2026 (3) TMI 6 - SC - Indian Laws

Contractual Prohibition on Interest prevents pre-award interest; post-award interest may be awarded but rate subject to judicial reduction.

The text addresses whether an arbitral tribunal may award pre-award (pendente lite) and post-award interest where contract clauses expressly bar interest. ... Pre-award interest barred by contract - principles applicable to pre-award or pendente lite interest - principle of ejusdem generis - modification of post-award interest rate - judicial interference under Sections 34 and 37 Pre-award interest barred by contract - The arbitral tribunal was not justified in awarding pre-award/pendente lite interest (or amounts in the nature of interest) in respect of Claim Nos. 1, 3 and 6 in view of the contractual bar contained in Clause 16(3) read with Clause 64(5) of the GCC and Section 31(7)(a) of the Act. - HELD THAT: - The Court analysed Clause 16(3) (which states that no interest shall be payable upon earnest money, security deposit or amounts payable to the contractor under the contract) and Clause 64(5) (which bars interest on money payable till the date the award is made) in light of Section 28(3) and Section 31(7)(a) of the Arbitration and Conciliation Act, 1996. Applying precedent, including Bright Power Projects [2015 (7) TMI 256 - SUPREME COURT] and Manraj Enterprises [2021 (11) TMI 728 - SUPREME COURT], the Court held that the statutory scheme subordinated the arbitrator's power to the contract and that the expression 'amounts payable to the contractor under the contract' is wide and unambiguous and cannot be read down by ejusdem generis. The tribunal therefore erred in awarding pre-award/pendente lite interest even if styled as 'compensation', and such awards are contrary to the agreement and liable to be set aside. The Court further noted that the tribunal itself had in parts treated interest as inadmissible under Section 31(7)(a) and Clause 64(5), but nonetheless awarded pendente lite interest in respect of the specified claims, which attracts interference under Sections 34 and 37 of the Act. [Paras 45, 46, 52, 53, 61] Pre-award/pendente lite interest awarded by the Arbitral Tribunal in respect of Claim Nos. 1, 3 and 6 is set aside as being contrary to the contractual bar. Post-award interest entitlement under Section 31(7)(b) - modification of post-award interest rate - The tribunal was justified in awarding post-award interest, but the rate fixed by the tribunal (12% per annum) was modified to 8% per annum from the date of the award till realization. - HELD THAT: - The Court distinguished pre-award interest from post-award interest: Section 31(7)(b) entitles a successful party to post-award interest from the date of the award until payment unless the award otherwise directs, and this entitlement is not contractually waivable by implication. Clause 64(5) bars interest only till the date of the award and does not operate to exclude post-award interest. The tribunal's conditional grant of post-award interest as a deterrent to delay was therefore within the statutory framework. However, the tribunal assigned a 12% post-award rate without reasons; having regard to the statutory benchmark and the Court's power to moderate post-award interest (as recognised in recent authority), the Court considered 12% excessive and reduced the rate to 8% per annum from the date of award until realization. [Paras 57, 58, 59, 60, 61] Post-award interest is payable but the rate is reduced from 12% to 8% per annum from the date of the award until realization. Judicial interference under Sections 34 and 37 - The Commercial Court and the High Court erred in upholding the arbitral award insofar as they failed to interfere with the tribunal's award of pre-award interest and in not modifying the post-award interest rate; appellate interference under Sections 34 and 37 was warranted on these points. - HELD THAT: - The Court held that the lower courts did not adequately appreciate that the tribunal's grant of pre-award/pendente lite interest violated an express contractual bar, which warranted interference even within the limited scope of Sections 34 and 37. Similarly, the lower courts failed to address the absence of reasons for the 12% post-award rate, a matter the Court found justifies modification under the statutory power to adjust post-award interest in appropriate cases. Consequently, both courts' orders were set aside to the extent indicated. [Paras 53, 61, 62, 63] The orders of the Commercial Court and the High Court are set aside insofar as they upheld the grant of pre-award interest and the unreasoned 12% post-award rate; appropriate relief is granted as detailed above. Final Conclusion: The appeal is partly allowed: the arbitral award is set aside insofar as it grants pre-award/pendente lite interest for Claim Nos. 1, 3 and 6; the award is affirmed insofar as it orders post-award interest, subject to a reduction of the post-award rate from 12% to 8% per annum from the date of the award until realization; the impugned High Court and Commercial Court orders are set aside to that extent. Issues: (i) Whether the arbitral tribunal was justified in awarding pre-award/pendente lite interest (by way of compensation) in view of contractual Clauses 16(3) and 64(5) of the General Conditions of Contract; (ii) Whether the arbitral tribunal was justified in awarding post-award interest and, if so, whether the rate fixed required modification; (iii) Whether the courts below erred in refusing to set aside or modify the award under Section 34 and Section 37 of the Arbitration and Conciliation Act, 1996.Issue (i): Whether pre-award/pendente lite interest could be awarded despite a contractual bar.Analysis: Section 31(7)(a) of the Arbitration and Conciliation Act, 1996 subjects the arbitrator's power to award interest before the award to the agreement between the parties; Clause 16(3) expressly bars interest on earnest money, security deposits and 'amounts payable to the contractor under the contract' while Clause 64(5) bars interest up to the date of the award. The expression covering 'amounts payable' is disjunctive and of wide amplitude and cannot be read down by ejusdem generis in the facts of this contract. Prior decisions applying the 1996 Act establish that a contractual prohibition of interest precludes an arbitral award of pendente lite or pre-award interest even if labelled as compensation.Conclusion: The award of pre-award/pendente lite interest in respect of the specified claims is not justified and is set aside.Issue (ii): Whether post-award interest could be awarded and whether the rate required modification.Analysis: Section 31(7)(b) of the Arbitration and Conciliation Act, 1996 entitles a sum directed by an award to carry post-award interest unless the award otherwise directs; entitlement to post-award interest is not subject to party autonomy and a contractual bar applicable to pre-award interest does not, by implication, exclude post-award interest. The arbitral tribunal awarded post-award interest at 12% per annum without reasons; courts possess power to modify the rate where the statutory benchmark and facts justify adjustment to avoid disproportionate burden and to ensure just compensation.Conclusion: Post-award interest is justified; the rate of post-award interest as fixed by the arbitral tribunal is modified from 12% per annum to 8% per annum from the date of award until realization.Issue (iii): Whether the courts below erred in their exercise of powers under Section 34 and Section 37.Analysis: The arbitral tribunal's grant of pre-award interest contravened the contractual bar and Section 31(7)(a), a legal error warranting interference under Section 34 and Section 37; the courts below failed to correct that error. The conditional grant of post-award interest remains permissible but the rate required judicial moderation in the circumstances.Conclusion: The courts below erred in upholding the parts of the award granting pre-award interest and in declining to moderate the post-award interest rate; interference was warranted to set aside pre-award interest awards and to modify the post-award interest rate.Final Conclusion: The arbitral award is set aside to the extent it awards pre-award/pendente lite interest on the specified claims; the award is otherwise maintained but the post-award interest rate is reduced to 8% per annum from the date of award until realization, and the appeal is partly allowed.Ratio Decidendi: Where a contract under the Arbitration and Conciliation Act, 1996 expressly bars interest on amounts payable, Section 31(7)(a) prevents the arbitrator from awarding pre-award/pendente lite interest; by contrast, entitlement to post-award interest under Section 31(7)(b) is statutory and, absent an explicit contractual exclusion, may be awarded but the rate is subject to judicial modification where justified.