Supreme Court on Arbitration Act 1940: General Interest Bar Does Not Exclude Pendente Lite Interest

This civil appeal had ensued from an order of the High Court of Rajasthan which had upheld the District Judge's order, reversing the order of the award of 15% pendente lite interest made by an arbitrator in favour of M/S Ferro Concrete Construction (India) Pvt. Ltd. (the appellant).

The arbitrator had granted this interest on dues due under a works contract dated 06.02.1988, which had a clause (Clause 22) that the contractor would not be entitled to claim any interest on any payment, any arrears, or on any balance found due. The District Judge had held that this clause was a bar on the arbitrator's jurisdiction to grant interest, and this view was also upheld by the High Court.

The question of law that was at the heart of the matter before the Supreme Court was whether Clause 22 of the agreement, which excluded the appellant from any claim of interest on any payment, arrears, or balance due, constituted an express exclusion of the arbitrator's jurisdiction to award pendente lite interest under the Arbitration Act, 1940.

The Supreme Court reitrated the well-established law position on awarding interest under the 1940 Act and observed that that although arbitrators have the authority to award pre-reference, pendente lite, and post-award interest subject to contractual bar, such exclusion under the 1940 Act must be given a strict meaning requiring an explicit and express condition against payment of interest in the event of difference, dispute, or misunderstanding, or delay in payment, in order to exclude the jurisdiction of the arbitrator. The Court differentiated the 1996 Act approach, wherein party autonomy of interest is easier to sanctify.

Drawing support from its earlier rulings such as Reliance Cellulose Products Ltd Vs Oil and Natural Gas Corporation Limited and Pam Developments Private Limited vs. State of West Bengal, the Court held that a mere general clause declaring no interest would be payable on monies payable in terms of the contract would be inadequate to disentitle an arbitrator to grant pendente lite interest under the 1940 Act.

The Apex Court observed that the correctness of Reliance Cellulose stood and is in accordance with the principles established in Union of India v. Ambica Construction (First Ambica case), wherein it was stated that an express contractual bar against pendente lite interest is necessary to limit the power of the arbitrator. Supreme Court allows Pendente Lite Interest Under 1940 Act over General Contractual Bar AND granted leave to appeal by reversing the challenged judgment of the High Court.

The Court held that Clause 22 of the contract did not specifically preclude the grant of pendente lite interest. Considering the extended period of litigation and the amounts already paid, including post-award interest, the Supreme Court deemed it appropriate to grant 9% pendente lite interest on the arbitral sum from 18.12.1991 (when the arbitrator entered reference) till 07.03.1995 (date of the arbitral award), payable within 60 days.

CORAM: JUSTICE PAMIDIGHANTAM SRI NARASIMHA & JUSTICE JOYMALYA BAGCHI
BETWEEN: Ms FERRO CONCRETE CONSTRUCTION (INDIA) PVT. LTD VS THE STATE OF RAJASTHAN 2025 INSC 429
DOJ: 02-04-2025