The Supreme Court has held that an express, independent bar on delayed payments, standing apart from any dispute, ousts the arbitrator’s power to award pre-reference interest under Section 31(7)(a) of the Arbitration and Conciliation Act, 1996. The Court explained that the opening words ‘unless otherwise agreed by the parties’ expressly subordinate the arbitrator’s statutory power to the bargain between the parties. An express contractual bar suffices to exclude that power, even if not specifically addressed to the arbitrator’s jurisdiction.
Unlike pendente lite interest, pre-reference interest cannot be sourced in Section 31(7)(a) alone, and it must trace its basis to an agreement (express or implied), a statutory provision such as Section 3 of the Interest Act, 1978, or proof of mercantile usage. The Court therefore said that the plea founded on a contractual bar to interest, when specifically raised in the pleadings before the Arbitral Tribunal, is not waived merely because the Tribunal proceeded to award interest. Such bar can be pressed in subsequent proceedings under Sections 34 and 37 of the Arbitration Act.
A Two-Judge Bench comprising Justice Pamidighantam Sri Narasimha and Justice Alok Aradhe traced the trajectory of the law on the power of an Arbitral Tribunal to award interest. Under the Arbitration Act, 1940, there was no express provision conferring such power, and the Constitution Bench in Secretary, Irrigation Department v. G.C. Roy [(1992) 1 SCC 508] filled the gap by holding that interest could be implied as a term of the bargain. Under the 1996 Act, Section 31(7)(a) expressly confers the power to award interest, but the opening words ‘unless otherwise agreed by the parties’ subordinate that power to the parties’ bargain.
The Court reaffirmed that pendente lite interest is governed by procedural law under Section 31(7)(a), whereas pre-reference interest is referable to substantive law and cannot be sourced in Section 31(7)(a) alone. The Court then examined Clause 54 of the GCC, which bars claims for interest or damages in two distinct situations: first, money or balance lying with the Corporation owing to any dispute, difference or misunderstanding; and second, any delay on the part of the Engineer-in-Charge in making periodical or final payments. The Court contrasted this with the clause in State of U.P. v. Harish Chandra [(1999) 1 SCC 63], which only addressed money withheld due to a dispute and did not, in terms, cover interest on delayed payments simpliciter.
Briefly, in 1995, NEEPCO invited tenders for civil works of a Gas Turbine Power Project at Ram Chandra Nagar, Tripura. The respondent, Astra Construction Private Limited, was awarded the contract through a formal agreement dated May 23, 1996, with an estimated value of Rs. 17.09 crores and a stipulated completion date of March 26, 1997. Disputes arose between the parties, and the matter was referred to arbitration. By an award dated June 05, 2015, the Arbitral Tribunal held the delay attributable to NEEPCO, allowed four claims of the contractor, and awarded a principal sum of Rs. 3.30 crores along with pre-reference interest at 12% per annum and pendente lite and future interest at 9% per annum.
NEEPCO challenged the award under Section 34 of the Arbitration and Conciliation Act, 1996 before the Commercial Court, which by its judgment dated Feb 15, 2024, held that Clause 54 of the General Conditions of Contract (GCC) bars the grant of interest and set aside the pre-reference and pendente lite interest. The respondent’s appeal under Section 37 was allowed by the High Court of Meghalaya, which restored the Arbitral Tribunal’s award in its entirety.
