Exclusion Of Interest By An Agreement: A Constraint On Arbitral Powers?

A. Introduction

1. Section 31 (7) of the Arbitration and Conciliation Act, 1996 confers upon the arbitral tribunals the disctetion to grant interest at a rate they consider appropriate, subject to any contrary agreement between the parties. This attutory authority is not self contained, but operates within the overarching principle of party autonomy that lies at the heart of the Indian Arbitral framework.

2. An arbitral tribunal owes its existence to the contract between the parties, from which it derives the source and limits of its jurisdictionand authority. The, courts have thus consistently scrutinized the limits of an arbitrators authority, especially when disputes arise over the awardof pendente lite interest.

3. The issue arises between two competing concerns, the freedom of parties to define their respective contractual rights and obligations, and the authority of arbitral tribunals to grant effective and comprehensive relief. Courts have over time refined the contours of an arbitrators authority to award interest, with judicial reasoning aimed at focusing towards the contractual rights agreed between the parties.

4. Section 31(7)(a) of the Arbitration and Conciliation Act, 1996 authorises an arbitral tribunal to award interest for the period prior to the making of the award, though this power is explixtly qualified by the words "unless otherwise agreed by the parties", thereby making it contingentupon the terms of the underlying contract. In contrast, Section 31 (7) (b), which deals with post award interest, operates on a separate statutory plane and is not subject to the same deference to party autonomy. This distinction was conclusively settled by the Hon'ble Supreme Court in R.P. Garg v. Telecom Department 2024 SCC OnLine SC 2928. The Court held that while parties are at liberty to exclude of pre award interest under Section 31 (7) (a), the entitement to award post

award interest under Setion 31 (7) (b) arises by virtue of a statutory mandate. It was surther observed that post award interest followsas a matter of course unless the arbitral tribunal expressly provides to the contrary, and that the parties, therefore, cannot altogether contract out of such entitlement.

B. Judicial Precedents on the Issue

5. The jurisprudence on pendente lite interest in arbitration traces its foundation to the decision of the Hon'ble Supreme Court in the case of Secretary, Irrigation Department, Government of Orissa and Ors Vs. G.C. Roy (1992) 1 SCC 508 , wherein the agreement between the parties does not contain any prohibition on the grant of interest, and a claim for interest forms prt of the dipute referred to arbitration, the arbitrator is competent to award pendente lite interest. This principle has been affirmed as the legal position. The Hon'ble Supreme Court examined the scope of contractual exclusion in Sayeed Ahmed and Company Vs. State of Uttar Pradesh and Ors (2009) 12 SCC 26, holding that a clause framed in expansive terms excluding interest "in any respect whatsoever" operates as a bar on the grant of pendente lite interest

6. This position was affirmed by the Hon'ble Supreme Court of India in Union of India Vs. Bright Power Projects (India) Private Limited (2015) 9 SCC 695, where it was held that once the parties to a contract have expressly agreed that interest shall not be payable on amounts due to the contractor, they are bound by the terms of that agreement. Similarly, in the case of Union of India Vs. Manraj Enterprises (2022) 2 SCC 331 the Hon'ble Supreme Court held that an arbitrator, being a creature of the contract, cannot award pendente lite interest in the face of an express contractual bar of granting pendente lite interest.

C. Recent Supreme Courts Decisions on the Issue

7. Recently in the case of ONGC Ltd. Vs. G and T Beckfield Drilling Services Pvt Ltd. 2023 SCC OnLine SC 1888, the Hon'ble Supreme Court was faced with a question of awarding of the pendente lite interest. The Hon'ble Supreme Court was faced with a question that whether Clause 18.1 of the agreement signed between the parties prescribed even the pendente lite interest on the sum awarded. The Hon'ble Supreme Court relied upon Clause 18.1 of the agreement which stated that "Should corporation question any item or items of an invoice, it may withhold payment of the amount in dispute until such matter is resolved between the parties, but the amount not in dispute is to be paid within above period. No interest shall be payable by ONGC or any delayed payment /disputed claim". While interpreting the meaning of Clause 18.1, the Hon'ble Supreme Court took reference to the earlier judicial precedents on the bar on award of interest and held that arbitral tribunal can be denuded of its power to award pendente lite interest only if the agreement between the parties' barred of the awarding of the same. The Hon'ble Supreme Court held that Clause 18.1 of the agreement between the parties does not expressly or by necessary implication prescribes a bar on the grant of pendente lite interest by the arbitral tribunal. The Hon'ble Supreme Cout stated that the clause merely stated that there would be no interest payable by the Corporation on any delayed payment/disputed claim. Neither it bars the arbitral tribunal from awarding pendente lite interest, nor it says that interest would not be payable in any respect

8. Similarly, in the case of Union of India and Others Vs. Larsen and Toubro Limited 2026 SCC OnLine SC 327, the Hon'ble Supreme Court was again faced with a question of grant of pendente lite interest on the awarded amount. The Hon'ble Supreme Court analysed the language of Clause 16 (3) of the GCC and Clause 64 (5) of GCC which held that no interest shall be payable on whole or any part of the money for any period till the date on which award is made. The Hon'ble Court while relying upon Manraj Enterprise (supra) case and Bright Power Projects (India) (supra) case, stated that Section 31 (7) (a) gives paramount importance to the contract entered into between the parties and categorically restricts the power of an arbitrator to award pendente lite interest when parties themselves have agreed to the contrary.

D. Conclusion

9. Section 31(7)(a) of the Arbitration and Conciliation Act, 1996 makes it clear that the power of a tribunal to award pendente lite interest is not unfettered, but is conditioned by the terms of the agreement between the parties. The expression "unless otherwise agreed by the parties" accords primacy to contractual stipulations and affirms the fundamental principle that an arbitral tribunal, as a creature of the contract, must operate within the bounds set by the parties and cannot transgress those contractual bounds.

10. The judicial approach makes it clear that clauses relating to delayed payments or disputed claims do not, operate as an absolute bar on the grant of pendente lite interest. Courts have distinguished between contractual provisions that stipulate that interest shall not be payable on deayed payments, and those that, either expressly or by necessary implication, prohibit the arbitral tribunal itself from awarding such interest. While decisions such as Bright Power Projects, Manraj Enterprises and Larsen and Tourbo underscore that an explixit contractual exclusion must be given effect, the decision in ONGC Vs. G &T Beckfiled Drilling Service Private Limited illustrates that any such exclusion must be clear, specific and unequivocal.

11. The jurisprudence, thus reveals a balance between the principle of party autonomy and the need to preserve the effectiveness of arbitral remedies. Courts have consistently respected the sanctity of contractual arrangement between the parties by declining to allow arbitral tribuanls to award pendente lite interest where an express prohibition exists.

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