A contractual clause that separately bars interest on delayed payments prevents an arbitral tribunal from awarding interest for the period before arbitration begins, the Supreme Court has held in a dispute arising from a power project in Tripura.

In North Eastern Electric Power Corporation Limited (NEEPCO) v. Astra Construction Private Limited, a Bench of Justices Pamidighantam Sri Narasimha and Alok Aradhe set aside a Meghalaya High Court ruling to the extent that it restored pre-reference interest awarded to the contractor. 

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The Court held that Clause 54 of the contract’s General Conditions barred claims for interest arising from delayed payments, even where the delay was not caused by a dispute. Under Section 31(7)(a) of the Arbitration and Conciliation Act, 1996, an arbitral tribunal’s power to award interest before an award is made is subject to what the parties have agreed.

NEEPCO invited tenders in June 1995 for civil works connected with the main plant and auxiliary building of a gas turbine power project at Ram Chandra Nagar, Tripura. It entered into an agreement with Astra Construction in May 1996. The estimated contract value was ₹17,09,26,913, and the scheduled completion date was March 26, 1997.

Disputes over the project later went to arbitration. In its June 2015 award, the Arbitral Tribunal attributed the delay in execution to NEEPCO and allowed four of the contractor’s claims, awarding a principal sum of ₹3.30 crore. It also awarded 12% annual pre-reference interest on the claims, along with 9% annual interest during the arbitration and after the award.

On NEEPCO’s challenge under Section 34 of the 1996 Act, the Commercial Court held that Clause 54 barred interest and set aside the pre-suit and interest during arbitration on the relevant claims, while otherwise upholding the award. The Meghalaya High Court reversed that decision under Section 37 and restored the tribunal’s award in full. NEEPCO then approached the Supreme Court, confining its challenge there to the restoration of pre-reference interest.

Clause 54 said that the corporation would not entertain claims for interest or damages concerning money held because of a dispute or concerning delay by the Engineer-in-Charge in making periodical or final payments. It ended with the words “or in any other respect whatsoever.”

The High Court had treated the clause as equivalent to one considered by the Supreme Court in State of U.P. v. Harish Chandra and Co. In that earlier case, the bar was read as applying to money held back because of a dispute; it did not independently address a payment that was simply delayed.

The Supreme Court found a decisive difference. In NEEPCO’s contract, delay in making payments appeared as a separate ground, joined to the dispute-related ground by “or”. The clause therefore covered delayed payment whether or not the parties disputed the amount. The Court said this wording was closer to clauses considered in Sayeed Ahmed & Company v. State of U.P. and later decisions, where contractual restrictions on interest were upheld.

The Bench explained that the 1996 Act expressly gives arbitral tribunals power to award interest, but Section 31(7)(a) begins with the qualification “unless otherwise agreed by the parties”. A contractual bar can therefore restrict interest for the period before an award.

The judgment also distinguished interest for the pre-reference period from interest accruing while arbitration is pending. Pre-reference interest requires a basis in substantive law, such as an agreement, a statutory provision or established commercial usage; Section 31(7)(a) alone does not supply that basis.

Astra Construction argued that NEEPCO had waived its reliance on Clause 54 by failing to raise it before the Arbitral Tribunal. The Supreme Court rejected that argument after finding that NEEPCO had specifically pleaded the clause in its statement of defence filed before the tribunal on August 23, 2012.

The Court concluded that the tribunal exceeded the limits of its authority in awarding pre-reference interest despite Clause 54. It allowed NEEPCO’s appeal and set aside the High Court judgment only insofar as it restored that interest. The Supreme Court’s appeal was confined to that issue; its operative ruling does not separately decide the treatment of interest during arbitration or after the award. No costs were awarded.

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