In a crucial judgment clarifying the arbitrator’s authority under different arbitration regimes, the Supreme Court has held that the power to award pendente lite interest under the Arbitration Act, 1940 is not automatically barred by a contractual clause, unless such bar is clear and express. The Court, in M/s Ferro Concrete Construction (India) Pvt. Ltd. v. State of Rajasthan, Civil Appeal No. ___ of 2025 (arising out of SLP (C) No. 7851 of 2023), drew a sharp distinction between the 1940 and the 1996 Arbitration Acts while ruling in favour of the contractor.
The decision was rendered by a Division Bench comprising Justice Pamidighantam Sri Narasimha and Justice Joymalya Bagchi, who allowed the appeal filed by M/s Ferro Concrete Construction (India) Pvt. Ltd., setting aside the Rajasthan High Court’s order dated 06.01.2023, which had upheld the District Judge’s decision of denying pendente lite interest awarded by an arbitrator.
Background of the Case
The appellant, a private construction company, was awarded a public works contract by the State of Rajasthan, culminating in an agreement dated 06.02.1988. Clause 22 of the contract included a clause stating:
“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.”
When disputes arose, arbitration proceedings were invoked. The arbitrator, by award dated 07.03.1995, granted the contractor Rs. 1,78,17,146, along with 15% interest per annum from 18.12.1991 (the date of reference) till the date of payment or decree.
However, this was partly overturned by the District Judge in 2005, who reduced the interest to 9% from the date of the award only, citing the contractual bar. The High Court later upheld that view.
Appearing for the appellant, Mr. Vinayak Mehrotra, Advocate, argued that the clause did not explicitly bar the arbitrator from granting pendente lite interest and relied heavily on the precedent set in Reliance Cellulose Products Ltd. v. ONGC (2018) 9 SCC 266 and Pam Developments Pvt. Ltd. v. State of West Bengal (2024) 10 SCC 715. Ms. Sansriti Pathak, Additional Advocate General for Rajasthan, defended the state’s position and claimed the arbitrator lacked authority due to the express contractual bar.
Legal Issues
The primary legal issue before the Court was:
Whether Clause 22 of the contract amounted to an express bar on the arbitrator’s power to award pendente lite interest under the Arbitration Act, 1940.
This led the Court to examine the doctrinal and interpretative differences between the Arbitration Act, 1940 and the Arbitration and Conciliation Act, 1996 with respect to the arbitrator’s power to award interest.
SC’s Observations and Decision
The Court reiterated the principle laid down in G.C. Roy v. State of Orissa (1992) 1 SCC 508 and N.C. Budharaj v. Executive Engineer (2001) 2 SCC 721 — that an arbitrator under the 1940 Act does possess the power to grant interest unless there is a specific bar in the agreement.
Quoting para 24 of Reliance Cellulose, the Court noted:
“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… unless there is a clear and express bar… such clauses cannot stand in the way of an arbitrator awarding pendente lite interest.”
The Court clarified that under the 1996 Act, Section 31(7)(a) explicitly sanctifies party autonomy, meaning that even a general bar against interest may suffice to oust the arbitrator’s power. However, under the 1940 Act, a much stricter interpretative approach is required to infer such a bar.
Referring to the recent three-judge ruling in Union of India v. Ambica Construction (2016) 6 SCC 36 (First Ambica Case), the Court held that:
“The grant of pendente lite interest depends upon the phraseology used in the agreement… and on what items the power to award interest has been taken away and for which period.”
Applying this, the Court concluded that Clause 22 in the present case was not a sufficient bar, as it did not specifically mention disputes, arbitration, or pendente lite interest.
The Court set aside the High Court’s judgment and modified the arbitral award to grant 9% pendente lite interest (instead of 15%) from 18.12.1991 to 07.03.1995. The respondent State is directed to make the payment within 60 days.
“It is not sufficient to lay down a precedent, but it is equally important to follow and apply them,” the Bench remarked, underlining the duty of consistency in judicial interpretation.
