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

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

Date: 26.09.2026

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

The Supreme Court has held that a party cannot ordinarily raise a contractual or legal plea at a later stage of arbitration proceedings when it had the opportunity to raise the plea before the Arbitral Tribunal but failed to do so. Such conduct can amount to waiver or abandonment of the plea, particularly where allowing it later would prejudice the opposite party.

In Union of India v. M/s Susaka Pvt. Ltd. & Ors., the Supreme Court dismissed the Union of India/Railways’ appeal challenging an arbitral award of interest, holding that the Railways could not rely for the first time before the Supreme Court upon a contractual clause prohibiting interest when it had failed to properly raise and pursue that objection before the Arbitral Tribunal and the courts below.

Dispute Arose From Railway Works Contract

• The dispute arose from a works contract awarded by the Union of India (Railways) to M/s Susaka Pvt. Ltd. on 19 December 1994 for repair work relating to 25 stators of TAO-659 Traction Motors of Electric Locomotives, Type WCAMI, at Electric Loco Shed, Valsad.
• Disputes subsequently arose during execution of the contract. Since Clause 56(1) of the General Conditions of Contract (GCC) contained an arbitration mechanism, Susaka invoked arbitration and approached the Bombay High Court under Section 11(5) of the Arbitration and Conciliation Act, 1996 for constitution of an Arbitral Tribunal.
• By an order dated 27 July 2001, the High Court, with the consent of the parties, referred the claims to a three-member Arbitral Tribunal consisting of Railway officials. Significantly, the reference expressly stated that the arbitrators would also be free to decide pre-reference interest, pendente lite interest, further interest and costs, considering the agreement.

Arbitral Tribunal Awards ₹27.62 Lakh

• The Arbitral Tribunal delivered a unanimous reasoned award dated 11 September 2002, partly allowing Susaka’s claims.
• The award covered, among other things, loss due to under-utilisation of equipment, material purchased but not utilised, loss of profit, overheads, payment under the price-variation clause and interest.
• The table reproduced on pages 5 and 6 of the Supreme Court judgment records a total award of ₹27,62,214, including ₹12,89,033 towards interest.
• The central issue that eventually reached the Supreme Court concerned the Tribunal’s power to award interest for different periods. The award provided for pre-reference interest at 15% per annum, pendente lite interest at 12% per annum and post-award interest at 18% per annum.

Railways Challenges Award Under Section 34

• Aggrieved by the award, the Union of India filed proceedings under Section 34 of the Arbitration and Conciliation Act, 1996 before a Single Judge of the Bombay High Court.
• The Single Judge partly interfered with the award by modifying the date from which interest would be payable in relation to two claims. However, the Railways’ objections concerning the remaining claims were rejected and the award was otherwise upheld.
• Susaka challenged the limited interference before the Division Bench. The Railways, however, did not file an appeal against the part of the Single Judge’s order rejecting its other objections. Consequently, that part of the award attained finality.
• The Division Bench subsequently allowed Susaka’s appeal, holding that no ground under Section 34 had been established for modifying the award in relation to interest. This effectively restored the arbitral award in its entirety.
• The Union of India then approached the Supreme Court.

Railways Relies on Clause 13(3) to Challenge Interest

• Before the Supreme Court, the Railways relied heavily upon Clause 13(3) of the GCC.
• According to the Railways, Clause 13(3) stipulated that no interest would be payable on earnest money, security deposit or amounts payable to the contractor under the contract, except Government securities.
• It therefore argued that the Arbitral Tribunal had acted contrary to the contract in awarding interest and that the award was liable to be set aside under Section 34.
• Susaka opposed the argument on a fundamental procedural ground: the Railways had not raised and pursued the Clause 13(3) objection before the Arbitral Tribunal or the courts below and therefore could not introduce it for the first time before the Supreme Court under Article 136 of the Constitution.

Supreme Court: Railways Had Consented to Arbitration of Interest Claim

• The Supreme Court accepted Susaka’s objection.
• The Court found that the Railways had not raised the plea based on Clause 13(3) in its reply before the Arbitral Tribunal. More importantly, during the Section 11(5) proceedings, the Railways had expressly consented to referring the question of interest to arbitration.
• The Court observed that if the Railways intended to rely on Clause 13(3), it could have raised the objection when the dispute was referred to arbitration or expressly reserved its right to raise the objection before the Tribunal.
• It did neither.
• The Railways thereafter participated in the arbitration and allowed the Tribunal to adjudicate the interest issue on merits without specifically pleading Clause 13(3).

