Section 31(7) of The Arbitration Act III : Award of Interest

‘Interest’ is defined as “the return or compensation for the use or retention by one person for a sum of money belonging to or owned by any reason to another”. In essence, an award of interest compensates a party for its forgone return on investment, or for money withheld without a justifiable cause. The current practice of awarding interest in International Commercial Arbitrations is riddled with inconsistencies, and is criticized for lack of uniformity. 

Section 31(7) is in two parts: Sub-Section (a) pertain to the award of interest for the pre-reference and pendente lite period, which is subject to the agreement between the parties. Absent an agreement between the parties, the Arbitral Tribunal has the discretion to award interest; as it deems reasonable. Section 31(7)(b) pertain to the post-award period, i.e., from the date of the award to the date of realization, and is not subject to party autonomy or an agreement between the parties. This would be apparent from the manner in which clause (b) of Section 31(7) is framed. The phrase “unless otherwise agreed by the parties” is absent from this provision.

In an International Commercial Arbitration, in the absence of an agreement between the parties on interest, the rate of interest awarded would be governed by the law of the seat of Arbitration. The rate of interest awarded must correspond to the currency in which the award is given, and must be in conformity with the laws in force in the lex fori.

In the present case, the International Commercial Arbitration having its seat in India, the rate of interest to be awarded must be in accordance with The Arbitration and Conciliation Act, 1996. Absent an agreement between the parties, the Arbitral Tribunal has the discretion to award interest; as it deems reasonable.

An Arbitral Tribunal while making an award for interest must take into consideration a host of factors, such as: (i) the ‘loss of use’ of the principal sum; (ii) the types of sums to which the interest must apply; (iii) the time period over which interest should be awarded; (iv) the internationally prevailing rates of interest; (v) whether simple or compound rate of interest is to be applied; (vi) whether the rate of interest awarded is commercially prudent from an economic standpoint; (vii) the rates of inflation;  (viii) proportionality of the count awarded as interest to the principal sums awarded.

On the one hand, the rate of interest must be compensatory as it is a form of reparation granted to the award holder; while on the other it must not be punitive, unconscionable or usurious in nature. Courts may reduce the interest rate awarded by an Arbitral Tribunal where such interest rate does not reflect the prevailing economic conditions or where it is not found reasonable, or promotes the interests of justice.”

Hon’ble Justice Indu Malhotra, Vedanta Ltd. v. Shenzen Shandong Nuclear Power Construction Company Ltd., [Civil Appeal No.10394 of 2018].