2025 INSC 429 1

REPORTABLE

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO. OF 2025

ARISING OUT OF SLP (C) No. 7851 OF 2023

M/S FERRO CONCRETE CONSTRUCTION

(INDIA) PVT. LTD. ...APPELLANT(S)

VERSUS

THE STATE OF RAJASTHAN …RESPONDENT(S)

J U D G M E N T

PAMIDIGHANTAM SRI NARASIMHA, J.

1. Leave granted.

2. It is just as necessary to follow a precedent as it is to make a

precedent.

3. The short issue arising for consideration in this appeal is

whether the contractual clause that bars the appellant/contractor

from claiming any interest on any payment, arrears or balance due

to it amounts to an express bar on the arbitrator’s power to grant

pendente lite interest as per the law under the Arbitration Act,

1940

1. While the arbitrator granted 15% pendente lite interest, the

1

Hereinafter “1940 Act”.

2

same was set aside by the District Judge while deciding objections

against the award, and upheld by the High Court by order dated

06.01.2023, which is impugned herein. By relying on settled case -

law on the grant of interest under the 1940 Act and the

interpretation of contractual clauses barring payment of interest ,

we have allowed the present appeal and have directed payment of

pendente lite interest on the arbitral sum .

4. The relevant facts are that the appellant was awarded a works

contract by the respondent, and they entered into an agreement

dated 06.02.1988 that contains the following clause barring the

appellant from claiming interest on any payment or arrears or

balance due to him at any time:

“22. Payments :-

(i) Payments will be made to the contractor within one month of

the issuing of the corresponding bills. The contractor shall

comply with the procedure that may be prescribed for all

operations from the recording of progress measurements upto

payment of bills.

(ii) All materials and work for which payment is made in part or

full shall become the sole property of the Govt, but this

provision shall not relieve the contractor of his responsibility

for the care and protection of the materials and works at his

own cost nor his liability to make good the damage if any

unless and until the whole work has been deemed to have

been completed and handed over to the Government.

3

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.”

(emphasis supplied)

5. When disputes arose under the contract, the appellant

invoked arbitration and filed its claim, resulting in arbitral award

dated 07.03.1995 for a sum of Rs. 1,78,17,146 in its favour. The

arbitrator also directed payment of 15% interest p.a. on all dues

payable from 18.12.1991 (when the arbitrator entered reference)

till payment or the date of decree, whichever is earlier. The

respondent filed an application to set aside the award, which was

decided by the District Judge’s order dated 16.08.2005 that only

set aside the interest awarded by the arbitrator, and instead

granted 9% simple interest on the principal sum from that date till

the date of payment. The other objections against the award were

rejected and the rest of the award was upheld. It was held that the

arbitrator did not consider that Clause 22 of the contract is widely

worded and prohibits the appellant from claiming interest at any

time. Both parties preferred appeals against this order, which were

dismissed by the High Court by order dated 06.01.2023, impugned

herein.

4

6. While issuing notice on 24.04.2023 in the present special

leave petition converted to a civil appeal, this Court passed the

following order:

“1. Learned counsel appearing on behalf of the petitioner relies upon

paragraph 24 of the decision of this Court in Reliance Cellulose

Products Ltd Vs Oil and Natural Gas Corporation Limited

2

. He

urges that Clause 22 of the agreement does not specifically exclude

either the power of the arbitrator to grant pendente lite interest or rule

out the claimant from claiming interest pendente lite in the course of

arbitration.

2. Issue notice returnable in four weeks.”

7. We have heard Mr. Vinayak Mehrotra, learned counsel for the

appellant, and Ms. Sansriti Pathak, learned Additional Advocate

General for the respondent State on the issue of whether Clause

22 amounts to a bar on the arbitrator from awarding pendente lite

interest under the 1940 Act.

7.1 Mr. Mehrotra submits that the present issue is covered by

this Court’s decision in Reliance Cellulose (supra). He submits that

the contractual clause in the present case does not clearly and

expressly bar the arbitrator from awarding interest on the arbitral

sum. He has also referred to this Court’s decision in Pam

2

(2018) 9 SCC 266.

