The Supreme Court has held that when a clause of the General Conditions of Contract (GCC) bars the grant of interest for the pre-reference period, the Arbitral Tribunal cannot award such interest by exceeding the bounds of its jurisdiction under Section 31(7)(a) of the Arbitration and Conciliation Act, 1996.

The Appeal before the Apex Court was filed against the order whereby the appeal preferred by the respondent under Section 37 of the Arbitration and Conciliation Act was allowed and the grant of pre-reference interest by the Arbitral Tribunal, earlier disallowed by the Commercial Court, was restored.

The Division Bench of Justice Pamidighantam Sri Narasimha and Justice Alok Aradhe held, “For the foregoing reasons, we are of the considered view that Clause 54 of the GCC bars the grant of interest for the prereference 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 High Court erred in equating Clause 54 with the clause considered in Harish Chandra (supra), and in restoring the grant of pre-reference interest on that basis.”

Factual Background

The case dates back to the year 1995, when the appellant invited tenders for the civil works of the main plant and auxiliary building of a Gas Turbine Power Project at Ram Chandra Nagar, Tripura. The respondent's tender was accepted, and a formal agreement was executed between the parties. The estimated value of the work under the contract was ₹ 17,09,26,913. Disputes having arisen between the parties, the matter was referred to arbitration. The Arbitral Tribunal held that the delay in execution of the project was attributable to the appellant. Four claims preferred by the respondent were allowed, and a principal sum of ₹3.30 crore was awarded. The Tribunal further awarded pre-reference interest at the rate of 12% per annum on each of the claims, together with pendente lite and future interest.

The appellant assailed the award before the Commercial Court under Section 34 of the Act. The Commercial Court held that Clause 54 of the GCC bars the grant of interest, whether pre-reference or pendente lite. The award was modified accordingly, and the grant of pre-suit and pendente lite interest on four claims was set aside as being contrary to Clause 54 of the GCC read with Section 31(7) of the Act, the award being otherwise upheld. Aggrieved, the respondent preferred an appeal under Section 37. The High Court restored the award of the Arbitral Tribunal in its entirety.

Reasoning

The Bench reaffirmed the settled position, that pendente lite interest stands on the footing of procedural law, and is governed by Section 31(7)(a). “Interest for the pre-reference period stands on a different footing altogether: it is referable to substantive law and cannot be sourced in Section 31(7)(a) alone”, it added.

On a perusal of the facts of the case as well as the GCC, the Bench noted that Clause 54 bars claims for interest or damages in two separate situations, not one. The Bench stated that the first is the same as before, money or balance lying with the Corporation owing to a dispute, difference or misunderstanding but it also adds a second, independent situation, "any delay on the part of the Engineer-in-Charge making periodical or final payments", before finally adding the same closing words, "or in any other respect whatsoever”. It was noticed that this clause expressly shut out a claim for interest arising from delayed payment, whether or not there was any dispute about it at all.

The Bench thus held, “This is also not a one-off or unusual way of drafting such a clause. 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.”

The Bench thus allowed the appeal and set aside impugned judgment, to the extent it restored the grant of pre-reference interest.

Cause Title: North Eastern Electric Power Corporation Limited v. Astra Construction Private Limited (Neutral Citation: 2026 INSC 1036)

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Justice Pamidighantam Sri NarasimhaJustice Alok Aradhe

Tulip Kanth

Assistant Editor

Tulip Kanth is an Assistant Editor at Verdictum having over 5 years of experience in the field of legal journalism and editing. She extensively covers judgments of the Supreme Court, High Courts as well as Tribunals. She has previously worked with a legal publishing website where she oversaw the work of other editors and has also created updates on notifications of different Government Ministries. She holds an English Honours Degree from SGTB Khalsa College, Delhi University and has completed her LLB course with specialisation in Corporate Law from Amity University.