral tribunals can now confidently award interest over subdivided periods — pre-reference and pendente lite — at differing rates.
- Tribunals are permitted to award post-award interest on the total sum, inclusive of pre-award interest.
- The ruling reaffirms party autonomy and flexibility in arbitral discretion under the 1996 Act.
- This decision will significantly impact the structuring of interest claims in commercial arbitrations going forward.