Arbitral Tribunal Cannot Bypass Contractual Bar On Pendente Lite Interest By Calling It Compensation; Post-Award Interest Statutory: Supreme Court
Court sets aside pre-award interest granted against Railways; reduces post-award interest from 12% to 8% citing lack of reasons and economic realities
The Supreme Court has held that an arbitral tribunal cannot bypass an express contractual prohibition on pendente lite interest by describing it as “compensation”. However, it clarified that post-award interest operates under a distinct statutory regime and cannot be excluded by implication, under the Arbitration and Conciliation Act, 1996.
Importantly, the Court said that under Section 31(7)(a) of the 1996 Act, the arbitrator’s power to grant pre-award or pendente lite interest is subject to the agreement between the parties. Where the contract bars interest, the tribunal cannot award it, even indirectly.
While sustaining the grant of post-award interest, the Court found the rate of 12% per annum to be excessive, noting that the Tribunal had assigned no reasons for fixing the rate at 12%. In the absence of justification and considering the contemporary economic scenario, such a rate would impose an undue financial burden and would not align with the principle of just compensation, the judgment read.
Justice Sanjay Karol and Justice Vipul M. Pancholi, observed, “The provisions of the Act of 1996, including provisions contained in Section 31(7)(a) 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. Thus, the AT cannot award pre-award/pendente lite interest, even in the form of compensation, in view of specific Clause 16(3) of GCC read with Clause 64(5) of GCC”.
“With regard to the post-award interest, Section 31(7)(b) of the Act provides that unless the award otherwise directs, the sum awarded shall carry interest from the date of the award till payment. The legislative intent underlying this provision is twofold: first, to compensate the successful party for delayed realization of the award, and second, to ensure prompt compliance with the award by the judgment-debtor… a distinct legal regime governs post-award interest, which operates independent of the principles applicable to pre-award or pendente lite interest. Clause 64(5) of the GCC bars interest only “till the date on which the award is made”. It does not prohibit interest for the period subsequent thereto.” the bench further observed.
Advocate Manisha Chava appeared for the appellant and Advocate Amitesh Chandra Mishra for the respondent.
The judgment came in a dispute between the Union of India and Larsen & Toubro Limited (L&T) arising out of a turnkey contract dated 27-01-2011 for modernization of the Jhansi Workshop of North Central Railways.
The contract, valued at over ₹93 crore, was originally to be completed within 18 months but was extended ten times, leading to a delay of nearly 40 months. Disputes arose regarding delayed payments, price variation components (PVC), financing charges, and other claims. The matter was referred to arbitration under Clause 64 of the General Conditions of Contract (GCC).
On 25-12-2018, the Arbitral Tribunal awarded L&T ₹5.53 crore and directed that the amount would carry post-award interest at 12% per annum in case of default. The award was upheld by the Commercial Court, Jhansi under Section 34 and later by the Allahabad High Court under Section 37.
Now, the Union of India challenged the award before the Supreme Court, arguing that Clauses 16(3) and 64(5) of the GCC expressly barred payment of interest.
It is to be noted that Clause 16(3) of the GCC stipulated that no interest would be payable on earnest money, security deposits, or amounts payable to the contractor under the contract.
Therefore, the Court rejected the contractor’s argument that this clause should be read narrowly and held that the phrase “amounts payable under the contract” is broad and independent, and cannot be limited to deposits alone.
“…it can be said that the rule of ejusdem generis is a tool of interpretation and is applicable only where the general words follow a specific class forming a genus. The expression “amounts payable to the contractor under the contract” used in Clause 16(3) is independent, distinct and of wide amplitude, and cannot be read down to defeat its plain meaning…”, the judgment read.
The Court observed that the Tribunal had awarded amounts under Claim Nos. 1, 3 and 6 in the nature of interest by terming them “compensation,” despite acknowledging the contractual prohibition. This, the Court held, was impermissible. It reiterated that an arbitral tribunal is a creature of the contract and cannot act contrary to its express terms.
Accordingly, the award of pre-award/pendente lite interest was set aside, however, the Court drew a clear distinction between pre-award and post-award interest.
Clause 64(5) of the GCC barred interest only “till the date on which the award is made”. It did not prohibit interest thereafter.
Referring to Section 31(7)(b) of the Act, the Court held that post-award interest is statutory in nature. Unlike pre-award interest, it is not subject to party autonomy in the same manner, accordingly, the Court therefore upheld the Tribunal’s direction granting post-award interest.
Cause Title: Union Of India & Ors. v. Larsen And Tubro Limited (L AND T) [Neutral Citation: 2026 INSC 203]
Appearances:
Appellants: Aishwarya Bhati, A.S.G. (Not present), Manisha Chava, Shagun Thakur, Mehak Sandhu, Annirudh Sharma Ii, Digvijay Dam, Ruchi Kohli, Raman Yadav, Sachin Sharma, Amrish Kumar, AOR, Advocates.
Respondent: Amitesh Chandra Mishra, Pankaj Singh, Vishakha Jha, Jishya Pandey, M/S. Acm Legal, AOR, Advocates.