5

Developments Private Limited v. State of West Bengal

3 in support of

his argument.

7.2 On the other hand, Ms. Pathak has made detailed

submissions regarding the interpretation of the contractual

clause, which are as follows: First, the interpretation of an ouster

clause is the same under the 1940 Act and the Arbitration and

Conciliation Act, 1996

4. Under both statutes, the arbitrator can

award interest unless the agreement provides otherwise. The key

difference between the statutes is that the 1996 Act contains an

express statutory provision for the grant of interest in Section

31(7), but this is based on the principle in G.C. Roy

5 that

recognised the arbitrator’s power to award interest under the 1940

Act. Further, that Section 31(7)(a) of the 1996 Act does not

differentiate pre-reference and pendente lite interest. However,

these differences do not have any bearing on the interpretation of

contractual clauses. Second, by referring to various decisions of

this Court, she submits that narrower contractual clauses have

been treated as ouster clauses that bar the arbitrator from

awarding pendente- lite interest.

6 Third, she submits that

3

(2024) 10 SCC 715, para 23.

4

Hereinafter “1996 Act”.

5

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

6

Relied on M.B. Patel & Co. v. ONGC , (2008) 8 SCC 251; Union of India v. Krafters Engg. & Leasing (P) Ltd.,

(2011) 7 SCC 279 under the 1940 Act.

6

paragraph 24 of Reliance Cellulose (supra) , which is relied on by

the appellant, is based on this Court’s decision in Board of Trustees

For The Port of Calcutta v. Engineers-De-Space- Age

7, which has

been doubted in several cases. A 3-judge bench of this Court in

Union of India v. Ambica Construction

8 (First Ambica case) held that

the observations in Engineer s-De-Space- Age (supra) cannot be

considered as general observations and each contractual clause

barring payment of interest must be interpreted by the words used

therein. Fourth, in the facts of the present case, the respondent

has already paid a sum of Rs. 4.65 crores to the appellant, of which

Rs. 2.83 crores is the interest component. Hence, a further award

of pendente lite interest is not warranted in the present case.

8. The position of law on the grant of interest under the 1940

Act and the 1996 Act is well-settled. The constitution bench

decisions of this Court in GC Roy (supra) and NC Budharaj

9

recognised the arbitrator’s power to grant pre-reference, pendente

lite, and post-award interest on an arbitral award made under the

1940 Act unless there is a contractual bar.

10 The question that

falls for our consideration is whether the contractual bar in the

7

(1996) 1 SCC 516.

8

(2016) 6 SCC 36.

9

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

10

GC Roy (supra), para 45.

7

present case prohibits the arbitrator from granting pendente lite

interest, which necessarily entails an interpretation of the clause.

9. This Court has, on multiple occasions, noted that a

contractual clause which bars the payment of interest is

interpreted differently under the 1940 Act and the 1996 Act. In

fact, while deciding cases under the 1996 Act, this Court has been

slow to rely on the principles laid down under the 1940 Act ,

considering the legislative incorporation of the arbitrator’s power

to grant interest through Section 31(7) of the 1996 Act.

11 The

difference in the interpretative approach has been expounded by

this Court in Reliance Cellulose (supra) as follows:

“24. A conspectus of the decisions that have been referred to above

would show that under the 1940 Act, an arbitrator has power to grant

pre-reference interest under the Interest Act, 1978 as well as

pendente lite and future interest. However, he is constricted only by

the fact that an agreement between the parties may contain an

express bar to the award of pre-reference and/or pendente lite

interest. Since interest is compensatory in nature and is parasitic

upon a principal sum not having been paid in time, this Court has

frowned upon clauses that bar the payment of interest. It has

therefore evolved the test of strict construction of such clauses, and

has gone on to state that unless there is a clear and express bar to

the payment of interest that can be awarded by an arbitrator, clauses

which do not refer to claims before the arbitrators or disputes between

11

Sayeed Ahmed & Co. v. State of U.P., (2009) 12 SCC 26, para 24; Sree Kamatchi Amman Constructions v.

