Supreme Court: Arbitrator Cannot Award Pre-Reference Interest When Contract Expressly Bars It

Aadrikaa Legal Services (ALS)- Law I Litigation I Arbitration

Date: 25.09.2026

Supreme Court: Arbitrator Cannot Award Pre-Reference Interest When Contract Expressly Bars It

In an important ruling concerning interest in arbitration arising from public works contracts, the Supreme Court has held that where the parties have expressly agreed to a contractual clause barring interest on delayed payments, an Arbitral Tribunal cannot award pre-reference interest contrary to that bargain.

Allowing the appeal filed by North Eastern Electric Power Corporation Limited (NEEPCO) against Astra Construction Private Limited, the Supreme Court set aside the Meghalaya High Court judgment to the extent that it had restored pre-reference interest awarded by the Arbitral Tribunal.

The Court held that Clause 54 of the General Conditions of Contract (GCC) constituted an express contractual prohibition against such interest and therefore restricted the Tribunal’s power under Section 31(7)(a) of the Arbitration and Conciliation Act, 1996.

Background of the Dispute

• NEEPCO had invited tenders on 12 June 1995 for civil works relating to the main plant and auxiliary building of a Gas Turbine Power Project at Ram Chandra Nagar, Tripura. Astra Construction’s tender was accepted and the parties executed a formal agreement on 23 May 1996.
• The estimated contract value was approximately ₹17.09 crore, and the work was stipulated to be completed by 26 March 1997.
• Disputes subsequently arose and were referred to arbitration. By an award dated 5 June 2015, the Arbitral Tribunal found that the delay in execution of the project was attributable to NEEPCO.

Four claims raised by Astra Construction were allowed and a principal amount of ₹3.30 crore was awarded. In addition, the Tribunal granted:

Component	Interest awarded
Pre-reference interest	12% per annum
Pendente lite interest	9% per annum
Future interest	9% per annum

The pre-reference interest at 12% was awarded on each of the claims allowed by the Tribunal.

Commercial Court Interferes with Interest Component

• NEEPCO challenged the award under Section 34 of the Arbitration and Conciliation Act, 1996.
• The Commercial Court, by its judgment dated 15 February 2024, relied upon the Supreme Court’s decision in Sayeed Ahmed & Company v. State of U.P. and concluded that Clause 54 barred the grant of interest.
• Accordingly, the Commercial Court set aside the grant of pre-suit and pendente lite interest on Claim Nos. 2, 3, 4 and 5, while otherwise upholding the award.

Meghalaya High Court Restores Arbitral Award

• Astra Construction challenged the Commercial Court’s decision under Section 37 of the 1996 Act.
• The Meghalaya High Court relied upon the Supreme Court’s earlier judgment in State of U.P. v. Harish Chandra & Co., (1999) 1 SCC 63.
• It held that the contractual bar under Clause 54 was confined to interest claimed on money or balances withheld because of a dispute and did not extend to every other head of claim.
• On that reasoning, the High Court restored the Arbitral Tribunal’s award in its entirety.
• NEEPCO consequently approached the Supreme Court.

NEEPCO Confines Supreme Court Challenge to Pre-Reference Interest

• Before the Supreme Court, NEEPCO confined its challenge to the High Court’s restoration of pre-reference interest.
• NEEPCO argued that the High Court had wrongly relied upon Harish Chandra, which arose under the Arbitration Act, 1940, without properly appreciating the later jurisprudence under the Arbitration and Conciliation Act, 1996.
• NEEPCO relied particularly upon Sayeed Ahmed, Jai Prakash Associates Ltd. v. Tehri Hydro Development Corporation Ltd., Ferro Concrete Construction (India) Pvt. Ltd. v. State of Rajasthan and ONGC v. G & T Beckfield Drilling Services Pvt. Ltd.
• Astra Construction, on the other hand, argued that NEEPCO had not raised the Clause 54 objection before the Arbitral Tribunal and had therefore waived its right to raise the issue. It relied upon Union of India v. Susaka Pvt. Ltd. & Ors., (2018) 2 SCC 182.

Supreme Court Explains Major Difference Between 1940 and 1996 Arbitration Laws

• A significant part of the judgment explains the evolution of the law governing an arbitrator’s power to award interest.
• Under the Arbitration Act, 1940, there was no express statutory provision empowering an arbitrator to award interest. The Supreme Court’s Constitution Bench in Secretary, Irrigation Department, Government of Orissa v. G.C. Roy, (1992) 1 SCC 508 developed the principle that where an agreement did not prohibit interest and the claim was referred to arbitration, interest could be treated as an implied term of the agreement.
• The position changed materially under the 1996 Act.
• Section 31(7)(a) expressly begins with the words “Unless otherwise agreed by the parties”. The Supreme Court held that these words give primacy to party autonomy: the statutory power of an arbitrator to award interest is subject to what the contracting parties have agreed.

Contract Can Restrict Arbitrator’s Power to Award Interest

• Referring to Pam Developments Private Limited v. State of West Bengal, (2024) 10 SCC 715, the Court explained that under the 1996 Act an express contractual bar can restrict the arbitrator’s power to award pre-reference and pendente lite interest.
• Unlike the position under the 1940 Act, it is not necessary that the contractual provision specifically state that the “arbitrator” has no power to award interest. If the agreement itself bars payment of interest, Section 31(7)(a) respects that contractual arrangement.
• The Court reiterated that Section 31(7)(a) reflects a deliberate legislative shift toward party autonomy.

