A) ABSTRACT / HEADNOTE

This appeal examines whether a contractual clause which provides that “the contractor shall not be entitled to claim any interest upon any payment, any arrears or upon any balance, which may be found due to him at any time” operates as an express ouster of an arbitrator’s power to award pendente lite interest under the Arbitration Act, 1940. The arbitrator had awarded 15% p.a. pendente lite interest from the date of reference; the District Judge reduced the rate to 9% and the High Court upheld that order. The Supreme Court revisited settled precedents under the 1940 Act, contrasted them with the approach under the Arbitration and Conciliation Act, 1996, and applied the test of strict construction developed by earlier constitutional and larger benches.

Holding that a general bar on claiming interest on amounts payable under a contract does not, without more, constitute an express bar on the arbitrator’s power to award pendente lite interest, the Court set aside the High Court’s decision. Taking account of delay, payments already made, and post-award interest already paid, the Court granted 9% p.a. pendente lite interest from 18.12.1991 to 07.03.1995. The judgment reiterates that under the 1940 Act an express and clear ouster must be shown before denying an arbitrator the power to award pre-reference or pendente lite interest, whereas the 1996 Act (s.31(7)) gives greater primacy to party autonomy.

Keywords: pendente lite interest; Arbitration Act, 1940; strict construction; ouster clause; Clause 22; party autonomy; Section 31(7).

B) CASE DETAILS

C) INTRODUCTION AND BACKGROUND OF JUDGEMENT

The dispute concerns a state works contract executed on 06.02.1988 containing Clause 22, which states that the contractor shall not be entitled to claim interest on any payment, arrears or balance found due at any time. After differences arose, arbitration was invoked and the arbitrator (reference entered 18.12.1991) awarded a principal sum in favour of the contractor and directed 15% p.a. pendente lite interest until payment or the date of decree. The respondent challenged that component; the District Judge substituted 9% simple interest on the principal, and the High Court affirmed. The Supreme Court was called upon to interpret whether Clause 22 amounts to an express contractual bar ousting the arbitrator’s jurisdiction to award pendente lite interest under the Arbitration Act, 1940.

The case required the Court to reconcile earlier strands of authority. A Constitution Bench in Secretary, Irrigation Dept., Govt. of Orissa v. G.C. Roy and later in N.C. Budharaj recognised the arbitrator’s power to award pre-reference and pendente lite interest under the 1940 Act unless the contract expressly excludes it. Subsequent authorities, and a different statutory text in the 1996 Act (s.31(7)), have shaped two interpretative approaches: under the 1940 Act courts apply strict construction and do not readily infer an ouster from broadly worded clauses; under the 1996 Act the legislature has given clearer recognition to party autonomy and removed some interpretative ambiguity. The present judgment applies settled 1940 Act principles, examines phraseology, and evaluates relevant precedents notably Reliance Cellulose and the First Ambica decision to determine whether Clause 22 is an express bar to pendente lite interest.

D) FACTS OF THE CASE

The appellant, M/s Ferro Concrete Construction (India) Pvt. Ltd., secured a works contract from the State of Rajasthan and executed the agreement dated 06.02.1988 containing Clause 22 which prescribes payments and contains the non-interest stipulation. Disputes arose during performance; the appellant invoked arbitration. The arbitrator entered the reference on 18.12.1991 and by award dated 07.03.1995 directed payment of Rs. 1,78,17,146 to the appellant and granted 15% p.a. pendente lite interest on all dues from the date of reference until payment or decree. The State challenged the award before the District Judge who, while upholding the substantive award, set aside the arbitrator’s interest and granted 9% simple interest on the principal from the date of reference until payment. Both parties appealed; the High Court dismissed the appeals on 06.01.2023.

