Supreme Court Clarifies Section 31(7) of the Arbitration & Conciliation Act, 1996:
Arbitral Tribunals May (a) Segment “Pre-reference” and “Pendente-lite” Interest Periods and (b) Capitalise Accrued Interest for Future Interest
1. Introduction
On 15 May 2025, the Supreme Court in M/s. Interstate Construction v. National Projects Construction Corporation Ltd. (2025 INSC 699) decisively resolved two long-running controversies under Section 31(7) of the Arbitration and Conciliation Act, 1996 (“1996 Act”):
- Whether an arbitral tribunal may treat the period “between the date on which the cause of action arose and the date of the award” as two internal sub-periods—pre-reference and pendente-lite—and award different rates or exclude an inactive sub-period from interest altogether.
- Whether the tribunal can add the pre-award interest to the principal sum and award post-award interest on that aggregated “sum” (effectively permitting simple “compound” interest).
The Court answered both questions in the affirmative, overturning the Delhi High Court’s contrary view and, in the process, reaffirming the shift away from S.L. Arora (2010) in favour of the later three-Judge decisions such as Hyder Consulting (2015) and UHL Power (2022).
2. Factual and Procedural Background
- Two construction work orders issued in 1984 for NTPC’s Ramagundam project.
- Work completed in 1987; disputes regarding withheld amounts and extra claims.
- Arbitration invoked in 1993; a chequered path of multiple arbitrators ensued.
- Final award (28 Oct 2020) granted INR 34.43 lakh plus interest:
- 18% p.a. pre-reference (July 1987 – 19 Jan 1998)
- 12% p.a. pendente-lite, excluding 01 Jan 2009 – 31 Dec 2016 (claimant’s laches)
- 18% p.a. post-award on the aggregated sum
- Single Judge (2021) reduced post-award rate to 9% but otherwise upheld the award.
- Division Bench (2023) went further—held that:
- Section 31(7)(a) recognises only two periods, hence tribunal’s three-fold segmentation was illegal;
- Capitalising past interest amounted to prohibited compound interest.
- Supreme Court, on appeal by the contractor, reinstated the tribunal’s award in full (except the Single Judge’s 9% post-award rate remained unchallenged).
3. Summary of the Supreme Court’s Judgment
- Statutory Construction. Section 31(7)(a) gives tribunals discretion to award interest “for the whole or any part of the period” between cause of action and award. Therefore, sub-dividing that period and applying differential rates (or zero interest during claimant’s laches) is lawful.
- Precedent Alignment. The Court harmonised earlier cases, holding that S.L. Arora (2010) stands overruled by Hyder Consulting (2015) and subsequent three-Judge benches recognising that the word “sum” in s.31(7)(b) includes accrued pre-award interest. Hence post-award interest on the aggregated amount is permissible.
- Result. Division Bench decision set aside; arbitral directions in para 58(b) restored; appeal allowed without costs.
4. Analysis
4.1 Precedents Cited and Their Influence
| Case | Key Holding | Impact on Present Judgment |
|---|---|---|
| Sayeed Ahmed & Co. v. State of U.P. (2009) | Section 31(7) merges pre-reference & pendente-lite into one “first period”. | Relied upon by Delhi HC; Supreme Court clarifies that the case never barred different rates within the first period. |
| S.L. Arora v. State of Haryana (2010) | Disallowed interest on interest; interpreted “sum” narrowly. | Explicitly overruled by later 3-Judge benches; SC reiterates that Arora no longer good law. |
| Hyder Consulting (UK) Ltd. v. State of Orissa (2015, 3-Judge) | “Sum” in s.31(7)(b) includes pre-award interest; tribunal may grant post-award interest on aggregated amount. | Main authority adopted; Division Bench negated its ratio—Supreme Court restores it. |
| UHL Power Co. v. State of H.P. (2022, 3-Judge) | Reaffirmed Hyder; compound-like post-award interest permissible. | Used to buttress reasoning that Arora overruled. |
| PAM Developments Pvt. Ltd. v. State of W.B. (2024) | Detailed propositions on pre-reference and pendente-lite interest under 1996 Act. | Supreme Court quotes to show tribunals’ wide discretion provided contract not prohibitory. |
| North Delhi Municipal Corporation v. S.A. Builders (2024) | Clarified objectives behind pre-award and post-award interest. | Cited to demonstrate rationale for segmented dates and deterrence. |
4.2 Court’s Legal Reasoning
- Linguistic Emphasis. The phrase “for the whole or any part of the period” in s.31(7)(a) is dispositive: the tribunal may carve the period as it deems fit and award one or more rates.
- Purpose-oriented Interpretation. Interest compensates deprivation and deters delay. Denying tribunals flexibility would defeat that purpose.
- Hierarchy of Precedent. Three-Judge benches override earlier two-Judge decisions; hence Hyder and UHL Power control, not S.L. Arora.
- Party Autonomy. Where the contract is silent (as here) tribunal discretion is at its zenith. No contractual prohibition existed against compound or differential interest.
- Statutory Default Post-amendment. Since 2015 amendment, s.31(7)(b) prescribes “2% above current rate” as default, but tribunals may still specify a different rate or composition.
4.3 Impact on Future Arbitration Practice
- Segmentation Endorsed. Tribunals may confidently award separate pre-reference and pendente-lite interest—even exclude dormant intervals—without fear of annulment.
- Capitalisation Accepted. Post-award interest on “principal + past interest” is lawful unless contractually barred. This legitimises “simple compounding” that deters non-payment.
- Reduced Judicial Interference. High Courts should not re-appreciate interest methodology unless it violates an express statutory or contractual bar, aligning with the pro-arbitration ethos.
- Contract Drafting Alert. Parties averse to compounded post-award interest must add explicit clauses barring capitalisation; silence now favours the award-holder.
- Uniformity Restored. Conflicting High Court rulings (Delhi, Bombay, etc.) on these issues are implicitly overruled, providing nationwide consistency.
5. Complex Concepts Simplified
“Pre-reference” vs “Pendente-lite” Interest
• Pre-reference: From accrual of cause of action to date arbitration is invoked.
• Pendente-lite: From invocation/filing of claim until publication of award.
Under s.31(7)(a) both form a single statutory window, but can still be subdivided.
Capitalisation of Interest
Adding accrued interest to the principal and then charging future interest on the combined figure. It is not “compound interest” in the banking sense (with multiple periodic rests) but a once-and-for-all capitalisation permitted by Hyder Consulting.
Current Rate of Interest (s.31(7)(b))
Defined as the highest of the RBI-published marginal cost of funds-based lending rate (“MCLR”) amongst leading banks. Post-2015, if the tribunal is silent, the award sum automatically earns 2% above that figure.
6. Conclusion
The Supreme Court’s decision in Interstate Construction settles two vexed questions of arbitral interest:
- Tribunals possess statutory discretion to segment the pre-award period and tailor interest—rewarding diligence, penalising delay, or excluding laches.
- The word “sum” in Section 31(7)(b) includes the principal plus pre-award interest, thereby validating post-award interest on that augmented amount.
By reinstating the arbitral award, the Court strengthens finality in arbitration, underscores party autonomy, and clarifies the post-2015 legislative landscape. Practitioners must now advise clients that, absent express contractual curbs, tribunals may impose differential and capitalised interest regimes that materially inflate exposure for award-debtors who delay payment.
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