Power Of Arbitral Tribunal To Grant Pre-Reference Interest Now Statutorily Recognised: Supreme Court

In a significant interpretation of Section 31(7)(a) of the Arbitration and Conciliation Act, 1996, the Supreme Court has reaffirmed the arbitral tribunal’s statutory authority to grant interest for the period preceding the commencement of arbitral proceedings (pre-reference interest) as well as during the pendency of arbitration (pendente lite interest).

A bench of Justices Abhay S Oka (since retired) and Ujjal Bhuyan held that the 1996 Act now expressly recognizes the tribunal's power to grant interest for the period beginning from the date the cause of action arose until the date of the arbitral award. This position, the Court noted, marks a departure from the regime under the Arbitration Act, 1940, which was silent on the issue and left the matter to judicial interpretation.

“While the 1940 Act did not contain any express provision authorizing pre-reference interest, this power was recognized through judicial pronouncements. Section 31(7)(a) of the 1996 Act, however, confers such authority explicitly,” the Court observed.

The bench clarified that under the said provision, the arbitral tribunal has discretion to grant interest at a reasonable rate for the entire or any part of the period between the accrual of the cause of action and the making of the award. This also means that tribunals may choose to exclude certain periods within this timeframe, or apply different rates of interest for sub-divided intervals depending on the conduct of the parties.

“It can be a composite period or divided into sub-periods, for instance, from the date of cause of action to the filing of the claim, and from filing of the claim to the date of award, excluding any period during which a party was found to be at fault,” the bench explained; “Accordingly, the tribunal may apply a uniform rate of interest or vary the rate across the identified periods.”

The judgment came while allowing an appeal filed by M/s Interstate Constructions challenging the Delhi High Court's decision dated August 1, 2023. The High Court had held that the arbitral tribunal lacked jurisdiction to award interest for the pre-reference and pendente lite periods. It had further found fault with the tribunal’s computation methodology, holding that it improperly merged past interest with the principal amount to calculate future interest, thereby resulting in an impermissible grant of compound interest.

Disagreeing with this interpretation, the Supreme Court set aside the High Court's ruling, holding that the tribunal’s decision was well within the statutory framework. Referring to North Delhi Municipal Corporation v. S A Builders Ltd. (2024) and Pam Developments Pvt Ltd v. State of West Bengal (2024), the Court affirmed that the arbitral tribunal had correctly exercised its discretion under Section 31(7)(a) of the Act.

On the issue of post-award interest under Section 31(7)(b), the bench explained that “the ‘sum’ referred to includes both the principal and the interest awarded up to the date of the award. This composite sum may then carry further interest at a rate 2% higher than the current rate of interest from the date of award until the date of payment.”

The Court thus clarified that adding accrued interest to the principal for the purpose of post-award interest does not amount to granting compound interest. It upheld the tribunal’s approach as legally permissible under the 1996 Act.

“The High Court’s view does not align with a correct interpretation of Section 31(7)(a),” the Court concluded, reinstating the award passed by the arbitral tribunal.

Case Title: M/s Interstate Construction Vs National Projects Construction Corporation Ltd.