Full Judgment Text
REPORTABLE
IN THE SUPREME COURT OF INDIA
2025 INSC 429
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL NO. OF 2025
ARISING OUT OF SLP (C) No. 7851 OF 2023
M/S FERRO CONCRETE CONSTRUCTION
(INDIA) PVT. LTD. ...APPELLANT(S)
VERSUS
THE STATE OF RAJASTHAN …RESPONDENT(S)
J U D G M E N T
PAMIDIGHANTAM SRI NARASIMHA, J.
1. Leave granted.
It is just as necessary to follow a precedent as it is to make a
2.
precedent.
3. The short issue arising for consideration in this appeal is
whether the contractual clause that bars the appellant/contractor
from claiming any interest on any payment, arrears or balance due
to it amounts to an express bar on the arbitrator’s power to grant
pendente lite interest as per the law under the Arbitration Act,
Signature Not Verified
1
1940 . While the arbitrator granted 15% pendente lite interest, the
Digitally signed by
KAPIL TANDON
Date: 2025.04.02
17:58:13 IST
Reason:
1
Hereinafter “1940 Act”.
1
same was set aside by the District Judge while deciding objections
against the award, and upheld by the High Court by order dated
06.01.2023, which is impugned herein. By relying on settled case-
law on the grant of interest under the 1940 Act and the
interpretation of contractual clauses barring payment of interest,
we have allowed the present appeal and have directed payment of
pendente lite interest on the arbitral sum.
4. The relevant facts are that the appellant was awarded a works
contract by the respondent, and they entered into an agreement
dated 06.02.1988 that contains the following clause barring the
appellant from claiming interest on any payment or arrears or
balance due to him at any time:
“22. Payments :-
(i) Payments will be made to the contractor within one month of
the issuing of the corresponding bills. The contractor shall
comply with the procedure that may be prescribed for all
operations from the recording of progress measurements upto
payment of bills.
(ii) All materials and work for which payment is made in part or
full shall become the sole property of the Govt, but this
provision shall not relieve the contractor of his responsibility
for the care and protection of the materials and works at his
own cost nor his liability to make good the damage if any
unless and until the whole work has been deemed to have
been completed and handed over to the Government.
2
The contractor shall not be entitled to claim any interest upon
any payment, any arrears or upon any balance, which may
be found due to him at any time .”
(emphasis supplied)
5. When disputes arose under the contract, the appellant
invoked arbitration and filed its claim, resulting in arbitral award
dated 07.03.1995 for a sum of Rs. 1,78,17,146 in its favour. The
arbitrator also directed payment of 15% interest p.a. on all dues
payable from 18.12.1991 (when the arbitrator entered reference)
till payment or the date of decree, whichever is earlier. The
respondent filed an application to set aside the award, which was
decided by the District Judge’s order dated 16.08.2005 that only
set aside the interest awarded by the arbitrator, and instead
granted 9% simple interest on the principal sum from that date till
the date of payment. The other objections against the award were
rejected and the rest of the award was upheld. It was held that the
arbitrator did not consider that Clause 22 of the contract is widely
worded and prohibits the appellant from claiming interest at any
time . Both parties preferred appeals against this order, which were
dismissed by the High Court by order dated 06.01.2023, impugned
herein.
3
6. While issuing notice on 24.04.2023 in the present special
leave petition converted to a civil appeal, this Court passed the
following order:
“ 1. Learned counsel appearing on behalf of the petitioner relies upon
paragraph 24 of the decision of this Court in
Reliance Cellulose
2
Products Ltd Vs Oil and Natural Gas Corporation Limited . He
urges that Clause 22 of the agreement does not specifically exclude
either the power of the arbitrator to grant pendente lite interest or rule
out the claimant from claiming interest pendente lite in the course of
arbitration.
2. Issue notice returnable in four weeks. ”
7. We have heard Mr. Vinayak Mehrotra, learned counsel for the
appellant, and Ms. Sansriti Pathak, learned Additional Advocate
General for the respondent State on the issue of whether Clause
22 amounts to a bar on the arbitrator from awarding pendente lite
interest under the 1940 Act.
7.1 Mr. Mehrotra submits that the present issue is covered by
this Court’s decision in Reliance Cellulose (supra). He submits that
the contractual clause in the present case does not clearly and
expressly bar the arbitrator from awarding interest on the arbitral
sum. He has also referred to this Court’s decision in Pam
2
(2018) 9 SCC 266.
4
3
Developments Private Limited v. State of West Bengal in support of
his argument.
7.2 On the other hand, Ms. Pathak has made detailed
submissions regarding the interpretation of the contractual
clause, which are as follows: First , the interpretation of an ouster
clause is the same under the 1940 Act and the Arbitration and
4
Conciliation Act, 1996 . Under both statutes, the arbitrator can
award interest unless the agreement provides otherwise . The key
difference between the statutes is that the 1996 Act contains an
express statutory provision for the grant of interest in Section
5
31(7), but this is based on the principle in G.C. Roy that
recognised the arbitrator’s power to award interest under the 1940
Act. Further, that Section 31(7)(a) of the 1996 Act does not
differentiate pre-reference and pendente lite interest. However,
these differences do not have any bearing on the interpretation of
contractual clauses. Second , by referring to various decisions of
this Court, she submits that narrower contractual clauses have
been treated as ouster clauses that bar the arbitrator from
6
awarding pendente-lite interest. Third , she submits that
3
(2024) 10 SCC 715, para 23.
