Arbitration Act | Residuary Term 'Or Otherwise' In Negative Covenant Completely Bars Pre-Reference & Pendente Lite Interest: Supreme Court

"The expression 'or otherwise' is residuary in nature and has been consciously incorporated with wide amplitude to encompass every other conceivable circumstance under which a claim for interest might be asserted against the Corporation." Supreme Court, in an authoritative decision delivered on October 15, 2026, held that an arbitral tribunal has no jurisdiction to award pre-reference and pendente lite interest when the contract contains an expansive negative interest clause concluding with the residuary phrase "or otherwise".

A bench comprising Justice Aravind Kumar and Justice Vipul M. Pancholi observed that the statutory mechanism under Section 31(7)(a) of the Arbitration and Conciliation Act, 1996 is expressly subordinated to party autonomy by the opening phrase "unless otherwise agreed by the parties", thereby rendering any award of pre-award interest contrary to the contract unsustainable in law.

The dispute arose out of a 1991 sub-contract awarded by National Building Construction Corporation (NBCC) to M/s Sharma Enterprises for flooring and cladding works at Vashi Railway Station, which was terminated in September 1992. The sole arbitrator appointed by the Supreme Court in 2011 rendered an award in 2016 in favour of the contractor, granting substantive claims along with 10% interest per annum covering pre-reference, pendente lite, and post-award periods. The Delhi High Court, both through a Single Judge and subsequently a Division Bench in Section 37 proceedings, partly set aside the arbitral award by excising the pre-reference and pendente lite interest on the ground that Clause 26 of the Special Conditions of Contract operated as a complete prohibition.

The primary legal question before the Supreme Court was whether the phrase "or otherwise" in Clause 26 of the Special Conditions of Contract constituted an absolute contractual bar under Section 31(7)(a) of the Arbitration and Conciliation Act, 1996, disabling the arbitral tribunal from awarding pre-reference and pendente lite interest. The Court was also called upon to determine whether the principle of ejusdem generis could be applied to restrict the scope of such a residuary negative covenant.

Arbitrator Bound By Contractual Exclusion Under Section 31(7)(a)

The bench examined the statutory interplay between Section 28(3) and Section 31(7)(a) of the 1996 Act, emphasizing that the statutory scheme unambiguously restricts the power of an arbitrator where the parties have expressly contracted out of interest. The Court reiterated that an arbitrator is strictly a creature of the contract and possesses no equitable authority to grant pre-award interest in contravention of express contractual prohibitions.

Reaffirming the line of precedents in Sayeed Ahmed and Company v. State of U.P., Union of India v. Bright Power Projects, and Union of India v. Larsen & Toubro Limited, the bench noted that the statutory phrase "unless otherwise agreed by the parties" confers absolute primacy on contractual covenants.

"The provisions of the Act of 1996, including provisions contained in Section 31(7)(a) give paramount importance to the contract entered into between the parties and categorically restrict the power of an arbitrator to award pre-award/pendente lite interest when the parties have themselves agreed to the contrary."

Ejusdem Generis Inapplicable When Clauses Are Disjunctively Separated By 'Or'

Rejecting the appellant's contention that "or otherwise" must take color from the preceding words dealing with delayed running or final payments, the Court clarified the scope of the rule of ejusdem generis. The bench observed that the rule can apply only where the preceding terms constitute a distinct class or genus, which was entirely absent in Clause 26 of the contract.

The Court held that because the contractual events were disjunctively separated by the conjunction "or", each clause retains an independent identity of wide amplitude. Relying upon the Constitution Bench ruling in Lilavati Bai v. State of Bombay and Union of India v. Manraj Enterprises, the bench held that "or otherwise" represents words of extension rather than limitation, designed to encompass every conceivable circumstance under which a claim for interest might arise.

"Restricting the scope of the expression 'or otherwise' to only delays in monthly or final payments would render the term redundant and would amount to rewriting the contract entered into between the parties."

Phrase 'Or Otherwise' Identical In Effect To 'In Any Other Respect Whatsoever'

The Court distinguished its recent ruling in ONGC Ltd. v. G&T Beckfield Drilling Services Pvt. Ltd., pointing out that the clause therein merely barred interest on delayed payments or disputed claims without any residuary language. By contrast, the inclusion of "or otherwise" places Clause 26 on the exact same footing as the widely worded clauses interpreted in Sayeed Ahmed and Jaiprakash Associates Limited.

Consequently, the Court ruled that the phrase operated as a comprehensive prohibition against granting any pre-reference or pendente lite interest, regardless of whether the underlying dispute pertained to balance payments, security deposits, or illegal termination.

"The High Court rightly concluded that incorporating the residuary term 'or otherwise' stands on identical footing with the terminology 'or any other respect whatsoever'... thereby operating as a contractual prohibition against granting pre-reference as well as pendente lite interest."

Parties Cannot Contract Out Of Post-Award Interest Under Section 31(7)(b)

The bench drew a fundamental statutory distinction between pre-award interest under Section 31(7)(a) and post-award interest under Section 31(7)(b) of the 1996 Act. The Court pointed out that while pre-award interest is fully subject to party autonomy, post-award interest is a statutory mandate meant to ensure prompt compliance, meaning parties cannot "contract out" of post-award interest.

The bench affirmed the decision of the Delhi High Court in maintaining post-award interest while setting aside pre-reference and pendente lite interest, holding that the arbitral tribunal had acted entirely without jurisdiction in awarding interest for the pre-award period contrary to Clause 26.

Dismissing the appeal, the Supreme Court confirmed that the arbitral award was rightly set aside in part under Sections 34 and 37 to the extent of pre-reference and pendente lite interest. The decision firmly solidifies the principle that expansive contractual interest bars incorporating residuary language like "or otherwise" completely strip arbitral tribunals of jurisdiction to grant pre-award interest.

Date of Decision: October 15, 2026

Case Title: M/s Sharma Enterprises v. National Building Construction Corporation