Under Arbitration Act 1940, clauses in contract merely barring contractor from claiming interest is no bar on arbitrator to grant Pendente lite interest.
In a recent judgment, the Hon’ble Supreme Court had upheld grant of Pendente lite interest by the Arbitrator holding that under the provisions of the 1940 Act, there can not be a bar on the arbitrator from clauses of the contract that merely bar the contractor from claiming interest.
ABCAUS Case Law Citation:
4491 (2025) (04) abcaus.in SC
In the instant case, the question to be decided was whether the contractual clause that bars the appellant/contractor from claiming any interest on any payment, arrears or balance due to it amounts to an express bar on the arbitrator’s power to grant pendente lite interest as per the law under the Arbitration Act, 1940?
In this case, the arbitrator had awarded 15% pendente lite interest to the contractor, the award was set aside by the District Judge while deciding objections against the award, and the same was upheld by the High Court.
The appellant/contractor was awarded a works contract by the State Department, and they entered into an agreement that contains a clause barring the appellant from claiming any interest on any payment or arrears or balance due to him at any time.
When disputes arose under the contract, the appellant invoked arbitration resulting in arbitral award in its favour. The arbitrator also directed payment of 15% interest p.a. on all dues payable from the date when the arbitrator entered reference till payment or the date of decree, whichever is earlier.
The respondent filed an application to set aside the award, which was decided by the District Judge who though upheld the award but set aside the interest awarded by the arbitrator, and instead granted 9% simple interest on the principal sum from for the said period. It was held that the arbitrator did not consider that Clause 22 of the contract which prohibited the appellant from claiming interest at any time.
Both parties preferred appeals against this order, which were dismissed by the High Court.
The Hon’ble Supreme Court observed that under the 1940 Act, a stricter approach was followed that requires a clear and express clause against the payment of interest in case of difference, dispute, or misunderstanding, in case of delay of payment, or any other case whatsoever, to constitute a bar on the arbitrator from granting interest. A clause that only provides that interest shall not be granted on amounts payable under the contract would not be sufficient. On the other hand, under the 1996 Act wherein Section 31(7)(a) sanctifies party autonomy, interest is not payable the moment the contract provides otherwise.
The Hon’ble Supreme Court observed that the position of law on the grant of interest under the 1940 Act and the 1996 Act is well-settled. The constitution bench decisions of the Court recognised the arbitrator’s power to grant pre-reference, pendente lite, and post-award interest on an arbitral award made under the 1940 Act unless there is a contractual bar. Therefore, the question in the instant case was whether the contractual bar in the present case prohibited the arbitrator from granting pendente lite interest, which necessarily entails an interpretation of the clause.
The Hon’ble High Court observed that it was held 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.
The Hon’ble Supreme Court observed that under the 1940 Act, a stricter approach is followed that requires a clear and express clause against the payment of interest in case of difference, dispute, or misunderstanding, in case of delay of payment, or any other case whatsoever, to constitute a bar on the arbitrator from granting interest. A clause that only provides that interest shall not be granted on amounts payable under the contract would not be sufficient. On the other hand, under the 1996 Act wherein Section 31(7)(a) sanctifies party autonomy, interest is not payable the moment the contract provides otherwise. This distinction had been reiterated by us in a recent decision.
The Hon’ble Supreme Court observed that the decision of the full bench was to the effect that the arbitrator’s power to grant interest would depend on the contractual clause in each case, and whether it expressly takes away the arbitrator’s power to grant pendente lite interest. This
would have to be determined based on the phraseology of the agreement, clauses conferring powers relating to arbitration, the nature of claim and dispute referred to the arbitrator, and on what items the power to award interest is contractually barred and for which period. Further, a bar on award of interest for delayed payment would not be readily inferred as an express bar to the award of pendente lite interest by the arbitrator.
The Hon’ble Supreme Court proceeded to examine the contractual clause which prohibited the contractor from claiming interest on any payment, arrears or balance, which may be found due to him at any time. Applying the above-stated law, the Hon’ble Supreme Court observed that the clause did not expressly bar the award of pendente lite interest in the event of disputes, differences, or misunderstandings between the parties, or on delayed payment, or in any other respect whatsoever. Under the 1940 Act, this Court has not readily inferred a bar on the arbitrator from clauses that merely bar the contractor from claiming interest, and the same will apply to this case as well.
In view of the above the appeal was allowed and Hon’ble Supreme Court set aside the impugned judgment of the High Court.
However, considering the period between arbitrator entering reference and date of the award, along with the passage of time in litigation as well as the amounts already paid by the respondent including post-award interest, the Hon’ble Supreme Court granted 9% pendente lite interest, instead of 15% as granted by the arbitral tribunal.
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