Pendente Lite Interest in Arbitration: When Can Arbitrators Go Beyond the Contractual Bar

Introduction

Contemporary arbitration jurisprudence has placed growing emphasis on the evolving dynamics between the tribunal’s jurisdiction and the contractual autonomy of the parties. At its core, arbitration was introduced to balance the autonomy of parties and resolution of disputes. But, what happens when the very clause of the agreement becomes the source of the dispute between the parties? One such legal dilemma was perceived in Oil and Natural Gas Corporation Ltd. v. M/s G & T Beckfield Drilling Services Pvt. Ltd¹. before the Supreme Court, focusing on when an arbitral tribunal can award pendente lite interest despite the presence of a contractual clause that bars interest.

The bench composed of Justice Pamidighantam Sri Narasimha and Justice Manoj Misra, held that a contractual clause must explicitly or by necessary implication bar an arbitral tribunal’s power to award such interest. It has primarily clarified that a general clause barring interest on delayed or disputed payments is not sufficient to override the statutory power of the arbitrator to award pendente lite interest under Section 31(7)(a) of the Arbitration Act². 

The legal confrontation of the case was set in motion by a striking contention. The dispute arose from an arbitral award directing the appellant to pay a sum to the respondent, along with 12% pendente lite interest from the date of the claim until recovery. The appellant challenged the award, but the Gauhati High Court upheld it under Section 37 of the Act. The Supreme Court, however, limited its view to the issue of whether the 12% interest was permissible.

Dispute: Within Agreed Boundaries

The appellant argued that the clause stating “No interest shall be payable… on any delayed payment/disputed claim” barred all interest, including pendente lite, under Section 31(7) of the Arbitration Act. The respondent countered that the clause only restricted interest on routine delays, not arbitral discretion to award pendente lite interest on valid claims. They emphasized that interest was awarded from the date of claim affirmation, not from when the dispute arose, making it a lawful and justified exercise of arbitral power.

The Judiciary’s Stand: Autonomy and Authority

Both the parties relied on different judgments in support of their contentions. In a bird-eye’s view, it appears that there is a dichotomy of judgments. The Supreme Court engaged in a detailed analysis of the judgments to resolve the issue.

The court revisited the rationale in Irrigation Deptt., State of Orissa v. G.C. Roy³ which established that while an arbitrator has the power to award pendente lite interest, this power is subject to the contract. If the agreement explicitly prohibits such interest, the arbitrator cannot award it. The reasoning is rooted in the principle that the arbitrator derives authority solely from the contract. The arbitrator must act within the bounds of the contract. In another case, Union of India v. Ambica Construction⁴ It was settled that a mere bar on interest for delayed payments is not an automatic bar on the award of pendente lite interest. The tribunal must consider the phraseology of the agreement, the nature of the claim, and the specific items on which interest is barred. 

The Supreme Court analysed this issue in depth in the case of Sayeed Ahmed & Co. v. State of Uttar Pradesh⁵ where the interest-proscribing clause was much broader, which prohibited all types of interest possible. This comprehensive language of the clause barred pre-reference, pendente lite and post-award interest, which clearly meant the arbitrator cannot award interest for any period, if the clause says so.

In Tehri Hydro Development Corpn. Ltd. v. Jai Prakash Associates Ltd⁶. The court again distinguished between a mere and explicitly barring clause,  as the clause in the case had language including “in any respect whatsoever” covering any delay, any sum, whether due under measurement or otherwise, guarantees or payments in arrears, balances due on final settlement etc. Because of that sweeping language, it is not limited to certain items or types of delay, it explicitly denies interest even when the delay is due to dispute or any other cause.

A Subtle Judicial Reminder: Precision in Clause

After considering both parties’ contentions and reviewing the applicable legal precedents, the Supreme Court removed the dichotomy by focusing on the precise wording of the Clause. The court reasoned that the clause’s phrasing—”No interest shall be payable by the appellant on any delayed payment /disputed claim” is a general commercial stipulation meant to regulate day-to-day payments and is not an unequivocal bar on the arbitrator’s power. It distinguished this language from the more sweeping and comprehensive clauses found in cases like Sayeed Ahmed (Supra) and THDC (Supra), which contained phrases such as “in any respect whatsoever.”

Recognizing these judicial precedents, it was concluded that the language of the Clause  in the present case was not as absolute or comprehensive. The court noted that a clause merely barring interest on “delayed payment/disputed claim” is insufficient to infer an explicit or necessary bar on the statutory power of an arbitral tribunal to award pendente lite interest. The power to award interest is a statutory one under Section 31(7)(a) and can only be taken away by a clear and unambiguous contractual provision.

The general bar on interest for delayed payments does not, by itself, explicitly or by necessary implication, limit the statutory power of the arbitral tribunal to award pendente lite interest. The arbitral tribunal’s discretion to award such interest from the date of the claim was therefore considered correct. Finding no error in the arbitral award, which was consistent with the statutory provision and not expressly barred by the contract, the Supreme Court dismissed the appeal.

Conclusion

The Supreme Court’s decision in Oil and Natural Gas Corporation Ltd. (supra) provides critical clarity on the interpretation of interest-barring clauses in arbitration agreements. The judgment upholds the principle that an arbitral tribunal’s power to award pendente lite interest under Section 31(7)(a) of the Arbitration and Conciliation Act, 1996, is a statutory default that can only be overridden by a very specific and unambiguous contractual provision. The ruling distinguishes between a general clause that seeks to regulate commercial payments and a clause that is intended to completely oust the arbitrator’s jurisdiction to award interest on a claim.

The future ramifications of this judgment are significant for all arbitration clauses in commercial contracts. Parties and legal practitioners must now be acutely aware that boilerplate language like “no interest on delayed payments” is unlikely to be sufficient to prevent an arbitrator from awarding interest during the pendency of a dispute. Companies, especially large corporations that frequently enter into contracts with such clauses, will need to revise their standard agreements to include more explicit and comprehensive language if they wish to completely eliminate the possibility of being liable for pendente lite interest.

The judgment reinforces the pro-arbitration stance of the Indian judiciary, ensuring that a party found to have unjustly withheld payment cannot escape the financial consequences of the delay, even if the contract contains a general interest-barring clause. But at the same time, it leaves a mark of questions in the mind as to what specific, “magic-word” phrasing would be required in a contractual clause to effectively bar an arbitral tribunal from awarding pendente lite interest? How will this impact the drafting of arbitration clauses in future contracts, particularly for public sector undertakings and large corporations? Given that the court has established a high bar for what constitutes an effective bar on pendente lite interest, what suggestions can be made to minimize future disputes on this issue?

Citations

1. ONGC Ltd. v. G & T Beckfield Drilling Services (P) Ltd., 2025 SCC OnLine SC 1888
2. Arbitration and Conciliation Act, 1996
3. Irrigation Deptt., Govt. of Orissa v. G.C. Roy, (1992) 1 SCC 508
4. Union of India v. Ambica Construction, (2016) 6 SCC 36
5. Sayeed Ahmed & Co. v. State of U.P., (2009) 12 SCC 26
6. Tehri Hydro Development Corpn. Ltd. v. Jai Prakash Associates Ltd., (2012) 12 SCC 10

Expositor(s): Adv. Shreya Mishra