Allahabad High Court strips compound interest from Rs 1.57 crore Mathura road award, keeps 14 per cent rate
Chief Justice Arun Bhansali and Justice Jaspreet Singh, sitting at Lucknow, held that an arbitral tribunal cannot compound interest when the contract is silent, and used the Gayatri Balasamy guardrails to modify the award against the State of Uttar Pradesh rather than set it aside.
A Mathura contractor that widened and strengthened the Raya-Math Road in 2009 will keep its arbitral award of Rs 1,56,79,034.65 against the Uttar Pradesh Public Works Department, and the 14 per cent interest rate that came with it. What it loses is the compounding. The Lucknow bench of the Allahabad High Court has held that an arbitral tribunal, which the Interest Act, 1978 treats as a court, cannot award interest upon interest unless the contract says so, and has rewritten the interest clause of the award while leaving every other finding intact.
Chief Justice Arun Bhansali and Justice Jaspreet Singh, in a judgment authored by Justice Singh and reserved on 23 September 2026, partly allowed the State's appeal under Section 37 of the Arbitration and Conciliation Act, 1996 against the order of Commercial Court No. 1, Lucknow, which had dismissed its Section 34 petition on 9 February 2023. The State's main attack, that the work was never certified complete, failed outright.
Eleven kilometres of road and a Rs 23.79 crore claim
The contract, awarded on 30 September 2008, was for widening and strengthening the Raya-Math Road in Mathura district. The contract bond put the value at Rs 4,72,38,885 for ten kilometres, excluding bitumen. The scope and price grew: on 21 January 2009 the State told M/s Apex Construction Company that the project cost had been enhanced from Rs 737.85 lakh to Rs 1137.29 lakh, a figure that included bitumen and two sanctioned extra items. The contractor's position was that the road ran to 12 kilometres rather than 11.8, that it had built 200 metres of extra road, and that the price should therefore have been Rs 1279.30 lakh.
The completion deadline was 30 September 2009. The contractor finished on 31 August 2009 and submitted a final bill that day for Rs 5,31,58,238. The State disputed it. A writ petition, No. 8773 (MB) of 2010, was disposed of on 4 April 2014 with liberty to invoke arbitration. A first arbitration application was dismissed as not maintainable because the clause had not been properly invoked; a second, Arbitration Application No. 42 of 2015, was decided on 18 November 2015 and a three-member tribunal was constituted.
The statement of claim filed on 31 January 2016 sought Rs 23,79,90,727, with pendente lite and future interest at 18 per cent with quarterly rests and Rs 10 lakh in costs. The State's defence of 11 November 2016 said the contractor had breached the contract, used sub-standard material and done incomplete work. Two teams, one of PWD engineers and one from the Central Road Research Institute, had inspected the road and recommended deductions. The State said the work done was worth Rs 5,96,35,888, that it had already paid Rs 5,80,71,340, and that after deductions it was the State that was owed money. It filed a counter-claim.
What the tribunal found
The tribunal framed ten issues on the claim and three on the counter-claim on 5 March 2017. The contractor examined four witnesses, the State three. Limitation was decided as a preliminary issue on 30 April 2017 in the contractor's favour.
The award of 30 July 2017 was a mixed result. The tribunal held that the contractor had completed the work as per the contract, including the extra items, and that the State had never put any defect or incomplete work to it or issued a notice to remove defects. But it also found that the final bill of Rs 5,31,58,238 was false and misleading, rejected the claim for 5 per cent annual escalation, and held that the road built was 11.8 kilometres, not 12, so the contract value had not exceeded Rs 1137.29 lakh. The contractor had by then confined its claim to Rs 1,56,79,034.65, calculated as the contract bond value of Rs 4,72,38,885 plus the two extra items worth Rs 1,50,25,189.65 and Rs 1,14,86,300, a total of Rs 7,37,50,374.65, less the Rs 5,80,71,340 admittedly paid. The tribunal awarded that sum.
On interest, the award was not internally consistent. Under issue 6 it spoke of 12 per cent compounded yearly from 1 September 2010; under issue 8 and in its conclusion it granted 14 per cent compounded annually from 1 September 2009 until the reference, through the proceedings and until realisation. The tribunal also awarded Rs 10 lakh in costs, and allowed the State Rs 1,39,619 on its counter-claim, with 14 per cent interest from 1 September 2009, to be deducted from the sum due. The High Court read the operative award as 14 per cent with annual rests for both the pre-reference and the post-reference periods.
No completion certificate, no completion?
Pritish Kumar, Senior Counsel and Additional Advocate General, with Tushar Verma, Additional Chief Standing Counsel, argued that a tribunal is a creature of the contract and bound by it. The General Conditions of Contract define the completion date as the date certified by the Engineer under Clause 48.1, which requires the contractor to ask for a certificate and the Engineer to issue one on deciding the work is done. No certificate was ever issued. For the tribunal to hold the work complete without one was, he said, to rewrite the contract, a patent illegality that the Commercial Court had compounded. Without a certificate and an approved final bill, the quantity of work could not be known; and the tribunal had itself found the final bill false.
For the contractor, Akshat Kumar, Durgendra Kumar Tiwari, Sanjay Kumar Srivastava and K.K. Arora answered that there was ample evidence of completion before the deadline, that the State's witnesses under cross-examination could point to no deficiency, and that the dispute over the work surfaced only during the arbitration. The PWD and CRRI reports, they said, explained the wear on the road: the contract specifications were for light and medium traffic, but the State had diverted heavy vehicles onto it. The certificate was the State's to issue, and it could not withhold it and then treat its absence as proof of incomplete work.
