Arbitrators and Interest Awards: An Overview
The Arbitration and Conciliation Act, 1996, particularly Section 31(7), delineates the scope of an arbitrator’s authority to grant interest. The section is divided into two primary parts: Section 31(7)(a) pertains to pre-award or pendente lite interest and is subject to any agreement between the parties, while Section 31(7)(b) deals with post-award interest. Courts have consistently maintained that these clauses operate independently, granting arbitrators full discretion when determining future interest, provided the parties have not stipulated otherwise for the pre-award phase.
Historical Context: Evolution from 1940 to 1996
The transition from the Arbitration Act of 1940 to the revised framework of the 1996 Act introduced a more structured approach to arbitrators’ powers regarding interest awards. A landmark case, Sayeed Ahmed & Co. v. State of UP (2009) 12 SCC 26, saw the Supreme Court of India interpreting the powers under Section 31(7)(a). The Court concluded that the 1996 Act defines two distinct periods for interest awards: pre-award and post-award. It was further ruled that if a contract explicitly prohibits interest of any kind, this prohibition extends to pendente lite interest as well, resulting in the Court setting aside the award for such interest.
Key Judicial Interpretations
Further jurisprudence, such as Sree Kamatchi Amman Constructions v. Railways (2010) 8 SCC 767, reinforced that an express prohibition within a contract prevents the arbitrator from awarding interest during both the pre-reference and pendente lite periods. Similarly, Union of India v. Bright Power Projects (2015) SCC OnLine SC 605 upheld this interpretation.
In a more recent case, Union of India v. L&T (2026) INSC 203, the Supreme Court addressed a situation where an arbitral tribunal awarded interest as compensation despite a clear contractual prohibition. The Court intervened to modify the award, emphasizing the comprehensive bar on interest payments. However, it acknowledged the autonomy of post-award interest as a statutory right, albeit with modifications to the interest rate.
ONGC v. G&T Beckfield: A Nuanced Understanding
A pivotal judgment in ONGC Ltd. v. G&T Beckfield Drilling Services (2025) SCC OnLine SC 1888, introduced a nuanced interpretation. The Supreme Court distinguished between broad prohibitions and specific clauses that only bar interest on delayed payments or disputed claims. The Court allowed pendente lite interest, asserting that unless a contract explicitly prohibits it, such interest awards are permissible. This decision underscores that prohibitory clauses must be explicitly worded to exclude pendente lite interest.
Conclusion
The decision in ONGC marks a significant shift, granting a balanced approach that respects both party autonomy and statutory rights. It aligns with the 1996 Act’s intent, ensuring that defaulting parties are unable to shirk their obligations to compensate affected parties.
About the authors: Abhishek Kumar is a Partner and Shubham Singh is an Associate at Singhania & Partners.
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