Union of India v Larsen & Toubro: Supreme Court on Pre-Award and Post-Award Interest in Arbitration

Case Summary

Union of India & Ors. v. Larsen & Toubro Limited (L&T)

• Case Details: (@ Special Leave Petition (Civil) No. 14989 of 2023) — Civil Appeal No. _______ of 2026

• Date of Judgment: 27 February 2026

• Bench: Honourable Justice Sanjay Karol; Honourable Justice Vipul M. Pancholi

• Advocates: Ms Aishwarya Bhati, learned Additional Solicitor General (for the appellants); Ms Meenakshi Arora, learned Senior Counsel (for the respondent)

• Statutes and Provisions Considered: Arbitration and Conciliation Act, 1996 — Sections 28(3), 31(7)(a) and (b), 34, 37; Section 31A and Section 38 (referenced); Interest Act (definition of current rate of interest) and Indian Contract Act, 1872 (Section 73) invoked in submissions

• Principal Contractual Provisions: Clause 16(3) and Clause 64(5) of the General Conditions of Contract (GCC)

• Leading Decisions Cited: Union of India v. Bright Power Projects (India) (P) Ltd., (2015) 9 SCC 695; Union of India v. Manraj Enterprises, (2022) 2 SCC 331; Sree Kamatchi Amman Constructions v. Railway Administration, (2010) 8 SCC 767; Raveechee & Co. v. Union of India, (2018) 7 SCC 664; Ambica Construction v. Union of India, (2017) 14 SCC 323; R.P. Garg (2024 SCC OnLine SC 2928); Gayatri Balasamy v. M/s ISG Novasoft Technologies Ltd., (2025) 7 SCC 1; BHEL v. Globe Hi-Fabs Ltd. (2015)

Overview of Legal Questions

This Supreme Court judgment addresses a concentrated legal question of high practical importance for contracting parties and arbitration practitioners: the extent to which parties can, by contract, exclude awards of interest in arbitration and whether such exclusions bind the arbitral tribunal in respect of pre award (including pendente lite) interest and post award interest. The Court also considered the tribunal’s power to award interest described as compensation and the proper forum for scrutiny under Sections 34 and 37 of the Act.

Factual and Procedural History

The dispute arose out of a turnkey contract for modernisation of the Jhansi Workshop executed in January 2011 between North Central Railway (parties represented by Union of India) and L&T. The contract completion date was extended repeatedly and substantial claims arose for delayed payments (financing charges), price variation components, final bill payments and related arbitration costs. A three member Arbitral Tribunal published an award on 25 December 2018 directing payment of a net sum to L&T, which included amounts that the Tribunal treated as compensation. The appellants challenged the award under Section 34, and the High Court dismissed their appeal under Section 37; the matter reached the Supreme Court.

Core Legal Issues and Judicial Findings

The Court framed three central issues: (A) whether the tribunal was justified in awarding pre award/pendente lite interest by way of compensation in view of Clauses 16(3) and 64(5) of the GCC; (B) whether post award interest could be awarded; and (C) whether the lower courts erred in exercising their powers under Sections 34 and 37.

The Supreme Court held decisively that the arbitral tribunal had erred in awarding pre award/pendente lite interest qua Claim Nos. 1, 3 and 6. The Court relied on the plain language of Clause 16(3) — no interest will be payable upon the Earnest Money and Security Deposit or amounts payable to the Contractor under the Contract — and on Section 31(7)(a) of the Arbitration Act which begins with the phrase Unless otherwise agreed by the parties …. The Court emphasised that the 1996 Act gives paramount importance to party autonomy on the question of pre award interest, such that an express contractual bar will constrain the arbitrator’s power. The Bench rejected the respondent’s ejusdem generis argument that Clause 16(3) should be confined to deposits akin to earnest money; the Court relied on the disjunctive structure of the clause and the reasoning in Manraj Enterprises and Bright Power Projects to conclude that the ban is wide.

