Safiya Malik

The Supreme Court Division Bench of Justice Pamidighantam Sri Narasimha and Justice Joymalya Bagchi held that an arbitrator’s power to grant pendente lite interest under the Arbitration Act, 1940 is not barred unless the contract expressly prohibits such grant. The Court recorded that a clause merely stating that the contractor shall not be entitled to claim interest on any arrears or balances does not constitute a clear and express bar on the arbitrator's jurisdiction. The Bench observed that the interpretation of such clauses must follow a strict standard and found that the clause in question failed to exclude interest in case of disputes. The Court accordingly directed payment of 9% pendente lite interest on the awarded sum, modifying the arbitral award and setting aside the contrary view taken by the High Court.

The dispute arose from a works contract entered into on 6 February 1988 between the appellant, M/s Ferro Concrete Construction (India) Pvt. Ltd., and the respondent, the State of Rajasthan. The agreement contained Clause 22, which stated that the contractor would 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 under the contract were referred to arbitration, resulting in an award dated 7 March 1995 directing payment of Rs. 1,78,17,146 with 15% pendente lite interest from 18 December 1991 until the date of award or payment, whichever was earlier.

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The State filed objections to the arbitral award, and the District Judge, by order dated 16 August 2005, upheld the award except for the direction to pay 15% interest. Instead, the District Judge awarded 9% simple interest on the principal amount from the date of his order till payment. Appeals filed by both parties were dismissed by the High Court on 6 January 2023. The contractor approached the Supreme Court in a Special Leave Petition, which was converted to a civil appeal.

The appellant submitted that Clause 22 did not expressly prohibit the arbitrator from granting pendente lite interest, relying on paragraph 24 of Reliance Cellulose Products Ltd. v. ONGC [(2018) 9 SCC 266], which distinguishes between a general bar on interest and an express bar on the arbitrator’s power. It was further submitted that the clause in the present contract only bars the contractor from claiming interest on payments due, but not from obtaining such interest through arbitration proceedings.

The respondent, represented by the Additional Advocate General, submitted that the clause must be read as an ouster clause barring any claim of interest, relying on precedents such as M.B. Patel & Co. v. ONGC and Union of India v. Krafters Engg. & Leasing (P) Ltd. It was argued that the interpretation of interest-bar clauses under both the Arbitration Act, 1940 and the Arbitration and Conciliation Act, 1996 is broadly similar and that the bar should apply here. The respondent also informed the Court that a substantial portion of the awarded amount, including interest, had already been paid, and any further award of pendente lite interest would be excessive.

The Supreme Court undertook a detailed examination of the legal position on pendente lite interest under the Arbitration Act, 1940. It reiterated that the arbitrator’s power to award such interest is well recognised unless contractually barred. Referring to earlier Constitution Bench decisions in G.C. Roy v. State of Orissa [(1992) 1 SCC 508] and N.C. Budharaj v. Executive Engineer, Dhenkanal [(2001) 2 SCC 721], the Court stated that “a clause that only provides that interest shall not be granted on amounts payable under the contract would not be sufficient.”

The Court analysed Clause 22 of the present agreement and held:

“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.”

The Court recorded that under the 1940 Act, a stricter interpretive approach is followed, requiring a clear and express bar to exclude the arbitrator’s power. It was held:

“Under the Arbitration Act, 1940, 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 express, specific provision that excludes the jurisdiction of the arbitrator.”

Referring to Reliance Cellulose and the three-judge bench decision in Union of India v. Ambica Construction [(2016) 6 SCC 36] (First Ambica case), the Court held that both precedents support the view that a mere restriction on claiming interest does not necessarily operate as a bar on the arbitrator’s power unless the clause expressly mentions disputes, arbitration, or delay.

The Court recorded:

“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.”

On the relevance of precedents, the Court remarked:

“It is not sufficient to lay down a precedent, but it is equally important to follow and apply them as well.”

Addressing the respondent’s reliance on earlier cases such as Engineers-De-Space-Age and Madnani Construction, the Court cited the First Ambica case, which clarified that “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.”

The Court concluded that the clause in the present contract failed to expressly bar pendente lite interest and, therefore, did not prevent the arbitrator from granting such interest under the Arbitration Act, 1940.

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The Supreme Court allowed the appeal and set aside the judgment of the Rajasthan High Court dated 6 January 2023 in SBCMA No. 3175/2006. It modified the arbitral award to grant 9% pendente lite interest in place of the originally awarded 15%, for the period from 18 December 1991 to 7 March 1995. The Court directed the respondent to make this payment within a period of 60 days.

The Court stated:

“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 at 9%, we deem it appropriate to grant 9% pendente lite interest, instead of 15% as granted by the arbitral tribunal.”

The Court made no order as to costs and directed that all pending applications stand disposed of.

Advocates Representing the Parties

For the Appellants: Vinayak Mehrotra, Advocate-on-Record
For the Respondents: Sansriti Pathak, Additional Advocate General

Case Title: M/s Ferro Concrete Construction (India) Pvt. Ltd. v. The State of Rajasthan
Neutral Citation: 2025 INSC 429
Case Number: Civil Appeal arising out of SLP (C) No. 7851 of 2023
Bench: Justice Pamidighantam Sri Narasimha, Justice Joymalya Bagchi

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