Section 31(7) of the Arbitration and Conciliation Act, 1996, governs the award of interest in arbitral proceedings, providing both default provisions and flexibility for parties to agree upon terms. This article explores the default rules, judicial precedents, and factors influencing the award of interest under this section, focusing on its implications for pre-award and post-award interest in arbitral decisions.
Section 31(7) of Arbitration and Conciliation Act, 1996
Default Rule: Unless otherwise agreed by the parties, the arbitral tribunal may award interest at a rate deemed reasonable from the date the cause of action arose until the date of the award.
Rate of Interest: In the absence of a contractual agreement, tribunals often award interest between 6% to 12% per annum, depending on the facts of the case.
Section 31 (7) reads as follows: –
“(7) (a) Unless otherwise agreed by the parties, where and in so far as an arbitral award is for the payment of money, the arbitral tribunal may include in the sum for which the award is made interest, at such rate as it deems reasonable, on the whole or any part of the money, for the whole or any part of the period between the date on which the cause of action arose and the date on which the award is made.
(b) A sum directed to be paid by an arbitral award shall, unless the award otherwise directs, carry interest at the rate of two per cent. higher than the current rate of interest prevalent on the date of award, from the date of award to the date of payment.
Explanation. —The expression “current rate of interest” shall have the same meaning as assigned to it under clause (b) of section 2 of the Interest Act, 1978 (14 of 1978).”
Judicial Precedents
Vedanta Ltd. v. Shenzen Shandong Nuclear Power Construction Co. Ltd. (2018)
Section 31(7)(a) – Award of interest for pre-reference and pendente lite period is subject to agreement between parties – In absence of agreement between parties arbitral tribunal has discretion to award interest as it deem reasonable.
(Para 5) “The discretion of the arbitrator to award interest must be exercised reasonably. An arbitral tribunal while making an award for Interest must take into consideration a host of factors, such as:
- the `loss of use’ of the principal sum;
- the types of sums to which the Interest must apply;
- the time period over which interest should be awarded;
- the internationally prevailing rates of interest;
- whether simple or compound rate of interest is to be applied;
- whether the rate of interest awarded is commercially prudent from an economic standpoint;
- the rates of inflation,
- 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 nor found reasonable, or promotes the interests of justice.”
Factors Influencing Interest Rate
Contractual Agreement:
- If the contract specifies an interest rate, the tribunal typically follows that rate.
- In the absence of a stipulated rate, the tribunal uses its discretion.
Nature of the Dispute: For commercial disputes, tribunals often award rates aligned with prevailing market or lending rates.
Delay in Payments: Higher interest may be awarded if one party delays payments without justification.
Prevailing Banking Rates: Tribunals sometimes use rates provided by the Reserve Bank of India (RBI) or base their decisions on prime lending rates.
Common Interest Rates in Arbitration
Pre-Award Interest: Pre-award interest refers to the interest awarded for the period between the date when the cause of action arose and the date of the arbitral award. [Section 31(7)(a)]
- Typically ranges between 6% to 12% per annum.
- The tribunal determines the rate based on the case’s facts and circumstances.
Post-Award Interest: Post-award interest refers to the interest awarded for the period from the date of the arbitral award until the date of actual payment. (Section 31(7)(b))
- Default statutory rate: 18% per annum.
- Courts may reduce it to a reasonable level (e.g., 9% to 12%) based on equity and commercial considerations.
Section 31(7) of the Arbitration and Conciliation Act, 1996, strikes a balance between statutory guidance and judicial discretion in awarding interest. While the statutory framework ensures uniformity and fairness, tribunals and courts are empowered to tailor interest rates based on the specific circumstances of a case. This dual approach ensures that interest awards remain compensatory rather than punitive, thereby aligning with the principles of justice and equity.