Introduction
On 22 September 2026, the Supreme Court of India delivered its judgment in North Eastern Electric Power Corporation Limited (NEEPCO) v. Astra Construction Private Limited, 2026 INSC 1036, setting aside an award of pre-reference interest at 12% per annum that a contractor had secured against a public sector undertaking. The Bench of Justice Pamidighantam Sri Narasimha and Justice Alok Aradhe, with the judgment authored by Justice Aradhe, held that Clause 54 of NEEPCO’s General Conditions of Contract (GCC) operated as a complete contractual bar on interest for the pre-reference period, and that the Arbitral Tribunal had exceeded its jurisdiction under Section 31(7)(a) of the Arbitration and Conciliation Act, 1996 by awarding it.
Although the judgment is marked non-reportable and the Court itself described the controversy as “narrow in compass”, its consequences are wide. Clauses of this type appear, with minor variations in wording, across the standard-form contracts used by government departments and public sector undertakings for civil works, power projects and infrastructure. The ruling makes clear that the outcome of an interest claim running into crores can turn on a single conjunction in a clause that most bidders never negotiate.
Background of the Dispute Between NEEPCO and Astra Construction
In June 1995, NEEPCO invited tenders for the civil works of the main plant and auxiliary building of a Gas Turbine Power Project at Ram Chandra Nagar in Tripura. Astra Construction’s bid was accepted, and a formal agreement was executed on 23 May 1996 for work valued at approximately ₹17.09 crore, with completion stipulated by 26 March 1997. Disputes followed, and the matter was referred to arbitration.
By its award dated 5 June 2015, nearly two decades after the contract was signed, the Arbitral Tribunal found that the delay in executing the project was attributable to NEEPCO. It allowed four of the contractor’s claims with a principal sum of about ₹3.30 crore, and then added pre-reference interest at 12% per annum on each claim, along with pendente lite and future interest at 9% per annum. Given the long gap between the cause of action and the reference, the interest component was a significant part of the contractor’s overall recovery.
How the Case Moved Through Three Forums Before Reaching the Supreme Court
The Commercial Court Set Aside the Interest Under Section 34
NEEPCO challenged the award before the Commercial Court under Section 34 of the Arbitration and Conciliation Act, 1996. By its judgment dated 15 February 2024, the Commercial Court relied on Sayeed Ahmed & Company v. State of U.P., (2009) 12 SCC 26, and held that Clause 54 of the GCC barred the grant of interest for both the pre-reference and pendente lite periods. It therefore set aside the pre-suit and pendente lite interest on claim nos. 2, 3, 4 and 5 as being contrary to Clause 54 read with Section 31(7) of the Act, while upholding the rest of the award.
The Commercial Court’s approach of removing only the offending interest component, while leaving the principal award intact, is consistent with the severability principle later affirmed by the Constitution Bench in Gayatri Balasamy v. ISG Novasoft Technologies Ltd. (2025), which recognised that a court hearing a challenge under Section 34 may sever an invalid portion of an award where that portion is separable from the valid remainder.
The High Court of Meghalaya Restored the Award Under Section 37
The contractor appealed under Section 37 of the 1996 Act. On 19 June 2025, the High Court of Meghalaya at Shillong allowed the appeal by relying on the three-Judge Bench decision in State of U.P. v. Harish Chandra and Co., (1999) 1 SCC 63. The High Court reasoned that the clause considered in Harish Chandra was identical to Clause 54, that the bar was confined to interest on money held back because of a dispute, and that it did not reach interest on any other head of claim. On that basis, the award was restored in its entirety.
The Question Before the Supreme Court
The Supreme Court therefore had to decide a focused question of construction: whether Clause 54 of the GCC corresponds in substance to the clause construed in Harish Chandra, which left the arbitrator’s power intact, or to the clauses construed in Sayeed Ahmed and the later line of authority, which were held to bar interest completely.
