How Interest on Arbitral Awards Works Under Section 31(7)

Section 31(7) of the Arbitration and Conciliation Act, 1996 governs interest on arbitral awards in India across three components: pre-award interest for the period before the award is made, post-award interest running from the date of the award until payment, and the tribunal's discretion to compound either. Unless the parties have agreed otherwise, the tribunal decides the rate and period for pre-award interest, while post-award interest defaults to two percent above the current rate of interest unless the award directs otherwise. Because interest can rival or exceed the principal in a dispute spanning several years, this article examines how tribunals exercise that discretion and how it differs in foreign-seated arbitration. Interest is payable for the period before 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.

What Rate of Interest Do Tribunals Typically Award?

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.

What Is the Default Rate for Post-Award Interest?

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.

Can an arbitral tribunal award compound interest in India?

Yes. Section 31(7) of the Arbitration and Conciliation Act, 1996 does not prohibit compound interest, and tribunals have awarded it in commercial disputes, particularly banking and financial services matters, where the contract itself provided for compounding or it reflected the applicable commercial norm. In construction and infrastructure disputes, tribunals more commonly award simple interest instead.

What is the default post-award interest rate if the arbitral award is silent?

Section 31(7)(b) fixes the default at two percent per annum above the current rate of interest, running from the date of the award until the date of payment, unless the award directs otherwise. The current rate of interest is determined by reference to the Interest Act, 1978 and the rate the Reserve Bank of India has notified as prevailing on the date of the award.

Can a court reduce the interest rate awarded by an arbitral tribunal?

Courts reviewing an award under Section 34 of the Arbitration and Conciliation Act, 1996 are reluctant to interfere with the interest rate a tribunal has fixed unless it is manifestly unreasonable. A reduction has occasionally followed a negotiated settlement during enforcement proceedings, but courts do not routinely revise the rate specified in the award itself.

Is compound interest awarded by a foreign-seated tribunal enforceable in India?

Generally, yes. Where an award from a foreign-seated arbitration is brought to India for enforcement under Part II of the Arbitration and Conciliation Act, 1996, Indian courts have upheld compound interest components provided they do not violate India's public policy, following the narrowed public policy exception set out in Renusagar Power Co. Ltd. v. General Electric Co.

From what date does pre-award interest under Section 31(7)(a) typically run?

Section 31(7)(a) allows the tribunal to award interest for the whole or any part of the period between the date the cause of action arose and the date of the award. Counsel for claimants should specifically plead interest from the date the cause of action arose rather than the later date of a claim notice, since a longer pre-award period increases the interest component.

Can an award debtor resist enforcement solely because the interest rate is high?

This argument has had limited success. After the Supreme Court narrowed the public policy exception in Renusagar Power Co. Ltd. v. General Electric Co. and Shri Lal Mahal Ltd. v. Progetto Grano Spa, courts have been reluctant to refuse enforcement of an otherwise valid award solely on account of the interest rate, reserving the exception for genuinely usurious or unconscionable rates.

Can parties contractually exclude the tribunal's power to award interest altogether?

Yes, for pre-award interest. Section 31(7)(a) of the Arbitration and Conciliation Act, 1996 applies only "unless the parties have otherwise agreed," so a contract clause stating that no interest is payable on sums due will bind the tribunal and preclude pre-award interest. The exclusion must be specific to interest; a general clause on a different subject will not be read as displacing it. Post-award interest under Section 31(7)(b) works differently: it applies "unless the award otherwise directs," so it is controlled by what the tribunal states in the award itself, not by a standing contractual waiver.

Does interest continue to accrue while a Section 34 challenge or Section 37 appeal is pending?

Generally yes. Post-award interest under Section 31(7)(b) of the Arbitration and Conciliation Act, 1996 runs "from the date of the award to the date of payment," and merely filing a Section 34 petition to set aside the award, or a Section 37 appeal, does not by itself stop that clock. Interest continues to accrue unless the court granting an unconditional stay of the award's operation also directs that interest will not run during the stay, or the award debtor secures a conditional stay by depositing the awarded amount. Award creditors should track this distinction carefully when negotiating stay conditions.

Does Section 31(7) interest apply to costs awarded by the tribunal, or only to the principal sum?

Section 31(7)(a) of the Arbitration and Conciliation Act, 1996 allows the tribunal to award interest on "the whole or any part of the money awarded," language broad enough to cover a costs award as well as the substantive claim, though tribunals do not always exercise this power for costs specifically. Section 31(7)(b) similarly speaks of interest on "the sum" directed to be paid by the award, without excluding costs. Parties who want interest to run on an awarded costs component should ask the tribunal to address it expressly, since practice on this point varies and is not uniform across tribunals.

Must a party specifically plead for compound interest, or can a tribunal grant it without a specific request?

Tribunals in India generally expect a party seeking compound interest under Section 31(7) of the Arbitration and Conciliation Act, 1996 to plead it specifically in the statement of claim or the relief sought, since compounding increases the sum recoverable and the respondent should have notice of the claim being made against it. A tribunal that awards compound interest without it having been pleaded or argued risks the award being challenged on grounds that a party was not given a fair opportunity to address the claim. Counsel should therefore include an express prayer for compound interest, with the proposed rests, rather than leaving it to the tribunal's discretion.

What happens to interest already accrued if a court partially sets aside an award under Section 34?

Where a court under Section 34 of the Arbitration and Conciliation Act, 1996 sets aside only part of an award, for example a specific head of claim, while upholding the remainder, post-award interest under Section 31(7)(b) continues to apply to the portion of the award that survives, calculated on the reduced sum from the date of the original award. Interest that had accrued on the portion set aside does not survive the setting aside, since that part of the award no longer directs any sum to be paid. Award creditors enforcing a partially upheld award should recompute the interest base accordingly.

About Vikrant D. Shetty and Associates (Advocates & Solicitors)

Vikrant D. Shetty and Associates (Advocates & Solicitors) 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.

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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.