4
Hereinafter “1996 Act”.
5
Secretary, Irrigation Department, Government of Orissa v. G.C. Roy , (1992) 1 SCC 508.
6
Relied on M.B. Patel & Co. v. ONGC , (2008) 8 SCC 251; Union of India v. Krafters Engg. & Leasing (P) Ltd. ,
(2011) 7 SCC 279 under the 1940 Act.
5
paragraph 24 of Reliance Cellulose (supra), which is relied on by
the appellant, is based on this Court’s decision in Board of Trustees
7
For The Port of Calcutta v. Engineers-De-Space-Age , which has
been doubted in several cases. A 3-judge bench of this Court in
8
Union of India v. Ambica Construction (First Ambica case ) held that
the observations in Engineers-De-Space-Age (supra) cannot be
considered as general observations and each contractual clause
barring payment of interest must be interpreted by the words used
therein. Fourth , in the facts of the present case, the respondent
has already paid a sum of Rs. 4.65 crores to the appellant, of which
Rs. 2.83 crores is the interest component. Hence, a further award
of pendente lite interest is not warranted in the present case.
8. The position of law on the grant of interest under the 1940
Act and the 1996 Act is well-settled. The constitution bench
9
decisions of this Court in GC Roy (supra) and NC Budharaj
recognised the arbitrator’s power to grant pre-reference, pendente
lite , and post-award interest on an arbitral award made under the
10
1940 Act unless there is a contractual bar. The question that
falls for our consideration is whether the contractual bar in the
7
(1996) 1 SCC 516.
8
(2016) 6 SCC 36.
9
Executive Engineer, Dhenkanal Minor Irrigation Division v. N.C. Budharaj , (2001) 2 SCC 721.
10
GC Roy (supra), para 45.
6
present case prohibits the arbitrator from granting pendente lite
interest, which necessarily entails an interpretation of the clause.
9. This Court has, on multiple occasions, noted that a
contractual clause which bars the payment of interest is
interpreted differently under the 1940 Act and the 1996 Act. In
fact, while deciding cases under the 1996 Act, this Court has been
slow to rely on the principles laid down under the 1940 Act,
considering the legislative incorporation of the arbitrator’s power
11
to grant interest through Section 31(7) of the 1996 Act. The
difference in the interpretative approach has been expounded by
this Court in Reliance Cellulose (supra) as follows:
“ 24. A conspectus of the decisions that have been referred to above
would show that under the 1940 Act, an arbitrator has power to grant
pre-reference interest under the Interest Act, 1978 as well as
pendente lite and future interest. However, he is constricted only by
the fact that an agreement between the parties may contain an
express bar to the award of pre-reference and/or pendente lite
interest. Since interest is compensatory in nature and is parasitic
upon a principal sum not having been paid in time, this Court has
frowned upon clauses that bar the payment of interest. It has
therefore evolved the test of strict construction of such clauses, and
has gone on to state that unless there is a clear and express bar to
the payment of interest that can be awarded by an arbitrator, clauses
which do not refer to claims before the arbitrators or disputes between
11
Sayeed Ahmed & Co. v. State of U.P. , (2009) 12 SCC 26, para 24; Sree Kamatchi Amman Constructions v.
Railways , (2010) 8 SCC 767, paras 18-19; Union of India v. Bright Power Projects (India) (P) Ltd. , (2015) 9 SCC
695, paras 17-19; Chittaranjan Maity v. Union of India , (2017) 9 SCC 611, para 16; Garg Builders v. BHEL ,
(2022) 11 SCC 697, para 17.
7
parties and clearly bar payment of interest, cannot stand in the way
of an arbitrator awarding pre-reference or pendente lite interest.
Thus, when one contrasts a clause such as the clause in Second
Ambica Construction case with the clause in Tehri Hydro
Development Corpn. Ltd., it becomes clear that unless a contractor
agrees that no claim for interest will either be entertained or payable
by the other party owing to dispute, difference, or misunderstandings
between the parties or in respect of delay on the part of the engineer
or in any other respect whatsoever, leading the Court to find an
express bar against payment of interest, a clause which merely states
that no interest will be payable upon amounts payable to the
contractor under the contract would not be sufficient to bar an
arbitrator from awarding pendente lite interest under the 1940 Act.
As has been held in First Ambica Construction case, the grant of
pendente lite interest depends upon the phraseology used in the
agreement, clauses conferring power relating to arbitration, the
nature of claim and dispute referred to the arbitrator, and on what
items the power to award interest has been taken away and for
which period. We hasten to add that the position as has been
explained in some of the judgments above under Section 31(7) of the
1996 Act, is wholly different, inasmuch as Section 31(7) of the 1996
Act sanctifies agreements between the parties and states that the
moment the agreement says otherwise, no interest becomes payable
right from the date of the cause of action until the award is delivered. ”
(emphasis supplied)
10. The difference in the interpretative approach can be stated as
follows. Under the 1940 Act, a stricter approach is followed that
requires a clear and express clause against the payment of interest
in case of difference, dispute, or misunderstanding, in case of delay
of payment, or any other case whatsoever, to constitute a bar on
8
the arbitrator from granting interest. A clause that only provides
that interest shall not be granted on amounts payable under the
contract would not be sufficient. On the other hand, under the
1996 Act wherein Section 31(7)(a) sanctifies party autonomy,
interest is not payable the moment the contract provides otherwise .