Railways, (2010) 8 SCC 767, paras 18 -19; Union of India v. Bright Power Projects (India) (P) Ltd., (2015) 9 SCC

695, paras 17- 19; Chittaranjan Maity v. Union of India, (2017) 9 SCC 611, para 16; Garg Builders v. BHEL ,

(2022) 11 SCC 697, para 17.

8

parties and clearly bar payment of interest, cannot stand in the way

of an arbitrator awarding pre-reference or pendente lite interest.

Thus, when one contrasts a clause such as the clause in Second

Ambica Construction case with the clause in Tehri Hydro

Development Corpn. Ltd., it becomes clear that unless a contractor

agrees that no claim for interest will either be entertained or payable

by the other party owing to dispute, difference, or misunderstandings

between the parties or in respect of delay on the part of the engineer

or in any other respect whatsoever, leading the Court to find an

express bar against payment of interest, a clause which merely states

that no interest will be payable upon amounts payable to the

contractor under the contract would not be sufficient to bar an

arbitrator from awarding pendente lite interest under the 1940 Act.

As has been held in First Ambica Construction case, the grant of pendente lite interest depends upon the phraseology used in the agreement, clauses conferring power relating to arbitration, the nature of claim and dispute referred to the arbitrator, and on what items the power to award interest has been taken away and for which period. We hasten to add that the position as has been explained in some of the judgments above under Section 31(7) of the 1996 Act, is wholly different, inasmuch as Section 31(7) of the 1996

Act sanctifies agreements between the parties and states that the

moment the agreement says otherwise, no interest becomes payable

right from the date of the cause of action until the award is delivered.”

(emphasis supplied)

10. The difference in the interpretative approach can be stated as

follows. Under the 1940 Act, a stricter approach is followed that

requires a clear and express clause against the payment of interest

in case of difference, dispute, or misunderstanding, in case of delay

of payment, or any other case whatsoever, to constitute a bar on

9

the arbitrator from granting interest. A clause that only provides

that interest shall not be granted on amounts payable under the

contract would not be sufficient. On the other hand, under the

1996 Act wherein Section 31(7)(a) sanctifies party autonomy,

interest is not payable the moment the contract provides otherwise.

This distinction has been reiterated by us in a recent decision in

Pam Developments (supra), which summarised the position of law

as follows:

“23. The power of the arbitrator to grant pre-reference interest,

pendente lite interest, and post-award interest under Section 31(7) of

the Act is fairly well-settled. The judicial determinations also highlight

the difference in the position of law under the Arbitration Act, 1940.

The following propositions can be summarised from a survey of these

cases:

23.1. Under the Arbitration Act, 1940, there was no specific provision

that empowered an arbitrator to grant interest. However, through

judicial pronouncements, this Court has affirmed the power of the

arbitrator to grant pre-reference, pendente lite, and post-award

interest on the rationale that a person who has been deprived of the

use of money to which he is legitimately entitled has a right to be

compensated for the same. When the agreement does not prohibit the

grant of interest and a party claims interest, it is presumed that

interest is an implied term of the agreement, and therefore, the

arbitrator has the power to decide the same.

23.2. Under the 1940 Act, this Court has adopted a strict construction

of contractual clauses that prohibit the grant of interest and has held

that the arbitrator has the power to award interest unless there is an

10

express, specific provision that excludes the jurisdiction of the

arbitrator.

23.3. Under the 1996 Act, the power of the arbitrator to grant interest

is governed by the statutory provision in Section 31(7). This provision

has two parts. Under clause (a), the arbitrator can award interest for

the period between the date of cause of action to the date of the

award, unless otherwise agreed by the parties. Clause (b) provides

that unless the award directs otherwise, the sum directed to be paid

by an arbitral award shall carry interest @ 2% higher than the current

rate of interest, from the date of the award to the date of payment.

23.4. The wording of Section 31(7)(a) marks a departure from the

Arbitration Act, 1940 in two ways : first, it does not make an explicit

distinction between pre-reference and pendente lite interest as both

of them are provided for under this sub-section; second, it sanctifies

party autonomy and restricts the power to grant pre-reference and

pendente lite interest the moment the agreement bars payment of

interest, even if it is not a specific bar against the arbitrator.

