The Supreme Court has held that when a contractual clause bars claims for interest arising from delay in making periodical or final payments, it is impermissible for an arbitral tribunal to award the same as a pre-reference interest under Section 31(7)(a) of the Arbitration and Conciliation Act, 1996.

A bench of Justice Pamidighantam Sri Narasimha and Justice Alok Aradhe set aside the Meghalaya High Court's judgment, which had restored the Arbitral Tribunal's decision to grant an interest on delayed payments (i.e., for the pre-reference period) despite a bar in a contractual clause. Relying on Section 31(7)(a) of the 1996 Act, the Court said the arbitral tribunal is denuded of power to grant an interest on the pre-reference period, when the contractual clause says otherwise.

“…we are of the considered view that Clause 54 of the GCC bars the grant of interest for the pre- reference period, and that the Arbitral Tribunal, in awarding such interest, exceeded the bounds of its jurisdiction under Section 31(7)(a) of the 1996 Act.”, the Court said.

Dispute

A dispute arose in a ₹17.09 crore project work in Tripura, which was then referred to arbitration.

The Arbitral Tribunal held that the delay in execution of the project was attributable to North Eastern Electric Power Corporation Limited (NEEPCO). It allowed four claims and awarded a principal amount of approximately ₹3.30 crore.

The Tribunal additionally awarded pre-reference interest at 12% per annum for the delay in making periodical or final payments, along with pendente lite and future interest at 9% per annum.

NEEPCO challenged the award under Section 34 of the Arbitration Act. The Commercial Court held that Clause 54 of the General Conditions of Contract (GCC) barred the grant of interest, including pre-reference and pendente lite interest.

“No claims for interest or damages will be entertained by the Corporation with respect to any money or balance which may be lying with the Corporation owing to any dispute, difference or misunderstanding between the Engineer in-Charge on the one hand and contractor on the other or with respect to any delay on the part of the Engineer-in-Charge making periodical or final payments or in any other respect whatsoever.”, Clause 54 of the GCC states.

It accordingly modified the award and set aside the grant of pre-reference and pendente lite interest on the relevant claims.

The respondent approached the High Court under Section 37. The Meghalaya High Court restored the interest awarded by the Arbitral Tribunal, relying upon the Supreme Court's judgment in State of U.P. v. Harish Chandra and Co. (1999) and holding that the clause in the present case was materially identical to the clause considered in that decision.

The High Court held that the contractual bar was confined to interest on money or balances held up owing to a dispute and did not extend to interest arising under other heads of claim.

Aggrieved, the NEEPCO approached the Supreme Court.

Decision

Allowing NEEPCO's appeal, the judgment authored by Justice Aradhe faulted the High Court's reliance on Harish Chandra, noting a material distinction in the contractual clauses in the present case compared with Harish Chandra.

The Court explained that although the clause in Harish Chandra appeared similar at first glance, there was a crucial difference. In Harish Chandra, the contractual prohibition concerned money or balances lying with the Government owing to a dispute, difference or misunderstanding.

The reference to periodical or final payments did not create an independent bar covering delayed payments generally. This means, the interest for a pre-reference period on delayed payments was not prohibited in Harish Chandra, thereby entitling the Arbitral Tribunal, therein, to award interest for a pre-reference period.

However, in the present case, the Court noted that there was a specific bar on payment of interest for a pre-reference period for a delayed payment, thereby disentitling the arbitral tribunal to award such an interest.

“By naming delay in payment as a separate ground, standing on its own and not tied to any dispute, Clause 54 does what the clause in Harish Chandra (supra) never did: it expressly shuts out a claim for interest arising from delayed payment, whether or not there was any dispute about it at all. The very situation that fell outside the bar in Harish Chandra (supra), delay in payment, without more, is brought squarely inside the bar in Clause 54. That is the true and complete answer to the High Court's view that the two clauses say the same thing; they do not, and the difference is decisive.”, the Court said.

The Court noted that the drafting structure followed in the present case, a general prohibition relating to disputed amounts followed by a separate prohibition concerning delayed payments, was present in the clauses examined in earlier Supreme Court judgments of Sayeed Ahmed & Company v. State of U.P. & Ors and Jaiprakash Associates Limited v. Tehri Hydro Development Corporation (India) Limited (THDC-II).

In those cases, the Court had held that the contractual clauses constituted a complete bar against the arbitral tribunal awarding interest for the relevant periods.

“The very same structure, a separate, additional line barring interest on delayed payments, over and above the bar on money withheld due to a dispute, appears in the clauses that this Court examined in Sayeed Ahmed (supra) and THDC-II (supra), and in each of those cases, for that very reason, this Court held that the clause was a complete bar on the arbitrator's power to award interest, whether for the pre-reference period or pendente lite. We respectfully agree with that reasoning and see no reason to depart from it. It follows that the High Court was in error in treating Clause 54 as no different from the clause in Harish Chandra (supra). The two clauses are worded differently, and that difference in wording makes all the difference in law. It is the line of decisions in Sayeed Ahmed (supra) and thereafter, not Harish Chandra (supra), that governs this case.”, the Court held.

As a result, the appeal was allowed.

Cause Title: North Eastern Electric Power Corporation Limited (NEEPCO) Versus Astra Construction Private Limited

Citation : 2026 LiveLaw (SC) 980

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Appearance:

For Petitioner(s) : Mr. Tushar Mehta, Solicitor General Mr. Raghavendra P. Shankar, A.S.G. Mr. Karan Lahiri, Adv. Mr. Prateek Arora, Adv. Mr. Neelabh Bist, Adv. Ms. Pallavi Mishra, Adv. Mr. Kanak Grover, Adv. Mr. Digvijay Dam, Adv. Mr. Aman Mehta, Adv. Ms. Pragya Choudhary, Adv. Ms. Nasadiya Singh, Adv. Mr. Kanishka Singh, Adv. Mr. Daksh Aggarwal, Adv. Ms. Anjali Singariya, Adv. Ms. Sonali Jain, AOR

For Respondent(s) : Mr. C. S. Vaidyanathan, Sr. Adv. Mr. Ritin Rai, Sr. Adv. Mr. K. R. Sasiprabhu, AOR Mr. Aditya Swarup, Adv. Mr. Hiten Sampat, Adv. Mr. Vishnu Sharma A S, Adv. Mr. Raunak Shankar Aggarwal, Adv. Mr. Vijay Valsan, Adv. Mr. Vinayak Mani, Adv. Mr. Tushar Bhardwaj, Adv. Mr. Prasouk Jain, Adv. Ms. Shalini Nair, Adv. Mr. Rohan Batra, AOR