Two words, or otherwise, cost a contractor 24 years of interest on an arbitral award against NBCC

Justices Aravind Kumar and Vipul M. Pancholi held that a no-interest clause ending in "or otherwise" bars pre-reference and pendente lite interest under Section 31(7)(a), while post-award interest survives.

In 1992 NBCC terminated a sub-contract for flooring and cladding at Vashi railway station and encashed the contractor's bank guarantees. In 2016 an arbitrator held the termination wrongful and awarded the contractor its claims with 10 per cent interest from 22 September 1992. The Delhi High Court upheld every substantive claim but struck out the interest for the period before the reference and during the arbitration. On 15 October 2026 the Supreme Court agreed with the High Court. Justice Vipul M. Pancholi, writing for himself and Justice Aravind Kumar, held that Clause 26 of the sub-contract, which barred interest claims on held-up payments, delayed payments "or otherwise", was a contractual bar of the kind Section 31(7)(a) of the Arbitration and Conciliation Act, 1996 respects. The arbitrator had no power to override it. Interest for the period after the award, which Section 31(7)(b) governs, is unaffected.

Three decades from Vashi to the Supreme Court

NBCC had taken work from the Indian Railway Construction Company. On 11 January 1991 it sub-contracted flooring and cladding at the Vashi railway station-cum-commercial complex in New Bombay to M/s Sharma Enterprises for ₹9,50,73,603.20, to be completed by 10 January 1993. That work depended on civil work by another contractor, which was delayed, so only limited areas could be done. The contractor finished the priority platform areas in time for the inauguration on 9 May 1992. On 22 September 1992 NBCC terminated the contract and encashed the bank guarantees.

NBCC did not appoint an arbitrator, so the contractor went to court under the Arbitration Act, 1940. After several rounds, the Supreme Court appointed an arbitrator on 3 August 2011. The award of 28 July 2016 found that NBCC had wrongly terminated the contract and failed to provide work fronts. It granted ₹45,653.15 for executed work, ₹26,03,465 for extra items, ₹2,77,500 in bank guarantee extension charges, a refund of the ₹19,01,480 security deposit encashed through the guarantee, and ₹5,00,000 in costs, and it rejected NBCC's counter-claims. It added interest at 10 per cent on the sums other than costs from 22 September 1992 until payment.

In December 2021 the Supreme Court held that the 1996 Act, not the 1940 Act, governed the proceedings. NBCC then challenged the award under Section 34. On 19 November 2025 a single judge of the Delhi High Court upheld the substantive claims as findings of fact based on the evidence, but set aside the pre-reference and pendente lite interest as barred by Clause 26. A Division Bench dismissed the contractor's appeal under Section 37 on 20 March 2026.

The clause

After providing for monthly running bills, advances and release of payment within seven days of NBCC being paid by its clients, Clause 26 of the special conditions said that no claim for interest would be entertained by NBCC in respect of any balance payments or deposits held up because of a dispute, or in respect of any delay in making monthly or final payments, “or otherwise”.

Section 31(7)(a) allows an arbitral tribunal to award interest from the date the cause of action arose to the date of the award, but it begins with the words “unless otherwise agreed by the parties”. Read with Section 28(3), which requires the tribunal to decide in accordance with the contract, the Court held that it places the arbitrator's discretion below what the parties agreed. Relying on Larsen and Toubro Limited, which restated Sayeed Ahmed, Sree Kamatchi Amman Constructions, Bright Power Projects and Manraj Enterprises, the Court held that where the parties have agreed that no interest will be paid, the tribunal cannot award pre-award or pendente lite interest, not even described as compensation.

Why "or otherwise" was not read down

The contractor argued that "or otherwise" should take its meaning from the words before it, applying ejusdem generis and noscitur a sociis, so that the clause covered only interest on delayed interim bills and not interest on substantive claims allowed in arbitration. It said that a true prohibition on pendente lite interest would have used clear words, as the clauses in Sayeed Ahmed and Jaiprakash Associates v. Tehri Hydro Development Corporation did.

The Court disagreed. Ejusdem generis applies only where the specific words before a general phrase form a single class. Where phrases are joined by "or", each has to be read independently and given its full width, as the Court had held in Manraj Enterprises and Larsen and Toubro. Clause 26 lists separate events joined by "or": balance payments or deposits held up because of a dispute, delay in monthly or final payments, and "otherwise". Those earlier items do not form one narrow class limited to delayed running bills. They also cover withheld deposits and amounts held up in disputes. "Or otherwise" therefore could not be confined to delayed interim bills.

Post-award interest is different

The Court explained why the contractor kept part of its interest. Section 31(7)(a), for the period up to the award, is subject to the parties' agreement. Section 31(7)(b), for the period after the award, is not. It provides that the sum awarded carries interest, at the rate the award fixes or, failing that, the statutory rate, and the parties cannot contract out of it. The words "unless the award otherwise directs" in that clause concern the rate, not whether interest is payable. The High Court had correctly recognised this distinction by striking out only the pre-reference and pendente lite interest.

Order

The Court held that the arbitrator, who derives authority from the contract, had exceeded his jurisdiction by awarding pre-reference and pendente lite interest contrary to Clause 26. The High Court's judgments, setting aside that part of the award while keeping the contractor's substantive claims and its post-award interest, were upheld. The appeal was dismissed.