Interest on Arbitral Awards in India: Pre-Award, Post-Award and Compounding Under Section 31(7)

Interest on arbitral awards in India is governed by Section 31(7) of the Arbitration and Conciliation Act 1996. The provision covers three distinct periods: the period bef

ore the award is made (pre-award interest), the period between the award and its enforcement (post-award interest), and the question of whether interest can be compounded. The tribunal has discretion on all of these, subject to what the parties have agreed. Getting interest right matters because, in disputes that take years to resolve, interest can rival or exceed the principal claim in size.

Pre-Award Interest Under Section 31(7)(a)

Section 31(7)(a) provides that unless the parties have otherwise agreed, the tribunal may award interest at a rate it considers reasonable on the whole or any part of the money awarded, for the whole or any part of the period between the date the cause of action arose and the date of the award. This gives the tribunal broad discretion. It can choose the period, the rate, and whether to award simple or compound interest.

Rate of Interest

Indian tribunals typically award pre-award interest at rates ranging from 9% to 18% per annum, depending on the nature of the claim, the sector involved, and the evidence of the applicable commercial rate. Courts reviewing interest awards under Section 34 have been reluctant to interfere with the rate chosen by the tribunal unless it is manifestly unreasonable. The Supreme Court has affirmed that interest rate determination falls within the tribunal's fact-finding discretion.

Compounding

Section 31(7) does not expressly prohibit compound interest, and tribunals have awarded it in commercial disputes where compound interest was the applicable commercial norm and the parties had not excluded it. In disputes arising out of banking and financial services contracts, compound interest has been upheld where the contract itself provided for it. In construction and infrastructure disputes, simple interest is more common.

Post-Award Interest Under Section 31(7)(b)

Section 31(7)(b) provides that where an award directs a sum to be paid, interest shall be payable on that sum at the rate of two percent per annum above the current rate of interest from the date of the award to the date of payment, unless the award otherwise directs. "Current rate of interest" is defined by reference to the Interest Act 1978 as the rate prevailing on the date of the award, which has varied over time and is notified periodically.

The Default Rate

The default rate under Section 31(7)(b) is two percent above the current rate. This is often lower than commercial rates and may not adequately compensate an award creditor for the time value of money during enforcement proceedings. Tribunals are therefore encouraged to address post-award interest expressly in the award rather than allowing the statutory default to apply. A higher rate, or an order that post-award interest shall compound, can materially change the incentive for the award debtor to pay promptly.

Can Courts Modify Post-Award Interest?

Where an award does not address post-award interest and the Section 31(7)(b) default applies, courts enforcing the award give effect to the statutory rate. Where an award does specify a post-award rate, courts generally enforce it unless there is a specific ground to refuse. A reduction in the post-award rate has occasionally been ordered as part of a settlement of enforcement proceedings, but courts do not routinely interfere with the rate specified in the award.

Interest in Foreign-Seated Arbitrations

For arbitrations seated outside India, interest on the award is governed by the law of the seat and the applicable institutional rules. When such an award is brought to India for enforcement under Part II of the Act, Indian courts enforce the interest component as part of the award. The question of whether compound interest awarded by a foreign tribunal is enforceable in India has been addressed in several cases, and courts have generally upheld compound interest awards from foreign tribunals provided they do not violate Indian public policy.

Interest and the Public Policy Defence

In some enforcement proceedings, award debtors have argued that high rates of interest, or compound interest, violate Indian public policy and should be refused. This argument has had limited success. After the Supreme Court's narrowing of the public policy exception in Renusagar Power Co. Ltd. v. General Electric Co. (1994) Supp. (1) SCC 644 and Shri Lal Mahal Ltd. v. Progetto Grano Spa (2014) 2 SCC 433, courts have been reluctant to refuse enforcement of an otherwise valid award solely because of the interest rate. The exception remains available for awards involving usurious or unconscionable rates, but this threshold is high.

Practical Points for Counsel

Counsel representing claimants in arbitration should specifically plead pre-award interest from the date the cause of action arose, not merely from the date of the claim notice. The longer the pre-award period, the larger the interest component. Counsel should also address post-award interest expressly in the list of reliefs and ask the tribunal to specify a commercial rate, including compounding where appropriate, rather than relying on the Section 31(7)(b) default. On the other side, counsel for respondents should examine the claimed interest period carefully: truncating the pre-award period by arguing a later crystallisation date for the cause of action can materially reduce the award.

Frequently Asked Questions

Can a party claim interest if the contract is silent on interest?

Yes. Section 31(7)(a) applies "unless the parties have otherwise agreed." Silence in the contract on interest does not exclude the tribunal's power to award it. However, where the contract expressly excludes interest or specifies a particular rate, the tribunal is bound by that agreement.

What is the "current rate of interest" for Section 31(7)(b) purposes?

The current rate of interest is the bank rate declared by the Reserve Bank of India under the Reserve Bank of India Act 1934. This rate changes over time. The rate applicable for post-award interest is the rate prevailing on the date the award is made. Courts determining post-award interest under the statutory default look to the RBI's published bank rate at that date.

Does the tribunal have to award interest?

No. Section 31(7)(a) gives the tribunal discretion to award interest, not an obligation. A tribunal may decline to award pre-award interest, for example where a claimant delayed unreasonably in bringing its claim or where the nature of the dispute makes interest inappropriate. However, this is rare in straightforward commercial disputes, and courts reviewing such decisions have generally expected a reasoned explanation when interest is refused.

About Vikrant D. Shetty and Associates

Vikrant D. Shetty and Associates is a Mumbai-based law firm practising in international arbitration, commercial litigation, and corporate advisory. The firm represents and advises parties on domestic and international arbitral proceedings and award enforcement in India.

Related reading: 5 Mistakes Indian Banks and NBFCs Make That Lead to Overpaying for Arbitration Claims.

Disclaimer: This article is for general information only and does not constitute legal advice. Readers should obtain appropriate professional advice before acting on any information set out here.