Apex Court says Clause 54 of the GCC expressly prohibits interest claims on delayed payments and money withheld due to disputes, setting aside High Court’s reliance on an earlier precedent.
The Supreme Court has held that a contractual clause in a public works agreement between North Eastern Electric Power Corporation Limited (NEEPCO) and Astra Construction Private Limited bars the grant of pre-reference interest, ruling that an arbitral tribunal cannot override an express prohibition contained in the contract.
A Bench of Justices Pamidighantam Sri Narasimha and Alok Aradhe allowed NEEPCO’s appeal and set aside the Meghalaya High Court’s judgment that had restored the arbitral tribunal’s award of pre-reference interest. The Court said the High Court erred in treating Clause 54 of the General Conditions of Contract (GCC) as identical to the clause interpreted in State of U.P. v. Harish Chandra and Co. Instead, the Court found Clause 54 materially similar to the clauses considered in Sayeed Ahmed & Co. v. State of U.P. and Jaiprakash Associates Ltd. v. THDC-II, both of which were held to impose a complete bar on interest claims.
The dispute arose from a civil works contract executed in 1996 for the main plant and auxiliary building of a gas turbine power project in Tripura. After disputes over delay in execution, the matter went to arbitration. The arbitral tribunal awarded Astra Construction Rs. 3.30 crore as principal amount, along with pre-reference interest at 12 per cent per annum, and pendente lite and future interest at 9 per cent per annum.
NEEPCO challenged the award under Section 34 of the Arbitration and Conciliation Act, 1996. The Commercial Court partially accepted the challenge and set aside the pre-suit and pendente lite interest, holding that Clause 54 barred such claims. However, on appeal under Section 37, the High Court restored the tribunal’s award, relying on Harish Chandra and Co.
The Supreme Court disagreed. It explained that under Section 31(7)(a) of the 1996 Act, arbitral power to award interest exists “unless otherwise agreed by the parties.” The Court reiterated that this statutory scheme gives primacy to party autonomy, and an express contractual bar is enough to exclude the tribunal’s power to grant pre-reference and pendente lite interest.
The Bench also drew a distinction between pre-reference interest and pendente lite interest. It observed that pendente lite interest falls within the procedural domain of Section 31(7)(a), while pre-reference interest is governed by substantive law and must be supported by contract, statute, or mercantile usage. Since Clause 54 expressly prohibited interest claims, the tribunal had no jurisdiction to grant pre-reference interest.
Interpreting Clause 54, the Court said it contains two separate bars: one relating to money or balance lying with the Corporation due to a dispute, difference or misunderstanding, and another independent bar relating to delay in making periodical or final payments. This, the Court held, makes the clause broader than the one considered in Harish Chandra and Co., where the bar was confined to money held back because of a dispute and did not clearly extend to delayed payments.
The Court also rejected the respondent’s argument that NEEPCO had waived reliance on Clause 54 by not raising it before the arbitral tribunal. The record showed that the plea had in fact been specifically taken in the statement of defence.
Accordingly, the Supreme Court held that the arbitral tribunal exceeded its jurisdiction in awarding pre-reference interest, and that the High Court’s judgment restoring that part of the award could not be sustained.
Statutory provision(s): Section 31(7)(a), Arbitration and Conciliation Act, 1996, Section 34, Arbitration and Conciliation Act, 1996, Section 37, Arbitration and Conciliation Act, 1996
