Interest on Interest Is Not Prohibited Under Arbitration Law: Supreme Court Rules Arbitral Tribunals Can Grant Compound Interest

"Section 31(7) does not prohibit grant of post-award interest on the sum comprising both principal and pre-award interest" – In a significant ruling reinforcing the autonomy of arbitral tribunals, the Supreme Court of India emphatically held that there is no bar under the Arbitration and Conciliation Act, 1996, on awarding interest on the aggregate of principal and pre-award interest. The Court overruled a restrictive interpretation by the Delhi High Court and reaffirmed the power of arbitral tribunals to award compound interest, including interest on interest, unless contractually barred.

Delivering the judgment, the Bench comprising Justice Abhay S. Oka and Justice Ujjal Bhuyan observed, “There is no bar under the Arbitration and Conciliation Act, 1996, to the arbitral tribunal awarding interest on the aggregate of the principal and the interest accrued till the date of the award.”

“A Misreading of Section 31(7) Cannot Curtail the Tribunal’s Power”: Court Rebukes High Court’s Narrow Approach

The dispute arose from a 1984 construction contract between NPCC and Interstate Construction for excavation works at a thermal power project. Although the project was completed in 1987, payment disputes persisted, eventually leading to arbitration. After a protracted process involving change of arbitrators, Justice R.C. Jain (Retd.) delivered an award on October 28, 2020, granting various sums, including interest across three periods: pre-reference, pendente lite, and post-award.

The crux of the challenge was paragraph 58(b) of the award, which granted: “Interest pendente lite at 12% p.a. from 20th January 1998 to 31st December 2008 and again from 1st January 2017 to the date of award, on the total amount i.e. principal amount plus interest awarded for the pre-reference period; and future interest at 18% per annum on the said total amount.”

The Delhi High Court Division Bench set aside this portion, reasoning that awarding interest on interest amounted to granting compound interest, which it declared impermissible. The Supreme Court firmly disagreed with this view, holding:

“The approach adopted by the High Court is contrary to the law laid down in authoritative precedents and amounts to a misreading of Section 31(7) of the Act.”

“The Tribunal Has Full Discretion Over the Period and Structure of Interest”

Addressing the nature and scope of Section 31(7)(a), the Court clarified that arbitral tribunals are not restricted to treating the period from the cause of action to the award date as a monolithic whole. Instead, it held:

“There is no legal bar for the arbitral tribunal to bifurcate the period between the date of cause of action and the date of the award into two segments – pre-reference and pendente lite – and to award different rates of interest for each of the periods.”

The Court stressed that this structure is not only statutorily permissible but often necessary to account for prolonged delays in the arbitral process, noting:

“Considering that sometimes arbitral proceedings are prolonged and take several years to conclude, there is a rationale in awarding interest for the pre-reference and pendente lite periods separately.”

It further elaborated: “The expression ‘whole or any part of the period’ in Section 31(7)(a) makes it amply clear that different rates of interest for different segments of time are not only possible but permissible.”

“Sum Includes Interest Already Adjudged”: Supreme Court Validates Interest on Interest Post-Award

One of the central legal controversies was whether the term “sum” in Section 31(7)(b) includes pre-award interest. The Court gave a conclusive answer, stating:

“The ‘sum’ under Section 31(7)(b) includes the principal amount adjudged and the pre-award interest. There is no prohibition in the statute that prevents an arbitral tribunal from awarding post-award interest on such a sum.”

The judgment explicitly affirmed the correctness of the Court’s prior ruling in Hyder Consulting (UK) Ltd. v. State of Orissa, which had recognized the legality of awarding interest on interest under the Act. Referring to this precedent, the Bench noted:

“This Court has already held in Hyder Consulting that the sum directed to be paid under Section 31(7)(b) can include pre-award interest… therefore, post-award interest can validly be granted on such aggregate amount.”

Rejecting the Delhi High Court’s reliance on State of Haryana v. S.L. Arora & Co., the Court pointed out that subsequent larger Bench decisions had effectively overruled Arora’s reasoning. It declared:

“The interpretation given in S.L. Arora was not accepted by the majority in Hyder Consulting. Therefore, the view taken by the High Court relying on Arora cannot be sustained.”

A Clear Signal Upholding Arbitral Discretion and Economic Justice

In a strong reaffirmation of arbitral autonomy and claimants’ rights to fair compensation, the Supreme Court held that arbitral tribunals can award interest for different sub-periods and can grant post-award interest on the entire sum, including interest already awarded for earlier periods.

The judgment concluded: “The award of interest by the learned arbitrator for the pre-reference period, pendente lite period, and post-award period, including on the aggregate sum, is in accordance with law. The High Court was not right in interfering with this part of the award.”

By reinstating the award in full and upholding the tribunal’s discretion, the Court has laid to rest a contentious question in arbitration jurisprudence and sent a clear signal that compound interest in arbitration is not per se illegal unless expressly barred by contract.

Date of Decision: May 15, 2025