Supreme Court Upholds NEEPCO's Contractual Bar, Precludes Arbitral Tribunal's Pre-reference Interest Award

In a significant ruling on arbitration law, the Supreme Court has held that a contractual clause barring claims for interest on delayed payments effectively prohibits an arbitral tribunal from awarding pre-reference interest. The decision clarifies the distinction between clauses that bar interest only on disputed amounts and those that separately target delayed payments.

A bench of Justices Pamidighantam Sri Narasimha and Alok Aradhe allowed an appeal by North Eastern Electric Power Corporation Limited (NEEPCO) against Astra Construction Private Limited , setting aside a Meghalaya High Court judgment that had restored pre-reference interest awarded by an arbitral tribunal.

A Tale of Two Clauses: The Crucial Distinction

The dispute arose from a 1995 contract for civil works of a gas turbine power project in Tripura, valued at approximately ₹17.09 crore. The project faced delays, leading to arbitration. The Arbitral Tribunal attributed the delay to NEEPCO and awarded ₹3.30 crore on four claims, along with 12% pre-reference interest and 9% pendente lite and future interest.

NEEPCO challenged the award under Section 34 of the Arbitration and Conciliation Act, 1996. The Commercial Court held that Clause 54 of the General Conditions of Contract (GCC) barred the grant of interest, both pre-reference and pendente lite, and modified the award accordingly. However, the High Court restored the interest, relying on the Supreme Court's decision in State of U.P. v. Harish Chandra and Co. (1999).

The core issue was whether Clause 54 was identical to the clause in Harish Chandra —which only barred interest on money held due to a dispute—or to clauses in Sayeed Ahmed & Company v. State of U.P. (2009) and Jaiprakash Associates Limited v. Tehri Hydro Development Corporation (India) Limited (2019), which were held to be complete bars.

The Evolution of Interest Law Under Arbitration

The Supreme Court traced the law on interest under the Arbitration Act, 1940 and the 1996 Act. Under the 1940 Act, arbitrators could imply a power to award interest, and contractual bars were strictly construed. However, Section 31(7)(a) of the 1996 Act changed this: it expressly allows the tribunal to award interest " unless otherwise agreed by the parties " —meaning an express contractual bar is sufficient to exclude the power.

The Court noted that pre-reference interest stands on a different footing from pendente lite interest. While pendente lite interest is procedural, pre-reference interest is substantive and cannot be sourced solely from Section 31(7)(a) but must have a basis in an agreement, statute, or mercantile usage.

"Delay in Payment" as a Separate Ground: The Decisive Difference

The Court compared the wording of Clause 54 with the clauses in Harish Chandra and Sayeed Ahmed . In Harish Chandra , the clause barred claims for interest "with respect to any moneys or balances which may be lying with the Government owing to any dispute, difference or misunderstanding." It did not separately address delay in making payments.

Clause 54, however, reads: "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... 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."

The Court held that by naming delay in payment as a separate, independent ground, Clause 54 does what the clause in Harish Chandra never did: it expressly shuts out a claim for interest arising from delayed payment, whether or not there was any dispute about it.

High Court's Error: Equating Apples and Oranges

The Supreme Court faulted the High Court for treating Clause 54 as identical to the clause in Harish Chandra . The Court noted that the very same structure—a general prohibition on interest for disputed amounts followed by a separate prohibition on delayed payments—appears in the clauses examined in Sayeed Ahmed and THDC-II , which were held to be complete bars.

"It is the line of decisions in Sayeed Ahmed and thereafter, not Harish Chandra , that governs this case," the Court observed.

Key Observations from the Judgment

The Court made the following pivotal observations:

"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 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 two clauses are worded differently, and that difference in wording makes all the difference in law ."

The Court also rejected the argument that NEEPCO had waived its right to invoke Clause 54, noting that the plea was specifically taken in the Statement of Defence before the Arbitral Tribunal.

Final Verdict: Contractual Bar Prevails

The Supreme Court allowed the appeal, setting aside the High Court's judgment to the extent it restored pre-reference interest. The Court held that the Arbitral Tribunal exceeded its jurisdiction under Section 31(7)(a) by awarding such interest despite the contractual bar.

" 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 ," the Court concluded.

The award stands modified accordingly, with no order as to costs. The decision reinforces the principle that party autonomy under the 1996 Act allows express contractual terms to override the arbitral tribunal's default power to award interest.