When a contract says how interest works, arbitrators can't override it

They signed a deal saying interest would be at SBI rate plus 2%. Then the arbitrator tried to add more. The Court said: the contract wins.

In 2008, in a room that smelled of fresh print and ambition, Delhi Airport Metro Express Private Limited (DAMEPL) won a bid and signed a Concession Agreement with Delhi Metro Rail Corporation (DMRC) to operate the airport metro line. Four years later, DAMEPL terminated the agreement. A dispute erupted. It went to arbitration. And in 2017, inside a tribunal chamber where the award document sat heavy on the table, the Arbitral Tribunal awarded DAMEPL Rs. 2,782.33 crores as Termination Payment — plus interest at the contractual rate of SBI Prime Lending Rate plus 2%.

That should have been the end. It wasn't.

When the award became a new battlefield

DMRC challenged the award. Under Section 34 of the Arbitration and Conciliation Act, 1996 (the provision that allows a party to apply to a court to set aside an arbitral award), DMRC filed a petition before a Single Judge of the Delhi High Court. On March 6, 2018, the Single Judge rejected the petition and upheld the award. DMRC then appealed to a Division Bench of the Delhi High Court, which on January 15, 2019, partly allowed the appeal. The case climbed all the way to the Supreme Court, which on September 9, 2021, finally set aside the Division Bench order and upheld the award. DAMEPL then filed execution proceedings — the legal process to actually collect the money. And here, in the execution court where the file felt thin despite the staggering sum, a new fight erupted: how much interest did DMRC actually owe?

DAMEPL argued that the 'sum' under Section 31(7)(a) of the Arbitration and Conciliation Act, 1996 (the provision that governs interest on an arbitral award before the award is made) should include both the principal amount and the pre-award interest — totalling Rs. 4,662.59 crores. Post-award interest, they said, should run on that entire amount.

The Single Judge of the Delhi High Court rejected this on March 10, 2022. DAMEPL appealed to the Supreme Court. And on May 5, 2022, in a courtroom where the bench listened in silence, a bench of Justice L. Nageswara Rao and Justice B.R. Gavai dismissed the appeal.

The contract that changed everything

The core question was deceptively simple: does the word 'sum' under Section 31(7)(a) include interest that accrued before the award (called interest pendente lite, or interest during the pendency of the dispute) for the purpose of calculating post-award interest under Section 31(7)(b)?

DAMEPL had a strong precedent on its side. In Hyder Consulting (UK) Ltd. v. Governor, State of Orissa, the Supreme Court had held that 'sum' does include both principal and pre-award interest. If that case applied, DAMEPL's calculation was correct.

But the Court found a crucial difference. In Hyder Consulting, there was no agreement between the parties on how interest would work. Here, there was. Article 29.8 of the Concession Agreement specifically governed interest on the Termination Payment. The parties had agreed: interest would be at SBI PLR plus 2%.

Why 'unless otherwise agreed' matters

Section 31(7)(a) of the Arbitration Act gives the Arbitral Tribunal discretion to award interest. But the provision contains a critical phrase: 'unless otherwise agreed by the parties'. The Court held that this phrase means exactly what it says. If the parties have agreed on interest terms, the Tribunal's discretion is displaced. The contractual terms win.

The Court reasoned that an interpretation of Section 31(7)(a) that would render the phrase 'unless otherwise agreed by the parties' redundant or otiose — meaningless or without effect — is impermissible. Every word and phrase in a statute must be given effect. Since Article 29.8 existed, the default statutory power to award interest did not apply.

The Hyder Consulting precedent, the Court clarified, governs only where there is no inter-party agreement on interest. Where such an agreement exists, Hyder Consulting does not apply.

The distinction that saved the contract

The Court drew a sharp line. In Hyder Consulting, the majority had held that 'sum' includes interest pendente lite. But that case involved no contractual stipulation on interest. The Arbitral Tribunal there had exercised its default discretion under Section 31(7)(a). Here, the Tribunal had not exercised that discretion — it had applied the contractual rate. The two situations were fundamentally different.

The Court also cited N.S. Nayak & Sons v. State of Goa and Sree Kamatchi Amman Constructions v. Divisional Railway Manager (Works), Palghat to reinforce the principle that party autonomy in commercial contracts must be respected. When parties negotiate and agree on interest terms, those terms bind both the parties and the Tribunal.

