Supreme Court Sets Aside High Court Order Restoring Pre-Reference Interest Despite Contractual Bar

The Supreme High Court of India has set aside a High Court judgment that restored pre-reference interest to a contractor, holding that the arbitral tribunal acted beyond its authority by granting interest when the underlying contract explicitly barred it. A bench comprising Justice Pamidighantam Sri Narasimha and Justice Alok Aradhe allowed an appeal filed by North Eastern Electric Power Corporation Limited (NEEPCO) against Astra Construction Private Limited, setting aside the High Court order to the extent it restored pre-reference interest worth ₹3.30 crore at 12% annual rate.

The dispute arose from a construction contract between NEEPCO and Astra Construction. The arbitral tribunal had awarded ₹3.30 crore on four claims and, critically, had also granted pre-reference interest at 12% per annum on those claims. When the matter reached the High Court on appeal, that court chose to restore the pre-reference interest component. NEEPCO then approached the Supreme Court 0f India by special leave petition, challenging the High Court's restoration of interest that the contract itself had prohibited.

Tribunal Exceeded Jurisdiction Under Contract Terms

The Supreme Court judgments on arbitration award in this case turned on a straightforward principle: an arbitral tribunal cannot grant relief that the contract forbids. The bench found that the arbitral tribunal had simply exceeded the bounds of its jurisdiction when it awarded pre-reference interest despite the contractual bar. The tribunal's power derives entirely from the contract and the arbitration agreement embedded within it. Once a contract expressly excludes pre-reference interest, the tribunal has no authority to award it.

Justice Pamidighantam Sri Narasimha and Justice Alok Aradhe reasoned that allowing such awards would erode the principle that parties to a contract are free to define the terms on which they engage with each other. If parties have negotiated and agreed that no interest will run before the arbitrator's award is made, that agreement must be respected. The tribunal cannot rewrite the contract in the guise of exercising discretion or achieving what it views as a fair outcome.

The court's approach reflects established jurisprudence on the limits of arbitral authority. An arbitrator's role is to resolve disputes according to the terms the parties have set, not to impose terms the parties have rejected. The contractual bar on pre-reference interest was not ambiguous or subject to conflicting interpretation. It was a clear exclusion that the tribunal disregarded.

High Court Erred in Restoration

The High Court's decision to restore the interest, even after the tribunal had awarded it, represented a further departure from contractual boundaries. When a High Court reviews an arbitral award under the Arbitration and Conciliation Act, it must respect the limits of the tribunal's authority. The High Court cannot expand an award beyond what the contract permits simply because it believes the result would be more equitable. The Supreme Court judgement on arbitration award therefore corrected this error by setting aside the High Court's restoration.

NEEPCO, represented by Solicitor General Tushar Mehta and Additional Solicitor General Raghavendra P. Shankar, argued that the tribunal's award of pre-reference interest was a clear excess of jurisdiction. The company maintained that the contract's express exclusion of such interest should have been binding on the tribunal and should have remained binding throughout the appellate process. Astra Construction, represented by Senior Counsel Ritin Rai, contested the appeal, but the Supreme Court found the contractual language decisive.

The bench's reasoning emphasizes that Section 37 of the Arbitration and Conciliation Act, which deals with the form of the arbitral award, does not grant a tribunal the power to ignore contractual terms. The statute provides the procedural framework for arbitration, but it does not override the substantive rights and obligations the parties have created through their contract. When a contract excludes pre-reference interest, that exclusion is a substantive term that the tribunal must observe.

Practical Implications for Construction Disputes

This decision has clear implications for construction disputes and commercial arbitrations across India. Contractors and employers who negotiate contracts often include provisions about interest to manage their financial exposure. Some contracts exclude interest entirely before an award; others cap it at a lower rate than statutory interest. These provisions exist because the parties have assessed their risk and decided what they are willing to accept. The judgment reinforces that such provisions are enforceable and that arbitrators cannot override them.

For parties engaged in arbitration, the decision makes clear the importance of precise drafting. If a contract intends to exclude or limit pre-reference interest, that intention must be expressed clearly and unambiguously. Conversely, if a party wishes to preserve the right to claim pre-reference interest, the contract must not contain language that excludes it. Ambiguity in the contract language is the arbitrator's problem to resolve; but where the language is clear, as it was here, the arbitrator's hands are tied.

The judgment also reminds High Courts reviewing arbitral awards that while they have the power to set aside awards that exceed the tribunal's jurisdiction, they cannot use that power to expand an award beyond what the contract allows. The High Court's role is to police the boundaries of arbitral authority, not to rewrite the substantive terms of the parties' bargain. In this case, the High Court crossed that line when it restored interest that the contract barred and the tribunal should never have awarded.