This distinction has been reiterated by us in a recent decision in
Pam Developments (supra), which summarised the position of law
as follows:
“ 23. The power of the arbitrator to grant pre-reference interest,
pendente lite interest, and post-award interest under Section 31(7) of
the Act is fairly well-settled. The judicial determinations also highlight
the difference in the position of law under the Arbitration Act, 1940.
The following propositions can be summarised from a survey of these
cases:
23.1. Under the Arbitration Act, 1940, there was no specific provision
that empowered an arbitrator to grant interest. However, through
judicial pronouncements, this Court has affirmed the power of the
arbitrator to grant pre-reference, pendente lite, and post-award
interest on the rationale that a person who has been deprived of the
use of money to which he is legitimately entitled has a right to be
compensated for the same. When the agreement does not prohibit the
grant of interest and a party claims interest, it is presumed that
interest is an implied term of the agreement, and therefore, the
arbitrator has the power to decide the same.
23.2. Under the 1940 Act, this Court has adopted a strict construction
of contractual clauses that prohibit the grant of interest and has held
that the arbitrator has the power to award interest unless there is an
9
express, specific provision that excludes the jurisdiction of the
arbitrator.
23.3. Under the 1996 Act, the power of the arbitrator to grant interest
is governed by the statutory provision in Section 31(7). This provision
has two parts. Under clause (a), the arbitrator can award interest for
the period between the date of cause of action to the date of the
award, unless otherwise agreed by the parties. Clause (b) provides
that unless the award directs otherwise, the sum directed to be paid
by an arbitral award shall carry interest @ 2% higher than the current
rate of interest, from the date of the award to the date of payment.
23.4. The wording of Section 31(7)(a) marks a departure from the
Arbitration Act, 1940 in two ways : first, it does not make an explicit
distinction between pre-reference and pendente lite interest as both
of them are provided for under this sub-section; second, it sanctifies
party autonomy and restricts the power to grant pre-reference and
pendente lite interest the moment the agreement bars payment of
interest, even if it is not a specific bar against the arbitrator.
23.5. The power of the arbitrator to award pre-reference and
pendente lite interest is not restricted when the agreement is silent on
whether interest can be awarded or does not contain a specific term
that prohibits the same.
23.6. While pendente lite interest is a matter of procedural law, pre-
reference interest is governed by substantive law. Therefore, the
grant of pre-reference interest cannot be sourced solely in Section
31(7)(a) (which is a procedural law), but must be based on an
agreement between the parties (express or implied), statutory
provision (such as Section 3 of the Interest Act, 1978), or proof of
mercantile usage. ”
(emphasis supplied)
At this stage, we find it necessary to deal with Ms. Pathak’s
11.
submission that Reliance Cellulose (supra) relies on Engineers-De-
10
Space-Age (supra), which was later read down and clarified by a 3-
judge bench in the First Ambica case. Upon reading Reliance
Cellulose (supra), it is clear that this Court undertook a
comprehensive survey of the case-law on the issue of payment of
interest on arbitral awards, including a detailed discussion of the
12
First Ambica case, before formulating the legal position extracted
hereinabove.
12. In the First Ambica case (supra), the issue before this Court
was whether Engineers-De-Space-Age (supra) and Madnani
13 14
Construction were correctly decided. After taking note of the
interpretation of various contractual clauses barring payment of
interest in this Court’s decisions under the 1940 Act and the 1996
Act, it summarised their rulings as follows:
“ 28. It is apparent from various decisions referred to above that
in G.C. Roy the Constitution Bench of this Court has laid down that
where the agreement expressly provides that no interest pendente lite
shall be payable on amount due, the arbitrator has no power to
award interest. In N.C. Budharaj a Constitution Bench has observed
that in case there is nothing in the arbitration agreement to exclude
jurisdiction of the arbitrator to entertaining claim for interest, the
jurisdiction of the arbitrator to consider and award interest in respect
to all periods is subject to Section 29 of the Act. In Hindustan
Construction Co. Ltd. this Court has followed the decision in G.C.
12
Reliance Cellulose (supra), paras 19-21.
13
Madnani Construction Corpn. (P) Ltd. v. Union of India , (2010) 1 SCC 549.
14
First Ambica case (supra), para 1.
11
Roy and laid down that on the basis of principles of Section 34 the
arbitrator would have the power to award pendente lite interest also.
In B.N. Agarwalla, this Court has again followed G.C.
