A) ABSTRACT / HEADNOTE

The controversy in M/s Ferro Concrete Construction (India) Pvt. Ltd. v. The State of Rajasthan, [2025] 4 S.C.R. 529 : 2025 INSC 429 concerns the scope of an arbitrator’s power to award pendente lite interest under the Arbitration Act, 1940 when the contract contains a clause stating that the contractor “shall not be entitled to claim any interest upon any payment, arrears or upon any balance which may be found due to him at any time”.

The Supreme Court evaluated whether this phrasing constituted an express bar on the arbitrator’s jurisdiction to grant interest during the pendency of arbitration proceedings. The Court reaffirmed earlier jurisprudence such as Secretary, Irrigation Dept., Govt. of Orissa v. G.C. Roy and N.C. Budharaj, which recognised an implied arbitrator’s power to award interest under the 1940 Act unless contractually excluded.

It examined the interpretative scheme in Reliance Cellulose and the First Ambica decision, which mandate strict construction of interest-ouster clauses and require a clear, specific exclusion for disputes, misunderstandings, delays, or arbitral references.

The Court held that Clause 22 in this contract did not sufficiently exclude pendente lite interest because it merely restricted the contractor from claiming interest, without addressing disputes, arbitration, or delayed payments. The Court set aside the High Court judgment and restored the arbitrator’s power, though it modified the rate of pendente lite interest to 9% considering the long passage of time and payments already made.

Keywords: Pendente lite interest; Arbitration Act 1940; Contractual bar clauses; Strict construction; Interest on arbitral sums.

B) CASE DETAILS 

C) INTRODUCTION AND BACKGROUND OF JUDGMENT

The litigation originates from a works contract executed on 06.02.1988 between the appellant-contractor and the respondent State. Clause 22 of the agreement contains a stipulation 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”.

Disputes arose concerning payments, leading to arbitration under the Arbitration Act, 1940. The arbitrator awarded a substantial sum Rs. 1,78,17,146 and granted 15% pendente lite interest from 18.12.1991 until the date of payment or decree.

The District Judge, however, set aside the pendente lite interest on the ground that Clause 22 constitutes a wide bar. The High Court affirmed this view, holding that the arbitrator exceeded jurisdiction by ignoring the contractual prohibition. The matter thus reached the Supreme Court, which had to determine whether Clause 22 was an express bar on the arbitrator’s power to award pendente lite interest under the 1940 Act.

The Court examined the contrasting interpretative approaches under the 1940 Act and the Arbitration and Conciliation Act, 1996. Under the 1940 Act, interest power is judge-made and subject to contractual limitations; under the 1996 Act, Section 31(7) codifies that interest is payable unless parties agree otherwise. Decisions such as G.C. Roy, N.C. Budharaj, Reliance Cellulose, and the First Ambica case have shaped the jurisprudential criteria for construing interest-ouster clauses.

The Court noted that the respondent had already paid approximately Rs. 4.65 crores, including Rs. 2.83 crores as interest, which was advanced as an argument to resist further pendente lite liability. The adjudicatory question nevertheless remained one of principle: whether a clause that simply bars interest on payments due at any time suffices to exclude pendente lite interest during arbitral adjudication.

D) FACTS OF THE CASE

The appellant was awarded a works contract by the respondent State of Rajasthan. An agreement dated 06.02.1988 embodied the obligations of the parties, including Clause 22, which regulates payments and prohibits the contractor from claiming interest on any payment or balance due. The clause reads: “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”.

Disputes emerged over unpaid sums. Arbitration was invoked, and the arbitrator entered reference on 18.12.1991. The arbitral award dated 07.03.1995 granted Rs. 1,78,17,146 and awarded 15% interest per annum pendente lite. The respondent challenged the award before the District Judge, arguing that Clause 22 ousted the arbitrator’s power to award interest.

The District Judge partly allowed the objections, setting aside the arbitrator’s interest award, and substituted it with 9% simple interest only on the principal sum from the date of reference till payment. The High Court affirmed this reasoning in its order dated 06.01.2023, taking the view that Clause 22 was widely phrased and that the arbitrator misapplied the law by ignoring the contractual restriction.

During the pendency of proceedings, the State paid approximately Rs. 4.65 crores to the contractor, including Rs. 2.83 crores as interest. The appellant brought the matter before the Supreme Court, challenging the High Court’s affirmation and asserting that Clause 22 did not constitute an express bar on pendente lite interest, particularly when tested against precedent such as Reliance Cellulose Products Ltd. v. ONGC.