23.5. The power of the arbitrator to award pre-reference and pendente lite interest is not restricted when the agreement is silent on whether interest can be awarded or does not contain a specific term that prohibits the same.

23.6. While pendente lite interest is a matter of procedural law, pre-

reference interest is governed by substantive law. Therefore, the

grant of pre-reference interest cannot be sourced solely in Section

31(7)(a) (which is a procedural law), but must be based on an

agreement between the parties (express or implied), statutory

provision (such as Section 3 of the Interest Act, 1978), or proof of

mercantile usage.”

(emphasis supplied)

11. At this stage, we find it necessary to deal with Ms. Pathak’s

submission that Reliance Cellulose (supra) relies on Engineers-De-

11

Space- Age (supra), which was later read down and clarified by a 3-

judge bench in the First Ambica case. Upon reading Reliance

Cellulose (supra), it is clear that this Court undertook a

comprehensive survey of the case- law on the issue of payment of

interest on arbitral awards, including a detailed discussion of the

First Ambica case,

12 before formulating the legal position extracted

hereinabove.

12. In the First Ambica case (supra), the issue before this Court

was whether Engineers-De-Space-Age (supra) and Madnani

Construction

13 were correctly decided.

14 After taking note of the

interpretation of various contractual clauses barring payment of

interest in this Court’s decisions under the 1940 Act and the 1996

Act, it summarised their rulings as follows:

“28. It is apparent from various decisions referred to above that

in G.C. Roy the Constitution Bench of this Court has laid down that

where the agreement expressly provides that no interest pendente lite

shall be payable on amount due, the arbitrator has no power to

award interest. In N.C. Budharaj a Constitution Bench has observed

that in case there is nothing in the arbitration agreement to exclude

jurisdiction of the arbitrator to entertaining claim for interest, the

jurisdiction of the arbitrator to consider and award interest in respect

to all periods is subject to Section 29 of the Act. In Hindustan

Construction Co. Ltd. this Court has followed the decision in G.C.

12

Reliance Cellulose (supra), paras 19-21.

13

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

14

First Ambica case (supra), para 1.

12

Roy and laid down that on the basis of principles of Section 34 the

arbitrator would have the power to award pendente lite interest also.

In B.N. Agarwalla, this Court has again followed G.C.

Roy and Hindustan Construction Co. Ltd. with respect to the power

of the arbitrator to award pendente lite interest and it was held that

the arbitrator has the power to award interest. In Harish

Chandra this Court interpreted Clause 1.9 which provided that no

claim for interest or damages will be entertained by the Government

in respect to any monies or balances which may be lying with the

Government. It was held that there was no provision which could be

culled out against the contractor not to claim interest by way of

damages before the arbitrator on the relevant items placed for

adjudication. In Ferro Concrete Construction (P) Ltd. this Court

considered Clause 4 containing a stipulation that no interest was

payable on amount withheld under the agreement. It was held that

Clause 4, which dealt with rates, material and workmanship, did not

bar award of interest by the arbitrator on claims of the contractor

made in the said case. In Sayeed Ahmed this Court has emphasised

that award of interest would depend upon nature of the clause in the

agreement. In Bright Power Projects (India) (P) Ltd. this Court has

considered the expression “unless otherwise agreed by parties”

employed in Section 31(7)(a) of the 1996 Act and laid down that in

case contract bars claim of interest the contractor could not have

claimed interest. The provision of Section 31(7)(a) of the 1996 Act is

binding upon the arbitrator. In Sree Kamatchi Amman

Constructions similar view has been taken.”

The Court then took note of the doubts expressed regarding the

correctness of Engineers-De-Space-Age (supra) and Madnani

Construction (supra) in Sayeed Ahmed (supra) and Tehri Hydro

13

Development Corpn. Ltd. v. Jai Prakash Associates Ltd.

15, on the

ground that they allow the arbitrator to grant interest by ignoring

an express bar in the contract.

16 In order to resolve the discordant

note, this Court in the First Ambica case (supra) held as follows:

“32. In para 4 in Engineers-De-Space-Age this Court has observed

that bar under the contract will not be applicable to the arbitrator

cannot be said to be observation of general application. In our opinion,

it would depend upon the stipulation in the contract in each case

whether the power of the arbitrator to grant pendente lite interest is

expressly taken away. If answer is “yes” then the arbitrator would

have no power to award pendente lite interest.

