Clause Barring Interest On Delayed Payment Cannot Be Inferred As Bar To Award Pendente-Lite Interest By Arbitral Tribunal: Supreme Court

The Supreme Court observed that a clause merely barring award of interest on delayed payment by itself will not be readily inferred as a bar to award pendente-lite interest by the arbitral tribunal.

The Bench of Justice P.S. Narasimha and Justice Manoj Misra held, “On a careful analysis of the decisions discussed above, we are of the view that arbitral tribunal can be denuded of its power to award pendente lite interest only if the agreement/ contract between the parties is so worded that the award of pendente lite interest is either explicitly or by necessary implication (such as in the case of Sayeed & Co. (supra) and THDC First (supra)) barred. A clause merely barring award of interest on delayed payment by itself will not be readily inferred as a bar to award pendente-lite interest by the arbitral tribunal.”

Case Brief

An Appeal was filed against the order of High Court whereby the appeal of the respondent, under Section 37 of the Arbitration and Conciliation Act, 19962, was allowed, the judgment and order of the District Judge under Section 34 of 1996 Act, was set aside and the arbitral award was affirmed.

An arbitral award for the amount of Dollar 6,56,272.34 was passed against the ONGC in 2004. Being aggrieved by it, the ONGC filed an application for setting aside the award. Thereafter, the District Judge allowed the application and set aside the award on two grounds: (a) the award was non-reasoned, therefore, violates the mandate of Section 31(3) of 1996 Act; and (b) objection under Section 16(2) was neither rejected prior to proceeding further, nor considered by the arbitral tribunal at the time of making final award.

Further, the Respondent filed an appeal before the High Court under Section 37(1)(c) of 1996 Act, which was allowed and thereby affirming the arbitral award in toto.

The ONGC submitted that Section 31 (7)3 of 1996 Act, clearly provides that power of arbitral tribunal to award interest for the period between the date the cause of action arose up to the date of the award is subject to the agreement between the parties, therefore, in view of the arbitration agreement between the parties no interest could have been awarded.

While the Respondent submitted that if the said clause of the arbitration agreement read as a whole, it would indicate that payment was not to be withheld if the amount was not in dispute.

Court’s Observation

The Supreme Court had issued notice only to the extent as to whether the said clause of the arbitration agreement proscribed payment of even pendente lite interest on the sum awarded.

The Court noted that the arbitral tribunal has declined interest on the balance amount payable under the invoices from the date the cause of action arose up to the date when the statement of claim was affirmed before the arbitral tribunal.

Thereafter, the Court highlighted the “Law regarding payment of interest by arbitral tribunal”, wherein reference was made to Sub-section (7) of Section 31 of 1996 Act, which deals with award of interest when the arbitral award is for the payment of money.

The Court said, “However, arbitral tribunal’s power to award interest for the aforesaid period is subject to the agreement between the parties. Therefore, if the agreement stipulates that no interest is payable, the arbitral tribunal cannot award interest for the aforesaid period and an award contrary to the terms of the contract would be vulnerable to a challenge under Section 34 of 1996 Act.”

The Bench further clarified that the arbitral tribunal has jurisdiction to award interest for three distinct periods, namely, pre-reference, pendente lite, and future i.e., post-award. Award of pre-reference and pendente-lite interest is subject to the agreement between the parties whereas post award interest is statutorily governed and is not subject to the agreement between the parties.

The Court was also of the opinion that the rate of interest awarded at 12% per annum was reasonable being lower than the statutorily prescribed rate.

Pertinently, the Court reached to the issue of whether the arbitration agreement proscribed payment of interest on the sum awarded between the date on which the cause of action arose and the date on which the award was made. The Court held that a clause merely barring award of interest on delayed payment by itself will not be readily inferred as a bar to award pendente-lite interest by the arbitral tribunal.

Further, the Supreme Court clarified that the said clause in the arbitration agreement merely said that there would be no interest payable by the Corporation on any delayed payment / disputed claim. Neither it barred the arbitral tribunal from awarding pendente lite interest nor it said that interest would not be payable.

“In our view, therefore, Clause 18.1 would not limit the statutory power of the arbitral tribunal to award pendente-lite interest. Consequently, we find no such error in the award of pendente lite interest as may warrant interference with the award”, the Court said.

Accordingly, the Appeal was dismissed.

Cause Title: Oil and Natural Gas Corporation Ltd. V. M/s G&T Beckfield Drilling Services Pvt. Ltd. (Neutral Citation:2025 INSC 1066)

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