Under Section 31(7)(b) of the Arbitration and Conciliation Act, 1996, interest on the sum directed to be paid by an arbitral award (which includes principal and pre-award interest) is permissible and does not constitute impermissible interest on interest.

The Court made the following Judgment: (per Hon‟ble Sri Justice R. Raghunandan Rao)

The appellants herein, had entered into an Agreement, dated 28.12.1994, for execution of certain works contracts, in relation to the Visakhapatnam Steel Plant. Certain disputes had arisen between the parties, in relation to payment of enhanced consideration and compensation. These disputes were referred to Arbitration and resulted in an Award being passed by a learned Arbitrator, on 15.03.2002.

2. Aggrieved by the said Award, the appellants herein had moved A.O.P.No.572 of 2002 before the learned VI Additional District Judge, Visakhapatnam. The said petition came to be dismissed, on 21.10.2005.

3. Aggrieved by the said Order of Dismissal, the present Writ Appeal came to be filed.

4. Sri C. Prakash Reddy, learned counsel appearing for the appellants, assails the Award, on the ground that, the learned Arbitrator had awarded interest on interest and the same is impermissible and the entire Award has to be set aside.

5. The case of the appellants is that, the learned Arbitrator had awarded compensation, in relation to claims 1 to 8 made by the respondents. Along with the Principal Award under these claims, the learned Arbitrator also awarded interest @ 15%, on the principal amounts from the date of completion of contract to the date of the award. The aforesaid compensation which included the principal amounts and the interest thereon, amounted to Rs.32,73,171.59 paise. The learned Arbitrator, after arriving at this figure, had further awarded interest @ 18% p.a. from the date of award till the date of realization.

6. Sri C. Prakash Reddy, learned counsel appearing for the appellants, would rely upon the judgment of the Hon’ble Supreme Court in the case of M/s. D. Khosla and Company V. The Union of India , [2024] 8 S.C.R. 113: 2024 INSC 587, to contend that the learned Arbitrator did not have any power or authority to award interest on interest and consequently, the Award would have to be set aside. The Hon’ble Supreme Court, after referring to the judgments of the Hon’ble Supreme Court in the case of Hyder Consulting (UK) Ltd. V. State of Orissa, (2015) 2 SCC 189 and the judgment of the Hon’ble Supreme Court in the case of UHL Power Company Limited Vs. State of Himachal Pradesh , (2022) 4 SCC 116, had held as follows:

“24. Neither the Act specifically empowers the Arbitrator or the court to award interest upon interest or compound interest nor there is any other provision which provides for grant of compound interest or interest upon interest. Even Section 34 CPC is silent in this regard whereas Sub-Section (3) of Section 3 of the Interest Act specifically prohibits the same.”

7. Sri G. Rama Gopal, learned counsel appearing for the respondents, on the other hand, sought to take us through the judgments of the Hon’ble Supreme Court in the cases of Hyder Consulting (UK) Ltd. V. State of Orissa and UHL Power Company Limited Vs. State of Himachal Pradesh , to contend that there could be award of interest on interest by a learned Arbitrator, in Arbitration conducted under the Arbitration and Conciliation Act, 1996.

8. A three-Judge Bench of the Hon’ble Supreme Court in the case of Hyder Consulting (UK) Ltd. V. State of Orissa, while overruling the earlier judgment of the Hon’ble Supreme Court in the case of State of Haryana Vs. S.L. Arora & Co.,, (2010) 3 SCC 690, had held as follows:

“5……

“21. In the result , I am of the view that S.L. Arora case is wrongly decided in that it holds that a sum directed to be paid by an Arb