The Supreme Court has ruled that an arbitral tribunal cannot grant pre-award interest when the contract clearly bars it. The Court also said that the tribunal cannot label such interest as compensation to get around the contractual bar. On that basis, it set aside the part of the Allahabad High Court’s order that had upheld the grant of pre-award interest despite the prohibition in the contract.
A Bench of Justice Sanjay Karol and Justice Vipul M. Pancholi examined Section 37(1)(a) of the Arbitration and Conciliation Act, 1996. The Court clarified that pre-award interest does not follow automatically. The parties’ agreed terms govern that issue.
Contractual Bar on Pre-Award Interest
The Court made it clear that the contract controls the question of pre-award interest. When the agreement bars such interest, the arbitral tribunal cannot avoid that restriction by describing the amount as compensation.
The Court observed:
“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 amount 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.”
Dispute over Jhansi Workshop Modernization Contract
The dispute stemmed from a turnkey agreement that the parties signed in 2011. The agreement covered the modernization of the Jhansi Workshop of the North Central Railway. The contract was worth about ₹93.08 crore.
The project ran into a delay of around 40 months. Larsen & Toubro Limited (L&T) then initiated arbitration proceedings. It claimed unpaid amounts, price variation dues, and financing charges.
Arbitral Award and Challenge Before Courts
In 2018, the Arbitral Tribunal awarded L&T ₹5.53 crore. The tribunal noted that Clause 64(5) barred interest on any part of the money for any period “till the date on which the award is made.”
Even then, the tribunal granted “financing charges” and other interest-like amounts for Claim Nos. 1, 3, and 6. It treated those sums as compensation. The Commercial Court upheld the award. The Allahabad High Court did the same. The Union of India then challenged those rulings before the Supreme Court.
Supreme Court on Pre-Award and Pendente Lite Interest
Justice Vipul M. Pancholi authored the judgment. The Court partly allowed the appeal. It held that the tribunal could not grant pre-award or pendente lite interest in the form of compensation when the contract expressly barred such payment.
The Court stated:
“The AT is not justified in awarding pre-award/pendente lite interest, by way of compensation, while passing the award in favour of the respondent-claimant, and more particularly in view of Clause 16(3) and Clause 64(5) of the GCC. The award of such interest is not in accordance with the agreement, and liable to be set aside.”
Post-Award Interest Reduced from 12% to 8%
The Supreme Court upheld the grant of post-award interest. However, it reduced the rate from 12% per annum to 8% per annum from the date of the award till realization.
The Court held:
“The AT is justified in awarding post award interest in favour of the respondent claimant; however, the rate of post- award interest is modified from 12% per annum to 8% per annum from the date of award till realization.”
The Court partly allowed the appeal.
Cause Title: UNION OF INDIA & ORS. VERSUS LARSEN & TUBRO LIMITED (L&T)
Citation: SLP (C) No. 14989 of 2023
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