Roy and Hindustan Construction Co. Ltd. with respect to the power
of the arbitrator to award pendente lite interest and it was held that
the arbitrator has the power to award interest. In Harish
Chandra this Court interpreted Clause 1.9 which provided that no
claim for interest or damages will be entertained by the Government
in respect to any monies or balances which may be lying with the
Government. It was held that there was no provision which could be
culled out against the contractor not to claim interest by way of
damages before the arbitrator on the relevant items placed for
adjudication. In Ferro Concrete Construction (P) Ltd. this Court
considered Clause 4 containing a stipulation that no interest was
payable on amount withheld under the agreement. It was held that
Clause 4, which dealt with rates, material and workmanship, did not
bar award of interest by the arbitrator on claims of the contractor
made in the said case. In Sayeed Ahmed this Court has emphasised
that award of interest would depend upon nature of the clause in the
agreement. In Bright Power Projects (India) (P) Ltd. this Court has
considered the expression “unless otherwise agreed by parties”
employed in Section 31(7)(a) of the 1996 Act and laid down that in
case contract bars claim of interest the contractor could not have
claimed interest. The provision of Section 31(7)(a) of the 1996 Act is
binding upon the arbitrator. In Sree Kamatchi Amman
Constructions similar view has been taken. ”
The Court then took note of the doubts expressed regarding the
correctness of Engineers-De-Space-Age (supra) and Madnani
Construction (supra) in Sayeed Ahmed (supra) and Tehri Hydro
12
15
Development Corpn. Ltd. v. Jai Prakash Associates Ltd. , on the
ground that they allow the arbitrator to grant interest by ignoring
16
an express bar in the contract. In order to resolve the discordant
note, this Court in the First Ambica case (supra) held as follows:
“ 32. In para 4 in Engineers-De-Space-Age this Court has observed
that bar under the contract will not be applicable to the arbitrator
cannot be said to be observation of general application. In our opinion,
it would depend upon the stipulation in the contract in each case
whether the power of the arbitrator to grant pendente lite interest is
expressly taken away. If answer is “yes” then the arbitrator would
have no power to award pendente lite interest.
33. The decision in Madnani Construction Corpn. has followed the
decision in Engineers-De-Space-Age. The same is also required to be
diluted to the extent that express stipulation under contract may
debar the arbitrator from awarding interest pendente lite. Grant of
pendente lite interest may depend upon several factors such as
phraseology used in the agreement, clauses conferring power relating
to arbitration, nature of claim and dispute referred to arbitrator and
on what items power to award interest has been taken away and for
which period.
34. Thus, our answer to the reference is that if the contract expressly
bars the award of interest pendente lite, the same cannot be awarded
by the arbitrator. We also make it clear that the bar to award interest
on delayed payment by itself will not be readily inferred as express
bar to award interest pendente lite by the Arbitral Tribunal, as ouster
of power of the arbitrator has to be considered on various relevant
15
(2012) 12 SCC 10.
16
First Ambica case (supra), paras 29-31.
13
aspects referred to in the decisions of this Court, it would be for the
Division Bench to consider the case on merits. ”
(emphasis supplied)
13. From the above extracted paragraphs, the decision of the 3-
judge bench in the First Ambica case (supra) can be stated as
follows. The arbitrator’s power to grant interest would depend on
the contractual clause in each case, and whether it expressly takes
away the arbitrator’s power to grant pendente lite interest . This
would have to be determined based on the phraseology of the
agreement, clauses conferring powers relating to arbitration, the
nature of claim and dispute referred to the arbitrator, and on what
items the power to award interest is contractually barred and for
which period. Further, a bar on award of interest for delayed
payment would not be readily inferred as an express bar to the
award of pendente lite interest by the arbitrator.
14. We find that the position of law laid down in paragraph 24 of
Reliance Cellulose (supra) is in line with the position of law laid
down in the First Ambica case. Both decisions emphasise the need
for an express contractual bar on the payment of pendente lite
interest to create a bar on the arbitrator from awarding interest.
They also emphasise that a bar on the arbitrator’s power would
depend on the phraseology of the contractual clause in that case.
14
In this light, Ms. Pathak’s submission regarding the correctness of
Reliance Cellulose (supra) ought to be rejected. We do not find any
reason to unsettle the position of law, when it has been clearly
enunciated and followed. It is not sufficient to lay down a
precedent, but it is equally important to follow and apply them as
well.
Now that we have stated the law applicable to this case, we
15.
will consider the terms of Clause 22 of the contract to determine
whether it bars the arbitrator from awarding pendente lite interest
on the arbitral award. Clause 22 prohibits the appellant
(contractor) from claiming interest on any payment, arrears or
balance , which may be found due to him at any time . Applying the
above-stated law, we find that this clause does not expressly bar
pendente lite
the award of interest in the event of disputes,
differences, or misunderstandings between the parties, or on
delayed payment, or in any other respect whatsoever. Under the
1940 Act, this Court has not readily inferred a bar on the arbitrator
from clauses that merely bar the contractor from claiming interest,
and the same will apply to this case as well.
16. In view of the above discussion, we allow the present appeal
and set aside the impugned judgment of the High Court in SBCMA
15
No. 3175/2006 dated 06.01.2023. Considering that the arbitrator
entered reference in 1991 and the award was made in 1995, along
with the passage of time in litigation as well as the amounts
already paid by the respondent including post-award interest @
9%, we deem it appropriate to grant 9% pendente lite interest,
instead of 15% as granted by the arbitral tribunal, from
18.12.1991 till 07.03.1995 (date of the arbitral award) within a
17
period of 60 days.
No order as to costs.
17.
18. Pending applications, if any, stand disposed of.
………………………………....J.
[PAMIDIGHANTAM SRI NARASIMHA]
………………………………....J.
[JOYMALYA BAGCHI]
NEW DELHI;
APRIL 02, 2025
17
As these proceedings arise under the 1940 Act, the scope and jurisdiction of the Court to modify or vary the
award is larger than that of the court exercising jurisdiction under Section 34 of the 1996 Act.
