Supreme court: Contractual bar on interest for delayed payments excludes pre-reference interest

Supreme Court Ruling: Contractual restrictions on interest for payment delays do not include pre-reference interest.

Case Title: North Eastern Electric Power Corporation Ltd. (NEEPCO) v. Astra Construction Pvt. Ltd.

Coram: Justice P.S. Narasimha and Justice Alok Aradhe

Citation: (2026) ibclaw.in 646 SC (Civil Appeal No. 13081 of 2026, decided on 22 September 2026) The Supreme Court has held that Clause 54 of the General Conditions of Contract (GCC) bars the grant of pre-reference interest, and that the Arbitral Tribunal exceeded its jurisdiction under Section 31(7)(a) of the Arbitration and Conciliation Act, 1996 in awarding it. The Bench set aside the judgment of the High Court of Meghalaya to the extent it restored such interest.

NEEPCO invited tenders on 12 June 1995 for the civil works of the main plant and auxiliary building of a Gas Turbine Power Project at Ram Chandra Nagar, Tripura. A formal agreement was executed with Astra Construction on 23 May 1996. The estimated value of the work was Rs. 17,09,26,913 and the work was to be completed by 26 March 1997.

Disputes were referred to arbitration. By its award dated 5 June 2015, the Arbitral Tribunal held that the delay in execution was attributable to NEEPCO. Four claims were allowed and a principal sum of Rs. 3.30 crore was awarded, along with pre-reference interest at 12% per annum on each claim and pendente lite and future interest at 9% per annum.

The Commercial Court, in proceedings under Section 34, relied on Sayeed Ahmed and Company v. State of U.P. and held that Clause 54 bars interest, whether pre-reference or pendente lite. The award was modified accordingly. In an appeal under Section 37, the High Court relied on State of U.P. v. Harish Chandra and Co. It held that the clause considered there was identical to Clause 54, that the bar was confined to interest on money or balances held up owing to a dispute, and restored the award in its entirety.

Before the Supreme Court, NEEPCO confined its challenge to the restoration of pre-reference interest. It submitted that the High Court relied on a decision rendered under the Arbitration Act, 1940, while the question stood settled under the 1996 Act by Sayeed Ahmed and Jai Prakash Associates Limited v. Tehri Hydro Development Corporation Limited. Astra Construction contended that the plea based on Clause 54 was never urged before the Tribunal and was therefore waived. The intervenors argued that the prohibition is limited to money lying with the appellant and that the residuary words of the clause take colour from the specific language preceding them.

The Court traced the law on interest under both Acts. Under the 1940 Act, which had no provision on interest, the Constitution Bench in Secretary, Irrigation Department, Government of Orissa v. G.C. Roy held that where an agreement does not forbid interest and a claim for it is referred, interest is presumed to be an implied term. Contractual bars were construed strictly. Under the 1996 Act, relying on Pam Developments Private Limited v. State of West Bengal, the Court noted that Section 31(7)(a) begins with the words "unless otherwise agreed by the parties", so an express bar in the agreement suffices to exclude the power, even if it is not specifically addressed to the arbitrator.

The Court reaffirmed that pendente lite interest is a matter of procedural law governed by Section 31(7)(a), whereas pre-reference interest is referable to substantive law and cannot be sourced in Section 31(7)(a) alone. It must rest on an agreement, a statutory provision such as Section 3 of the Interest Act, 1978, or mercantile usage. Whether the parties had agreed to prohibit interest therefore depended on the construction of Clause 54.

Comparing the clauses, the Court observed that in Harish Chandra the words "in making periodical or final payments" described the situation in which the dispute or misunderstanding arose and did not create a separate ground. The bar there was addressed only to money held back because of a dispute, and said nothing about money simply paid late. The closing words "or in any other respect whatsoever" were read as belonging to the same family as the dispute-related bar before them.

Clause 54, the Court held, is worded differently. It bars claims for interest or damages in two separate situations: money or balance lying with the Corporation owing to a dispute, difference or misunderstanding, and, joined by the word "or", any delay on the part of the Engineer-in-Charge in making periodical or final payments. Delay is thus named as an independent ground, not tied to any dispute. The situation that fell outside the bar in Harish Chandra is brought squarely within the bar in Clause 54.

The Court noted that the same structure appears in the clauses examined in Sayeed Ahmed and Jaiprakash Associates Limited v. Tehri Hydro Development Corporation (India) Limited (THDC-II), where this Court held that the clause was a complete bar on the arbitrator's power to award interest, for the pre-reference period or pendente lite. It respectfully agreed with that reasoning and held that the line of decisions beginning with Sayeed Ahmed, and not Harish Chandra, governs the case.

On waiver, the Court found from the record that the plea was specifically taken in NEEPCO's Statement of Defence filed on 23 August 2012 before the Arbitral Tribunal. The contention of waiver was rejected, and the intervenors' contention that Clause 54 is similar to the clause in Harish Chandra was held to be without merit.

Accordingly, the Csourt held that the Arbitral Tribunal, in awarding pre-reference interest, exceeded the bounds of its jurisdiction under Section 31(7)(a). The impugned judgment, to the extent it restored pre-reference interest, was set aside. The appeal was allowed with no order as to costs.