Arguments Advanced by the Parties
The Solicitor General, Mr. Tushar Mehta, and the Additional Solicitor General, Mr. Raghavendra P. Shankar, appearing for NEEPCO, confined the challenge to the restoration of pre-reference interest. They argued that the plea based on Clause 54 had been specifically raised before the Tribunal, and that the High Court erred in applying Harish Chandra, a decision rendered under the Arbitration Act, 1940, when the question had been authoritatively settled under the 1996 Act in Sayeed Ahmed and in Jaiprakash Associates Ltd. v. Tehri Hydro Development Corporation Ltd., (2012) 12 SCC 10 (THDC-I). Reliance was also placed on Ferro Concrete Construction (India) Pvt. Ltd. v. State of Rajasthan, 2025 SCC OnLine SC 708, and ONGC v. G & T Beckfield Drilling Services Pvt. Ltd., 2025 SCC OnLine SC 1888.
The contractor, represented by senior counsel Mr. Ritin Rai, contended that NEEPCO had never urged the Clause 54 objection before the Tribunal and had therefore waived it, relying on Union of India v. Susaka Pvt. Ltd., (2018) 2 SCC 182. It supported the High Court’s reliance on Harish Chandra.
Intervenors, represented by senior counsel Mr. C.S. Vaidyanathan, advanced a broader argument that is of interest to contractors generally. They submitted that the prohibition in Clause 54 was confined to interest on money or balances lying with the employer and did not extend to other heads such as damages, that the residuary words “or in any other respect whatsoever” must take colour from the specific words preceding them, and that a wider reading would render the clause one-sided, arbitrary and constitutionally impermissible. They relied on Harish Chandra, Reliance Cellulose Products Ltd. v. ONGC Ltd., (2018) 9 SCC 266, and THDC-I.
How the Law on an Arbitrator’s Power to Award Interest Has Developed
The Court’s reasoning rests on the way Indian arbitration law has treated interest over three decades, and understanding that development explains why the contractor’s reliance on Harish Chandra ultimately failed.
The Position Under the Arbitration Act, 1940
The Arbitration Act, 1940 contained no provision empowering an arbitrator to award interest. The Constitution Bench in Secretary, Irrigation Department, Government of Orissa v. G.C. Roy, (1992) 1 SCC 508, filled that gap by holding that where the agreement does not prohibit interest and a claim for interest is referred to arbitration, interest is presumed to be an implied term of the bargain, so that the arbitrator may award it. The principle underlying this view is that a party kept out of money justly due to it ought to be compensated for that deprivation, unless the contract says otherwise.
Under the 1940 Act regime, the Supreme Court also consistently held that a contractual bar on interest had to be expressed in clear and specific terms and had to be construed strictly against the party invoking it. This line runs through Union of India v. Ambika Construction, (2016) 6 SCC 36, Ambika Construction v. Union of India, (2017) 14 SCC 323, Reliance Cellulose, and Ferro Concrete. It was in this strict-construction setting that Harish Chandra was decided.
The Shift Brought About by Section 31(7) of the 1996 Act
The Arbitration and Conciliation Act, 1996 changed the position by conferring an express statutory power on the tribunal. Section 31(7)(a) permits the tribunal to include interest, at such rate as it deems reasonable, for the whole or any part of the period between the date on which the cause of action arose and the date of the award. Section 31(7)(b), as substituted by the Arbitration and Conciliation (Amendment) Act, 2015, provides that the sum awarded shall, unless the award directs otherwise, carry post-award interest at 2% higher than the “current rate of interest” as defined in Section 2(b) of the Interest Act, 1978.
The decisive feature of Section 31(7)(a) is its opening phrase, “unless otherwise agreed by the parties”. In Pam Developments Private Limited v. State of West Bengal, (2024) 10 SCC 715, the Supreme Court explained that these words subordinate the tribunal’s power to the parties’ bargain, so that an express bar in the agreement is sufficient to exclude the power even where the bar is not specifically addressed to the arbitrator. This is a clear departure from the strict-construction approach under the 1940 Act, and it reflects the primacy that the 1996 Act gives to party autonomy. It also sits comfortably with Section 28(3), which requires the tribunal, in all cases, to take into account the terms of the contract while making the award.
