Contractual Bar On Interest Does Not Automatically Preclude Arbitrator From Awarding Pendente Lite Interest Under Arbitration Act, 1940

A bench of Justices Pamidighantam Sri Narasimha and Joymalya Bagchi heard an appeal against a High Court order which had upheld a District Judge’s setting aside of pendente lite interest awarded by an arbitrator, and considered whether a contractual clause forbidding a contractor from claiming "any interest upon any payment, any arrears or upon any balance" operated as an express bar on the arbitrator’s power under the Arbitration Act, 1940.

The Court allowed the appeal, held that the arbitrator retained power to grant pendente lite interest under the 1940 Act unless a contract contained a clear and express ouster of that power, set aside the High Court judgment dated 06.01.2023, and directed payment of pendente lite interest at 9% per annum from 18.12.1991 to 07.03.1995, to be paid within 60 days. The Court explained that under the 1940 Act a stricter test applied and that "a clause that only provides that interest shall not be granted on amounts payable under the contract would not be sufficient" to bar an arbitrator. The Court, in its reasoning, observed: "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... 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."

Background The dispute arose from a works contract dated 06.02.1988 between a contractor and the State, which contained Clause 22 stating: "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." Following disputes, the contractor invoked arbitration and the arbitrator awarded Rs. 1,78,17,146 on 07.03.1995 and directed 15% pendente lite interest from 18.12.1991 until payment or decree. The respondent challenged the award; the District Judge (order dated 16.08.2005) set aside the interest component and instead granted 9% simple interest on the principal from that date, while upholding the rest of the award. Appeals were dismissed by the High Court on 06.01.2023. The Special Leave Petition (SLP (C) No. 7851 of 2023) was converted into the present civil appeal.

Counsel for the appellant relied on this Court’s decision in Reliance Cellulose Products Ltd. v. ONGC and Pam Developments Pvt. Ltd. v. State of West Bengal, arguing that Clause 22 did not clearly and expressly exclude the arbitrator’s power to award pendente lite interest. The State relied on authorities interpreting contractual ouster clauses and urged that narrower clauses have been construed as bars to pendente lite interest; it also pointed to payments already made and the interest component therein.

The Court reviewed settled precedents under the 1940 Act and the later Arbitration and Conciliation Act, 1996, including constitutional bench decisions (G.C. Roy, N.C. Budharaj), the First Ambica reference, Reliance Cellulose and Pam Developments; it reiterated the distinction in interpretative approach between the 1940 Act (requiring an express bar) and the 1996 Act (where Section 31(7) gives statutory primacy to party autonomy). Applying that principle, the Court found Clause 22 insufficiently explicit to deprive the arbitrator of jurisdiction to award pendente lite interest and, having regard to delay and amounts already paid, moderated the interest to 9% for the pendency period specified. The appeal was allowed; the High Court order was set aside; the directed payment was to be made within 60 days. No order as to costs was made and pending applications were disposed of.

Case Details: Case No.: 2025 INSC 429 Case Title: M/s Ferro Concrete Construction (India) Pvt. Ltd. v. The State of Rajasthan Appearances: For the Petitioner(s): Mr. Vinayak Mehrotra, Advocate For the Respondent(s): Ms. Sansriti Pathak, Additional Advocate General