Where a contract expressly bars interest not only on money withheld due to a dispute but also, as a separate ground, on delayed payments, the bar is complete and disables an arbitral tribunal from awarding pre-reference interest, the Supreme Court held, setting aside a High Court order that had restored such interest.
New Delhi: The Supreme Court has held that a contractual clause which bars claims for interest, and which separately shuts out interest on delayed payments in addition to interest on money withheld owing to a dispute, operates as a complete bar on an arbitral tribunal’s power to award interest, including pre-reference interest, and that a tribunal awarding such interest exceeds its jurisdiction under Section 31(7)(a) of the Arbitration and Conciliation Act, 1996 [North Eastern Electric Power Corporation Limited v. Astra Construction Private Limited].
A Bench of Justice P.S. Narasimha and Justice Alok Aradhe allowed the appeal of the North Eastern Electric Power Corporation Limited (NEEPCO), setting aside the judgment of the High Court of Meghalaya to the extent it had restored the grant of pre-reference interest to the contractor.
The dispute
The case arose from a 1996 contract for the civil works of a gas turbine power project in Tripura, valued at about Rs 17 crore. Disputes over delay were referred to arbitration, and in 2015 the Arbitral Tribunal, finding the delay attributable to NEEPCO, awarded the contractor a principal sum of about Rs 3.30 crore, along with pre-reference interest at 12% per annum and pendente lite and future interest at 9% per annum.
The Commercial Court, in a challenge under Section 34 of the Act, held that Clause 54 of the General Conditions of Contract (GCC) barred interest, whether pre-reference or pendente lite, and set aside that portion of the award, relying on the Supreme Court’s decision in Sayeed Ahmed & Company v. State of U.P.. On the contractor’s appeal under Section 37, however, the High Court took the opposite view, holding that Clause 54 was identical to the clause considered in State of U.P. v. Harish Chandra and Co., that the bar was confined to interest on money held up owing to a dispute, and that it did not extend to other heads; it accordingly restored the Tribunal’s award in full. NEEPCO’s appeal to the Supreme Court was confined to the restoration of pre-reference interest.
The evolution of an arbitrator’s power to award interest
The Court traced the trajectory of the law. Under the Arbitration Act, 1940, which contained no provision empowering an arbitrator to award interest, a Constitution Bench in Secretary, Irrigation Department, Government of Orissa v. G.C. Roy had filled the gap, holding that where an agreement does not forbid interest and a claim for interest is referred to arbitration, the law presumes interest to be an implied term of the bargain, so that a party kept out of money justly due to it ought to be compensated. Under the 1940 Act, the Court noted, a contractual bar on interest had to be couched in clear and specific terms, construed strictly and against the party invoking it.
The 1996 Act altered the position by expressly conferring the power to award interest through Section 31(7), but crucially made that power subject to the parties’ agreement, applying “unless otherwise agreed by the parties.” It is against this backdrop, the Court said, that the effect of a contractual bar on a claim for pre-reference interest falls to be assessed.
Why the two clauses say different things
The heart of the judgment was a close comparison between Clause 54 of the GCC and the clause construed in Harish Chandra. The Court explained, in plain terms, why the two, though similar at first glance, are materially different.
The clause in Harish Chandra, it held, barred interest only with respect to money or balances held up because of a dispute, difference or misunderstanding; the words “in making periodical or final payments” merely described the situation in which the dispute arose, and did not create a separate, free-standing ground. That clause was therefore addressed to one thing only, money withheld because of a dispute, and said nothing about money simply paid late where there was no dispute, only delay. That, the Court noted, was why the three-Judge Bench in Harish Chandra had read the closing words “or in any other respect whatsoever” as belonging to the same dispute-related family, and had held the clause did not bar interest arising purely from delay.
Clause 54, the Court held, is worded differently and bars interest in two separate situations, not one:
“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. The very situation that fell outside the bar in Harish Chandra, delay in payment, without more, is brought squarely inside the bar in Clause 54.”
This structure, a separate, additional limb barring interest on delayed payments over and above the bar on money withheld due to a dispute, was, the Court observed, exactly the structure of the clauses it had examined in Sayeed Ahmed and in Jaiprakash Associates Limited v. Tehri Hydro Development Corporation (THDC-II), in each of which the clause had been held to be a complete bar on the arbitrator’s power to award interest, whether pre-reference or pendente lite. The difference in wording, the Court said, “makes all the difference in law.”
The decision
The Court accordingly held that it was the line of authority beginning with Sayeed Ahmed, and not Harish Chandra, that governed the case, and that the High Court had erred in equating the two clauses. Clause 54, it concluded, barred the grant of pre-reference interest, and the Arbitral Tribunal, in awarding it, had exceeded the bounds of its jurisdiction under Section 31(7)(a).
The Court also rejected the contractor’s argument that NEEPCO had waived the point by not raising it before the Tribunal, finding from the record that the plea had in fact been specifically taken in the Statement of Defence. It set aside the impugned judgment to the extent it restored the grant of pre-reference interest, and allowed the appeal, with no order as to costs.
Why the judgment matters
Though the Court described the controversy as “narrow in compass,” the judgment bears materially on public works contracts generally, and offers a clear method for construing the interest-barring clauses that are ubiquitous in government and public-sector construction agreements. The central lesson is that the enforceability of such a bar turns on its precise wording: a clause that bars interest only on money withheld because of a dispute will not prevent an arbitrator from awarding interest on delayed payments, whereas a clause that separately and expressly names delay in payment as a ground for the bar will operate as a complete prohibition, ousting even pre-reference interest.
The decision reaffirms that, under Section 31(7) of the 1996 Act, the tribunal’s power to award interest is expressly subject to the parties’ agreement, so that a validly-drafted contractual bar will prevail, and an award of interest in the teeth of such a bar is beyond jurisdiction. For contractors and public-sector employers alike, the judgment is a reminder to read the interest clause with care: the presence or absence of a distinct limb addressing “delay in payment,” as opposed to only “money withheld due to a dispute,” can determine whether crores in interest are recoverable at all. By carefully distinguishing Harish Chandra from the Sayeed Ahmed line, the Court has provided a workable test for that inquiry.
Case Title: North Eastern Electric Power Corporation Limited v. Astra Construction Private Limited [Civil Appeal arising out of SLP(C) No. 24803 of 2025]
Bench: Justice P.S. Narasimha and Justice Alok Aradhe
Citation: 2026 INSC 1036
Date of Judgment: September 22, 2026