During litigation the respondent made payments aggregating Rs. 4.65 crores, of which Rs. 2.83 crores constituted interest components. The central controversy before the Supreme Court was the legal effect of Clause 22 whether its language operates as an express exclusion of the arbitrator’s power to award pendente lite interest under the 1940 Act or whether the arbitrator’s power survives because the clause lacks the precision required for ouster. The parties advanced detailed submissions grounded in the comparative jurisprudence of the 1940 and 1996 Acts and the phraseology of prior decisions such as Engineers-De-Space-Age, Reliance Cellulose, First Ambica, G.C. Roy, and N.C. Budharaj as they bear on the correct test of construction.

E) LEGAL ISSUES RAISED

i. Whether Clause 22 — stating that the contractor shall not be entitled to claim interest “upon any payment, any arrears or upon any balance” — amounts to an express contractual bar on the arbitrator’s power to award pendente lite interest under the Arbitration Act, 1940?
ii. What is the correct interpretative approach under the 1940 Act to clauses that purport to bar interest — strict construction or otherwise — and how does that differ from the approach under Section 31(7) of the 1996 Act?
iii. If an arbitrator’s pendente lite interest award is sustainable, what rate and period are appropriate given the facts (reference date, award date, payments already made, post-award interest)?

F) PETITIONER / APPELLANT’S ARGUMENTS

i. The appellant submitted that Reliance Cellulose governs the issue and that Clause 22 does not clearly or expressly exclude the arbitrator’s power to award pendente lite interest; a clause that merely states interest shall not be payable on amounts under the contract is insufficient to oust the arbitrator under the 1940 Act.
ii. The appellant argued that prior decisions require an express bar to be found in specific phraseology (e.g., reference to disputes, differences, or pendente lite claims) before an ouster is inferred.
iii. The appellant asked the Court to reinstate the arbitrator’s award of pendente lite interest (subject to equitable adjustment).

G) RESPONDENT’S ARGUMENTS

i. The respondent contended that Clause 22 is widely worded and prohibits the contractor from claiming interest at any time; therefore it constitutes an express contractual bar which should be given effect under the 1940 Act.
ii. It relied on authorities where narrower clauses have been treated as ouster clauses and stressed that the phraseology in the present contract takes away entitlement to interest.
iii. The respondent further submitted that substantial interest components have already been paid (Rs. 2.83 crores), so granting pendente lite interest afresh at tribunal rates would be inequitable.

H) RELATED LEGAL PROVISIONS 

i. Arbitration Act, 1940 — no express statutory provision for arbitrator to award interest; power established by judicial interpretation (e.g., G.C. Roy).
ii. Arbitration and Conciliation Act, 1996, Section 31(7) — statutory recognition of arbitrator’s power to award interest and sanctification of party autonomy (“unless otherwise agreed by the parties”).
iii. Principles of contract interpretation: strict construction of clauses purportedly ousting judicial/tribunal powers; phraseology and context determine effect.

I) JUDGMENT 

The Supreme Court allowed the appeal. After surveying authority notably G.C. Roy and N.C. Budharaj (Constitution Bench), Reliance Cellulose, First Ambica, and other pronouncements — the Court reiterated that under the 1940 Act an arbitrator’s power to award pre-reference and pendente lite interest exists by judicial recognition but is subject to an express contractual bar. The Court emphasised the analytic test: whether the clause in clear and express terms removes entitlement to interest in cases of disputes, delays or arbitrations. Applying that test, the Court held that Clause 22 merely states that the contractor shall not be entitled to claim interest on payments or balances “which may be found due to him at any time” but does not contain express language that addresses claims before an arbitrator, disputes, pendente lite relief, or delayed payments in dispute.

Thus, it does not amount to an express ouster. The Court found Reliance Cellulose consistent with the First Ambica approach and declined to treat the clause as a bar. Considering equitable factors the long interval between reference (18.12.1991) and award (07.03.1995), amounts already paid by the respondent including post-award interest @ 9%, and delay in litigation — the Court moderated the arbitrator’s interest rate and granted 9% p.a. pendente lite interest from 18.12.1991 to 07.03.1995. The High Court’s order was set aside and the modified pendente lite interest directed to be paid within 60 days. No order as to costs.

