The Supreme Court has held that an arbitral tribunal cannot award pre-reference or pendente lite interest where the contract prohibits such interest, either through express terms or by necessary implication. A Bench of Justice Aravind Kumar and Justice Vipul M. Pancholi dismissed the appeal in M/s Sharma Enterprises v. National Building Construction Corporation (2026 INSC 1135, Civil Appeal No. 13782 of 2026).
The ruling turns on Section 31(7)(a) of the Arbitration and Conciliation Act, 1996, which empowers an arbitral tribunal to award interest for the period between the accrual of the cause of action and the date of the award, but only “unless otherwise agreed by the parties”. The Court interpreted a contractual clause ending with the expression “or otherwise” as a comprehensive prohibition against pre-award interest. It also clarified that post-award interest under Section 31(7)(b) stands on a different statutory footing.
Background of the Dispute
On 11 January 1991, the National Building Construction Corporation (NBCC) awarded M/s Sharma Enterprises a subcontract for flooring and cladding works at Vashi Railway Station-cum-Commercial Complex, New Bombay, for ₹9,50,73,603.20. The work was scheduled for completion by 10 January 1993.
The execution of the subcontract depended upon civil works being completed by another contractor. However, delays in those works prevented Sharma Enterprises from executing substantial portions of the assigned work. On 22 September 1992, NBCC terminated the contract and subsequently encashed the appellant’s bank guarantees.
Following several rounds of litigation, the Supreme Court appointed an arbitrator on 3 August 2011. On 28 July 2016, the arbitrator held that NBCC had wrongfully terminated the contract and failed to provide the necessary work fronts.
The arbitrator allowed claims relating to executed work, extra items, bank guarantee extension charges and refund of the encashed security deposit. Litigation costs of ₹5,00,000 were also awarded, while all counterclaims raised by NBCC were rejected.
Under Claim No. 7, the arbitrator awarded interest at 10% per annum from 22 September 1992 until actual payment on the awarded sums, excluding costs. The interest covered the pre-reference, pendente lite and post-award periods.
In an earlier round of litigation decided on 15 December 2021, the Supreme Court had clarified that the arbitration proceedings were governed by the Arbitration and Conciliation Act, 1996, rather than the Arbitration Act, 1940.
NBCC subsequently challenged the award under Section 34 before the Delhi High Court. By judgment dated 19 November 2025, the Single Judge upheld the substantive claims awarded by the arbitrator, treating the findings as factual determinations based on the appraisal of evidence.
However, the Single Judge set aside the award of pre-reference and pendente lite interest, holding that Clause 26 of the Special Conditions of Contract (SCC) operated as an absolute prohibition against such interest. The Court relied upon Sayeed Ahmed and Company v. State of Uttar Pradesh.
The Division Bench dismissed the appeal under Section 37 on 20 March 2026, holding that the expression “or otherwise” in Clause 26 was comparable to the expression “or any other respect whatsoever” considered in Sayeed Ahmed.
Issue Before the Supreme Court
The principal question before the Supreme Court was whether Clause 26 of the Special Conditions of Contract constituted a contractual bar under Section 31(7)(a), preventing the arbitral tribunal from awarding pre-reference and pendente lite interest on the substantive claims allowed in favour of Sharma Enterprises.
The relevant portion of Clause 26 provided that no claim for interest would be entertained by NBCC in respect of balance payments or deposits withheld due to disputes, delays in monthly or final payments, “or otherwise”.
Sharma Enterprises argued that the expression “or otherwise” should be interpreted narrowly, in the context of the preceding references to delayed payments. NBCC maintained that the expression created a comprehensive prohibition against interest.
Supreme Court’s Observations
Contractual Terms Govern the Arbitrator’s Power to Award Pre-Award Interest
The Supreme Court examined Section 31(7)(a) of the Arbitration and Conciliation Act, 1996, which authorises an arbitral tribunal to award interest for the pre-award period, including both pre-reference and pendente lite interest.
The Court emphasised that this power is expressly subject to the statutory qualification:
“Unless otherwise agreed by the parties”
The Bench further observed that Section 31(7) must be “construed harmoniously with Section 28(3)”, which requires the arbitral tribunal to decide disputes in accordance with the contractual terms governing the parties (paragraph 9).
The Court relied upon Union of India v. Larsen & Toubro Limited, 2026 INSC 203, which reaffirmed the principles laid down in Sayeed Ahmed and Company, Sree Kamatchi Amman Constructions, Bright Power Projects and Manraj Enterprises.
In Larsen & Toubro, the Supreme Court had explained that the statutory framework subordinates the arbitrator’s discretion concerning pre-award interest to the contractual provisions governing the parties.
The present Bench adopted this principle, reiterating that an arbitrator cannot award pre-reference or pendente lite interest contrary to a contractual prohibition.
Interpretation of ‘Or Otherwise’ and the Principle of Ejusdem Generis
Sharma Enterprises contended that the expression “or otherwise” should be interpreted by applying the principles of ejusdem generis and noscitur a sociis, restricting its meaning to delays in releasing contractual payments.
