The Supreme Court has held that Arbitral Pre-Reference Interest cannot be awarded when the governing contract expressly prohibits interest on delayed periodical or final payments. The Court held that an arbitral tribunal cannot override such a contractual restriction by invoking Section 31(7)(a) of the Arbitration and Conciliation Act, 1996.
A Bench comprising Justice Pamidighantam Sri Narasimha and Justice Alok Aradhe set aside a judgment of the Meghalaya High Court. The High Court had restored pre-reference interest awarded by an Arbitral Tribunal despite Clause 54 of the General Conditions of Contract (GCC).
The Supreme Court held that Section 31(7)(a) does not empower an arbitral tribunal to grant pre-reference interest when the parties have agreed otherwise.
The Court observed:
“…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.”
Dispute Arising From ₹17.09 Crore Project
The dispute arose from project work valued at ₹17.09 crore in Tripura. The matter was subsequently referred to arbitration.
The Arbitral Tribunal found that North Eastern Electric Power Corporation Limited (NEEPCO) was responsible for the delay in executing the project.
It allowed four claims and awarded a principal amount of approximately ₹3.30 crore.
The Tribunal also granted pre-reference interest at 12% per annum for delays in making periodical or final payments. In addition, it awarded pendente lite and future interest at 9% per annum.
NEEPCO challenged the award under Section 34 of the Arbitration and Conciliation Act, 1996.
Commercial Court Relied on Clause 54
The Commercial Court held that Clause 54 of the GCC prohibited the award of interest, including pre-reference and pendente lite interest.
Clause 54 stated:
“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.”
Accordingly, the Commercial Court modified the arbitral award. It set aside the grant of pre-reference and pendente lite interest on the relevant claims.
The respondent then approached the Meghalaya High Court under Section 37 of the Arbitration Act.
Meghalaya High Court Restored Interest
The High Court restored the interest awarded by the Arbitral Tribunal.
It relied on the Supreme Court’s decision in State of U.P. v. Harish Chandra and Co. (1999).
The High Court considered Clause 54 materially identical to the contractual provision examined in Harish Chandra.
It held that the contractual restriction applied only to interest on money or balances withheld because of a dispute. According to the High Court, the restriction did not cover interest arising under other heads of claim.
NEEPCO challenged that decision before the Supreme Court.
Supreme Court Finds Material Difference in Contractual Clauses
Allowing NEEPCO’s appeal, the Supreme Court found fault with the High Court’s reliance on Harish Chandra.
Justice Alok Aradhe, who authored the judgment, explained that the contractual provisions in the two cases contained a material difference.
The clause considered in Harish Chandra prohibited interest on money or balances lying with the Government because of a dispute, difference or misunderstanding.
The reference to periodical or final payments in that case did not independently prohibit interest arising from delayed payments generally.
Consequently, pre-reference interest on delayed payments was not barred in Harish Chandra. The arbitral tribunal in that case could therefore award such interest.
The position under Clause 54 in the present dispute was different.
The Supreme Court found that Clause 54 specifically prohibited interest arising from delayed payments during the pre-reference period. That restriction prevented the Arbitral Tribunal from granting such interest.
The Court explained:
“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.”
Court Refers to Sayeed Ahmed and THDC-II
The Supreme Court also examined the drafting structure of Clause 54.
It noted that the provision first contained a general restriction concerning disputed amounts. It then separately prohibited interest relating to delayed payments.
The Court found a similar structure in the contractual provisions examined in Sayeed Ahmed & Company v. State of U.P. & Ors and Jaiprakash Associates Limited v. Tehri Hydro Development Corporation (India) Limited (THDC-II).
In those decisions, the Supreme Court treated such contractual provisions as a complete restriction on the arbitral tribunal’s authority to grant interest for the relevant periods.
The Court observed:
“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 Court further held that the High Court had incorrectly treated Clause 54 as equivalent to the provision considered in Harish Chandra.
It added:
“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.”
Tribunal Exceeded Its Authority Under Section 31(7)(a)
The Supreme Court concluded that Clause 54 expressly barred pre-reference interest on delayed payments.
Therefore, the Arbitral Tribunal could not use Section 31(7)(a) of the Arbitration and Conciliation Act, 1996 to award interest contrary to the contractual restriction.
The ruling makes Arbitral Pre-Reference Interest unavailable in this case because the parties had expressly agreed to the contractual bar.
The Supreme Court consequently set aside the Meghalaya High Court’s judgment and allowed NEEPCO’s appeal.