16
IN THE SUPREME COURT OF INDIA
2025 INSC 429
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL NO. OF 2025
ARISING OUT OF SLP (C) No. 7851 OF 2023
M/S FERRO CONCRETE CONSTRUCTION
(INDIA) PVT. LTD. ...APPELLANT(S)
VERSUS
THE STATE OF RAJASTHAN …RESPONDENT(S)
J U D G M E N T
PAMIDIGHANTAM SRI NARASIMHA, J.
1. Leave granted.
It is just as necessary to follow a precedent as it is to make a
2.
precedent.
3. The short issue arising for consideration in this appeal is
whether the contractual clause that bars the appellant/contractor
from claiming any interest on any payment, arrears or balance due
to it amounts to an express bar on the arbitrator’s power to grant
pendente lite interest as per the law under the Arbitration Act,
Signature Not Verified
1
1940 . While the arbitrator granted 15% pendente lite interest, the
Digitally signed by
KAPIL TANDON
Date: 2025.04.02
17:58:13 IST
Reason:
1
Hereinafter “1940 Act”.
1
same was set aside by the District Judge while deciding objections
against the award, and upheld by the High Court by order dated
06.01.2023, which is impugned herein. By relying on settled case-
law on the grant of interest under the 1940 Act and the
interpretation of contractual clauses barring payment of interest,
we have allowed the present appeal and have directed payment of
pendente lite interest on the arbitral sum.
4. The relevant facts are that the appellant was awarded a works
contract by the respondent, and they entered into an agreement
dated 06.02.1988 that contains the following clause barring the
appellant from claiming interest on any payment or arrears or
balance due to him at any time:
“22. Payments :-
(i) Payments will be made to the contractor within one month of
the issuing of the corresponding bills. The contractor shall
comply with the procedure that may be prescribed for all
operations from the recording of progress measurements upto
payment of bills.
(ii) All materials and work for which payment is made in part or
full shall become the sole property of the Govt, but this
provision shall not relieve the contractor of his responsibility
for the care and protection of the materials and works at his
own cost nor his liability to make good the damage if any
unless and until the whole work has been deemed to have
been completed and handed over to the Government.
2
The contractor shall not be entitled to claim any interest upon
any payment, any arrears or upon any balance, which may
be found due to him at any time .”
(emphasis supplied)
5. When disputes arose under the contract, the appellant
invoked arbitration and filed its claim, resulting in arbitral award
dated 07.03.1995 for a sum of Rs. 1,78,17,146 in its favour. The
arbitrator also directed payment of 15% interest p.a. on all dues
payable from 18.12.1991 (when the arbitrator entered reference)
till payment or the date of decree, whichever is earlier. The
respondent filed an application to set aside the award, which was
decided by the District Judge’s order dated 16.08.2005 that only
set aside the interest awarded by the arbitrator, and instead
granted 9% simple interest on the principal sum from that date till
the date of payment. The other objections against the award were
rejected and the rest of the award was upheld. It was held that the
arbitrator did not consider that Clause 22 of the contract is widely
worded and prohibits the appellant from claiming interest at any
time . Both parties preferred appeals against this order, which were
dismissed by the High Court by order dated 06.01.2023, impugned
herein.
3
6. While issuing notice on 24.04.2023 in the present special
leave petition converted to a civil appeal, this Court passed the
following order:
“ 1. Learned counsel appearing on behalf of the petitioner relies upon
paragraph 24 of the decision of this Court in
Reliance Cellulose
2
Products Ltd Vs Oil and Natural Gas Corporation Limited . He
urges that Clause 22 of the agreement does not specifically exclude
either the power of the arbitrator to grant pendente lite interest or rule
out the claimant from claiming interest pendente lite in the course of
arbitration.
2. Issue notice returnable in four weeks. ”
7. We have heard Mr. Vinayak Mehrotra, learned counsel for the
appellant, and Ms. Sansriti Pathak, learned Additional Advocate
General for the respondent State on the issue of whether Clause
22 amounts to a bar on the arbitrator from awarding pendente lite
interest under the 1940 Act.
7.1 Mr. Mehrotra submits that the present issue is covered by
this Court’s decision in Reliance Cellulose (supra). He submits that
the contractual clause in the present case does not clearly and
expressly bar the arbitrator from awarding interest on the arbitral
sum. He has also referred to this Court’s decision in Pam
2
(2018) 9 SCC 266.
4
3
Developments Private Limited v. State of West Bengal in support of
his argument.
7.2 On the other hand, Ms. Pathak has made detailed
submissions regarding the interpretation of the contractual
clause, which are as follows: First , the interpretation of an ouster
clause is the same under the 1940 Act and the Arbitration and
4
Conciliation Act, 1996 . Under both statutes, the arbitrator can
award interest unless the agreement provides otherwise . The key
difference between the statutes is that the 1996 Act contains an
express statutory provision for the grant of interest in Section
5
31(7), but this is based on the principle in G.C. Roy that
recognised the arbitrator’s power to award interest under the 1940
Act. Further, that Section 31(7)(a) of the 1996 Act does not
differentiate pre-reference and pendente lite interest. However,
these differences do not have any bearing on the interpretation of
contractual clauses. Second , by referring to various decisions of
this Court, she submits that narrower contractual clauses have
been treated as ouster clauses that bar the arbitrator from
6
awarding pendente-lite interest. Third , she submits that
3
(2024) 10 SCC 715, para 23.
