Interest Provisions in Arbitral Awards

Source: Supreme Court  

Why in News? 

Recently, Justices PS Narasimha and Manoj Misra held that an arbitral tribunal can award pendente lite interest unless expressly barred by the contract, ruling that a clause excluding interest on delayed payments does not restrict this power, while dismissing ONGC’s appeal. 

• The Supreme Court held this in the matter of Oil and Natural Gas Corporation Ltd. v. M/S G & T Beckfield Drilling Services Pvt. Ltd (2025). 

What was the Background of Oil and Natural Gas Corporation Ltd. v. M/S G & T Beckfield Drilling Services Pvt. Ltd (2025) Case ? 

• Oil and Natural Gas Corporation Limited (ONGC) entered a contract with M/s G & T Beckfield Drilling Services Private Limited for drilling services. Under this contract, G & T Beckfield raised multiple invoices for services rendered, but ONGC withheld payments on various grounds. 
• The contract contained Clause 18.1, which specified that ONGC would arrange payment within 30 days of receiving properly certified invoices. The clause also provided that if ONGC questioned any items in an invoice, it could withhold payment of the disputed amount until the matter was resolved, but amounts not in dispute were to be paid within the stipulated period. Crucially, the clause stated: "No interest shall be payable by ONGC on any delayed payment/disputed claim." 
• When disputes arose over unpaid invoices totaling approximately USD 6,56,272.34, the matter was referred to a three-member arbitral tribunal on 12th December 1998. G & T Beckfield claimed payment for various invoices including charges for tools lost in drilling operations, demobilisation charges, and sought release of improperly deducted performance bond amounts. 
• The arbitral tribunal, in its award dated 21st November 2004, allowed most of G & T Beckfield's claims but rejected claims for interest on individual invoices from the date each cause of action arose. However, the tribunal awarded interest at 12% per annum on the total awarded amount from 12th December 1998 (the date when the statement of claim was affirmed before the tribunal) until recovery, along with costs of Rs. 5 lakhs. 
• ONGC challenged this award before the District Judge under Section 34 of the Arbitration and Conciliation Act, 1996, arguing that the award was non-reasoned and that Clause 18.1 prohibited any interest payment. The District Judge allowed ONGC's application and set aside the arbitral award on these grounds. 
• G & T Beckfield then appealed to the Gauhati High Court under Section 37(1)(c) of the Act, which reversed the District Judge's decision and affirmed the arbitral award in its entirety. This led ONGC to approach the Supreme Court through a Special Leave Petition, with the notice limited specifically to the question of whether interest on the total awarded amount could be granted. 

What were the Court’s Observations? 

• The Supreme Court held that arbitral tribunals can award pendente lite interest (during arbitration) unless contractual agreements explicitly or impliedly prohibit such awards. 
• Under Section 31(7) of the Arbitration and Conciliation Act, 1996, tribunals have jurisdiction to award interest for three distinct periods: pre-reference (before arbitration), pendente lite (during arbitration), and post-award. Whilst pre-reference and pendente lite interest are subject to party agreements, post-award interest is statutory and parties cannot contract out of it. 
• The Court found that Clause 18.1 only barred ONGC from paying interest on delayed payments but did not explicitly prohibit the tribunal's statutory power to award pendente lite interest. The tribunal had appropriately distinguished between different types of interest - denying pre-reference interest but awarding pendente lite interest from the claim filing date. 
• The Court distinguished this from precedents like Sayeed Ahmed & Co. and THDC cases, where comprehensive prohibitions used phrases like "in any respect whatsoever" or "under any head." These cases involved explicit contractual bars extending beyond mere delayed payment scenarios. 
• The Court noted that the 12% interest rate was reasonable, being lower than the then-statutory rate of 18% per annum. The tribunal's exercise of discretion was found to be within legal bounds. 
• The Court emphasised that arbitral tribunals can only be denuded of their power to award pendente lite interest when agreements are worded to explicitly or by necessary implication prohibit such awards. A clause merely barring interest on delayed payments will not be readily inferred as prohibiting pendente lite interest. 
• The Court concluded that Clause 18.1 lacked the comprehensive prohibitory language necessary to limit the tribunal's statutory discretion, finding no error warranting judicial interference with the arbitral award. 

What are Interest Provisions in Arbitral Awards? 

• About: 
  • Section 31(7) of the Arbitration Act establishes comprehensive provisions for awarding interest in monetary arbitral awards, encompassing both pre-award and post-award interest calculations. 
• Pre-Award Interest [Sub-section 7(a)]:  
  • Unless parties agree otherwise, arbitral tribunals possess discretionary authority to include interest on monetary awards. 
  • The tribunal may award interest at rates it deems reasonable on the entire sum or any portion thereof, covering the period from when the cause of action arose until the award date.  
  • This provision ensures compensation for the time value of money during dispute resolution proceedings. 
• Post-Award Interest [Sub-section 7(b)]:  
  • Once an arbitral award is made, any directed payment automatically carries interest from the award date until actual payment, unless the award specifically directs otherwise. 
  • The interest rate is statutorily fixed at two percent above the prevailing current interest rate on the award date.  
  • This mandatory provision incentivizes prompt compliance with awards and compensates successful parties for delayed payments. 
• Key Features: 
  • Pre-award interest is discretionary and requires tribunal determination 
  • Post-award interest is automatic unless explicitly excluded 
  • Different rate mechanisms apply for each phase 
  • Tribunals have flexibility in pre-award interest calculations 
  • Post-award rates are standardized and market-linked 
  • These provisions balance judicial discretion with statutory certainty, ensuring fair compensation while encouraging timely award compliance. The dual approach recognizes different policy considerations for compensation during proceedings versus enforcement phases.