The Supreme Court granted leave and examined the competing submissions: the appellant emphasised the narrow interpretation of interest-ouster clauses under the 1940 Act, while the respondent relied on authorities including M.B. Patel, Krafters Engineering, and Ambica Construction to demonstrate that narrower clauses had been upheld as ousting arbitral interest.

E) LEGAL ISSUES RAISED

i. Whether Clause 22 of the contract constitutes an express contractual bar on the arbitrator’s power to award pendente lite interest under the Arbitration Act, 1940?
ii. Whether the arbitral award of 15% pendente lite interest was sustainable in law despite the contractual prohibition on claiming interest?

F) PETITIONER / APPELLANT’S ARGUMENTS

The appellant contended that Clause 22 merely prevents the contractor from claiming interest from the employer, but does not expressly prevent an arbitrator from awarding pendente lite interest, particularly in a situation involving disputes referred to arbitration.

Reliance was placed on Reliance Cellulose where the Supreme Court held that interest-bar clauses must be strictly construed and must explicitly reference disputes, arbitrations, delays, or misunderstandings to oust arbitral power. The appellant argued that the present clause did not refer to any such circumstances.

The appellant further submitted that jurisprudence commencing from G.C. Roy to N.C. Budharaj recognises a broad power in arbitrators under the 1940 Act to compensate a party deprived of money. Reference was made to Pam Developments Pvt. Ltd. v. State of West Bengal, which the Court acknowledged in its notice order, emphasising judicial continuity on the subject.

G) RESPONDENT’S ARGUMENTS

The respondent submitted that Clause 22 is absolute and bars any form of interest claim, making no distinction between pre-reference, pendente lite, or post-award periods. It was argued that the bar applies equally before courts and arbitrators, as the arbitrator can only exercise jurisdiction conferred by contract.

The respondent relied on precedents including M.B. Patel, Krafters Engineering, and cases where narrower clauses were treated as effective ousters of arbitral power. It was asserted that Reliance Cellulose heavily drew from Engineers-De-Space-Age, a decision later qualified in the First Ambica judgment. Therefore, strict reliance on paragraph 24 of Reliance Cellulose was inappropriate.

Additionally, the respondent highlighted that substantial interest Rs. 2.83 crores had already been paid, rendering additional pendente lite interest inequitable.

H) RELATED LEGAL PROVISIONS

i. Arbitration Act, 1940 — jurisprudential source of arbitrator’s power to grant pre-reference and pendente lite interest (G.C. Roy; N.C. Budharaj).
ii. Arbitration and Conciliation Act, 1996, Section 31(7) — discussed comparatively to highlight differences in statutory framework.
iii. Interest Act, 1978 — recognised in case law as statutory basis for pre-reference interest.

H) JUDGMENT

The Supreme Court held that Clause 22 did not constitute an express bar on the arbitrator’s power to grant pendente lite interest. The Court began by reaffirming that under the 1940 Act, as established in G.C. Roy and N.C. Budharaj, the arbitrator’s authority to award interest is inherent unless contractually excluded.

The interpretative difference under the 1996 Act where Section 31(7) codifies party autonomy was acknowledged but found irrelevant for a contract governed by the 1940 Act.

The Court scrutinised Reliance Cellulose, where it was held that a clause must clearly bar interest in situations involving disputes, misunderstandings, delays, or arbitral references before it can exclude pendente lite interest. A mere restriction on the contractor claiming interest on contractual payments is insufficient.

The Court emphasised that paragraph 24 of Reliance Cellulose is harmonious with the First Ambica judgment, which clarified that an express bar is required and that each clause must be interpreted based on its wording, the nature of claims, and the operative context.

Applying this test, the Court found that Clause 22 did not refer to disputes, arbitration, misunderstanding, or delays. It only restricted the contractor from claiming interest on payments “at any time”, but did not expressly exclude interest arising due to adjudicatory delay or disputes. The Court reiterated that ouster clauses must be strictly construed and cannot be readily inferred.

The Court therefore set aside the High Court judgment and restored the arbitrator’s entitlement to grant pendente lite interest. However, given the age of the dispute (reference in 1991, award in 1995), prolonged litigation, and substantial payments already made including 9% post-award interest the Court modified the rate of pendente lite interest to 9% from 18.12.1991 to 07.03.1995.

a. RATIO DECIDENDI

The core ratio is that a clause barring a contractor from claiming interest on amounts due does not, without more, constitute an express bar on an arbitrator’s jurisdiction to grant pendente lite interest under the Arbitration Act, 1940.

