The Supreme Court of India has ruled that an Arbitral Tribunal cannot award pre-award or pendente lite interest—even when labeled as “compensation”—if the underlying contract expressly prohibits such payments. The Court emphasized that under the Arbitration and Conciliation Act, 1996, the terms of the contract hold “paramount importance” regarding interest for the period before the award.
A Bench comprising Justice Sanjay Karol and Justice Vipul M. Pancholi partly allowed an appeal filed by the Union of India against Larsen & Tubro Limited (L&T), setting aside the grant of pre-award interest and reducing the post-award interest rate from 12% to 8% per annum.
Background of the Case
The dispute originated from a 2011 agreement between the North Central Railway Administration and L&T for the modernization of the Jhansi Workshop, valued at approximately ₹93.08 crore. While the work was scheduled for completion in 18 months (by July 2012), it was extended 10 times until November 2015, resulting in a 40-month delay.
L&T raised several claims, including financing charges for delayed payments and price variation components. An Arbitral Tribunal (AT) was constituted, which, on December 25, 2018, awarded L&T a net sum of ₹5.53 crore. Crucially, the AT awarded sums under Claim Nos. 1, 3, and 6 that included pre-award interest or “compensation” for delayed payments, despite noting that Claim No. 7 (specifically for interest) was inadmissible under the contract.
The Union of India challenged the award before the Commercial Court, Jhansi, and subsequently before the Allahabad High Court under Sections 34 and 37 of the Arbitration Act. Both courts upheld the Arbitral Award, leading the Union of India to approach the Supreme Court.
Arguments of the Parties
Appellants (Union of India): Learned Additional Solicitor General Ms. Aishwarya Bhati argued that Clauses 16(3) and 64(5) of the General Conditions of Contract (GCC) constituted an “absolute prohibition” on awarding interest on any contract amounts. She relied on the three-judge Bench decision in Union of India v. Bright Power Projects (India) (P) Limited (2015), which held that Section 31(7)(a) of the Act subordinates the arbitrator’s power to the terms of the contract.
Respondent (L&T): Learned Senior Counsel Ms. Meenakshi Arora contended that Clause 16(3) should be interpreted using the principle of ejusdem generis, meaning the bar only applied to deposits like earnest money and security deposits, not to regular payments. She further argued that since Claim Nos. 3 and 6 involved “admitted sums,” the contractual bar would not apply.
Court’s Analysis and Observations
The Court addressed whether the AT was justified in awarding pre-award interest as “compensation” in light of Clause 16(3) and Clause 64(5) of the GCC.
1. Contractual Bar on Pre-Award Interest The Court rejected L&T’s ejusdem generis argument, citing Union of India v. Manraj Enterprises (2022). It held that the expression “amounts payable to the contractor under the contract” is “independent, distinct and of wide amplitude.”
Regarding Section 31(7)(a) of the Act, the Court observed:
“The provisions of the Act of 1996… give paramount importance to the contract entered into between the parties and categorically restrict the power of an arbitrator to award pre-award/pendente lite interest when the parties have themselves agreed to the contrary.”
The Court noted that the AT had committed a “serious error” by awarding interest under the guise of compensation for Claim Nos. 1, 3, and 6 while simultaneously acknowledging the contractual bar by rejecting Claim No. 7.
2. Distinction of Post-Award Interest The Court clarified that pre-award and post-award interest operate in distinct legal regimes. While pre-award interest is subject to the contract under Section 31(7)(a), post-award interest is governed by Section 31(7)(b), which is “not subject to party autonomy.”
The Court cited R.P. Garg v. Chief General Manager, Telecom Department (2024), stating:
“Section 31(7)(b) is therefore in contrast with clause (a) and is not subject to party autonomy. In other words, clause (b) does not give the parties the right to ‘contract out’ interest for the post-award period.”
3. Modification of Interest Rate While the Court found the grant of post-award interest justified, it deemed the 12% rate awarded by the AT to be excessive. Referring to Gayatri Balasamy v. M/s ISG Novasoft Technologies Limited (2025), the Court exercised its power to modify the rate.
“In the absence of any justification in the award for fixing the rate at 12% per annum and keeping in view the contemporary economic scenario, such rate would result in an excessive financial burden.”
Final Decision
The Supreme Court set aside the judgments of the High Court and Commercial Court, as well as the Arbitral Award, to the extent that they granted pre-award/pendente lite interest under Claim Nos. 1, 3, and 6.
The Court modified the Arbitral Award by:
- Striking down the pre-award interest components.
- Reducing the post-award interest rate from 12% per annum to 8% per annum from the date of the award until realization.
- Case Title: Union of India & Ors. v. Larsen & Tubro Limited (L&T)
- Case No.: Civil Appeal No. ___ of 2026 (@ SLP (Civil) No. 14989 of 2023)
