Arbitral interest under Section 31(7) may cover sub-periods and run on the composite award amount.
Section 31(7) of the Arbitration and Conciliation Act, 1996 permits the tribunal to award interest for the pre-award period, including both pre-reference and pendente lite stages, and to apply different rates to sub-periods where justified. It also permits post-award interest on the composite sum awarded, which may include accrued pre-award interest, unless the award provides otherwise. The text rejects the view that such treatment is confined to a single unbroken rate or necessarily amounts to impermissible compound interest, and confirms that the award may validly carry post-award interest on the amount as determined.
Issues: (i) Whether the arbitral tribunal could award interest for the pre-reference period, pendente lite period, and post-award period by treating the first statutory period as divisible into sub-periods with different rates of interest. (ii) Whether interest could be levied on the awarded interest amount by merging it with the principal sum so as to treat the award as carrying compound interest.
Issue (i): Whether the arbitral tribunal could award interest for the pre-reference period, pendente lite period, and post-award period by treating the first statutory period as divisible into sub-periods with different rates of interest.
Analysis: Section 31(7)(a) of the Arbitration and Conciliation Act, 1996 recognises a single pre-award period running from the date the cause of action arose to the date of the award. That period may include both the pre-reference and pendente lite stages. The statutory scheme permits the tribunal to award interest on the whole or any part of that period, and it may also apply different rates for different sub-periods if the circumstances justify such treatment. The earlier view that the tribunal was confined to only one unbroken rate for the entire pre-award span was incorrect.
Conclusion: The arbitral tribunal was competent to award pre-reference and pendente lite interest within the first statutory period, and the High Court was in holding otherwise.
Issue (ii): Whether interest could be levied on the awarded interest amount by merging it with the principal sum so as to treat the award as carrying compound interest.
Analysis: Under Section 31(7)(b) of the Arbitration and Conciliation Act, 1996, the sum directed to be paid by the award may include interest that has accrued up to the date of the award, and that entire sum can carry post-award interest unless the award directs otherwise. The legal position, as clarified by later precedent, recognises that the awarded sum may comprise principal and pre-award interest, and post-award interest may run on that composite amount. The High Court's reasoning that this necessarily amounted to impermissible compound interest was unsustainable.
Conclusion: Post-award interest on the composite awarded sum was permissible, and the High Court erred in setting aside that part of the award.
Final Conclusion: The judgment of the Division Bench was set aside and the arbitral award, as restored by the Court on the issue of interest, was upheld.
Ratio Decidendi: Section 31(7) of the Arbitration and Conciliation Act, 1996 permits award of interest on the whole or part of the pre-award period, including sub-division of that period, and post-award interest may run on the awarded sum comprising principal and pre-award interest.
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