The Court reaffirmed the doctrinal principle that interest ouster must be explicit and must reference circumstances relevant to arbitral adjudication such as disputes, delays, misunderstandings, or arbitral claims. A general clause addressing interest on payments does not remove the arbitrator’s inherent compensatory jurisdiction.

The Court reiterated the legal framework laid down in G.C. Roy and N.C. Budharaj, which validates the arbitrator’s authority in the absence of contractual prohibition. It integrated the interpretive synthesis from Reliance Cellulose and the First Ambica case to determine that clauses must be strictly construed and ambiguity must be resolved in favour of preserving arbitral jurisdiction.

Thus, because Clause 22 did not expressly prohibit pendente lite interest in relation to disputes or arbitration, the arbitrator retained jurisdiction. This ratio is a reaffirmation of the long-standing jurisprudence under the 1940 Act and clarifies how courts must interpret interest-bar clauses in legacy contracts.

b. OBITER DICTA

The Court noted that the interpretative divergence between the 1940 Act and 1996 Act is significant. Under the 1996 Act, Section 31(7)(a) sanctifies party autonomy and interest is automatically excluded when the contract provides otherwise, even without explicit reference to arbitration. This comparative observation serves as guidance on how future disputes must be analyzed based on the statutory regime governing the contract.

The Court also remarked on the necessity of judicial consistency, stating that “It is not sufficient to lay down a precedent, but it is equally important to follow and apply them as well”. This reflection underscores the importance of doctrinal stability in arbitral jurisprudence.

The Court also addressed the respondent’s argument that substantial interest had already been paid. Although this did not alter the legal interpretation, it influenced the Court’s discretion to reduce the pendente lite rate to 9%. This discretionary adjustment constituted an equitable consideration rather than a legal mandate.

c. GUIDELINES

While the Court did not frame formal guidelines, specific jurisprudential principles emerge:

i. Clauses barring interest must be strictly construed under the 1940 Act; ambiguity will not oust arbitral jurisdiction.
ii. A clause must expressly refer to disputes, delays, arbitration, or misunderstandings to exclude pendente lite interest.
iii. Clauses merely preventing a contractor from claiming interest on contractual payments are insufficient.
iv. Courts must evaluate the phraseology, arbitration clauses, nature of claims, and period for which interest is barred when interpreting ouster clauses.
v. Jurisprudential distinctions between the 1940 Act and 1996 Act must be maintained—especially the statutory codification of interest under Section 31(7) in the 1996 Act.
vi. Equity may guide modification of the interest rate even when legal entitlement is upheld.

I) CONCLUSION & COMMENTS

The judgment reinforces doctrinal clarity and continuity in arbitration law under the 1940 Act. It recognises that interest functions as compensation for delayed payments and reflects the principle that contractual exclusions of such compensation must be explicit. The decision harmonises earlier jurisprudence and resolves conflicts arising from differing interpretations of interest-bar clauses.

The Court appropriately acknowledges that contractual freedom cannot be presumed to extend to an unarticulated ouster of adjudicatory authority. The insistence on linguistic precision in exclusion clauses promotes fairness in commercial contracting and prevents unjust enrichment through delayed payments.

At the same time, the Court’s equitable modification of the interest rate demonstrates judicial balancing between legal correctness and practical justice, particularly given decades of delay and substantial interest already paid.

The judgment thus achieves both doctrinal coherence and equitable pragmatism, reaffirming essential principles governing interest in arbitration while ensuring fairness in the specific dispute.

J) REFERENCES

a. Important Cases Referred

i. Secretary, Irrigation Dept., Govt. of Orissa v. G.C. Roy, [1991] Supp. 3 SCR 417.
ii. Executive Engineer, Dhenkanal Minor Irrigation Division v. N.C. Budharaj, [2001] 1 SCR 264.
iii. Reliance Cellulose Products Ltd. v. ONGC, [2018] 6 SCR 618.
iv. Union of India v. Ambica Construction, [2016] 2 SCR 810.
v. Board of Trustees for the Port of Calcutta v. Engineers-De-Space-Age, [1995] Supp. 6 SCR 327.
vi. Sayeed Ahmed & Co. v. State of U.P., [2009] 10 SCR 841.
vii. Sree Kamatchi Amman Constructions v. Railways, [2010] 10 SCR 487.
viii. Pam Developments Pvt. Ltd. v. State of West Bengal, [2024] 8 SCR 615.

b. Important Statutes Referred

i. Arbitration Act, 1940.
ii. Arbitration and Conciliation Act, 1996, Section 31(7).
iii. Interest Act, 1978.