Pre-Reference and Pendente Lite Interest Are Legally Distinct

The judgment also draws an important distinction between pre-reference interest and pendente lite interest.

The Court reaffirmed that pendente lite interest is a matter of procedural law governed by Section 31(7)(a), whereas pre-reference interest is governed by substantive law.

Consequently, entitlement to pre-reference interest cannot be derived solely from Section 31(7)(a). It must have a basis in:

• an express or implied agreement between the parties;
• a statutory provision such as Section 3 of the Interest Act, 1978; or
• established mercantile usage.

Clause 54 Was the Decisive Contractual Provision

• Clause 54 of the NEEPCO contract was titled “No Claim for Delayed Payment due to Dispute Etc.”
• It provided that no claim for interest or damages would be entertained in respect of money or balances lying with NEEPCO because of a dispute, difference or misunderstanding, or in respect of delay by the Engineer-in-Charge in making periodical or final payments, or in any other respect whatsoever.
• The central question was whether this clause resembled the provision interpreted in Harish Chandra or the broader contractual bars considered in Sayeed Ahmed and the later THDC decisions.

Supreme Court’s Important Comparison of Contract Clauses

• The Supreme Court itself provided a comparative table on page 13 of the judgment, placing Clause 54 alongside the clauses considered in Harish Chandra, Sayeed Ahmed and THDC-II.
• The Court found an important drafting difference.
• In Harish Chandra, the contractual restriction essentially dealt with money withheld because of a dispute. It did not create a separate and independent prohibition concerning money simply paid late where no underlying dispute existed.
• That was why the Harish Chandra Bench had concluded that the provision did not generally prevent an arbitrator from awarding interest for delayed payment.

Clause 54 Goes Further Than Harish Chandra Clause

Clause 54 in the NEEPCO contract was materially different.

The Supreme Court found that it covered two independent situations:

1. money or balances lying with the Corporation because of a dispute, difference or misunderstanding; and
2. delay by the Engineer-in-Charge in making periodical or final payments.

The second limb was decisive.

• By separately and expressly covering delayed payment, Clause 54 prohibited an interest claim arising from delay even where there was no dispute about the underlying payment.
• The Court therefore concluded that the High Court had erred in treating Clause 54 as equivalent to the clause considered in Harish Chandra.

Sayeed Ahmed and THDC Line of Cases Applies

• The Supreme Court instead found Clause 54 materially similar to the clauses considered in Sayeed Ahmed and THDC-II.
• In those cases, separate language dealing with delayed payment was treated as a complete contractual restriction on the arbitrator’s authority to grant interest for the relevant periods.
• The Supreme Court expressly agreed with that reasoning and held that the Sayeed Ahmed line of decisions—not Harish Chandra—governed the NEEPCO dispute.

NEEPCO Had Not Waived the Contractual Objection

• The Supreme Court also rejected Astra Construction’s contention that NEEPCO had waived its right to rely upon Clause 54 because the objection had allegedly not been taken before the Arbitral Tribunal.
• The record showed that NEEPCO had specifically raised the plea in its Statement of Defence dated 23 August 2012 before the Tribunal. The waiver argument therefore failed on facts.

Supreme Court’s Final Decision

• The Supreme Court ultimately held that Clause 54 barred the grant of pre-reference interest.
• It further held that the Arbitral Tribunal, by granting such interest despite the contractual prohibition, exceeded the bounds of its jurisdiction under Section 31(7)(a).
• Accordingly, the Meghalaya High Court judgment was set aside to the extent it had restored pre-reference interest, and NEEPCO’s appeal was allowed without any order as to costs.
• Importantly, NEEPCO had confined its Supreme Court challenge to the restoration of pre-reference interest. The judgment should therefore not be read as the Supreme Court setting aside the entire arbitral award or the ₹3.30 crore principal amount.

Why This Judgment Is Important for Government and Infrastructure Contracts

• The judgment has considerable significance for EPC contracts, construction contracts, power projects, infrastructure agreements and government/public-sector works contracts containing “no-interest” clauses.
• Its central message is that Section 31(7)(a) does not give an arbitrator an unrestricted power to award interest. The statutory power operates subject to the parties’ agreement.
• The precise drafting of the contractual clause becomes critical. A clause limited merely to amounts withheld because of a dispute may have a different legal effect from a clause that independently and expressly prohibits interest for delayed periodical or final payments.
• The decision therefore reinforces both party autonomy and the importance of carefully construing the actual words of the contract before determining whether pre-reference interest is legally recoverable.

Key Takeaway

Where a contract governed by the Arbitration and Conciliation Act, 1996 expressly bars interest on delayed payments, an Arbitral Tribunal cannot override that bargain and award pre-reference interest under Section 31(7)(a). The wording of the contractual bar is decisive.

Connected Matter

Supreme Court: Contractual Bar on Interest Cannot Be Invoked Belatedly After Consenting to Arbitration

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Source: Supreme Court

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