Supreme Court limits interest on arbitration awards when parties have a contract

They signed a deal saying interest would be calculated one way. Then they tried to get more. The Supreme Court just shut that down.

In May 2022, a bench of Justice L. Nageswara Rao and Justice B.R. Gavai delivered a judgment that every commercial lawyer needs to read before drafting an arbitration clause. The question was deceptively simple: when a contract already says how interest will be calculated, can an arbitral tribunal — or a court — override that agreement and award more?

The answer, the Court said, is no. And in reaching that answer, the Court drew a bright line that separates cases where parties have a specific interest agreement from cases where they don't.

The courtroom was still as the bench read the operative order. The signed Concession Agreement — thick, dense, each page a promise — sat in the record. The tribunal's award document, dated May 2017, lay beside it, its pages already yellowing at the edges. The smell of old paper and the weight of a decade of litigation hung in the air. The file, passed from clerk to judge, seemed heavier than its pages — each one a decision, a challenge, an appeal compressed into paper.

When a metro line became a legal battlefield

In 2008, Delhi Airport Metro Express Private Limited (DAMEPL) won a bid and signed a Concession Agreement with Delhi Metro Rail Corporation (DMRC) to build and operate the Delhi Airport Metro Express line. DMRC was to handle the civil works; DAMEPL would do the rest. It was a classic public-private partnership — high stakes, tight timelines, and a contract that tried to anticipate every contingency.

It didn't work. Disputes erupted, and in October 2012, DAMEPL terminated the agreement. Arbitration followed — a long, expensive process that ended in May 2017 with the Arbitral Tribunal awarding DAMEPL Rs. 2,782.33 crores as a Termination Payment. The Tribunal also awarded interest at the rate specified in the contract: SBI Prime Lending Rate plus 2%.

DMRC challenged the award through the Delhi High Court and then the Supreme Court. In September 2021, the Supreme Court upheld the award. The money was finally due — or so it seemed.

The fight over how to calculate interest

But then came the execution stage — the process of actually collecting the money. DAMEPL walked into the Delhi High Court and made an argument that would have dramatically increased the amount DMRC had to pay.

DAMEPL said: under Section 31(7)(b) of the Arbitration and Conciliation Act, 1996 (the provision that governs post-award interest), the interest on the award should be calculated on the total sum — including the pre-award interest that had already accrued. That total sum was Rs. 4,662.59 crores, not just the original principal of Rs. 2,782.33 crores. Compound the interest on that larger base, and the numbers become staggering.

DAMEPL relied on the Supreme Court's own precedent in Hyder Consulting (UK) Ltd v. Governor, State of Orissa (2015), where the Court had held that the word 'sum' in Section 31(7)(a) (pre-award interest) includes interest that has already accrued — so post-award interest under clause (b) can be calculated on that larger 'sum'.

The Single Judge of the Delhi High Court rejected this argument. DAMEPL appealed directly to the Supreme Court.

Why the contract changed everything

The Supreme Court agreed with the High Court. But the reasoning is what matters for every future arbitration.

Section 31(7)(a) of the Arbitration Act says: "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…"

The key phrase is the opening one: "unless otherwise agreed by the parties."

In the DAMEPL-DMRC case, the parties had agreed. Article 29.8 of the Concession Agreement specifically laid out how interest would be calculated. The Arbitral Tribunal had followed that contractual stipulation. So the discretionary power that Section 31(7)(a) normally gives to tribunals — to decide the rate, the period, and the base on which interest is calculated — was displaced. The parties' own agreement governed.

The Court held that the Hyder Consulting precedent applied only in cases where there was no agreement between the parties on interest. In that case, the tribunal had discretion, and the Court's interpretation of 'sum' as including accrued interest made sense. But where parties have specifically contracted on interest, the tribunal's discretion vanishes — and so does the Hyder Consulting ratio.

The principle the Court refused to abandon

The Supreme Court was emphatic on one point: any interpretation of Section 31(7)(a) that makes the phrase "unless otherwise agreed by the parties" redundant or meaningless is impermissible. That phrase must be given full effect. It is not a decorative flourish. It is the statutory expression of party autonomy — the idea that parties to a commercial contract should be free to decide their own terms, and that courts and tribunals should respect those terms.

The Court cited its own earlier decisions — State of Haryana v. S.L. Arora and Co. (2010), N.S. Nayak & Sons v. State of Goa (2003), and Sree Kamatchi Amman Constructions v. Divisional Railway Manager (2010) — all of which had held that where parties have a specific agreement on interest, the tribunal must follow it. The Hyder Consulting majority was not overruled; it was simply confined to its facts.

In the operative order, the Court stated: "We therefore, see no error in the observations of the learned Single Judge of the Delhi High Court. The appeal is accordingly dismissed." The words were final, almost terse. The file was closed — the last of a decade's worth of paper, stamped and shelved.

