Eighteen percent arbitral interest is a valid exercise of statutory discretion under the pre-amendment regime.

The Petitioner (MCD) awarded a contract to Respondent No. 1 in 2004 for the construction of a Zonal Building at Narela

Following disputes over claims such as escalation under Clause 10CC and watch and ward expenses, the matter was referred to a Sole Arbitrator

On 01.04.2011, the Arbitrator awarded the Respondent’s claims along with interest at 18% per annum from 08.03.2004

After a complex procedural history involving a previous Section 34 judgment and a subsequent modification that set aside the interest component, the Division Bench remanded the matter for fresh adjudication confined strictly to the limited issue of the grant of interest

1. Whether the award of interest at 18% per annum is excessive, arbitrary, or contrary to the Interest Act, 1978 and Section 31(7) of the Arbitration and Conciliation Act, 1996

2. Whether the award constitutes impermissible "interest on interest" prohibited under Section 3(3)(c) of the Interest Act

3. Whether the Arbitrator erred in fixing the commencement date for interest as 08.03.2004

The Court applied Section 31(7) of the Arbitration and Conciliation Act, 1996 (pre-2015 amendment), which grants arbitrators wide discretion to award interest at "reasonable" rates and establishes 18% per annum as the statutory default rate for post-award interest

It relied on Hyder Consulting (UK) Ltd. v. Governor, State of Orissa, which defined the "sum" in Section 31(7)(b) to include pre-award interest, thus permitting interest on the aggregate amount

The Court also followed Shahi & Associates v. State of U.P. [para 57] and Larsen Air Conditioning & Refrigeration Co. v. Union of India [para 58], affirming that 18% interest is a valid legislative benchmark under the unamended Act.

Finally, it referenced Gayatri Balasamy v. M/s ISG Novasoft Technologies Limited regarding the limited power to modify interest components under Section 34

The Court held that since the arbitration commenced in 2008, the pre-2015 amendment regime applied, where Section 31(7)(a) provides unfettered discretion to award interest unless contractually prohibited

The Petitioner’s reliance on the Interest Act to cap rates at current bank rates was rejected because the 18% rate was a statutorily recognized benchmark in Section 31(7)(b)

Regarding the "interest on interest" argument, the Court applied the Hyder Consulting principle, stating that once interest is included in the "sum" awarded, the total constitutes a single amount upon which post-award interest may run

However, the Court found a "patent illegality" regarding the commencement date. The Arbitrator awarded interest from 08.03.2004 (tender date), despite the Respondent only claiming interest from 01.01.2007

Granting relief beyond what was prayed for (extra petita) was held legally untenable

However, it modified the commencement date to 06.07.2008 (the date of invocation of arbitration) to ensure the award aligned with permissible legal parameters and the claimant's own demands

The Petition was disposed of with the direction that interest shall run from 06.07.2008 until realization

No order as to costs