When business deals turn sour, companies often head to arbitration to settle their disputes faster than regular courts. But can an arbitrator order a party to pay interest for delays if their signed agreement clearly says ‘no interest’ will ever be paid? The Supreme Court has given a firm and decisive answer.
A bench comprising Justice Pamidighantam Sri Narasimha and Justice Alok Aradhe held that if a contract contains an express bar on claiming interest for delayed payments, an arbitral tribunal has no power to grant pre-reference interest. In doing so, the top court underscored that party autonomy and the exact wording of a contract reign supreme in commercial arbitration.
The Background: Dispute in a ₹17 Crore Project
The case stemmed from a contract worth ₹17.09 crore for project work carried out in Tripura. A dispute arose between North Eastern Electric Power Corporation Limited (NEEPCO) and the contractor, Astra Construction Private Limited. The matter was eventually referred to an arbitral tribunal.
The arbitral tribunal determined that NEEPCO was responsible for the delays in executing the project. It allowed four claims in favour of the contractor, granting a principal sum of around ₹3.30 crore. In addition to the principal amount, the tribunal awarded pre-reference interest at 12% per year for delayed periodical and final payments, along with pendente lite (during the arbitration) and future interest at 9% per year.
NEEPCO objected strongly to this award of interest. It argued that the contract expressly forbade any interest claims for payment delays.
The Legal Journey: From Commercial Court to High Court
NEEPCO challenged the award under Section 34 of the Arbitration and Conciliation Act, 1996 before a Commercial Court. The Commercial Court reviewed the agreement and agreed with NEEPCO. It found that Clause 54 of the General Conditions of Contract (GCC) barred interest entirely. As a result, the court modified the arbitral award and struck down the grant of pre-reference and pendente lite interest.
Clause 54 of the GCC read as follows:
- No claims for interest or damages: The clause stated that no claims for interest or damages would be entertained by the Corporation for any money or balance held up due to any dispute, difference, or misunderstanding between the Engineer-in-Charge and the contractor.
- Independent bar on delayed payments: It further barred interest ‘with respect to any delay on the part of the Engineer-in-Charge making periodical or final payments or in any other respect whatsoever.’
Unsatisfied, the contractor filed an appeal under Section 37 of the Act before the Meghalaya High Court. The High Court restored the interest awarded by the arbitrator. To reach this conclusion, the High Court relied on the 1999 Supreme Court ruling in State of U.P. v. Harish Chandra and Co., believing the clause in this dispute was identical to the one in the older case.
NEEPCO then took the battle to the Supreme Court of India.
What The Law Says: Section 31(7)(a) of the Arbitration Act
To understand the dispute, one must look at Section 31(7)(a) of the Arbitration and Conciliation Act, 1996. This section governs how an arbitral tribunal can award interest on money claims.
Under Section 31(7)(a), an arbitrator can award interest on the whole or part of the money, for the whole or any part of the period between the date on which the cause of action arose and the date on which the award is made. In simple words:
- Pre-reference interest: Interest calculated from the date the money became due until the arbitration officially begins.
- Pendente lite interest: Interest accrued while the arbitration proceedings are actively going on.
- The statutory catch: The very opening words of Section 31(7)(a) state: ‘Unless otherwise agreed by the parties…’
This opening condition is critical. It means that the arbitrator gets the legal authority to award pre-reference interest only if the contract does not say otherwise. If the contract explicitly prohibits interest, the arbitrator’s statutory power is completely stripped away.
Why Harish Chandra Did Not Apply
The Supreme Court found that the Meghalaya High Court had made an error in applying the Harish Chandra precedent. Authoring the judgment, Justice Alok Aradhe pointed out a crucial difference between the contract in Harish Chandra and Clause 54 of the present agreement.
In Harish Chandra, the contractual clause barred interest only when money was withheld because of an existing dispute, misunderstanding, or difference. It did not create a separate, independent bar on delayed routine payments where no dispute existed. Therefore, an arbitrator in that case could still grant pre-reference interest on ordinary delayed payments.
In contrast, Clause 54 in NEEPCO’s contract was drafted differently. It created two distinct bars:
- A bar against interest on money retained due to disputes or differences.
- A standalone bar against interest on delays in making periodical or final payments, regardless of whether any dispute existed.
The bench observed that by naming delay in payment as a separate ground on its own, Clause 54 expressly shut out interest claims arising purely from delayed payments. The court noted that this drafting matched earlier rulings in Sayeed Ahmed & Company v. State of U.P. and Jaiprakash Associates Limited v. Tehri Hydro Development Corporation, where identical contractual bars were upheld.
Because the parties had agreed to this clause voluntarily, the arbitral tribunal had exceeded its jurisdiction by granting pre-reference interest.
Why This Matters For You
This ruling carries significant practical takeaways for businesses, government contractors, engineers, and legal professionals across India:
- Words in the contract matter most: Commercial agreements are interpreted strictly. Courts will not rewrite terms to help a party escape a harsh clause they freely signed.
- Arbitrators are bound by the agreement: An arbitral tribunal is a creature of the contract. It cannot travel outside the boundaries set by the parties in their agreement.
- Drafting precision is vital: A slight difference in punctuation or sentence structure can change the entire legal outcome of an arbitration worth crores of rupees.
Ultimately, the Supreme Court allowed NEEPCO’s appeal and set aside the High Court’s order, confirming that when a contract says no to interest, an arbitrator cannot say yes.
Story reported by Supreme Court – High Court – Legal Breaking News | Live Law India. This article is BareLaw’s independent explanation and analysis.
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