4
Hereinafter “1996 Act”.
5
Secretary, Irrigation Department, Government of Orissa v. G.C. Roy , (1992) 1 SCC 508.
6
Relied on M.B. Patel & Co. v. ONGC , (2008) 8 SCC 251; Union of India v. Krafters Engg. & Leasing (P) Ltd. ,
(2011) 7 SCC 279 under the 1940 Act.
5
paragraph 24 of Reliance Cellulose (supra), which is relied on by
the appellant, is based on this Court’s decision in Board of Trustees
7
For The Port of Calcutta v. Engineers-De-Space-Age , which has
been doubted in several cases. A 3-judge bench of this Court in
8
Union of India v. Ambica Construction (First Ambica case ) held that
the observations in Engineers-De-Space-Age (supra) cannot be
considered as general observations and each contractual clause
barring payment of interest must be interpreted by the words used
therein. Fourth , in the facts of the present case, the respondent
has already paid a sum of Rs. 4.65 crores to the appellant, of which
Rs. 2.83 crores is the interest component. Hence, a further award
of pendente lite interest is not warranted in the present case.
8. The position of law on the grant of interest under the 1940
Act and the 1996 Act is well-settled. The constitution bench
9
decisions of this Court in GC Roy (supra) and NC Budharaj
recognised the arbitrator’s power to grant pre-reference, pendente
lite , and post-award interest on an arbitral award made under the
10
1940 Act unless there is a contractual bar. The question that
falls for our consideration is whether the contractual bar in the
7
(1996) 1 SCC 516.
8
(2016) 6 SCC 36.
9
Executive Engineer, Dhenkanal Minor Irrigation Division v. N.C. Budharaj , (2001) 2 SCC 721.
10
GC Roy (supra), para 45.
6
present case prohibits the arbitrator from granting pendente lite
interest, which necessarily entails an interpretation of the clause.
9. This Court has, on multiple occasions, noted that a
contractual clause which bars the payment of interest is
interpreted differently under the 1940 Act and the 1996 Act. In
fact, while deciding cases under the 1996 Act, this Court has been
slow to rely on the principles laid down under the 1940 Act,
considering the legislative incorporation of the arbitrator’s power
11
to grant interest through Section 31(7) of the 1996 Act. The
difference in the interpretative approach has been expounded by
this Court in Reliance Cellulose (supra) as follows:
“ 24. A conspectus of the decisions that have been referred to above
would show that under the 1940 Act, an arbitrator has power to grant
pre-reference interest under the Interest Act, 1978 as well as
pendente lite and future interest. However, he is constricted only by
the fact that an agreement between the parties may contain an
express bar to the award of pre-reference and/or pendente lite
interest. Since interest is compensatory in nature and is parasitic
upon a principal sum not having been paid in time, this Court has
frowned upon clauses that bar the payment of interest. It has
therefore evolved the test of strict construction of such clauses, and
has gone on to state that unless there is a clear and express bar to
the payment of interest that can be awarded by an arbitrator, clauses
which do not refer to claims before the arbitrators or disputes between
11
Sayeed Ahmed & Co. v. State of U.P. , (2009) 12 SCC 26, para 24; Sree Kamatchi Amman Constructions v.
Railways , (2010) 8 SCC 767, paras 18-19; Union of India v. Bright Power Projects (India) (P) Ltd. , (2015) 9 SCC
695, paras 17-19; Chittaranjan Maity v. Union of India , (2017) 9 SCC 611, para 16; Garg Builders v. BHEL ,
(2022) 11 SCC 697, para 17.
7
parties and clearly bar payment of interest, cannot stand in the way
of an arbitrator awarding pre-reference or pendente lite interest.
Thus, when one contrasts a clause such as the clause in Second
Ambica Construction case with the clause in Tehri Hydro
Development Corpn. Ltd., it becomes clear that unless a contractor
agrees that no claim for interest will either be entertained or payable
by the other party owing to dispute, difference, or misunderstandings
between the parties or in respect of delay on the part of the engineer
or in any other respect whatsoever, leading the Court to find an
express bar against payment of interest, a clause which merely states
that no interest will be payable upon amounts payable to the
contractor under the contract would not be sufficient to bar an
arbitrator from awarding pendente lite interest under the 1940 Act.
As has been held in First Ambica Construction case, the grant of
pendente lite interest depends upon the phraseology used in the
agreement, clauses conferring power relating to arbitration, the
nature of claim and dispute referred to the arbitrator, and on what
items the power to award interest has been taken away and for
which period. We hasten to add that the position as has been
explained in some of the judgments above under Section 31(7) of the
1996 Act, is wholly different, inasmuch as Section 31(7) of the 1996
Act sanctifies agreements between the parties and states that the
moment the agreement says otherwise, no interest becomes payable
right from the date of the cause of action until the award is delivered. ”
(emphasis supplied)
10. The difference in the interpretative approach can be stated as
follows. Under the 1940 Act, a stricter approach is followed that
requires a clear and express clause against the payment of interest
in case of difference, dispute, or misunderstanding, in case of delay
of payment, or any other case whatsoever, to constitute a bar on
8
the arbitrator from granting interest. A clause that only provides
that interest shall not be granted on amounts payable under the
contract would not be sufficient. On the other hand, under the
1996 Act wherein Section 31(7)(a) sanctifies party autonomy,
interest is not payable the moment the contract provides otherwise .