33. The decision in Madnani Construction Corpn. has followed the

decision in Engineers-De-Space-Age. The same is also required to be

diluted to the extent that express stipulation under contract may

debar the arbitrator from awarding interest pendente lite. Grant of

pendente lite interest may depend upon several factors such as

phraseology used in the agreement, clauses conferring power relating

to arbitration, nature of claim and dispute referred to arbitrator and

on what items power to award interest has been taken away and for

which period.

34. Thus, our answer to the reference is that if the contract expressly

bars the award of interest pendente lite, the same cannot be awarded

by the arbitrator. We also make it clear that the bar to award interest

on delayed payment by itself will not be readily inferred as express

bar to award interest pendente lite by the Arbitral Tribunal, as ouster

of power of the arbitrator has to be considered on various relevant

15

(2012) 12 SCC 10.

16

First Ambica case (supra), paras 29-31.

14

aspects referred to in the decisions of this Court, it would be for the

Division Bench to consider the case on merits.”

(emphasis supplied)

13. From the above extracted paragraphs, the decision of the 3-

judge bench in the First Ambica case (supra) can be stated as

follows. The arbitrator’s power to grant interest would depend on

the contractual clause in each case, and whether it expressly takes

away the arbitrator’s power to grant pendente lite interest. This

would have to be determined based on the phraseology of the

agreement, clauses conferring powers relating to arbitration, the

nature of claim and dispute referred to the arbitrator, and on what

items the power to award interest is contractually barred and for

which period. Further, a bar on award of interest for delayed

payment would not be readily inferred as an express bar to the

award of pendente lite interest by the arbitrator.

14. We find that the position of law laid down in paragraph 24 of

Reliance Cellulose (supra) is in line with the position of law laid

down in the First Ambica case. Both decisions emphasise the need

for an express contractual bar on the payment of pendente lite

interest to create a bar on the arbitrator from awarding interest.

They also emphasise that a bar on the arbitrator’s power would

depend on the phraseology of the contractual clause in that case.

15

In this light, Ms. Pathak’s submission regarding the correctness of

Reliance Cellulose (supra) ought to be rejected. We do not find any

reason to unsettle the position of law, when it has been clearly

enunciated and followed. I t is not sufficient to lay down a

precedent, but it is equally important to follow and apply them as

well.

15. Now that we have stated the law applicable to this case, we

will consider the terms of Clause 22 of the contract to determine

whether it bars the arbitrator from awarding pendente lite interest

on the arbitral award. Clause 22 prohibits the appellant

(contractor) from claiming interest on any payment, arrears or

balance, which may be found due to him at any time. Applying the

above-stated law, we find that this clause does not expressly bar

the award of pendente lite interest in the event of disputes,

differences, or misunderstandings between the parties, or on

delayed payment, or in any other respect whatsoever. Under the

1940 Act, this Court has not readily inferred a bar on the arbitrator

from clauses that merely bar the contractor from claiming interest,

and the same will apply to this case as well.

16. In view of the above discussion, we allow the present appeal

and set aside the impugned judgment of the High Court in SBCMA

16

No. 3175/2006 dated 06.01.2023. Considering that the arbitrator

entered reference in 1991 and the award was made in 1995, along

with the passage of time in litigation as well as the amounts

already paid by the respondent including post-award interest @

9%, we deem it appropriate to grant 9% pendente lite interest ,

instead of 15% as granted by the arbitral tribunal, from

18.12.1991 till 07.03.1995 (date of the arbitral award) within a

period of 60 days.

17

17. No order as to costs.

18. Pending applications, if any, stand disposed of.

………………………………....J.

[PAMIDIGHANTAM SRI NARASIMHA]

………………………………....J.

[JOYMALYA BAGCHI]

NEW DELHI;

APRIL 02, 2025

17

As these proceedings arise under the 1940 Act, the scope and jurisdiction of the Court to modify or vary the

award is larger than that of the court exercising jurisdiction under Section 34 of the 1996 Act.