Pre-Reference Interest Is Substantive, While Pendente Lite Interest Is Procedural
The most significant doctrinal point that the Court reaffirmed concerns the different footing of the two categories of pre-award interest. Drawing on Pam Developments, Central Bank of India v. Ravindra, (2002) 1 SCC 367, and G.C. Roy, the Court held that pendente lite interest is a matter of procedural law governed by Section 31(7)(a), whereas interest for the pre-reference period is governed by substantive law and cannot be sourced in Section 31(7)(a) alone. A claim for pre-reference interest must instead rest on an agreement between the parties, whether express or implied, on a statutory provision such as Section 3 of the Interest Act, 1978, or on proof of mercantile usage. The Court noted that a similar view had been taken in G & T Beckfield Drilling Services.
The practical effect of this distinction is considerable. If the contract itself excludes interest, the contractor cannot fall back on an implied agreement, because the express term displaces any implication, and Section 31(7)(a) cannot supply the substantive right that the contract has taken away. Once Clause 54 was found to bar the claim, therefore, nothing remained on which the Tribunal’s award of pre-reference interest could stand.
The Wording of Clause 54 and Why It Differed From Harish Chandra
Clause 54 of the GCC, titled “No Claim for Delayed Payment due to Dispute Etc.”, provided that no claims for interest or damages would be entertained by the Corporation with respect to any money or balance lying with it owing to any dispute, difference or misunderstanding between the Engineer-in-Charge and the contractor, “or with respect to any delay on the part of the Engineer-in-Charge making periodical or final payments or in any other respect whatsoever.”
The Court placed this clause alongside the clauses construed in Harish Chandra, Sayeed Ahmed and Jaiprakash Associates Ltd. v. Tehri Hydro Development Corporation (India) Ltd., (2019) 17 SCC 786 (THDC-II), and then explained the difference in plain terms.
The Single Bar in the Harish Chandra Clause
The clause in Harish Chandra barred claims for interest or damages on money or balances lying with the Government owing to a dispute, difference or misunderstanding between the Engineer-in-charge and the contractor “in making periodical or final payments or in any other respect whatsoever.” Read as a whole, the words “in making periodical or final payments” merely described the context in which the dispute arose and did not create a separate ground of their own. The bar was therefore addressed to only one situation, namely money held back because of a dispute. It said nothing about money that was simply paid late without any dispute at all. That is why the three-Judge Bench held that the clause did not prevent the arbitrator from awarding interest generally, and read the closing words “or in any other respect whatsoever” as belonging to the same family as the dispute-related bar.
The Two Independent Bars in Clause 54
Clause 54, the Court held, is worded differently, and that difference is decisive. It bars claims for interest or damages in two separate situations. The first is the same as in Harish Chandra, namely money or balance lying with the Corporation owing to a dispute. The second, introduced by the word “or” and standing in its own right, is “any delay on the part of the Engineer-in-Charge making periodical or final payments”. By naming delay in payment as an independent ground, unconnected to any dispute, Clause 54 does what the Harish Chandra clause never did, since it expressly excludes a claim for interest arising from delayed payment whether or not there was any dispute about it. The very situation that fell outside the bar in Harish Chandra, which was delay in payment without more, is brought squarely within the bar in Clause 54.
The Court further observed that this is not an unusual drafting choice. The same structure, with a separate line barring interest on delayed payments in addition to the bar on money withheld due to a dispute, appeared in the clauses examined in Sayeed Ahmed and THDC-II, and in each of those cases the Court had held the clause to be a complete bar on the arbitrator’s power to award interest for both the pre-reference and pendente lite periods. The Bench expressly agreed with that reasoning and held that it is the Sayeed Ahmed line of decisions, and not Harish Chandra, that governs clauses of this kind.
It is worth noting that the Court did not decide the case merely on the ground that Harish Chandra arose under the 1940 Act. It distinguished that decision on the text of the clause itself. This gives the ruling a wider reach, because any contractor seeking to invoke Harish Chandra in future must now show that the clause in question lacks an independent bar on interest for delayed payment.