This distinction has been reiterated by us in a recent decision in
Pam Developments (supra), which summarised the position of law
as follows:
“ 23. The power of the arbitrator to grant pre-reference interest,
pendente lite interest, and post-award interest under Section 31(7) of
the Act is fairly well-settled. The judicial determinations also highlight
the difference in the position of law under the Arbitration Act, 1940.
The following propositions can be summarised from a survey of these
cases:
23.1. Under the Arbitration Act, 1940, there was no specific provision
that empowered an arbitrator to grant interest. However, through
judicial pronouncements, this Court has affirmed the power of the
arbitrator to grant pre-reference, pendente lite, and post-award
interest on the rationale that a person who has been deprived of the
use of money to which he is legitimately entitled has a right to be
compensated for the same. When the agreement does not prohibit the
grant of interest and a party claims interest, it is presumed that
interest is an implied term of the agreement, and therefore, the
arbitrator has the power to decide the same.
23.2. Under the 1940 Act, this Court has adopted a strict construction
of contractual clauses that prohibit the grant of interest and has held
that the arbitrator has the power to award interest unless there is an
9
express, specific provision that excludes the jurisdiction of the
arbitrator.
23.3. Under the 1996 Act, the power of the arbitrator to grant interest
is governed by the statutory provision in Section 31(7). This provision
has two parts. Under clause (a), the arbitrator can award interest for
the period between the date of cause of action to the date of the
award, unless otherwise agreed by the parties. Clause (b) provides
that unless the award directs otherwise, the sum directed to be paid
by an arbitral award shall carry interest @ 2% higher than the current
rate of interest, from the date of the award to the date of payment.
23.4. The wording of Section 31(7)(a) marks a departure from the
Arbitration Act, 1940 in two ways : first, it does not make an explicit
distinction between pre-reference and pendente lite interest as both
of them are provided for under this sub-section; second, it sanctifies
party autonomy and restricts the power to grant pre-reference and
pendente lite interest the moment the agreement bars payment of
interest, even if it is not a specific bar against the arbitrator.
23.5. The power of the arbitrator to award pre-reference and
pendente lite interest is not restricted when the agreement is silent on
whether interest can be awarded or does not contain a specific term
that prohibits the same.
23.6. While pendente lite interest is a matter of procedural law, pre-
reference interest is governed by substantive law. Therefore, the
grant of pre-reference interest cannot be sourced solely in Section
31(7)(a) (which is a procedural law), but must be based on an
agreement between the parties (express or implied), statutory
provision (such as Section 3 of the Interest Act, 1978), or proof of
mercantile usage. ”
(emphasis supplied)
At this stage, we find it necessary to deal with Ms. Pathak’s
11.
submission that Reliance Cellulose (supra) relies on Engineers-De-
10
Space-Age (supra), which was later read down and clarified by a 3-
judge bench in the First Ambica case. Upon reading Reliance
Cellulose (supra), it is clear that this Court undertook a
comprehensive survey of the case-law on the issue of payment of
interest on arbitral awards, including a detailed discussion of the
12
First Ambica case, before formulating the legal position extracted
hereinabove.
12. In the First Ambica case (supra), the issue before this Court
was whether Engineers-De-Space-Age (supra) and Madnani
13 14
Construction were correctly decided. After taking note of the
interpretation of various contractual clauses barring payment of
interest in this Court’s decisions under the 1940 Act and the 1996
Act, it summarised their rulings as follows:
“ 28. It is apparent from various decisions referred to above that
in G.C. Roy the Constitution Bench of this Court has laid down that
where the agreement expressly provides that no interest pendente lite
shall be payable on amount due, the arbitrator has no power to
award interest. In N.C. Budharaj a Constitution Bench has observed
that in case there is nothing in the arbitration agreement to exclude
jurisdiction of the arbitrator to entertaining claim for interest, the
jurisdiction of the arbitrator to consider and award interest in respect
to all periods is subject to Section 29 of the Act. In Hindustan
Construction Co. Ltd. this Court has followed the decision in G.C.
12
Reliance Cellulose (supra), paras 19-21.
13
Madnani Construction Corpn. (P) Ltd. v. Union of India , (2010) 1 SCC 549.
14
First Ambica case (supra), para 1.
11
Roy and laid down that on the basis of principles of Section 34 the
arbitrator would have the power to award pendente lite interest also.
In B.N. Agarwalla, this Court has again followed G.C.
