Supreme Court affirms arbitral award allowing interest-on-interest under Section 31(7) and sets aside Delhi HC order

A bench of Justices Abhay S. Oka and Ujjal Bhuyan heard an appeal by special leave against a Division Bench judgment of the Delhi High Court which had set aside parts of an arbitral award relating to interest. The appeal challenged the High Court’s reversal of a Single Judge’s decision under Section 34 of the Arbitration and Conciliation Act, 1996 and raised the narrow question of whether the arbitral tribunal legitimately awarded interest for multiple sub-periods and compounded interest by levying post-award interest on pre-award interest.

The Court allowed the civil appeal, set aside the Division Bench order dated 01.08.2023, and restored the arbitral tribunal’s computation of interest. The Court held that Section 31(7) of the 1996 Act empowered an arbitral tribunal to award interest for the period between the date on which the cause of action arose and the date of the award and that the “sum” so awarded—being principal plus interest—could carry further interest from the date of award to the date of payment. The Court relied on prevailing precedents including Hyder Consulting (UK) Ltd., Pam Developments, and S.A. Builders to conclude that post-award interest on amounts that already included pre-award interest did not amount to an impermissible levy of compound interest. The Court, in its reasoning, observed: "It has been held that the sum awarded would mean the principal amount plus the interest awarded from the date of cause of action upto the date of the award. The sum awarded in Section 31(7)(a) would mean principal amount plus the interest awarded. Thereafter, as per Section 31(7)(b) of the 1996 Act, the sum (principal amount + interest) would carry further interest at the rate of 2 per cent higher than the current rate of interest prevalent on the date of the award to the date of payment." The Court therefore found the Division Bench’s conclusion—that the arbitral tribunal had no jurisdiction to award interest for sub-periods and that it impermissibly compounded interest—to be erroneous.

Background: The dispute arose from two 1984 work orders for foundation and excavation works at the Ramagundam Super Thermal Power Project executed by the appellant contractor. The contractor completed the works in 1987 but disputed certain recoveries and raised multiple financial claims; it invoked arbitration by notice dated 17.05.1993. Appointment of arbitrators was delayed and the tribunal composition changed several times; proceedings culminated in the appointment of a sole arbitrator (former High Court judge) who issued an award on 28.10.2020. The tribunal awarded principal damages of Rs. 34,43,490.61 and granted interest in several parts: pre-reference/past interest at 18% (from July 1987 to 19.01.1998), pendente lite interest at 12% for specified sub-periods (with an eight-year lacuna excluded), and future interest at 18% from the date of award to payment. Paragraph 58 of the award summarised these heads of interest and treated the awarded interest as part of the “total amount” on which subsequent interest was applied.

The respondent challenged only the interest computation under Section 34; a Single Judge upheld the award save for reducing future interest to 9% per annum. The Division Bench allowed the respondent’s appeal under Section 37, holding that Section 31(7) recognised only two periods and that the tribunal impermissibly awarded interest for three periods and compounded interest. The appellant obtained special leave to challenge the Division Bench’s legal conclusions before the Supreme Court. The Supreme Court concluded that Section 31(7)(a) permits the tribunal to award interest for the period between cause of action and award (which may be subdivided and attract different rates) and that the statutory scheme contemplates the “sum” so awarded—principal plus pre-award interest—carrying post-award interest. The civil appeal was allowed and the Division Bench order dated 01.08.2023 was set aside; there was no order as to costs.

Case Details: Case No.: 2025 INSC 699 (Civil Appeal No. 3461 of 2025) Case Title: M/s. Interstate Construction v. National Projects Construction Corporation Ltd. Appearances: For the Petitioner(s): Advocate(s) not mentioned in the judgment For the Respondent(s): Advocate(s) not mentioned in the judgment