Supreme Court – Arbitrator Cannot Grant Interest Contrary to the Contract
Judgment dated 15.10.2026 of the Supreme Court of India in Civil Appeal No.13782 of 2026 of MS Sharma Enterprises Vs. National Building Construction Corporation
Section 34 Court had set-aside the Arbitral Award dated 28.07.2016 to the extent of pre-reference and pendente lite interest in favour of the appellant.
The respondent, National Building Construction Corporation Limited (hereinafter referred to as “NBCC”) was awarded works by the Indian Railway Construction Company Limited (hereinafter referred to as “IRCON”). On 11.01.1991, the respondent awarded a sub-contract to the appellant, M/s Sharma Enterprises, for executing flooring and cladding works at Vashi Railway Station-cum-Commercial Complex, New Bombay (now Navi Mumbai), for an agreed contractual sum of Rs.9,50,73,603.20. The works were to be completed within a period of two years, with the stipulated completion date being 10.01.1993.
2 3.2. The execution of the sub-contracted flooring and cladding works was intrinsically dependent upon the completion of civil works by M/s Mohinder Singh & Co., which is the civil contractor engaged by the respondent. On account of delays and non-completion of civil works, the appellant could execute only limited areas. The appellant completed the priority platform areas in time for inauguration on 09.05.1992. However, on 22.09.1992, the respondent issued notices and formally terminated the contract, subsequently encashing the bank guarantees of the appellant.
The appellant invoked the arbitration clause being Clause 10 of Special Conditions of the Contract (hereinafter referred to as “the SCC”) and sought the appointment of an arbitrator, however, the respondent did not appoint an arbitrator. Thereafter, the appellant approached the High Court under Section 20 of the Arbitration Act, 1940 (hereinafter referred to as “the 1940 Act”) for appointment of an arbitrator. Following several rounds of litigation, this Court, by order dated 03.08.2011 in Civil Appeal No. 6341 of 3 2011, appointed the learned Arbitrator to adjudicate all claims and counter-claims of the parties.
On 28.07.2016, the learned Arbitrator rendered an award holding that the respondent had wrongfully terminated the contract and had failed to provide the requisite work fronts. Consequently, the learned Arbitrator:
Clause 26 of the Special Conditions of the Contract provides that “No claim for interest will be entertained by the corporation in respect of any balance payments or any deposit which may be held up with the corporation due to any dispute between the Corporation and sub-contractor or in respect of any delay on the part of the corporation in making monthly or final payments or otherwise.”
Upon perusal of Section 31(7)(a) of the 1996 Act, it is clear that the power of an Arbitral Tribunal to award interest for the pre-award period, i.e., from the date on which the cause of action arose up to the date on which the award is made (including both pre-reference and pendente lite periods), is expressly subject to the opening words – “Unless otherwise agreed by the parties”. Section 31(7) of the 1996 Act has to be construed harmoniously