Arbitrator's Power To Award Interest: Prohibitory Clauses

Introduction

Section 31(7) of the Arbitration and Conciliation Act, 1996 (“the Act”) governs arbitrator's power to award interest. Section 31(7)(a) covers pre-award/pendente lite interest (subject to party agreement), while section 31(7)(b) covers post-award interest. Courts have consistently held that these provisions operate separately, with arbitrator having absolute discretion while awarding future interest however, bound by parties’ agreement (if any) with respect to pre- award period.

Background: From the 1940 Act to the Amended 1996 Act

The 1996 Act introduced a new framework, wherein, arbitrator’s power to award interest is strictly subject to the agreement between the parties. In Sayeed Ahmed & Co. v. State of UP (2009) 12 SCC 26, Supreme Court of India examined the powers of an arbitrator to award interest under Section 31(7)(a) of the Act. The Court concluded that pursuant to the language used in 1996 Act, there are only two periods relevant for awarding the interest