Arbitrator's power to award Interest: Prohibitory clauses

Section 31(7) of the Arbitration and Conciliation Act, 1996 (“the Act”) governs arbitrator's power to award interest. Section 31(7)(a) covers pre-award/ pendente lite interest (subject to party agreement), while section 31(7)(b) covers post-award interest. Courts have consistently held that these provisions operate separately, with the arbitrator having absolute discretion while awarding future interest, subject to the parties’ agreement (if any) with respect to the pre-award period.

The 1996 Act introduced a new framework, wherein the arbitrator’s power to award interest is strictly subject to the agreement between the parties. In Sayeed Ahmed & Co. v. State of UP (2009) 12 SCC 26, the Supreme Court of India examined the powers of an arbitrator to award interest under Section 31(7)(a) of the Act. The Court concluded that pursuant to the language used in the 1996 Act, there are only two periods relevant for awarding the interest i.e., pre-award and post award. The Court, thereafter, held that a comprehensive clause under the contract barring the payment of interest in any respect excludes pendente lite interest as well. Observing the above, the award with respect to pendente lite interest was set aside by the Court. It was also held that the judgments on interest pertaining to arbitrations under the 1940 Act, would not apply to arbitrations under 1996 Act, as there was no express provision akin to Section 31(7) in the 1940 Act.

In Sree Kamatchi Amman Constructions v. Railways - (2010) 8 SCC 767, the Supreme Court of India, while discussing the arbitrator’s power to award interest, emphasised the expression “unless otherwise agreed by the parties” and held that in view of the express bar under the agreement, arbitrator was justified in not awarding any interest either for the pre-reference period or pendente lite interest. The Court proceeded to hold that such express bar meant that even pendente lite interest could not have been awarded by the arbitrator.

The aforesaid position was once again affirmed in Union of India v. Bright Power Projects - (2015) SCC OnLine SC 605.

In a recent judgment, Union of India v. L&T - (2026) INSC 203, the Supreme Court of India was seized of an issue where despite absolute contractual prohibition on interest, the arbitral tribunal had awarded interest on certain claims as ‘compensation’ alongwith future interest. The Court modified the award, holding that there was an absolute bar under the contract prohibiting interest on any amount payable to the contractor, which had a much wider meaning. It was concluded that the arbitral tribunal was not justified in awarding pre-reference/ pendente lite interest owing to the contractual bar. Critically, the Court observed that post-award interest occupies a distinct statutory field and upheld the award of future interest though it modified the rate of interest.

The above judgments discussed the scope and ambit of Section 31(7) and settled that an arbitrator doesn’t possess powers to award interest in any form for the pre-award period, if prohibited under the contract. However, there is no prohibition on awarding future interest.

Recently in an interesting judgment, the Supreme Court in ONGC Ltd. v. G&T Beckfield Drilling Services - (2025) SCC OnLine SC 1888, made a fine distinction while harping on the importance and mandatory nature of prohibitory clauses. The Court upheld the award of pendente lite interest by the arbitral tribunal, holding that a clause barring interest "on delayed payment/ disputed claims" does not exclude pendente lite interest, unlike broader clauses barring interest "in any other respect whatsoever." The Court while coming to this conclusion, observed that an arbitral tribunal can be denuded of its power to award pendente lite interest only if the agreement/ contract between the parties is so worded that the award of pendente lite interest is either explicitly or by necessary implication barred. A clause merely barring the award of interest on delayed payment by itself will not be readily inferred as a bar to award pendente lite interest by the arbitral tribunal.

The judgment of ONGC (supra) is thus a remarkable shift from the view taken by various courts on the issue of award of interest by an arbitral tribunal. Though in many judgments under the 1940 Act, the award of pendente lite interest was upheld, the 1940 Act didn’t contain any provision akin to Section 31(7) of the 1996 Act. Therefore, ONGC (supra) sets a new dimension giving parties a level playing field, where defaulting party cannot escape from its liability to compensate the aggrieved party. The judgment balances party autonomy with statutory entitlement.

About the authors: Abhishek Kumar is a Partner and Shubham Singh is an Associate at Singhania & Partners.

Disclaimer: The opinions expressed in this article are those of the author(s). The opinions presented do not necessarily reflect the views of Bar & Bench.

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