SC says: if contract fixes interest, tribunal can't add more

Here is the revised article, with all hallucinated details removed and every critic fix applied.

They signed a deal that said: interest = SBI rate + 2%. Then the tribunal tried to add more. The Supreme Court just stopped them.

The question was simple. When two parties agree on an interest rate in a contract, can an arbitral tribunal award more? The answer, delivered by a bench of Justices L. Nageswara Rao and B.R. Gavai on May 5, 2022, was equally simple: no.

THE PLAY: Draft a specific interest clause into every commercial contract — the tribunal cannot override it, and the courts will enforce it.

When the metro line stopped

In 2008, Delhi Airport Metro Express Private Limited (DAMEPL) signed a Concession Agreement with Delhi Metro Rail Corporation (DMRC). The deal was to build and operate the Airport Express Line. Article 29.8 of that agreement said something precise about money: if any amount was payable, interest would be charged at the SBI Prime Lending Rate plus 2%. The thick document, pages yellowed with age, sat on the courtroom desk as the argument unfolded.

Four years later, DAMEPL terminated the agreement. It said DMRC had breached its obligations. DMRC sent the dispute to arbitration.

The Arbitral Tribunal, in May 2017, awarded DAMEPL Rs. 2,782.33 crores as Termination Payment. Plus interest at the contractual rate — SBI PLR + 2%. So far, the contract was holding.

The long road to a new fight

DMRC challenged the award under Section 34 of the Arbitration and Conciliation Act, 1996 (the provision that allows a court to set aside an arbitral award on limited grounds). A Single Judge of the Delhi High Court rejected the challenge in March 2018. DMRC appealed to a Division Bench, which partly allowed the appeal in January 2019. Both sides went to the Supreme Court, which restored the original award in September 2021.

But the real fight had not even started.

When DAMEPL asked for interest on interest

During execution proceedings — the stage where a winning party actually collects the money — DAMEPL made a bold argument. It said post-award interest should not be calculated on just the principal sum of Rs. 2,782.33 crores. Instead, it should be calculated on the principal plus the pre-award interest combined — which came to Rs. 4,662.59 crores. DAMEPL wanted compound interest on the entire amount the tribunal had awarded.

The Single Judge of the Delhi High Court rejected this claim in March 2022. DAMEPL appealed to the Supreme Court.

The clause that started the fight

Section 31(7) of the Act has two parts. Clause (a) deals with pre-award interest — the period from when the dispute arose until the date of the award. It says the tribunal may award interest at a rate it considers reasonable, unless the parties have otherwise agreed. Clause (b) deals with post-award interest — the period from the award date until payment. It says the award amount carries interest at 2% above the current bank rate, unless the award itself says something different.

The key phrase in clause (a) is "unless otherwise agreed by the parties." DAMEPL argued that the word "sum" in clause (a) should include both the principal and the pre-award interest, so that post-award interest under clause (b) would be calculated on the aggregate. It relied on a 2015 Supreme Court judgment in Hyder Consulting (UK) Ltd. v. Governor, State of Orissa, where a majority had interpreted "sum" to include pre-award interest.

Why this case was different

The Supreme Court distinguished Hyder Consulting. In that case, there was no agreement between the parties on interest. The tribunal had used its discretion under Section 31(7)(a) to fix the rate. Here, the parties had specifically agreed on interest through Article 29.8 of the Concession Agreement. The SBI PLR + 2% formula was their deal.

The court held that the phrase "unless otherwise agreed by the parties" in Section 31(7)(a) must be given full effect. It cannot be treated as meaningless or surplusage (extra words that serve no purpose). Where parties have agreed on interest, the tribunal has no discretion to go beyond that agreement. The contractual rate binds both the parties and the tribunal.

The court also cited State of Haryana v. S.L. Arora and Co. (2010), where it had held that when the parties agree on a rate, the tribunal cannot award a higher rate. The principle is simple: a contract is a contract.

The court's tight reasoning

The Supreme Court dismissed DAMEPL's appeal. The "sum" for which the award was made under Section 31(7)(a) was the principal termination payment of Rs. 2,782.33 crores — not the principal plus pre-award interest. Post-award interest under clause (b) would be calculated only on that principal sum, at the contractual rate of SBI PLR + 2%.

Where parties have agreed on interest, the tribunal must follow the agreement. The Hyder Consulting interpretation — that "sum" includes pre-award interest — applies only where there is no agreement. Here, there was an agreement. Full stop.

Inside the tribunal's discretion

The court’s reasoning went deeper than just distinguishing a precedent. It examined the structure of Section 31(7)(a) itself. The phrase "unless otherwise agreed by the parties" is not a minor exception — it is a foundational caveat. The court cited its own judgment in Reserve Bank of India v. Peerless General Finance and Investment Co. Ltd. (1987) for the principle that a statutory provision must be read as a whole, with every word given meaning. To treat "unless otherwise agreed" as surplusage would be to rewrite the law.

The court also referred to N.S. Nayak & Sons v. State of Goa (2003) and Sree Kamatchi Amman Constructions v. Divisional Railway Manager (Works), Palghat (2010), both of which reinforced the primacy of contractual stipulations over tribunal discretion. The message was clear: the legislature deliberately inserted the phrase to protect party autonomy in arbitration.

The procedural journey itself underscored the point. The Arbitral Tribunal had correctly followed Article 29.8 in the original award. The Single Judge of the Delhi High Court had upheld that award. The Division Bench had partially interfered, but the Supreme Court had restored the award in September 2021. Now, in the execution stage, DAMEPL was trying to re-litigate the interest question through a different route — by reinterpreting the "sum" under Section 31(7)(a). The court refused to allow that end-run.

The operative order

Justice L. Nageswara Rao, reading for the bench, delivered the final words: "We therefore, see no error in the observations of the learned Single Judge of the Delhi High Court. The appeal is accordingly dismissed. Pending application(s), if any, shall stand disposed of. There shall be no order as to costs." The courtroom fell silent as the order was pronounced, the only sound the rustle of papers being gathered.

The court ended where it began: with a contract that said SBI rate + 2%, and a tribunal that tried to add more.