Arbitrator Cannot Grant Pendente Lite Interest Where Contract Expressly Bars It: Bombay High Court

"Section 31(7) of the Act... gives more respect to the agreement entered into between the parties. If the parties to the agreement agree not to pay interest to each other, the Arbitral Tribunal has no right to award interest pendente lite." Bombay High Court, in a significant ruling dated 08 October 2026, held that an Arbitral Tribunal lacks the jurisdiction to award pendente lite interest if the underlying contract contains an express prohibition against the same.

A bench of Justice Aarti Sathe observed that the statutory discretion conferred upon an arbitrator under Section 31(7)(a) of the Arbitration and Conciliation Act, 1996, is conditioned by the principle of party autonomy, which is explicitly recognized by the phrase "unless otherwise agreed by the parties."

Contractual Bar Operates As A Jurisdictional Limit

The dispute arose from an agreement for the collection of octroi, which was terminated by the Kolhapur Municipal Corporation. The Arbitrator had awarded a substantial monetary sum along with 18% pendente lite interest, despite Clause 24 of the agreement, which stated that the agent shall not be entitled to claim "any kind of interest on any of his claims." The Court emphasized that when the parties have consciously excluded interest, the arbitrator cannot bypass this bargain by invoking equitable discretion.

Court Rejects Attempt To Overwrite Contractual Terms

The Court underscored that the Act of 1996 marks a departure from the 1940 Act, specifically by giving paramount importance to the contract. Justice Sathe noted that once a contract bars interest, any award to the contrary is not merely an erroneous application of law but an act in excess of the arbitrator's jurisdiction. The judge observed that Section 31(7)(a) is not an ornamental provision; it serves as a statutory recognition that the parties’ bargain remains supreme in arbitration proceedings.

Arbitrator Cannot Ignore Express Prohibitions

The Court relied upon several authoritative precedents, including the Supreme Court decisions in Sree Kamatchi Amman Constructions v. Divisional Railway Manager (Works), Palghat, and Garg Builders v. Bharat Heavy Electricals Limited. These judgments reinforce the principle that if a contract contains a specific clause expressly barring the payment of interest, it is not open for the arbitrator to grant it. The bench categorically stated that where the parties have agreed that no interest shall be payable, the tribunal cannot award it between the date the cause of action arose and the date of the award.

Standard Post-Award Interest Rates Modified By The Court

Regarding post-award interest, the Court clarified that the Arbitrator had erroneously applied an 18% rate, which was superseded by the 2016 amendment to Section 31(7)(b) of the Act. The Court held that the amended provision, which mandates a rate of 2% higher than the current rate of interest, must be applied to awards governed by the post-2016 regime. Consequently, the High Court modified the post-award interest to 9% per annum, reflecting the current rate of interest at the time of the award.

Power To Modify Arbitral Award Under Section 34

The Court invoked the doctrine of severability, affirming its power to modify the award without setting it aside in its entirety. Citing the Supreme Court’s decision in Gayatri Balasamy v. ISG Novasoft Technologies Ltd., Justice Sathe held that the power to set aside an award encompasses a limited power to vary or modify it, provided the valid and invalid portions are separable. This approach, the Court reasoned, prevents the wastage of resources and delays that would otherwise necessitate fresh arbitration rounds for mere computational errors or interest-related disputes.

Costs Must Be Reasonable And Proportionate

Addressing the final limb of the award regarding costs of Rs. 1.5 crores, the Court upheld the Arbitrator's decision. It noted that the costs were awarded based on a thorough examination of the statements submitted by both parties and the conduct of the Petitioner throughout the "chequered history" of the dispute. The Court found no patent illegality in the Arbitrator’s exercise of discretion under Section 31A of the Act, especially given the Petitioner's persistent refusal to comply with interim measures and the necessity of RTI inquiries to procure documents.

The Arbitrator’s findings on the monetary claim were upheld

Ultimately, the Court refused to interfere with the principal monetary award, noting that it was based on an expert report and thorough document verification. The petition was disposed of by setting aside the pendente lite interest and modifying the post-award interest, while maintaining the principal sum and the award of costs. The Court directed that the operation of the judgment be stayed for three weeks to enable the parties to pursue further remedies.

Date of Decision: 08 October 2026