Sivasagar, India – September 3, 2025
For Ravi Sharma (name changed), a senior manager at a firm that frequently contracts with public sector undertakings, a recent ruling was a moment of crucial clarity. “For years, contractual ambiguity has been used to deny legitimate dues. This brings much-needed clarity,” he stated.
In a significant decision for commercial arbitration in India, the Supreme Court has ruled against the Oil and Natural Gas Corporation Ltd. (ONGC), affirming that vaguely worded contract clauses cannot be used to prevent an arbitral tribunal from awarding interest on disputed payments. The judgment, delivered in a dispute between ONGC and its contractor, M/S G & T Beckfield Drilling Services Pvt. Ltd., clarifies the power of arbitrators and sets a new precedent for how interest-bearing clauses in contracts are interpreted.
The conflict began when a three-member arbitral tribunal on November 21, 2004, ordered ONGC to pay G & T Beckfield a sum of Rs.5 Lakhs for outstanding invoices. The tribunal also awarded pendente lite interest (interest during the legal proceedings) at 12% per annum, calculated from December 12, 1998.
ONGC challenged the award, pointing to Clause 18.1 of their agreement, which stated, “No interest shall be payable by ONGC on any delayed payment/disputed claim”. The case then journeyed through the legal system, with the District Judge of Sivasagar initially setting aside the award, only for it to be reinstated by the Gauhati High Court. ONGC’s final appeal to the Supreme Court was limited specifically to contesting the award of interest. The central issue revolved around the interpretation of Section 31(7) of the Arbitration and Conciliation Act, 1996, which governs an arbitrator’s authority to grant interest.
The Supreme Court decisively dismissed ONGC’s appeal, upholding the arbitral tribunal’s award of interest. The judgment clarified the high threshold required to strip an arbitrator of the power to grant interest.
The Court’s reasoning was based on several key points:
- A contractual clause that simply bars interest on “delayed payment” is not automatically considered an express prohibition on an arbitrator’s power to award pendente lite interest.
- To prevent an arbitrator from awarding interest, the contract’s language must be explicit or create a bar by “necessary implication”.
- The Court found that Clause 18.1 was not sufficiently comprehensive to be considered an absolute bar, distinguishing it from clauses in other precedent-setting cases that were far more explicit.
Legal analysts believe this ruling sends a clear message to public sector undertakings and other large corporations that vague contractual clauses cannot be used as a shield to deny interest on legitimately awarded sums. The judgment reinforces the autonomy of arbitral tribunals, empowering them to provide relief in the form of interest unless a contract explicitly and unequivocally forbids it. This decision is expected to encourage clearer and more precise drafting of dispute resolution clauses in commercial agreements.
The Supreme Court’s verdict provides crucial clarity on the awarding of interest in arbitration proceedings. It establishes that the power of an arbitrator to award interest is the norm, and any deviation from this must be stipulated in the contract with absolute clarity. For contractors and service providers across the country, this judgment strengthens their position in disputes over delayed payments, ensuring that the cost of prolonged litigation can be equitably compensated.
