An arbitral tribunal must reason its pendente lite and post-award interest rates; unexplained rates are patently illegal.

Religare Finvest Limited, a non-banking financial company, sanctioned a loan facility of ₹11.50 crore to Atelier Automobiles Pvt. Ltd. under a loan agreement dated 14 March 2016. The loan carried floating interest initially at 13% per annum, later revised to 14% per annum from 20 February 2021, and was secured, inter alia, by a mortgage over immovable property in Saharanpur, Uttar Pradesh.

Following defaults, the petitioner recalled the loan on 14 October 2019, claiming ₹10,13,79,085 as outstanding, and initiated arbitration.

After the respondents challenged the mandate of the unilaterally appointed arbitrator, the High Court appointed a substitute sole arbitrator on 7 December 2022.

The arbitrator awarded ₹9,98,32,582 towards principal, pendente lite interest at 10% per annum, post-award interest at 10% per annum, and proportionate costs. The respondents were permitted to pay the amount in 36 monthly instalments, subject to acceleration upon default in two instalments.

On applications under Section 33 of the Arbitration and Conciliation Act, 1996, the award was modified to provide for 10% interest from 14 October 2019 until the award and to permit adjustment of payments made during the relevant period.

In the present Section 34 petition, the petitioner challenged only the rate and award of pendente lite and post-award interest.

1. Whether the arbitral tribunal could award pendente lite interest at 10% per annum without recording reasons or identifying a basis for determining that rate, despite the parties’ contractual floating interest rate of 13%, subsequently revised to 14%?

2. Whether the award of post-award interest at 10% per annum, without determining the applicable current rate of interest or disclosing any basis, was legally sustainable under Section 31(7)(b) of the Act?

3. Whether the petitioner was estopped from challenging the interest component of the award merely because it sought recovery of, or accepted payments towards, the principal awarded amount?

4. Whether the interest component of the arbitral award could be severed and set aside without disturbing the determination of principal liability and costs?

The Court applied Sections 31(3) and 31(7)(a) of the Arbitration and Conciliation Act, 1996. Section 31(7)(a) permits an arbitral tribunal, unless the parties have agreed otherwise, to award reasonable interest for the period up to the date of the award; such determination must be supported by reasons under Section 31(3).

Section 31(7)(b) provides for post-award interest at two per cent above the “current rate of interest,” unless the award directs otherwise; the expression “current rate of interest” is defined by Section 2(b) of the Interest Act, 1978 with reference to the highest applicable deposit rates prescribed for scheduled banks.

A non-speaking and unreasoned determination of interest may constitute patent illegality.

The Court also applied the principle that a severable invalid portion of an award may be set aside while preserving the valid portions, relying on Gayatri Balasamy v. ISG Novasoft Technologies Ltd., (2025) 7 SCC 1.

The doctrines of approbation and reprobation were considered with reference to Rajasthan State Industrial Development and Investment Corporation v. Diamond & Gem Development Corporation Ltd., (2013) 5 SCC 470, but were held inapplicable absent unequivocal acceptance or abandonment of statutory remedies.

The decisions in Sporty Solutionz Pvt. Ltd. v. Badminton Association of India and MS K S Jain Builders v. Indian Railway Welfare Organisation were distinguished.

The Court found that the parties had agreed to a floating contractual interest rate of 13%, subsequently revised to 14%, but the arbitrator awarded 10% interest without recording any reasoning, evidence, or discernible basis for selecting that rate.

This rendered the award of pendente lite interest contrary to Sections 31(3) and 31(7)(a).

The post-award interest was similarly unsustainable because the arbitrator neither determined the prevailing “current rate of interest” under Section 31(7)(b) nor explained why 10% was appropriate.

The Court rejected the respondents’ estoppel argument: the petitioner’s demand for the awarded principal and its pleadings concerning adjustment or recovery did not amount to unconditional acceptance of the award or express abandonment of its right to pursue a Section 34 challenge to the interest component.

Since the interest determination was separable from the adjudication of principal liability and costs, it could be set aside independently under the principle recognised in Gayatri Balasamy.

The petitioner was not estopped from challenging that component merely because it pursued or received payments towards the principal awarded amount.

The Section 34 petition was accordingly allowed, and the arbitral award was set aside to the extent that it granted interest; the remaining portions of the award, including the determination of principal liability and costs, were left undisturbed.