Arbitration And Conciliation Act 1996 | Contractual Bar In Clause Excluding Interest For 'Delay In Payment' Disentitles Arbitrator From Granting Pre-Reference Interest: Supreme Court

"The two clauses are worded differently, and that difference in wording makes all the difference in law. It is the line of decisions in Sayeed Ahmed and thereafter, not Harish Chandra, that governs this case." Supreme Court, in a judgment dated September 22, 2026, held that an express contractual provision barring claims for interest in the event of 'delay in payment' constitutes a valid exclusion of the arbitrator's power to award interest under Section 31(7)(a) of the Arbitration and Conciliation Act, 1996.

A bench comprising Justice Pamidighantam Sri Narasimha and Justice Alok Aradhe clarified that such a clause, when distinct from those addressing only money withheld due to disputes, effectively ousts the jurisdiction of the Tribunal to grant pre-reference interest.

Distinction Between Arbitration Regimes

The Court traced the evolution of the law from the Arbitration Act, 1940, to the 1996 Act. Under the 1940 Act, courts adopted a strict constructionist approach, often implying a power to award interest if the contract was silent. However, the Court observed that Section 31(7) of the 1996 Act fundamentally recalibrated the balance between statutory power and party autonomy. By explicitly incorporating the phrase "unless otherwise agreed by the parties," the 1996 Act subordinates the arbitrator's power to the specific terms of the parties' bargain.

Clause 54 Constitutes An Express Bar

The core controversy centered on the interpretation of Clause 54 of the General Conditions of Contract (GCC). The Court compared this clause with the one interpreted in State of U.P. v. Harish Chandra and Co., noting that the latter only barred interest on money held up due to disputes. In contrast, Clause 54 of the subject contract explicitly barred claims for interest arising from "any delay on the part of the Engineer-in-Charge making periodical or final payments."

Court Defines Scope Of Contractual Prohibition

The bench emphasized that the specific inclusion of "delay in payment" as a separate, free-standing ground for the bar distinguishes this case from the Harish Chandra precedent. The Court reasoned that Clause 54 serves as a comprehensive prohibition, expressly shutting out claims for interest arising from delayed payments, regardless of whether a dispute or misunderstanding exists. Consequently, the High Court’s reliance on Harish Chandra to restore the interest award was deemed legally flawed.

Contractual Autonomy Overrides Statutory Interest

The Court reaffirmed that while pendente lite interest is a matter of procedural law governed by Section 31(7)(a), the claim for pre-reference interest is rooted in substantive law. Therefore, when the contract explicitly bars interest, the arbitrator cannot invoke Section 31(7)(a) to bypass the parties' agreement. The ruling emphasizes that the arbitrator’s jurisdiction is circumscribed by the clear, unambiguous language of the contract.

"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."

Rejection Of Waiver Argument

The respondent had contended that the appellant waived its right to invoke Clause 54 by failing to raise the issue before the Arbitral Tribunal. Upon scrutinizing the record, the Supreme Court rejected this plea, noting that the appellant had explicitly raised the bar under Clause 54 in its Statement of Defence filed before the Tribunal. The Court found no merit in the argument that the plea was waived, thereby validating the appellant's right to agitate the contractual bar during the arbitration proceedings.

Final Order Setting Aside Interest Grant

Ultimately, the Supreme Court allowed the appeal and set aside the High Court’s judgment to the extent that it restored the grant of pre-reference interest. The Court concluded that by awarding interest in the face of an express contractual bar, the Arbitral Tribunal had exceeded its jurisdiction under the 1996 Act. The decision reinforces the sanctity of contractual terms in commercial disputes and clarifies the threshold for what constitutes an effective 'bar' on interest.

Date of Decision: 22 September 2026