Bar On Award Of Interest For Delayed Payment Can’t Be Readily Inferred As Express Bar To Award Pendente Lite Interest By Arbitrator: Supreme Court

The Court allowed the Appeal challenging the decision of the High Court that upheld the setting aside of an Arbitrator's award of pendente lite interest. The Court had to determine whether a contractual clause barring the contractor from claiming any interest on any payment, arrears, or balance due, prevents an Arbitrator from granting pendente lite interest under the Arbitration Act, 1940 (the Act).

A Bench of Justice Pamidighantam Sri Narasimha and Justice Joymalya Bagchi held, “From the above extracted paragraphs, the decision of the 3- judge bench in the First Ambica case (supra) can be stated as follows. The arbitrator’s power to grant interest would depend on the contractual clause in each case, and whether it expressly takes away the arbitrator’s power to grant pendente lite interest. This would have to be determined based on the phraseology of the agreement, clauses conferring powers relating to arbitration, the nature of claim and dispute referred to the arbitrator, and on what items the power to award interest is contractually barred and for which period. Further, a bar on award of interest for delayed payment would not be readily inferred as an express bar to the award of pendente lite interest by the arbitrator.”

AOR Vinayak Mehrotra represented the Appellant, while AAG Sansriti Pathak appeared for the Respondent.

Brief Facts

The Appellant was awarded a works contract by the Respondent, the State of Rajasthan, and they entered into an agreement which included a clause stating that the contractor shall not be entitled to claim any interest upon any payment, any arrears or upon any balance, which may be found due to him at any time.

When disputes arose, the Appellant invoked arbitration, and the arbitrator awarded a sum of Rs. 1,78,17,146 in its favor, along with 15% interest per annum on all dues payable until payment or the date of decree. The Respondent filed an application to set aside the award, and the Trial Court set aside the interest awarded by the arbitrator, granting 9% simple interest on the principal sum from that date till the date of payment, holding that the arbitrator did not consider the clause of the contract.

Court’s Reasoning

The Supreme Court referred to the decision of the 3-Judge Bench in Union of India v. Ambica Construction (2016) wherein it was held that “the grant of pendente lite interest depends upon the phraseology used in the agreement, clauses conferring power relating to arbitration, the nature of claim and dispute referred to the arbitrator, and on what items the power to award interest has been taken away and for which period.”

The Bench explained, “The difference in the interpretative approach can be stated as follows. Under the 1940 Act, a stricter approach is followed that requires a clear and express clause against the payment of interest in case of difference, dispute, or misunderstanding, in case of delay of payment, or any other case whatsoever, to constitute a bar on the arbitrator from granting interest. A clause that only provides that interest shall not be granted on amounts payable under the contract would not be sufficient. On the other hand, under the 1996 Act wherein Section 31(7)(a) sanctifies party autonomy, interest is not payable the moment the contract provides otherwise.”

“Now that we have stated the law applicable to this case, we will consider the terms of Clause 22 of the contract to determine whether it bars the arbitrator from awarding pendente lite interest on the arbitral award. Clause 22 prohibits the appellant (contractor) from claiming interest on any payment, arrears or balance, which may be found due to him at any time. Applying the above-stated law, we find that this clause does not expressly bar the award of pendente lite interest in the event of disputes, differences, or misunderstandings between the parties, or on delayed payment, or in any other respect whatsoever,” the Bench remarked.

“Under the 1940 Act, this Court has not readily inferred a bar on the arbitrator from clauses that merely bar the contractor from claiming interest, and the same will apply to this case as well,” the Bench stated.

Consequently, the Court held, “In view of the above discussion, we allow the present appeal and set aside the impugned judgment of the High Court.”

Accordingly, the Supreme Court allowed the Appeal.

Cause Title: M/S Ferro Concrete Construction (India) Pvt. Ltd. v. The State Of Rajasthan (Neutral Citation: 2025 INSC 429)

Appearance:

Appellant: AOR Vinayak Mehrotra; Advocates Sonali Jain and Nandini

Respondent: AAG Sansriti Pathak; AOR Nidhi Jaswal; Advocate Aman Prasad

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