On post award interest, the Court reiterated established law: Section 31(7)(b) operates differently from clause (a) and is not subject to party autonomy in the same manner. Post award interest flows as a matter of law unless the award itself provides otherwise. The tribunal had directed post award interest at 12% per annum in the event of default after 60 days. While permitting the grant of post award interest, the Supreme Court reduced the rate to 8% per annum, on the basis that (i) the tribunal gave no reasons for fixing 12% and (ii) the contemporary economic scenario and precedent (including Gayatri Balasamy) justified judicial modification of the rate under Section 31(7)(b).

Key Jurisprudential Observations

• Party Autonomy: Party autonomy under the 1996 Act remains decisive regarding pre award interest. As the Court states, the statutory scheme itself subordinates the discretion of the arbitrator to the contractual provisions governing interest. This echoes the line of authority post dating the 1996 Act distinguishing decisions under the earlier 1940 Act.

• Re-characterisation of Claims: The Court rejects attempts to re characterise an interest award as compensation where the contractual clause unambiguously bars interest on amounts payable under the contract. It would be travesty of justice if this interest as compensation is not paid because principal unpaid sum is an admitted amount by the Respondent but simply not paid without any reason — a quotation that captures the tribunal’s reasoning but which the Court ultimately held could not override the contractual bar.

• Statutory Entitlement: Post award interest is a statutory entitlement under Section 31(7)(b): parties cannot, by implication, exclude it unless the award itself directs otherwise. The Court’s power to moderate the rate protects awards from being set aside for excessive interest while safeguarding the award holder’s right to compensation for delay.

Practical Implications for Practitioners

1. Drafting clarity: If a contracting party intends to exclude interest both pre and post award, the exclusion must be explicit and unambiguous. A clause that bars interest till the date of the award (as in Clause 64(5)) will not exclude post award interest; a clause that speaks to any interest whatsoever and expressly covers post award periods would be necessary.

2. Reasoned Awards: Arbitrators and counsel must state clear reasons when awarding a post award rate other than the statutory benchmark; otherwise a court may reduce the rate.

3. Grounds for Challenge: When challenging an award, parties should focus on whether the tribunal exceeded its contractual mandate; on this score, the Court confirmed that interference under Sections 34 and 37 is permissible where the tribunal transgresses the contract.

4. Labeling Strategy: Re characterisation tactics (labelling interest as compensation) are unlikely to succeed where the contractual prohibition is plain.

Final Conclusion

This judgment reinforces the territorial distinction between pre award and post award interest under the 1996 Act. It reiterates that an arbitrator’s power to award pendente lite interest is subordinate to an express contractual bar, while post award interest remains a statutory protection for award holders — albeit subject to judicial moderation of the rate where appropriate. For practitioners, the message is clear: precision in contractual drafting and careful pleading on the quantum and justification for interest are indispensable.

Relevant Extracts from the Judgment

Clause 16(3) of the GCC reads as under: 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) of the GCC provides as under: 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.

On perusal of Section 28(3) and Section 31(7)(a) of the Act, it is clear that the statutory scheme itself subordinates the discretion of the arbitrator to the contractual provisions governing interest.

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. Thus, the submission canvassed by the learned counsel for the respondent cannot be accepted.

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 realisation of the award, and second, to ensure prompt compliance with the award by the judgment-debtor.

We are of the view that the AT has committed serious error by awarding pre-award/pendente lite interest qua Claim Nos. 1, 3 & 6, though AT has observed that the said amounts are awarded by way of compensation; however, in view of the peculiar clause of GCC as well as provisions contained in Section 31(7)(a) of the Act of 1996 and the decisions rendered by this Court, the AT could not have awarded the pre-award/pendente lite interest.

In the facts and circumstances of the present case, we deem it appropriate to modify the rate of post-award interest from 12% per annum to 8% per annum from the date of award till realisation.

Accordingly, the impugned judgment dated 25.05.2023 passed by the High Court of Judicature at Allahabad, the order dated 15.09.2022 passed by the Commercial Court, Jhansi, and the Arbitral Award dated 25.12.2018, are set aside to the extent of the grant of pre-award/pendente lite interest or amounts in the nature of interest qua Claim No. 1, 3 and 6. The Arbitral Award dated 25.12.2018 is further modified to the extent of the rate of the post-award interest from 12% per annum to 8% per annum from the date of award till realisation.