The Supreme Court has ruled that arbitrators may award interest during arbitration proceedings, even if contracts contain limited bans on interest for delayed payments. This decision ensures that companies cannot easily use restrictive contract clauses to avoid compensating parties for financial losses incurred during legal disputes. Investors should note that this shifts the balance toward fairness in commercial arbitration cases.
The Supreme Court of India has provided a significant clarification regarding the power of an arbitrator to award interest during the period of arbitration, legally known as pendente lite interest. In the recent case of ONGC Ltd. versus G&T Beckfield Drilling Services, the Court established that a standard or limited prohibition on interest for delayed payments does not necessarily stop an arbitrator from awarding interest for the time the arbitration process is ongoing.
Impact on Commercial Disputes
Under Section 31(7) of the Arbitration and Conciliation Act, 1996, arbitrators are granted powers to award interest to compensate the winning party. Historically, companies often included specific clauses in their contracts to block any interest on disputed claims, effectively limiting the compensation an arbitrator could grant.
With this new ruling, the Supreme Court has distinguished between a general bar on interest and a very specific, absolute prohibition. If a contract only bars interest on "delayed payments," it does not automatically strip the arbitrator of the authority to award interest for the period during which the legal proceedings are active. For an arbitrator to be completely barred from awarding such interest, the contract must include explicit, unequivocal language prohibiting interest in all respects.
What This Means for Investors
This development is relevant for investors tracking companies frequently involved in long-term infrastructure, energy, or construction contracts. Previously, a party involved in a dispute could rely on restrictive contract language to limit its financial liability if the arbitration dragged on for years. By allowing for greater arbitrator discretion, the risk of financial loss due to delayed settlements and litigation may now be better balanced.
While this protects the rights of aggrieved parties to receive fair compensation, it also implies that companies facing potential arbitration claims may need to account for higher potential payouts in their financial risk assessments. The judgment essentially limits the ability of a defaulting party to use contract wording to avoid their obligations during the extended periods arbitration often requires.
Investors should monitor how companies update their contracting practices and how this legal precedent influences the settlement of pending litigation in sectors like oil, gas, and infrastructure. Future arbitration awards in similar disputes may now see a higher incidence of interest payouts, which will be a factor to watch when companies disclose legal liabilities in their annual reports or quarterly filings.