Arbitral Tribunal Erred In Granting Pre-Reference Interest Despite Contractual Bar: Supreme Court

The Supreme Court has set aside a High Court order restoring pre-reference interest to a contractor, holding that the contract barred the grant of such interest.

The arbitral tribunal had awarded ₹3.30 crore on four claims, along with 12% annual pre-reference interest. The Supreme Court held that the tribunal exceeded the bounds of its jurisdiction by awarding the interest despite the contractual bar.

A Bench of Justice Pamidighantam Sri Narasimha and Justice Alok Aradhe allowed North Eastern Electric Power Corporation Limited's (NEEPCO) appeal against Astra Construction Private Limited.

The court set aside the Meghalaya High Court's order restoring pre-reference interest.

The dispute arose from a contract for civil works for NEEPCO's Gas Turbine Power Project in Tripura. The tribunal awarded Astra Construction ₹3.30 crore on four claims, with 12% pre-reference and 9% pendente lite and future interest.

The Commercial Court later held that Clause 54 barred both. The High Court restored the interest, holding that the clause only covered money held up due to a dispute.

The Supreme Court, however, found that Clause 54 covered two separate situations. One concerned money lying with NEEPCO because of a dispute, while the other independently covered delay by the Engineer-in-Charge in making periodical or final payments.

The court held that this wording distinguished Clause 54 from the clause considered in State of U.P. v. Harish Chandra. In that case, the clause concerned money withheld because of a dispute and did not separately address delay in making payments.

The court observed, “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 (supra) 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 court also explained the relevance of Section 31(7)(a) of the Arbitration and Conciliation Act, 1996. The provision permits an arbitral tribunal to award interest for the period between the date on which the cause of action arose and the date of the award, “unless otherwise agreed by the parties.”

The court noted that an express contractual bar can therefore restrict the tribunal's power to award interest.

The court separately noted that pre-reference interest relates to the period before the dispute is referred to arbitration, while pendente lite interest concerns the period during the arbitration. It held that pre-reference interest cannot be sourced solely from Section 31(7)(a) and must have a basis in an agreement, statutory provision, or mercantile usage.

Rejecting the waiver argument, the court noted that NEEPCO had specifically invoked Clause 54 in its Statement of Defence filed before the tribunal on August 23, 2012.

“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 appeal was allowed and the High Court judgment was set aside to the extent it restored pre-reference interest.

For Appellant (NEEPCO): Advocates Solicitor General Tushar Mehta, Additional Solicitor General Raghavendra P. Shankar.

For Respondent (Astra Construction): Advocate Senior Counsel Ritin Rai.