SC: Express contract bar on interest for delayed payments excludes pre-reference interest in arbitration

NEEPCO invited tenders for civil works relating to a Gas Turbine Power Project in Tripura; Astra Construction’s tender was accepted and the parties executed a contract containing Clause 54 of the General Conditions of Contract (GCC).

Disputes arose regarding delay in execution, which the Arbitral Tribunal attributed to NEEPCO. By award dated 05.06.2015, the Tribunal awarded Astra approximately Rs. 3.30 crores, together with pre-reference interest at 12% per annum and pendente lite and future interest at 9% per annum.

The Commercial Court set aside the award of pre-reference and pendente lite interest, holding that Clause 54 barred interest under Section 31(7) of the Arbitration and Conciliation Act, 1996.

The Meghalaya High Court reversed that decision, relying on State of U.P. v. Harish Chandra & Co., and restored the interest award.

NEEPCO appealed to the Supreme Court, principally challenging the restoration of pre-reference interest.

Whether Clause 54 of the GCC barred the grant of pre-reference interest under Section 31(7)(a) of the Arbitration and Conciliation Act, 1996.

Whether Clause 54 was materially similar to the clause construed in State of U.P. v. Harish Chandra & Co., or instead to the clauses considered in Sayeed Ahmed & Co. v. State of U.P. and Jaiprakash Associates Ltd. v. THDC-II.

Whether NEEPCO had waived its right to rely on Clause 54 by failing to raise the objection before the Arbitral Tribunal.

The Court applied Section 31(7)(a) of the Arbitration and Conciliation Act, 1996, under which an arbitral tribunal may award interest for the period between the accrual of the cause of action and the award date “unless otherwise agreed by the parties”.

Under the 1996 Act, party autonomy permits an express contractual prohibition on interest to exclude the tribunal’s power to grant pre-reference and pendente lite interest, even if the clause does not expressly refer to arbitral jurisdiction.

Pre-reference interest is governed by substantive law and must derive from an agreement, statute, or recognised mercantile usage; it cannot be founded solely on Section 31(7)(a).

The Court distinguished Harish Chandra, where the clause was confined to money withheld because of disputes, from Sayeed Ahmed and Jaiprakash Associates (THDC-II), where clauses separately barred interest arising from delay in making payments and therefore operated as complete bars to interest.

The Court also held that waiver was unavailable because NEEPCO had specifically raised Clause 54 in its Statement of Defence before the Tribunal.

Clause 54 provided that no claim for interest or damages would be entertained in respect of money lying with NEEPCO due to a dispute, or in respect of “any delay” by the Engineer-in-Charge in making periodical or final payments, “or in any other respect whatsoever”.

The Court held that the reference to delay in making payments was an independent and additional bar, rather than merely a description of disputes concerning withheld money.

Accordingly, unlike the clause in Harish Chandra, Clause 54 expressly covered interest arising from delayed payment, whether or not the delay was connected with a dispute.

Its wording therefore aligned with the clauses upheld in Sayeed Ahmed and THDC-II, and excluded the Tribunal’s authority to award pre-reference interest under Section 31(7)(a).

The record further established that NEEPCO had pleaded the contractual bar before the Tribunal, defeating Astra’s waiver argument.

The High Court erred in treating Clause 54 as equivalent to the narrower clause in Harish Chandra.

The appeal was allowed to the extent that the High Court’s restoration of pre-reference interest was set aside; there was no order as to costs.