The Supreme Court has held that a contractual clause prohibiting interest on withheld payments, deposits and delayed bills, and ending with the words “or otherwise”, bars an arbitral tribunal from awarding pre-reference and pendente lite interest.
The bench of Justice Aravind Kumar and Justice Vipul M. Pancholi affirmed the Delhi High Court’s decision to set aside the pre-award interest component of an arbitral award. However, maintained the contractor’s substantive monetary claims and the award of 10% annual post-award interest, explaining that interest accruing after an arbitral award is governed by a different statutory framework. Justice Pancholi authored the judgment.
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The central question was whether Clause 26 of the Special Conditions of Contract constituted an agreement excluding interest under Section 31(7)(a) of the Arbitration and Conciliation Act, 1996.
Specifically, the Court examined whether the concluding expression “or otherwise” merely referred to situations similar to delayed contractual payments or created a wider prohibition covering pre-reference interest and interest accruing during arbitration proceedings.
The distinction was decisive because Section 31(7)(a) makes an arbitrator’s power to award pre-award interest subject to the parties’ agreement.
The dispute originated in a subcontract awarded on January 11, 1991, for flooring and cladding work at the Vashi Railway Station-cum-Commercial Complex in New Bombay, now Navi Mumbai.
The agreed contract value was approximately ₹9.51 crore, with completion scheduled for January 10, 1993.
The contractor’s work depended on the completion of civil works by another contractor engaged by NBCC. According to the factual background recorded in the judgment, delays in those civil works restricted the areas available for flooring and cladding.
Although Sharma Enterprises completed the priority platform areas before the station’s inauguration on May 9, 1992, NBCC terminated the contract on September 22, 1992, and subsequently encashed its bank guarantees.
After several rounds of litigation over the appointment of an arbitrator, the Supreme Court appointed an arbitrator in August 2011.
The arbitrator held that NBCC had wrongfully terminated the contract and failed to provide the necessary work fronts.
The arbitrator awarded ₹45,653.15 for executed work, ₹26,03,465 for extra items, ₹2,77,500 towards bank guarantee extension charges and ₹19,01,480 as a refund of the encashed security deposit bank guarantee. Litigation costs of ₹5 lakh were also awarded, while NBCC’s counterclaims were rejected.
Additionally, the arbitrator granted interest at 10% per annum on the awarded sums, excluding costs, from September 22, 1992, until actual payment. This covered the periods before reference to arbitration, during arbitration and after the award.
In a separate decision delivered in December 2021, the Supreme Court settled that the proceedings were governed by the 1996 Act rather than the Arbitration Act, 1940.
NBCC challenged the award under Section 34 of the 1996 Act.
The Delhi High Court’s Single Judge upheld the substantive monetary claims but set aside the pre-reference and pendente lite interest, finding that Clause 26 prohibited such interest. A Division Bench subsequently upheld that decision under Section 37.
Clause 26 addressed monthly running bills and payments to the subcontractor. Its interest restriction covered balance payments or deposits withheld because of disputes, delays in monthly or final payments, and concluded with the expression “or otherwise”.
Sharma Enterprises argued that the clause concerned delayed contractual payments and could not be expanded into a blanket prohibition against interest on claims allowed in arbitration.
It also contended that the contract did not expressly exclude pendente lite interest or the tribunal’s statutory power to award it.
Rejecting the contractor’s interpretation, the Supreme Court held that the circumstances listed in Clause 26 were separate and distinct, connected by the word “or”.
The Court declined to apply the interpretative principle of ejusdem generis, under which general words may take their meaning from a preceding specific category. It explained that the preceding expressions covered different situations—including balance payments, withheld deposits and disputed amounts—and did not form a single narrow category confined to delayed running bills.
Consequently, the words “or otherwise” operated as a residual expression extending the prohibition to other circumstances in which interest might be claimed against NBCC.
Reading those words as merely repeating the restriction on delayed monthly or final payments would make them redundant and effectively rewrite the parties’ contract, the Court reasoned.
The Bench agreed with the High Court that the expression had the same effect as the wider wording considered in earlier decisions involving prohibitions extending to any other respect whatsoever.
The Supreme Court reiterated that Section 31(7)(a) expressly subjects the power to award pre-award interest to the parties’ agreement.
Read with Section 28(3), the statutory framework requires the tribunal to respect contractual provisions governing interest. An arbitrator cannot grant pre-reference or pendente lite interest contrary to an applicable contractual prohibition.
The Court distinguished Oil and Natural Gas Corporation Ltd. v. G&T Beckfield Drilling Services Pvt. Ltd., where the clause concerned interest on delayed payments or disputed claims and did not contain a comparable residual expression.
The ruling therefore turned on the wording and breadth of Clause 26, particularly its concluding words.
The Court separately explained that Section 31(7)(b), governing post-award interest, differs from Section 31(7)(a).
While pre-award interest is expressly subject to the parties’ agreement, post-award interest operates under the statutory framework applicable after the award. The Bench relied on precedent explaining that parties cannot contract out of post-award interest in the same manner.
The High Court correctly preserved the award of post-award interest while removing the pre-reference and pendente lite components.
The Supreme Court held that the arbitrator had exceeded his jurisdiction by awarding pre-award interest contrary to Clause 26. The substantive monetary awards and post-award interest remained undisturbed.
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