No Pre-Award Interest if Contract Disallows it

Factual Background

On January 27, 2011, the Union of India and the North Central Railway Administration executed a turnkey contract with Larsen & Toubro Limited (L&T) to modernize the Jhansi Workshop for a negotiated value of Rs. 93,08,07,696. The parties set an original completion date of July 18, 2012, but the railway administration extended this deadline ten times, resulting in a 40-month delay up to November 30, 2015.

Disputes over unpaid dues and delays prompted L&T to invoke the arbitration clause on September 4, 2017. A three-member Arbitral Tribunal entered the reference and subsequently passed an award on December 25, 2018. The Tribunal directed the railways to pay L&T a net sum of Rs. 5,53,57,597 within 60 days, failing which the amount would carry post-award interest at 12% per annum.

The Commercial Court in Jhansi and the Allahabad High Court dismissed the subsequent Section 34 and Section 37 challenges, respectively, leading the Union of India to approach the Supreme Court.

Issues Raised

The Supreme Court framed three main issues for consideration. First, it examined whether the Arbitral Tribunal legally awarded pre-award or pendente lite interest, styled as compensation, despite the express prohibitions in Clause 16(3) and Clause 64(5) of the General Conditions of Contract (GCC).

Second, the Court evaluated whether the Tribunal legitimately granted post-award interest to the claimant under the prevailing statutes . Finally, the Court determined whether the lower courts erred in exercising their jurisdiction under Section 34 and Section 37 of the Arbitration and Conciliation Act, 1996, by upholding the interest portions of the arbitral award.

Submissions on Behalf of the Parties

The Additional Solicitor General, representing the Union of India, argued that Clauses 16(3) and 64(5) of the GCC absolutely prohibit the payment of interest on all contract amounts.

She emphasized that Section 31(7)(a) of the Arbitration Act subordinates the arbitrator’s power to the specific terms of the contract. Consequently, she contended that the Tribunal lacked the jurisdiction to bypass this contractual bar by re-labeling the interest as “compensation”.

Senior Counsel for L&T countered by applying the principle of ejusdem generis to Clause 16(3) of the GCC, arguing that the restriction only applied to earnest money and security deposits, not to admitted operational dues like final bills or price variation components. She further maintained that Clause 64(5) only restricted interest up to the date of the award, meaning the statute independently supported the Tribunal’s decision to grant post-award interest under Section 31(7)(b) of the Act.

Analysis and Findings

The Supreme Court rejected the respondent’s ejusdem generis argument, clarifying that the phrase “amounts payable to the contractor under the contract” in Clause 16(3) operates independently and broadly prohibits interest on any contractual dues.

The Court reinforced that Section 28(3) and Section 31(7)(a) of the Act compel arbitrators to strictly adhere to the contract’s terms. Because the parties explicitly agreed to bar interest, the Tribunal committed a jurisdictional error by awarding pre-award and pendente lite interest under the guise of compensation for Claims 1, 3, and 6.

Regarding post-award interest, the Court distinguished the applicable legal regimes. The Court held that Clause 64(5) of the GCC only restricts interest until the date of the award. Once the Tribunal passes the award, Section 31(7)(b) of the Act mandates post-award interest unless the contract explicitly and unambiguously excludes it for the post-award period.

Since the GCC lacked an express post-award prohibition, the Tribunal legally imposed this conditional interest to deter delayed payments. Even so, the Court found the Tribunal’s 12% interest rate excessive and unexplained, noting that appellate courts possess the authority to modify interest rates to ensure just compensation without invalidating the entire award.

Conclusion

The Supreme Court partly allowed the appeal. It set aside the Arbitral Award, the Commercial Court order, and the High Court judgment specifically regarding the grant of pre-award and pendente lite interest for Claims 1, 3, and 6.

The Court upheld the respondent’s statutory entitlement to post-award interest but modified the rate, reducing it from 12% to 8% per annum from the date of the award until the final realization of the payment.

Title – Union of India & Ors. v. Larsen & Toubro Limited

Court – Supreme Court

Citation– 2026 INSC 203

Date – 27.02.2026