Court’s decision
The Supreme Court of India partly allowed an appeal filed by the Union of India against Larsen & Toubro Limited, setting aside the grant of pre-award and pendente lite interest awarded by an arbitral tribunal in a railway modernization dispute.
The Court held that where the General Conditions of Contract expressly prohibit interest on “amounts payable to the contractor under the contract,” arbitral tribunals cannot circumvent the bar by characterising such amounts as compensation. However, the Court upheld the grant of post-award interest under Section 31(7)(b) of the Arbitration and Conciliation Act, 1996, while reducing the rate from 12% to 8% per annum .
Facts
The dispute arose from a 2011 turnkey contract for modernization of the Jhansi Workshop of North Central Railways, valued at over ₹93 crore. The project completion period was 18 months but was extended ten times, resulting in a delay of approximately 40 months.
Disputes arose regarding delayed payments, price variation components, financing charges, indirect costs during the extended stay, and other claims. Arbitration was invoked under Clause 64 of the General Conditions of Contract.
The arbitral tribunal awarded ₹5.53 crore to the contractor, including sums under claims relating to financing charges, non-payment of price variation component, and final bill amounts. It also directed post-award interest at 12% per annum in case of non-payment within 60 days .
Issues
The Supreme Court framed three core issues:
- Whether the arbitral tribunal was justified in awarding pre-award or pendente lite interest despite Clauses 16(3) and 64(5) of the contract.
- Whether post-award interest could be granted in light of contractual prohibitions.
- Whether the Commercial Court and High Court erred under Sections 34 and 37 of the Arbitration Act in upholding the award.
Appellants’ arguments
The Union of India contended that Clause 16(3) of the General Conditions of Contract categorically barred payment of interest on earnest money, security deposit, and “amounts payable to the contractor under the contract.”
It was argued that Section 31(7)(a) of the Arbitration Act expressly subordinates arbitral discretion to party agreement. Therefore, once parties contractually exclude interest, the tribunal lacks jurisdiction to award it—whether styled as interest or compensation.
Reliance was placed on precedents holding that arbitral tribunals are creatures of contract and cannot travel beyond its terms.
Respondent’s arguments
The contractor argued that Clause 16(3) should be interpreted ejusdem generis and confined to deposits such as earnest money and security deposit. It contended that admitted dues were not covered by the prohibition.
It was further argued that Clause 64(5) barred only interest “till the date of award” and did not restrict post-award interest. The respondent relied on precedents distinguishing pre-award and post-award interest regimes under Section 31(7).
Analysis of the law
The Court examined Section 28(3) and Section 31(7) of the Arbitration Act. Section 31(7)(a) begins with the expression “unless otherwise agreed by the parties,” thereby making arbitral power to award pre-award interest subject to contractual terms.
Clause 16(3) was held to be broad and disjunctive, using the word “or” between earnest money, security deposit, and amounts payable. The Court rejected application of ejusdem generis, holding the clause independently barred interest on all contractual amounts.
The Court clarified that arbitral tribunals cannot award pre-award or pendente lite interest even in the guise of compensation when expressly barred.
Precedent analysis
The Court relied on Union of India v. Bright Power Projects (India) Pvt. Ltd., where a three-judge bench held that Section 31(7)(a) binds arbitrators to contractual prohibitions on interest.
It reaffirmed Union of India v. Manraj Enterprises, holding that contractual bars preclude both pendente lite and future interest under Section 31(7)(a).
The Court distinguished earlier rulings under the 1940 Arbitration Act, noting that the 1996 Act expressly prioritizes party autonomy regarding pre-award interest.
For post-award interest, the Court relied on R.P. Garg v. Chief General Manager, Telecom Department, clarifying that Section 31(7)(b) operates independently and is not subject to contractual exclusion unless expressly stated.
Court’s reasoning
The Court observed that the arbitral tribunal itself had rejected a separate claim for pendente lite interest but nevertheless embedded interest components within other claims by labelling them compensation.
Such a course, the Court held, defeats the contractual scheme and violates Section 31(7)(a). Consequently, the grant of pre-award and pendente lite interest under Claim Nos. 1, 3, and 6 was illegal.
However, Clause 64(5) barred interest only “till the date of award.” There was no express prohibition on post-award interest. Section 31(7)(b) therefore applied.
Finding 12% excessive and unsupported by reasoning, the Court exercised power to modify the rate to 8%, consistent with contemporary economic realities .
Conclusion
The Supreme Court set aside the award to the extent it granted pre-award and pendente lite interest under Claim Nos. 1, 3, and 6.
It upheld entitlement to post-award interest but reduced the rate from 12% to 8% per annum from the date of award until realization.
The judgments of the Commercial Court and the Allahabad High Court were accordingly modified, and the appeal was partly allowed .
Implications
This ruling reinforces party autonomy in arbitration and underscores that arbitral tribunals cannot override express contractual prohibitions on interest.
Key takeaways:
• Section 31(7)(a) subordinates pre-award interest to contract terms.
• Interest cannot be disguised as compensation to bypass a contractual bar.
• Ejusdem generis will not dilute clear and disjunctive contractual language.
• Post-award interest under Section 31(7)(b) operates independently.
• Courts may modify excessive post-award interest rates without setting aside the entire award.
The decision strengthens predictability in government contracts and clarifies the distinct legal treatment of pre-award and post-award interest under Indian arbitration law.
Case law references
- Union of India v. Bright Power Projects (India) Pvt. Ltd. (2015) – Arbitrator bound by contractual prohibition on interest.
- Union of India v. Manraj Enterprises (2022) – Contractual bar excludes pendente lite and future interest.
- Sree Kamatchi Amman Constructions v. Railway Administration (2010) – Arbitrator cannot award interest contrary to agreement.
- R.P. Garg v. Chief General Manager, Telecom Department (2024) – Post-award interest under Section 31(7)(b) is statutory and distinct from pre-award interest.
FAQs
1. Can an arbitral tribunal award interest if the contract prohibits it?
No. Under Section 31(7)(a) of the Arbitration Act, arbitral tribunals are bound by contractual prohibitions regarding pre-award and pendente lite interest.
2. Is post-award interest also barred if the contract excludes interest?
Not necessarily. Unless expressly excluded, post-award interest flows under Section 31(7)(b) as a statutory mandate.
3. Can courts modify the rate of post-award interest?
Yes. Courts may reduce or modify excessive post-award interest rates without setting aside the entire arbitral award.