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M/S. Interstate Construction v. National Projects Construction Corporation Ltd.

Civil Appeal · 2025 INSC 699Decided 15 May 2025
Civil Appeal No. 3461 of 2025
Justice Abhay S. Oka · Justice Ujjal Bhuyan

Background

Interstate Construction completed foundation work for National Projects Construction Corporation (NPCC) at the Ramagundam Super Thermal Power Project back in 1987, but disputes over withheld payments dragged on for decades, including multiple changes of arbitrator, before a final award was passed in 2020 by a retired High Court judge acting as sole arbitrator. The award granted interest in stages: an 18% pre-reference rate, a pendente lite rate compounding on the principal-plus-past-interest, and an 18% future-interest rate on the whole accumulated sum. NPCC challenged only the interest portion, and the Delhi High Court's Division Bench set aside those interest directions, holding the tribunal had wrongly awarded compound interest and improperly split the interest period. Interstate Construction appealed to the Supreme Court.

Decision Breakdown

The Supreme Court held that Section 31(7)(a) of the Act gives an arbitral tribunal discretion to award interest for the whole or any part of the period from the cause of action to the award, meaning it can validly split that period into sub-periods with different rates, as the arbitrator had done here. The High Court was wrong to say the statute permits only a single undivided period. On the compound-interest question, the Court traced the case law (S.L. Arora, later overruled by the three-judge bench in Hyder Consulting, followed in UHL Power and S.A. Builders) to hold that the "sum" on which post-award interest is calculated under Section 31(7)(b) legitimately includes the principal plus any interest already awarded up to that point, so charging further interest on that combined sum is not unlawful "interest on interest," it is simply how the statutory formula works. The High Court's order was set aside and the original arbitral award on interest restored.

Lesson Learnt

In arbitration, once a tribunal awards interest up to the date of the award, that combined amount (principal plus accrued interest) becomes the base on which further interest runs until actual payment: this is standard practice under Indian arbitration law, not an unlawful "compounding" of interest, and an arbitrator may also legitimately apply different interest rates to different phases of a long-running dispute.

Official source (sci.gov.in)View Judgment (PDF)

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