The Waiver Argument and the Importance of Pleadings
The contractor’s plea that NEEPCO had waived its right to rely on Clause 54 failed on the record. The Court found that NEEPCO had specifically taken the plea in its Statement of Defence filed before the Tribunal on 23 August 2012. Since the objection had been raised at the earliest stage, the principle in Susaka had no application. The contention of the intervenors that Clause 54 was similar to the Harish Chandra clause was likewise rejected as being without merit.
This part of the judgment carries a practical lesson for employers and their counsel. A contractual bar on interest is a defence that should be pleaded expressly in the statement of defence, because a party that raises it for the first time at the Section 34 or Section 37 stage may face a serious waiver objection.
The Supreme Court’s Decision
The Court concluded that Clause 54 bars the grant of interest for the pre-reference period, that the Arbitral Tribunal exceeded the bounds of its jurisdiction under Section 31(7)(a) in awarding such interest, and that the High Court erred in equating Clause 54 with the Harish Chandra clause. The impugned judgment of the High Court, to the extent it restored the grant of pre-reference interest, was set aside. The appeal was allowed without any order as to costs.
The scope of the operative relief deserves attention. Although the Court’s reasoning recognises that clauses of the Sayeed Ahmed type bar both pre-reference and pendente lite interest, the relief granted was confined to pre-reference interest, because NEEPCO had limited its challenge before the Supreme Court to that component. The judgment therefore shows how the framing of an appeal can determine how much of a favourable legal position a party actually recovers.
Issues the Judgment Leaves Open
The intervenors had argued that a broad reading of Clause 54 would make the clause one-sided, arbitrary and constitutionally impermissible, and that the bar should not extend to claims framed as damages rather than interest. The judgment does not separately engage with the constitutional argument, and it resolves the case on the textual construction of the clause. Questions about whether an employer that is a State instrumentality may, consistently with Article 14 of the Constitution, insist on a blanket exclusion of interest even where its own delay caused the loss, and about how far such a clause reaches claims for compensation under Section 73 of the Indian Contract Act, 1872, therefore remain open for another case.
Conclusion
The decision in NEEPCO v. Astra Construction settles an issue that has repeatedly arisen in arbitrations under government and public sector contracts, namely whether a clause excluding interest in standard conditions of contract can defeat a contractor’s claim for pre-reference interest. The Supreme Court has answered that question with clarity. Under the Arbitration and Conciliation Act, 1996, the power of the arbitral tribunal to award interest under Section 31(7)(a) is expressly subject to the agreement of the parties, and pre-reference interest in particular is a substantive right that must rest on the contract, on a statute such as Section 3 of the Interest Act, 1978, or on proven mercantile usage. Where the parties have agreed to exclude it, the tribunal has no source of power from which to award it, and an award that disregards such a bar exceeds the tribunal’s jurisdiction.
The judgment also brings needed discipline to the use of Harish Chandra, which contractors have often cited to argue that such clauses should be read narrowly. The Court has confined that decision to clauses that bar interest only on money withheld because of a dispute, and has confirmed that where a clause contains a separate and independent bar on interest for delayed payments, the Sayeed Ahmed line of authority applies and the bar operates in full. The outcome therefore depends on the precise wording of the clause rather than on any general presumption in favour of either party.
For contractors, the ruling means that the assessment of interest exposure must begin at the tender stage, when the conditions of contract can still be clarified or priced, rather than after the dispute arises. For employers, it confirms that a carefully drafted exclusion clause will be enforced, provided that the objection is pleaded before the arbitral tribunal at the first opportunity. For arbitral tribunals, it serves as a reminder that interest cannot be awarded as a matter of course and that the contractual basis for any award of pre-reference interest must be identified and examined before such interest is granted. In each of these respects, the judgment reinforces the principle that party autonomy under the 1996 Act extends to the question of interest, and that the terms of the contract, as the parties agreed them, will ultimately determine what a claimant can recover.
The principles governing arbitration proceedings also extend to Cross-Border Legal Privilege in International Arbitration, particularly where parties operate across multiple jurisdictions.