Deeper ratio: why the phrase 'unless otherwise agreed' is not a formality

The Court's reasoning went beyond simply distinguishing Hyder Consulting. It engaged with the structure of Section 31(7)(a) itself. The provision reads: "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."

The opening phrase — "Unless otherwise agreed by the parties" — is not a mere preamble. It is a condition precedent. The Court held that this phrase creates a hierarchy: the parties' agreement comes first. Only if no such agreement exists does the Tribunal's default power to award interest arise. This interpretation gives full effect to every word in the provision, avoiding the mischief of rendering any part of it otiose.

The Court also drew on the principle from Reserve Bank of India v. Peerless General Finance and Investment Co. Ltd. and Hardeep Singh v. State of Punjab that a statute must be read as a whole, and every clause must be given its natural meaning. Applying this, the Court concluded that the phrase 'unless otherwise agreed by the parties' in Section 31(7)(a) is not a dead letter — it is a living restriction on the Tribunal's discretion.

The procedural journey in detail

The case had a long procedural history, each step adding layers to the dispute. The Arbitral Tribunal delivered its award on May 11, 2017, granting DAMEPL Rs. 2,782.33 crores as Termination Payment plus contractual interest. DMRC challenged this under Section 34 of the Arbitration Act before a Single Judge of the Delhi High Court, who rejected the petition on March 6, 2018, upholding the award in full. DMRC then appealed to a Division Bench of the Delhi High Court, which on January 15, 2019, partly allowed the appeal, modifying the award. The matter reached the Supreme Court, which on September 9, 2021, allowed DAMEPL's appeal and set aside the Division Bench order, restoring the original award.

With the award finally confirmed, DAMEPL initiated execution proceedings before a Single Judge of the Delhi High Court. On March 10, 2022, the Single Judge rejected DAMEPL's contention that 'sum' under Section 31(7)(a) should include pre-award interest for computing post-award interest. DAMEPL then filed a Special Leave Petition before the Supreme Court, which was heard on May 5, 2022, and dismissed. The Court found no merit in the appeal and ordered no costs.

Practical implications for practitioners

This judgment delivers a clear message: if your contract specifies how interest works, that clause is your entire universe. The default provisions of the Arbitration Act on interest do not apply. The Arbitral Tribunal cannot override the parties' agreement — not even with a Supreme Court precedent in hand.

The phrase 'unless otherwise agreed by the parties' in Section 31(7)(a) is not a formality. It is a gateway. If the parties have walked through it by agreeing on interest terms, the default statutory power is locked out.

For lawyers drafting commercial contracts, this case underscores the importance of precise interest clauses. A well-drafted clause on interest — specifying the rate, the period, and the base amount — will displace the entire default regime under Section 31(7)(a). Any ambiguity in the clause, however, could invite litigation. The Court's emphasis on party autonomy means that the contractual language will be given full effect, but only if it is clear and unambiguous.

For arbitration practitioners, the takeaway is equally significant. When representing a client before an Arbitral Tribunal, the first question on interest should always be: what does the contract say? If the contract has an interest clause, the Tribunal's discretion is limited to applying that clause. Arguments based on default statutory provisions or precedents like Hyder Consulting will fail if the contract has its own terms.

The broader principle: party autonomy in arbitration

The Court's decision is also a reaffirmation of the principle of party autonomy, which is the bedrock of arbitration. The Arbitration and Conciliation Act, 1996, is built on the idea that parties should be free to structure their dispute resolution as they see fit. Section 31(7)(a) reflects this by making the Tribunal's power to award interest subject to the parties' agreement. The Court's interpretation gives full force to this legislative choice.

The judgment also clarifies the scope of Hyder Consulting. That case remains good law, but only in situations where there is no contractual agreement on interest. Where such an agreement exists, Hyder Consulting is inapplicable. This distinction is critical for practitioners who may be tempted to rely on Hyder Consulting as a blanket authority for including pre-award interest in the 'sum' for post-award interest calculations.

THE PLAY: Draft your interest clause with precision — it will displace the entire default regime under Section 31(7)(a), and no precedent on statutory interest can override it.

The appeal was dismissed. No costs. The contract had spoken, and the Court listened.