Introduction
In a judgment delivered in M/s Interstate Construction v. National Projects Construction Corporation Ltd. the Supreme Court has conclusively held that an arbitral tribunal is empowered under Section 31(7) of the Arbitration and Conciliation Act, 1996, to award interest on interest. The Court set aside the judgment of the Delhi High Court and reaffirmed the position taken in Hyder Consulting (UK) Ltd. v. Governor, State of Orissa [(2015) 2 SCC 189], thereby overruling the contrary view adopted in State of Haryana v. S.L. Arora & Co. [(2010) 3 SCC 690]. The judgment offers much needed clarity on the interpretation of “sum awarded” under Section 31(7)(b) of the Act.

Background
The dispute arose out of a 1984 contract concerning the Ramagundam Super Thermal Power Project. After prolonged arbitral proceedings spanning multiple arbitrator appointments and nearly three decades, an award was passed on 28th October 2020 in favour of Interstate Construction. The Tribunal awarded interest in three phases:

• Pre-reference interest @ 18% p.a. (from July 1987 till 19th January 1998)
• Pendente lite interest @ 12% p.a. (from 20th January 1998 to 31st December 2008 and from 1st January 2017 to the date of award)
• Future interest @ 18% p.a. on the aggregate of the principal and the interest amounts

The Respondent challenged the award under Section 34. The Single Judge reduced the future interest to 9%. Upon further challenge under Section 37, the Division Bench of the High Court held that awarding interest on accrued interest amounted to compound interest, which was impermissible.

Supreme Court’s Findings
Allowing the appeal, the Supreme Court held that the Tribunal’s power to grant interest across three periods viz. pre-reference, pendente lite and post-award is firmly embedded in Section 31(7)(a) of the Act. This view finds support in Pam Developments Pvt. Ltd. v. State of West Bengal [(2024) 10 SCC 715], which reaffirmed that arbitrators have discretion to award different rates for segmented periods unless the contract prohibits such interest.

Referring to the three-Judge Bench decision in Hyder Consulting (UK) Ltd. [(2015) 2 SCC 189], the Court reiterated that “sum” includes both the principal and interest awarded under Section 31(7)(a). Thus, post-award interest under Section 31(7)(b) can be levied on the aggregate of the principal and pre-award interest. This overrules the narrower interpretation adopted in S.L. Arora [(2010) 3 SCC 690].

The Delhi High Court’s conclusion that the arbitral tribunal could not divide the award period into pre-reference and pendente lite phases was rejected. The Court relied on North Delhi Municipal Corporation v. S.A. Builders Ltd. [(2024) SCC OnLine SC 3768] to explain that such segmentation is not only permissible but is also consistent with the text and object of Section 31(7).

The Court endorsed the ratio of UHL Power Company Ltd. v. State of Himachal Pradesh [(2022) 4 SCC 116] and Delhi Airport Metro Express Pvt. Ltd. v. Delhi Metro Rail Corporation [(2022) 9 SCC 286], both of which affirmed the permissibility of awarding post-award interest on accrued interest. Similarly, in Morgan Securities and Credits Pvt. Ltd. v. Videocon Industries Ltd. [(2023) 1 SCC 602], the Court held that arbitral tribunals retain full discretion to grant compound interest post-award where justified.

Conclusion
This decision reaffirms the arbitrator’s discretion under the Arbitration and Conciliation Act, 1996 and upholds the legislative intent behind Section 31(7). By recognising that the term “sum awarded” includes pre-award interest, and that segmented interest rates are permissible¹.

By - Chaitanyaa Bhandarkar