The procedural journey: a decade in court

The case had wound its way through the legal system for over a decade. The Arbitral Tribunal delivered its award on May 11, 2017. DMRC challenged it under Section 34 of the Arbitration Act before a Single Judge of the Delhi High Court, who upheld the award on March 6, 2018. DMRC then appealed under Section 37 before a Division Bench of the Delhi High Court, which partly allowed the appeal on January 15, 2019. DAMEPL took the matter to the Supreme Court, which set aside the Division Bench order on September 9, 2021, restoring the original award.

Then came the execution stage. On March 10, 2022, a Single Judge of the Delhi High Court rejected DAMEPL's argument that post-award interest should be calculated on the total sum including pre-award interest. DAMEPL appealed again to the Supreme Court. On May 5, 2022, the Supreme Court dismissed the appeal, finally putting the matter to rest.

Each step had added to the file. The tribunal's award document — its pages crisp at first, now soft from handling — had been read and re-read by judges in three different courts. The Concession Agreement, signed in 2008, had outlasted the metro line it governed. The courtroom on that May morning felt the full weight of that paper trail — the silence broken only by the rustle of pages as the bench delivered its final order.

The broader legal architecture: Section 31(7) and party autonomy

To understand the significance of this judgment, one must appreciate the architecture of Section 31(7) of the Arbitration and Conciliation Act, 1996. Clause (a) deals with pre-award interest — the period from the date the cause of action arose to the date of the award. Clause (b) deals with post-award interest — the period from the date of the award to the date of actual payment. Both clauses begin with the phrase "unless otherwise agreed by the parties."

The Court's interpretation gives teeth to that phrase. It means that if a contract specifies a rate, a base, and a method for calculating interest, the tribunal cannot deviate from it. The tribunal's discretion under Section 31(7)(a) — to decide the rate, the period, and whether to award simple or compound interest — is not a blank cheque. It is a power that exists only in the absence of a contractual agreement.

This is not a minor point. In large infrastructure projects, the interest clause can be worth hundreds of crores. A difference of one percentage point, applied over several years on a principal of thousands of crores, can shift the economics of an entire project. The Court's judgment ensures that parties who take the time to negotiate and draft a specific interest clause can rely on it — and that the other side cannot use the arbitration process to rewrite the deal.

What this means for your next contract

For practitioners, this judgment is a reminder that the arbitration clause is not the only clause that matters. The interest clause — often buried in the boilerplate — can determine the entire economics of a dispute years later.

If you want the tribunal to have discretion on interest, do not specify a rate or method in the contract. If you want certainty, specify everything — and the tribunal will be bound. The choice is strategic: flexibility versus predictability. This judgment tells you which one you get, depending on how you draft.

Consider the practical implications for a typical infrastructure contract. The interest clause is often a last-minute addition, copied from a previous contract, rarely negotiated in detail. This judgment means that every word of that clause will be scrutinised years later, when the stakes are highest. A vague clause — "interest at commercial rates" — may leave room for the tribunal to exercise discretion. A precise clause — "interest at SBI PLR plus 2%, calculated on the principal amount only" — will bind the tribunal completely.

The Court also cited Reserve Bank of India v. Peerless General Finance and Investment Co. Ltd. (1987) for the principle that a statute must be interpreted to give effect to every word — the phrase "unless otherwise agreed by the parties" cannot be read as surplusage. This interpretive principle, applied to Section 31(7)(a), reinforces the primacy of contractual terms in arbitration.

The practitioner's perspective: drafting for certainty

For a lawyer drafting a commercial contract, the lesson is clear: the interest clause deserves the same attention as the dispute resolution clause. If the parties want to avoid a future fight over how interest is calculated, they should specify the rate, the base (principal only or principal plus accrued interest), and the period. If they want to leave room for the tribunal to adjust the interest based on circumstances, they should remain silent on the specifics.

This judgment also has implications for the execution stage of arbitration awards. DAMEPL's argument — that post-award interest should be calculated on the total sum including pre-award interest — was not unreasonable. It was based on a plausible reading of Hyder Consulting. But the Court drew a distinction that many practitioners may have missed: Hyder Consulting applies only where there is no agreement on interest. Where there is an agreement, the tribunal's discretion is displaced, and the contractual terms govern.

The Court also cited Hardeep Singh v. State of Punjab (2014) and Union of India v. Dhanwanti Devi (1996) for the principle that precedents must be read in the context of their facts. The Hyder Consulting majority was not overruled — it was distinguished. This is a careful, incremental approach to precedent: the Court did not create a new rule, but clarified the boundary of an existing one.

THE PLAY: Draft your interest clause with the same care as your arbitration clause — because if you specify how interest is calculated, the tribunal cannot give the other side more.

The appeal was dismissed. The contract won. And for every lawyer who drafts a commercial contract, the message is unmistakable: the words you choose today will be the law tomorrow.