Supreme Court Rules Arbitral Awards Can Include Interest on Interest Under Section 31(7) of Arbitration and Conciliation Act - 2026-05-27

Settling the Score: Supreme Court Clarifies Interest on Arbitral Awards

In a landmark decision that provides much-needed clarity for commercial litigants, a three-judge bench of the Supreme Court of India led by Chief Justice H.L. Dattu has fundamentally reshaped the interpretation of Section 31(7) of the Arbitration and Conciliation Act, 1996. The ruling effectively settles a long-standing ambiguity regarding the computation of interest on arbitral awards, specifically whether post-award interest can be levied upon the aggregate sum (which includes pre-award interest).

The Backdrop: A Judicial tug-of-war

The dispute reached the apex court due to conflicting precedents. The primary point of contention was the 2010 judgment in State of Haryana v. S.L. Arora and Co. , which held that Section 31(7) did not authorize the award of interest on interest. Consequently, debtors often avoided paying interest on the full amount awarded by the arbitrator, arguing that "interest-on-interest" was impermissible.

However, appellants—including M/S. Hyder Consulting (UK) Ltd.—argued that the S.L. Arora decision erroneously ignored earlier jurisprudence, namely McDermott International and Three Circles . The central question was simple yet highly consequential: Does the "sum" directed to be paid by an arbitral award, which may include pre-award interest, become the new principal for the purpose of calculating post-award interest?

Legal Arguments: The Interpretation of 'Sum'

Representing the appellants, Senior Counsel K.K. Venugopal argued that the arbitral award operates as a merger: once pre-award interest is included in the total award "sum," it loses its distinct identity as interest and becomes the principal amount for the post-award stage. He argued that denying interest on this total sum penalized the creditor and encouraged judgment debtors to delay payments.

Conversely, the state’s representatives maintained that the S.L. Arora verdict was sound, emphasizing that statutory provisions in the 1996 Act were meant to restrict, not facilitate, compound interest in the absence of explicit contractual agreements.

A New Judicial Consensus

The three-judge bench, while unanimous in its rejection of the S.L. Arora precedent, focused on the "plain and unambiguous" language of Section 31(7).

Justices S.A. Bobde and Abhay Manohar Sapre were particularly instrumental in clarifying the legislative intent. They reasoned that the Parliament deliberately refrained from using the word "principal" in Section 31(7), opting instead for the term "sum." By choosing this broader term, the legislature intended that the total amount calculated at the date of the award becomes the basis for future interest.

Key Observations

• On the nature of the "Sum": "Once the interest is 'included in the sum' for which the award is made, the original sum and the interest component cannot be segregated... The interest component then loses its character of an 'interest' and takes the colour of 'sum' for which the award is made." — Justice Abhay Manohar Sapre
• On Legislative Intent: "Parliament has deliberately used the word 'sum' to refer to the aggregate of the amounts that may be directed to be paid by the Arbitral Tribunal and not merely the 'principal' sum without interest." — Justice S.A. Bobde
• On Plain Interpretation: "Where the language of the Act is clear and explicit, the court must give effect to it, whatever may be the consequences, for in that case the words of the statute speak the intention of the Legislature." — Justice S.A. Bobde (quoting Ganga Prasad Verma v. State of Bihar)

Final Decision and Implications

The Supreme Court held that there is no infirmity in the interpretation that the arbitral "sum" incorporates interest for the pre-award period, and the post-award interest subsequently applies to that total figure. By overruling the S.L. Arora doctrine, the Court has provided a boost to creditors, ensuring that systemic delays in arbitration enforcement do not erode the real value of the awarded money. For future arbitral proceedings, this standardizes the computation of interest and closes a significant loophole that has frustrated project developers and contractors for years.

The matters have now been remanded back to the appropriate Benches to re-calculate and enforce awards in accordance with these definitive principles.