Raising a Ground in Section 34 Petition Is Not Enough If It Is Not Pressed

• The Supreme Court also noticed an important procedural aspect.
• Although the Railways included the Clause 13(3) objection as a ground in its Section 34 proceedings before the Single Judge, the ground was not pressed during arguments. It was also not subsequently raised before the Division Bench.

The Supreme Court therefore described the case as one of:

“waiver or/and abandonment of a plea at the initial stage itself.”

Pleas Must Be Raised at the Appropriate Stage

• The judgment lays down an important litigation and arbitration principle: where a plea—whether based on fact or law—is available to a party, it must be raised at the appropriate stage in accordance with law.
• If a party fails to raise the plea, or gives it up by consent, it may subsequently be precluded from resurrecting it on the principle of waiver, particularly where doing so would prejudice the opposite party.
• The Court referred to the maxim “Cuilibet licet renuntiare juri pro se introducto”, explaining that a person may waive the advantage of a law made solely for his or her individual benefit and protection, provided no public right or public policy is infringed. Susaka Pvt. Ltd. & Ors.

Failure to Appeal Against Rejection of Other Claims Also Proved Fatal

• There was another reason why the Railways’ challenge failed.
• The Single Judge had substantially rejected the Railways’ Section 34 challenge except in relation to two interest claims. Yet the Railways did not appeal against the portion of the order rejecting its objections.
• The Supreme Court held that this part of the Single Judge’s decision had therefore attained finality.
• Had the Railways wished to keep those issues alive, it was required to challenge that portion before the Division Bench. Only thereafter could an adverse determination potentially have been pursued before the Supreme Court under Article 136.

Arbitral Tribunal Has Power to Award Interest

• The Supreme Court also made important observations concerning an arbitrator’s power to award interest.
• It held that an award of interest on arbitrable claims is not inherently illegal, contrary to public policy, per se bad in law or beyond the powers of an Arbitral Tribunal.
• The Court specifically referred to Section 31(7)(a) and (b) of the Arbitration and Conciliation Act, 1996, observing that these provisions empower an Arbitral Tribunal to award interest on the awarded sum, although that power remains subject to the agreement between the parties.
• This qualification is important: the Supreme Court did not hold that an arbitrator can disregard an express contractual prohibition on interest. Rather, the decision turned substantially on the Railways’ failure to timely raise and preserve its contractual objection.

Courts Should Not Lightly Interfere With Arbitral Awards

• The Supreme Court further reiterated the limited nature of judicial interference with arbitral awards.
• Once parties have chosen their arbitrators and authorised them to adjudicate specified disputes, their decision should ordinarily be respected. Courts should interfere only where the award falls within one of the grounds prescribed under Section 34 of the Arbitration and Conciliation Act, 1996.
• This part of the judgment reinforces the principle that Section 34 proceedings are not intended to provide parties with an unrestricted opportunity to reargue matters already submitted to arbitration.

Supreme Court Refers to Firm Kaluram Sitaram v. Dominion of India

The judgment expressly refers to the Bombay High Court decision in:

Firm Kaluram Sitaram v. The Dominion of India, AIR 1954 Bombay 50.

• The Supreme Court recalled former Chief Justice M.C. Chagla’s observations concerning the State’s reliance on technical defences against citizens.
• Applying that principle, the Supreme Court criticised the Railways for pursuing a technical legal argument up to the Supreme Court even though the plea had not been properly raised at the relevant stages of the proceedings.

Final Decision: Union of India’s Appeal Dismissed

• The Supreme Court ultimately found no merit in the Union of India’s appeal and dismissed it.
• Accordingly, M/s Susaka Pvt. Ltd. succeeded before the Supreme Court, and the Railways’ attempt to challenge the award of interest by relying upon Clause 13(3) of the GCC failed.
• The judgment is particularly significant for arbitration proceedings because it demonstrates that a potentially available contractual defence can be lost if it is not specifically pleaded, pressed and preserved at the appropriate stage.
• It also makes an important distinction between the substantive contractual limitation on an arbitrator’s power to award interest and the procedural question of whether a party has preserved its right to invoke that limitation.

Key Takeaway

A party cannot participate in arbitration without raising an available contractual objection, allow the Tribunal to decide the issue on merits, fail to press the objection in Section 34 proceedings, and then seek to revive it for the first time before the Supreme Court.

The decision in Susaka therefore stands as an important authority on waiver and abandonment of pleas in arbitration proceedings, while also recognising that Section 31(7) empowers arbitrators to award interest subject to the parties’ agreement.

Connected Matter

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

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Source: Supreme Court

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