The bench went to the pleadings and the record. The State's own statement of defence accepted the enhanced contract value and the payment of Rs 5,80,71,340. The work was completed on 31 August 2009. No notice, complaint or correspondence about non-completion, deficiency or sub-standard material was ever sent to the contractor. The CRRI and PWD reports did not say the work was incomplete; they recorded deficiencies and attributed them to the road being used for heavy traffic when it was built for light and medium vehicles. The reports recommended deductions, nothing more. The tribunal's finding that the contractor completed 11.8 kilometres was a pure finding of fact on evidence and could not be called perverse. The argument that the absence of a certificate meant the work was incomplete, and that the tribunal had rewritten the contract, was, the court said, misconceived on its face.
An arbitrator is a court under the Interest Act
The State's second ground was that the contract said nothing about interest, so the tribunal could not award it for the pre-reference period at all, still less compound it annually. Counsel pointed to Section 2(a) of the Interest Act, 1978, under which the term court includes a tribunal and an arbitrator, and Section 3(3)(c), which says nothing in that section empowers the court to award interest upon interest. Section 31(7) of the 1996 Act, he said, gives a discretion to award interest but not compound interest, and the tribunal had even capitalised the Rs 10 lakh costs and compounded interest on that. He relied on Gayatri Balasamy v. ISG Novasoft Technologies Ltd., State of Haryana v. S.L. Arora and Co., Hyder Consulting (UK) Ltd. v. State of Orissa and HLV Ltd. v. PBSAMP Projects (P) Ltd.
The contractor's counsel replied that Section 31(7) expressly empowers a tribunal to grant pre-reference, pendente lite and future interest at a rate it finds appropriate, with a statutory default of two per cent above the prevailing rate if the award is silent. The amount was payable on completion on 31 August 2009, so interest from 1 September 2009 was right. Banks lend with quarterly rests; annual rests could not be called arbitrary. They cited Haryana Tourism Ltd. v. Kandhari Beverages Ltd.
The bench broke the question into three parts. First, did the tribunal have power to award interest at all? Yes. Section 31(7) applies precisely where the contract is silent. Clause (a) confers a discretion for the period from cause of action to award; clause (b) carries a mandatory rate for the post-award period unless the award directs otherwise. The 14 per cent for the pre-reference period could not per se be faulted, and 14 per cent for the later period was within jurisdiction. The court added that the rate was not under challenge and was not high for a commercial contract.
Second, was interest with annual rests compound interest? The judges said it plainly was. Annual rests mean that at the end of each year the interest is capitalised with the principal and the next year's interest runs on both, which is interest upon interest. Banks may add interest quarterly or annually, “but that is only a methodology of charging interest”; it remains under the umbrella of compound interest.
Third, could the tribunal award it? No. The court said it is too well settled to be disputed that “the compound interest cannot be granted unless there is a stipulation in the contract”. A tribunal is a creature of the contract and must stay within its four corners. Section 3(3)(c) of the Interest Act bars a court, which by definition includes an arbitrator, from awarding interest upon interest, and no contractual or statutory provision displaced that bar here. The bench cited the Constitution Bench in Central Bank of India v. Ravindra, which traced the English banking cases to the proposition that there is no right to compound interest save by agreement, express or implied, or binding custom, and which recognised capitalisation of interest as lawful where parties have voluntarily contracted for it.
The court then worked through the Supreme Court's recent ruling in HLV Ltd., which collects S.L. Arora, Hyder Consulting, Delhi Airport Metro Express v. DMRC, Morgan Securities and Credits v. Videocon Industries and North Delhi Municipal Corporation v. S.A. Builders. The thread it drew from them is that party autonomy governs pre-award interest under clause (a), the tribunal's discretion governs post-award interest under clause (b), the sum awarded under clause (a) may merge principal and pre-award interest so that post-award interest runs on the merged figure, and a claim for compound interest cannot be introduced where neither the contract nor the award provides for it.
Modify, do not set aside
Having found the compounding unlawful, the bench had to decide what to do with the award. It declined to set the whole award aside for a defect confined to the interest clause, holding that the ends of justice were met by “correcting and modifying only part of the award relating to grant of interest”.
For that step it drew on the Constitution Bench in Gayatri Balasamy, summarising its guardrails: only severable parts of an award can be modified, not a composite or indivisible award; the error must be patent and apparent on the face of the record, not debatable; modification is specifically permitted to correct or adjust post-award interest without disturbing the tribunal's substantive findings; and where the correction would require review on merits or re-adjudication, the court must refrain and, where the law permits, remand to the tribunal. The interest question here fell within the permitted zone.
Order
Exercising its power under Section 37, the court modified the award of 30 July 2017 only as to the manner in which interest runs. The contractor is entitled to Rs 1,56,79,034.65 with simple interest at 14 per cent a year from 1 September 2009 to 31 January 2016, the date the claim was filed. The amount crystallised on that date, principal plus simple interest, carries simple interest at 14 per cent a year from 1 February 2016 until actual payment. From the aggregate, the State may deduct Rs 1,39,619 with simple interest at 14 per cent a year from 1 September 2009 until the date it pays the contractor, as the award provided.
Subject to that modification, the award and all its findings, including the rate of interest, were affirmed. The appeal was partly allowed, with no order as to costs. The judgment was delivered on 24 October 2026 from the Chief Justice's Court at Lucknow and marked for reporting.