The Supreme Court rejected this argument.
The Bench explained that ejusdem generis applies only where general words follow specific expressions belonging to an identifiable class or category. Where contractual expressions are joined disjunctively by the word “or”, each expression must be examined independently in light of its meaning and scope.
Referring to Manraj Enterprises, as reiterated in Larsen & Toubro, the Court observed that independently worded contractual expressions cannot necessarily be restricted by reference to preceding terms.
Applying these principles, the Court identified three distinct circumstances covered by Clause 26:
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Balance payments or deposits withheld due to disputes between NBCC and the subcontractor.
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Delays in making monthly or final payments.
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Other circumstances covered by the expression “or otherwise”.
The Court held that the preceding expressions did not constitute a narrow category confined exclusively to delayed running payments.
Expression ‘Or Otherwise’ Creates a Comprehensive Prohibition
The Supreme Court held that the expression “or otherwise” was residuary in nature and intended to extend the contractual prohibition beyond the specifically enumerated circumstances.
In paragraph 14, the Court observed:
“the expression ‘or otherwise’ is residuary in nature and has been consciously incorporated with wide amplitude to encompass every other conceivable circumstance under which a claim for interest might be asserted against the Corporation.”
The Bench referred to the Constitution Bench judgment in Lilavati Bai v. State of Bombay, (1957) 1 SCC 411, which recognised that the expression “or otherwise” may operate as words of extension rather than limitation.
The Court further held that restricting the expression solely to delays in monthly or final payments “would render the term redundant and would amount to rewriting the contract” (paragraph 14).
Accordingly, the Bench concluded that Clause 26 constituted a comprehensive contractual prohibition against the grant of pre-reference and pendente lite interest.
Distinction Between Limited and Comprehensive Interest Prohibition Clauses
The Supreme Court distinguished the present dispute from Oil and Natural Gas Corporation Ltd. v. G&T Beckfield Drilling Services Pvt. Ltd., 2025 SCC OnLine SC 1888.
In that case, the relevant contractual clause merely prohibited interest on delayed payments or disputed claims and did not contain any residuary expression.
The Court explained that a contractual stipulation limited to delayed payments cannot automatically be interpreted as an absolute prohibition against pendente lite interest.
However, the decision in ONGC also recognised that an arbitral tribunal’s power to award pendente lite interest may be excluded where the contract prohibits such interest expressly or by necessary implication.
The Bench observed that Clause 26 in the present case was materially different because it concluded with the broader expression “or otherwise”.
The Court found the provision comparable to the contractual clauses examined in Sayeed Ahmed and Company v. State of Uttar Pradesh, (2009) 12 SCC 26, and Jaiprakash Associates Limited v. Tehri Hydro Development Corporation (India) Limited, (2019) 17 SCC 786.
Consequently, the Supreme Court held that Clause 26 operated as a contractual prohibition against both pre-reference and pendente lite interest (paragraphs 15–16).
Post-Award Interest Stands on a Different Statutory Footing
The Supreme Court also clarified the distinction between pre-award interest under Section 31(7)(a) and post-award interest under Section 31(7)(b) of the Arbitration and Conciliation Act, 1996.
While Section 31(7)(a) expressly makes the arbitrator’s authority to award pre-award interest subject to the agreement between the parties, Section 31(7)(b) provides for interest from the date of the arbitral award until payment, unless the award otherwise directs.
The Bench relied upon Larsen & Toubro, which had referred to R.P. Garg for the proposition that Section 31(7)(b) does not permit parties to contract out of the statutory entitlement to post-award interest.
The earlier decision explained that the expression “unless the award otherwise directs” concerns the rate of interest rather than the underlying entitlement.
Adopting this distinction, the Supreme Court held that the Delhi High Court had correctly restricted its interference to the award of pre-reference and pendente lite interest while preserving post-award interest in favour of Sharma Enterprises (paragraph 17).
Final Decision
The Supreme Court concluded that the arbitrator, “being a creature of the contract, acted beyond his jurisdiction in granting pre-reference and pendente lite interest in contravention of Clause 26 of the SCC” (paragraph 18).
The Bench held that the Delhi High Court had correctly exercised its jurisdiction under Sections 34 and 37 of the Arbitration and Conciliation Act, 1996, by setting aside the arbitral award only to the extent that it granted impermissible pre-reference and pendente lite interest.
The substantive monetary claims awarded in favour of Sharma Enterprises and the entitlement to post-award interest were left undisturbed.
Accordingly, the Supreme Court dismissed the appeal and disposed of the pending applications. The judgment reinforces the primacy of contractual terms in determining an arbitrator’s authority to grant pre-award interest. While a narrowly worded restriction concerning delayed payments may not exclude pendente lite interest, a comprehensive prohibition extending to other circumstances can restrict such power under Section 31(7)(a) of the Arbitration and Conciliation Act, 1996.
The entitlement to post-award interest, however, remains governed by the distinct statutory framework under Section 31(7)(b).