The Supreme Court has held that an arbitral tribunal cannot award pre-award or pendente lite interest in the teeth of an express contractual prohibition, even if such interest is styled as “compensation”, and that courts exercising jurisdiction under Sections 34 and 37 of the Arbitration and Conciliation Act, 1996 are duty-bound to interfere where such an award violates the contract.
- Case Title: Union of India & Ors. v. Larsen & Toubro Limited
- Court: Supreme Court of India
- Bench: Justice Sanjay Karol and Justice Vipul M. Pancholi
- Date of Judgment: February 27, 2026
- Citation: 2026 INSC 203
The appeal arose from a contract dated 27.01.2011 bearing No. CME/NCR/JHSW/MOD/2010 (Turnkey), executed between the Union of India and North Central Railway Administration and Larsen & Toubro Limited (L&T) for modernization of the Jhansi Workshop of North Central Railways at a negotiated value of Rs. 93,08,07,696/-.
The original completion date of 18.07.2012 was extended ten times up to 30.11.2015, resulting in a delay of 40 months beyond the original deadline .
Disputes arose concerning delayed payments and other contractual claims.
The arbitration clause under Clause 64 of the General Conditions of Contract (GCC) was invoked, and a three-member Arbitral Tribunal entered reference on 10.01.2018. L&T raised multiple claims, including financing charges for inordinate delay, non-payment of price variation component (PVC), final bill payments, and interest.
The Tribunal, by award dated 25.12.2018, granted a total net award of Rs. 5,53,57,597/- payable within 60 days, failing which post-award interest at 12% per annum would apply .
The operative portion of the award recorded that the sum
“shall be paid by the Respondent to the Claimant within 60 days failing which, the awarded sum shall carry post-lite interest @12% per annum with effect from date of award till actual payment.”
The Union of India challenged the award under Section 34 of the 1996 Act, contending that Clauses 16(3) and 64(5) of the GCC constituted an absolute bar on interest.
The Commercial Court dismissed the application, and the High Court under Section 37 affirmed the award. The matter reached the Supreme Court.
Clause 16(3) of the GCC provided:
“no interest will be payable upon the Earnest Money and Security Deposit or amounts payable to the Contractor under the Contract, but Government Securities deposited in terms of Sub-Clause (1) of this clause will be payable with interest accrued thereon”
Clause 64(5) further stipulated:
“where the arbitral award is for the payment of money, no interest shall be payable on whole or any part of the money for any period till the date on which the award is made.”
Interpreting these clauses in light of Section 31(7)(a) of the Arbitration and Conciliation Act, 1996, the Court reiterated that the statutory scheme
“subordinates the discretion of the arbitrator to the contractual provisions governing interest” .
Rejecting the respondent’s reliance on the principle of ejusdem generis, the Court held that the phrase “amounts payable to the contractor under the contract” was independent and of wide amplitude. Referring to precedent, it emphasized that once parties have agreed that no interest shall be payable, the arbitral tribunal, being “the creature of the contract”, cannot award interest contrary to the agreement.
The Court took note that the Tribunal itself had rejected Claim No. 7 seeking pendente lite interest, observing:
“The Interest so claimed is therefore not admissible as per Section 31(7)(a) of the Act read with Clause 64(5) of the GCC & Clause 7.35 of SCC of the contract agreement signed between the two parties. Tribunal did not therefore consider to award any interest on the award sum as claimed by the Claimant. Therefore, Arbitral Tribunal declare Nil Award against this claim.”
Despite this acknowledgment, the Tribunal had awarded sums under Claim Nos. 1, 3 and 6 which, in substance, included pre-award/pendente lite interest components, albeit described as compensation.
The Supreme Court found this impermissible, holding that “the AT has committed serious error by awarding pre-award/pendente lite interest qua Claim Nos. 1, 3 & 6,” and that such award was contrary to Clause 16(3) read with Clause 64(5) and Section 31(7)(a).
The Court clarified that the 1996 Act gives
“paramount importance to the contract entered into between the parties and categorically restricts the power of an arbitrator to award pre-award/pendente lite interest when the parties have themselves agreed to the contrary” .
However, on post-award interest, the Court drew a clear distinction. Section 31(7)(b) operates independently of party autonomy and mandates that a sum directed to be paid by an arbitral award shall carry interest from the date of the award till payment, unless the award otherwise directs.
The Court observed that Clause 64(5) bars interest only “till the date on which the award is made” and does not prohibit post-award interest.
While upholding the entitlement to post-award interest, the Court found the rate of 12% per annum excessive in the absence of reasons. It observed that
“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 and would not subserve the principle of just compensation”.
Accordingly, the Court modified the rate of post-award interest from 12% to 8% per annum from the date of award till realization.
Thus, the Supreme Court set aside the impugned High Court judgment dated 25.05.2023, the Commercial Court’s order dated 15.09.2022, and the Arbitral Award dated 25.12.2018 to the extent they granted pre-award/pendente lite interest or amounts in the nature of interest under Claim Nos. 1, 3, and 6.
The award was further modified by reducing the post-award interest rate to 8% per annum.
The appeal was partly allowed.
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