Contractual Bar On Interest Binds Arbitrator; Delhi High Court Partly Sets Aside Award In BHEL–Delkon Dispute

In a dispute involving public sector undertaking Bharat Heavy Electricals Limited, the Delhi High Court has set aside a ₹66.50 lakh interest component of an arbitral award that had directed BHEL to pay Delkon India Private Limited.

The court held that an arbitral tribunal cannot award interest where the contract expressly prohibits it, even if the termination of the contract is found to be illegal.

A division bench of Justice V. Kameswar Rao and Justice Vinod Kumar ruled that the contractual bar on interest was binding and could not be bypassed by classifying claims as arising from termination rather than from the contract.

Interpreting Clause 17 of the contract, the bench held that “the words “any moneys due to the contractor” as appearing in Clause 17 of General Instructions to Tenderers are very wide worded and encompass not only the money payable by BHEL for any work done as per contract but also are applicable to any compensation or damages or any kind of claim on account of breach of contract and illegal termination of contract as happened in this case.”

The court added that “to make a distinction between two types of claims for awarding or not awarding the pre-reference and pendente lite interest is not acceptable."

The dispute dates back to 1996, when BHEL awarded Delkon India Private Limited a contract for testing, erection, and commissioning work at the Feroz Gandhi Thermal Power Project in Unchahar, Uttar Pradesh.

In January 1997, BHEL terminated the contract, alleging poor progress, inadequate deployment of labour and unsatisfactory execution. Delkon challenged the termination and invoked arbitration.

The sole arbitrator held that the termination was not in accordance with the contract and was therefore illegal. While rejecting most of BHEL's claims, the arbitrator partly allowed Delkon's counterclaims and awarded about Rs 29.42 lakh towards various heads, including transportation of materials, erection and alignment work, withholding of equipment, and mobilization and demobilization costs.

The arbitrator also awarded interest for the period prior to the award, as well as interest after the award. BHEL's challenge to the award under Section 34 of the Arbitration and Conciliation Act was dismissed by the district court.

Before the High Court, BHEL argued that Clause 17 of the contract expressly barred the payment of interest on any amounts due to the contractor and that the arbitrator had exceeded jurisdiction by awarding it. On the other hand, Delkon argued that the prohibition on interest was limited to routine contractual payments and did not extend to damages arising from the illegal termination of the contract.

The High Court rejected this submission, holding that the bar on interest was comprehensive and applied to all claims arising out of or in relation to the contract, including claims for damages on account of illegal termination.

The bench observed that arbitral discretion to award interest operates subject to the agreement between the parties and that, once interest is expressly excluded, the arbitrator has no authority to grant it for the period before the award. At the same time, the court declined to interfere with the compensation awarded on Delkon's counterclaims. It reiterated that where loss is established but precise proof of the amount is difficult, an arbitrator is entitled to adopt a reasonable estimation method, provided the compensation is not arbitrary.

Accordingly, the Delhi High Court set aside the arbitral award and the district court's order to the extent they granted interest for the period before the award. The remainder of the award was upheld.

The court also modified the direction on post-award interest. It clarified that such interest can run only from the date of the arbitral award itself, in line with the Arbitration and Conciliation Act.

Case Title: Bharat Heavy Electricals Limited v. Delkon India Pvt. Ltd.

Citation: 2026 LLBiz HC (DEL) 36

Case Number: FAO (COMM) 109/2023