Ask what a commercial arbitration is worth and the honest answer usually has two components: the claim, and the interest. In disputes that take years from cause of action to execution, interest can dwarf the principal — and Section 31(7) of the Arbitration and Conciliation Act, 1996 is the provision that governs it. Clause (a) deals with the period up to the award: the tribunal may include interest at such rate as it deems reasonable, for the whole or part of the period between cause of action and award — but only "unless otherwise agreed by the parties". Clause (b) deals with the period after: the award carries interest at two per cent higher than the prevailing "current rate of interest" from the date of award to payment, unless the award directs otherwise. Each phrase in that scheme is argued daily in Delhi's arbitration practice.
The three periods, and who rules each
| Period | Governing rule | Who decides |
|---|---|---|
| Pre-reference and pendente lite (cause of action to award) | Section 31(7)(a): tribunal's discretion on rate, period and portion of the sum — displaced by contrary agreement | The contract first; the tribunal where the contract is silent |
| Post-award (award to payment) | Section 31(7)(b): statutory default of current rate + 2% where the award is silent | The tribunal by express direction; the statute by default |
| Execution | The decree-holder executes the award as a decree; the awarded or default rate continues to run until realisation | The executing court applies, but does not rewrite, the award |
Clause (a): where the fights actually happen
Three recurring battlegrounds dominate pre-award interest. The first is the bar clause: contracts — especially public-sector standard forms — often provide that no interest shall be payable on amounts withheld, security deposits or delayed payments. Whether such a clause reaches the claim actually awarded (damages, as opposed to withheld payments) is a matter of construction, and tribunals must apply the clause as written rather than their sense of fairness. The second is the period: clause (a) permits interest for "the whole or any part" of the period, so conduct matters — claimants who slept on invocation, or delayed the reference, routinely see the pre-reference component trimmed. The third is the rate: commercial reality is the touchstone, and tribunals reason from the parties' cost of funds, the currency of the award and prevailing lending rates; unexplained outlier rates are what Section 34 courts notice.
Pleading discipline decides much of this. Interest should be claimed as a distinct head — specifying rate, rests, base and period, with the contractual foundation or its absence addressed squarely. A statement of claim that tacks on "interest as the tribunal deems fit" surrenders the most valuable head of claim to improvisation.
Clause (b): the default that concentrates minds
Post-award interest exists to make delay in honouring the award expensive. The statutory default — two per cent above the current rate of interest, in the Interest Act's sense, prevailing on the award's date — is deliberately unattractive to award-debtors, and it operates automatically where the award is silent. Award-creditors should nonetheless invite the tribunal to fix the post-award rate expressly and to state the base (principal alone, or the awarded sum inclusive of pre-award interest), because clarity in the award forecloses the execution-stage arguments that silence invites. Award-debtors weighing a Section 34 challenge must count this cost: a challenge that fails leaves the clock having run at the award's rate throughout, and the deposit ordered for a stay under Section 36(3) only partly answers it.
Interest under connected regimes
Section 31(7) is the general rule, not the only one. Where the MSMED Act, 2006 governs a supply transaction, its Section 16 interest — compound, with monthly rests, at three times the bank rate — overrides contractual terms and travels into awards made in references under Section 18. Foreign-seated awards brought for enforcement carry the interest their own law and terms provide. And in domestic awards on claims under statutes with their own interest codes, the tribunal harmonises rather than chooses at large. Counsel's task at the drafting stage is to know which regime the transaction lives under — because an interest clause negotiated for the general law may be a dead letter in an MSMED reference.
Checklist for claimants: plead interest with rate, base, rests and period; prove the commercial context for the rate sought; address any bar clause head-on with a construction argument; seek express pre-award and post-award directions; and on receiving the award, verify the interest arithmetic within the Section 33 window for computational corrections.
The chamber of Advocate Manish Jha appears in commercial arbitrations and arbitration litigation — enforcement, challenges and interim measures — before the High Court of Delhi and the commercial courts of Delhi. This article is for general information; it is not legal advice and does not create an advocate-client relationship.
Frequently Asked Questions
Can the contract exclude interest altogether?
For the pre-award period, yes. Clause (a) is expressly subject to the parties' agreement, and clauses barring interest on delayed payments or deposits — common in government and construction contracts — bind the tribunal for that period if their language genuinely covers the claim in question. Whether a particular clause bars interest on damages, or only on specified payments, is a question of construction fought case by case.
What rate applies after the award?
Unless the award directs otherwise, clause (b) supplies the default: two per cent above the "current rate of interest" prevailing on the date of the award — the term drawing its meaning from the Interest Act, 1978, which keys it to the highest rate on deposits of scheduled banks. Tribunals frequently displace the default with a specified rate; the default operates where the award is silent.
Is interest on interest permissible?
The structure of Section 31(7) treats the "sum" awarded under clause (a) — which may include pre-award interest — as the base on which post-award interest under clause (b) runs. Tribunals should say expressly what the post-award rate applies to; ambiguity on the base is a recurring source of execution disputes and Section 33 correction applications.
Can a Section 34 court reduce the interest awarded?
Award-interference doctrine applies: interest fixed within the tribunal's discretion is rarely disturbed, but rates with no reasoning, interest granted in the teeth of a contractual bar, or double-counting across periods have drawn correction. Parties challenging or defending awards should treat the interest paragraphs with the same seriousness as liability findings — the money at stake is often larger.