Roy and Hindustan Construction Co. Ltd. with respect to the power
of the arbitrator to award pendente lite interest and it was held that
the arbitrator has the power to award interest. In Harish
Chandra this Court interpreted Clause 1.9 which provided that no
claim for interest or damages will be entertained by the Government
in respect to any monies or balances which may be lying with the
Government. It was held that there was no provision which could be
culled out against the contractor not to claim interest by way of
damages before the arbitrator on the relevant items placed for
adjudication. In Ferro Concrete Construction (P) Ltd. this Court
considered Clause 4 containing a stipulation that no interest was
payable on amount withheld under the agreement. It was held that
Clause 4, which dealt with rates, material and workmanship, did not
bar award of interest by the arbitrator on claims of the contractor
made in the said case. In Sayeed Ahmed this Court has emphasised
that award of interest would depend upon nature of the clause in the
agreement. In Bright Power Projects (India) (P) Ltd. this Court has
considered the expression “unless otherwise agreed by parties”
employed in Section 31(7)(a) of the 1996 Act and laid down that in
case contract bars claim of interest the contractor could not have
claimed interest. The provision of Section 31(7)(a) of the 1996 Act is
binding upon the arbitrator. In Sree Kamatchi Amman
Constructions similar view has been taken. ”
The Court then took note of the doubts expressed regarding the
correctness of Engineers-De-Space-Age (supra) and Madnani
Construction (supra) in Sayeed Ahmed (supra) and Tehri Hydro
12
15
Development Corpn. Ltd. v. Jai Prakash Associates Ltd. , on the
ground that they allow the arbitrator to grant interest by ignoring
16
an express bar in the contract. In order to resolve the discordant
note, this Court in the First Ambica case (supra) held as follows:
“ 32. In para 4 in Engineers-De-Space-Age this Court has observed
that bar under the contract will not be applicable to the arbitrator
cannot be said to be observation of general application. In our opinion,
it would depend upon the stipulation in the contract in each case
whether the power of the arbitrator to grant pendente lite interest is
expressly taken away. If answer is “yes” then the arbitrator would
have no power to award pendente lite interest.
33. The decision in Madnani Construction Corpn. has followed the
decision in Engineers-De-Space-Age. The same is also required to be
diluted to the extent that express stipulation under contract may
debar the arbitrator from awarding interest pendente lite. Grant of
pendente lite interest may depend upon several factors such as
phraseology used in the agreement, clauses conferring power relating
to arbitration, nature of claim and dispute referred to arbitrator and
on what items power to award interest has been taken away and for
which period.
34. Thus, our answer to the reference is that if the contract expressly
bars the award of interest pendente lite, the same cannot be awarded
by the arbitrator. We also make it clear that the bar to award interest
on delayed payment by itself will not be readily inferred as express
bar to award interest pendente lite by the Arbitral Tribunal, as ouster
of power of the arbitrator has to be considered on various relevant
15
(2012) 12 SCC 10.
16
First Ambica case (supra), paras 29-31.
13
aspects referred to in the decisions of this Court, it would be for the
Division Bench to consider the case on merits. ”
(emphasis supplied)
13. From the above extracted paragraphs, the decision of the 3-
judge bench in the First Ambica case (supra) can be stated as
follows. The arbitrator’s power to grant interest would depend on
the contractual clause in each case, and whether it expressly takes
away the arbitrator’s power to grant pendente lite interest . This
would have to be determined based on the phraseology of the
agreement, clauses conferring powers relating to arbitration, the
nature of claim and dispute referred to the arbitrator, and on what
items the power to award interest is contractually barred and for
which period. Further, a bar on award of interest for delayed
payment would not be readily inferred as an express bar to the
award of pendente lite interest by the arbitrator.
14. We find that the position of law laid down in paragraph 24 of
Reliance Cellulose (supra) is in line with the position of law laid
down in the First Ambica case. Both decisions emphasise the need
for an express contractual bar on the payment of pendente lite
interest to create a bar on the arbitrator from awarding interest.
They also emphasise that a bar on the arbitrator’s power would
depend on the phraseology of the contractual clause in that case.
14
In this light, Ms. Pathak’s submission regarding the correctness of
Reliance Cellulose (supra) ought to be rejected. We do not find any
reason to unsettle the position of law, when it has been clearly
enunciated and followed. It is not sufficient to lay down a
precedent, but it is equally important to follow and apply them as
well.
Now that we have stated the law applicable to this case, we
15.
will consider the terms of Clause 22 of the contract to determine
whether it bars the arbitrator from awarding pendente lite interest
on the arbitral award. Clause 22 prohibits the appellant
(contractor) from claiming interest on any payment, arrears or
balance , which may be found due to him at any time . Applying the
above-stated law, we find that this clause does not expressly bar
pendente lite
the award of interest in the event of disputes,
differences, or misunderstandings between the parties, or on
delayed payment, or in any other respect whatsoever. Under the
1940 Act, this Court has not readily inferred a bar on the arbitrator
from clauses that merely bar the contractor from claiming interest,
and the same will apply to this case as well.
16. In view of the above discussion, we allow the present appeal
and set aside the impugned judgment of the High Court in SBCMA
15
No. 3175/2006 dated 06.01.2023. Considering that the arbitrator
entered reference in 1991 and the award was made in 1995, along
with the passage of time in litigation as well as the amounts
already paid by the respondent including post-award interest @
9%, we deem it appropriate to grant 9% pendente lite interest,
instead of 15% as granted by the arbitral tribunal, from
18.12.1991 till 07.03.1995 (date of the arbitral award) within a
17
period of 60 days.
No order as to costs.
17.
18. Pending applications, if any, stand disposed of.
………………………………....J.
[PAMIDIGHANTAM SRI NARASIMHA]
………………………………....J.
[JOYMALYA BAGCHI]
NEW DELHI;
APRIL 02, 2025
17
As these proceedings arise under the 1940 Act, the scope and jurisdiction of the Court to modify or vary the
award is larger than that of the court exercising jurisdiction under Section 34 of the 1996 Act.
16