a. RATIO DECIDENDI

The dispositive legal principle is that under the Arbitration Act, 1940 an arbitrator has the judicially-recognised power to award pre-reference and pendente lite interest unless the arbitration agreement expressly and unambiguously bars such relief. A clause that generically declares no interest on sums payable under the contract, without specifically referring to claims before arbitrators, disputes, pendente lite interest, or delays in payment in dispute, will not ordinarily be construed as an ouster of the arbitrator’s power. The phraseology of the clause and the context of the arbitration must be examined; only a clear and specific stipulation will oust the arbitrator. Where equities and practical circumstances warrant, courts may moderate the arbitrator’s rate while restoring the power to award pendente lite interest.

b. OBITER DICTA

The Court observed the contrast with the 1996 Act, specifically Section 31(7), which gives greater effect to party autonomy: under the 1996 Act an agreement that “provides otherwise” will more readily preclude an award of interest. The observation clarifies that interpretative strictness under the 1940 Act stems from absence of statutory language like s.31(7). The Court also commented on prior decisions such as Engineers-De-Space-Age and the need to read them in context, endorsing the balanced survey in Reliance Cellulose and First Ambica while calling for application of these principles on the precise phraseology of each contract.

c. GUIDELINES

i. Under the Arbitration Act, 1940, clauses purporting to bar interest must be construed strictly; courts should look for express language addressing pendente lite or arbitration claims.
ii. Generic stipulations that no interest is payable on contract sums do not automatically oust an arbitrator; courts should consider phraseology, arbitration clauses, and the nature of the claim.
iii. Where equities, litigation delay, or payments already made make the arbitrator’s rate excessive, courts may moderate the pendente lite interest while restoring the legal principle that interest is awardable.
iv. Under the 1996 Act (s.31(7)) parties’ agreements against interest carry stronger effect; practitioners drafting contracts should use clear wording if they intend to bar pre-reference or pendente lite interest.
v. Judicial authorities should apply precedents like G.C. Roy, Reliance Cellulose, and First Ambica by focusing on clause wording and context rather than adopting blanket rules.

J) CONCLUSION & COMMENTS

This decision reasserts the settled 1940 Act principle that a clear and express contractual provision is required to deny an arbitrator the power to award pendente lite interest. The Court’s approach balances rigid doctrinal fidelity with pragmatic equity: it vindicates established precedent (and hence contractual certainty under the 1940 Act) while mitigating possible windfalls where delay and prior payments warrant moderation of interest rates. Practically, the judgment underscores drafting lessons — parties who wish to exclude interest must draft specific, unambiguous clauses referring to arbitration claims and pendente lite relief. For litigators, the ruling confirms that generalized non-interest clauses are vulnerable to strict construction and that tribunals retain remedial flexibility. Finally, the judgment clarifies the continuing divergence between the 1940 and 1996 Act jurisprudences and alerts drafters and courts to the doctrinal shift effected by Section 31(7).

K) REFERENCES

a. Important Cases Referred

1. Secretary, Irrigation Department, Government of Orissa v. G.C. Roy, (1992) 1 SCC 508.

2. Executive Engineer, Dhenkanal Minor Irrigation Division v. N.C. Budharaj, (2001) 2 SCC 721.

3. Reliance Cellulose Products Ltd v. Oil and Natural Gas Corporation Ltd., (2018) 9 SCC 266.

4. Union of India v. Ambica Construction (First Ambica case), (2016) 6 SCC 36.

5. Board of Trustees For The Port of Calcutta v. Engineers-De-Space-Age, (1996) 1 SCC 516.

6. Pam Developments Pvt. Ltd. v. State of West Bengal, (2024) 10 SCC 715.

7. M.B. Patel & Co. v. ONGC, (2008) 8 SCC 251.

8. Madnani Construction Corpn. (P.) Ltd. v. Union of India, (2010) 1 SCC 549.

9. Tehri Hydro Development Corpn. Ltd. v. Jai Prakash Associates Ltd., (2012) 12 SCC 10.

b. Important Statutes Referred

1. Arbitration Act, 1940.

2. Arbitration and Conciliation Act, 1996, Section 31(7).