In a significant ruling on the scope of arbitral powers to award interest under the Arbitration and Conciliation Act, 1996, the Supreme Court has partly allowed an appeal filed by the Union of India against Larsen & Toubro Limited (L&T), setting aside the grant of pre-award and pendente lite interest while upholding post-award interest.
The bench of Justice B.V. Nagarathna and Justice R. Mahadevan clarified that Section 31(7)(b) mandates post-award interest unless the award otherwise directs. Since the tribunal had awarded 12% post-award interest only in case of default beyond 60 days, and there was no contractual bar against such interest, the direction was upheld.
The judgment arose out of a long-standing contractual dispute relating to the modernization of the Jhansi Workshop of North Central Railways.
The dispute originated from a turnkey agreement dated January 27, 2011, executed between the Union of India (through North Central Railway) and L&T for modernization works valued at approximately ₹93.08 crore. The original completion deadline of July 18, 2012, was extended ten times, ultimately pushing completion to November 30, 2015—resulting in a delay of about 40 months.
Disagreements arose over delayed payments, price variation components (PVC), foreign exchange variations, financing charges, and other contractual claims. Arbitration was invoked under Clause 64 of the General Conditions of Contract (GCC), and a three-member arbitral tribunal entered reference in January 2018.
On December 25, 2018, the tribunal awarded a total sum of ₹5.53 crore in favour of L&T after adjusting counterclaims. The tribunal granted amounts under various heads, including financing charges for delayed payments, non-payment of price variation component, and ues against final bills
However, the tribunal rejected L&T’s separate claim for pendente lite interest under Claim No. 7, citing Clause 64(5) of the GCC and Section 31(7)(a) of the 1996 Act. Despite this, certain components awarded under other claims effectively included interest elements characterized as “compensation.”
The award also directed that if payment was not made within 60 days, the awarded sum would carry post-award interest at 12% per annum from the date of the award until realization.
The Union of India challenged the award under Section 34 of the Arbitration Act before the Commercial Court at Jhansi, arguing that Clauses 16(3) and 64(5) of the GCC imposed an absolute bar on payment of interest on amounts payable under the contract.
The Commercial Court dismissed the challenge. The Allahabad High Court, in an appeal under Section 37, upheld the arbitral award, holding that the clauses did not prohibit the grant of interest in the manner awarded.
Aggrieved, the Union of India approached the Supreme Court.
The Supreme Court framed three principal issues.
Firstly, whether the arbitral tribunal was justified in awarding pre-award/pendente lite interest in view of the contractual bar.
Secondly, whether post-award interest could be granted.
Lastly, whether the courts below erred in refusing to interfere under Sections 34 and 37.
The Court emphasized that Section 31(7)(a) of the Arbitration and Conciliation Act, 1996 begins with the phrase “unless otherwise agreed by the parties,” making arbitral discretion subordinate to contractual terms.
Clause 16(3) of the GCC clearly stated that “no interest will be payable upon the earnest money and security deposit or amounts payable to the contractor under the contract.” The Court rejected L&T’s argument that this clause should be narrowly interpreted under the principle of ejusdem generis.
Relying on prior decisions including Union of India v. Bright Power Projects (India) (P) Ltd. and Union of India v. Manraj Enterprises, the Court held that where the contract expressly bars interest on amounts payable under the contract, the arbitral tribunal has no jurisdiction to award pre-award or pendente lite interest—even if styled as “compensation.”
The Court found that the tribunal had committed a serious error by granting such amounts under Claim Nos. 1, 3, and 6, which effectively included interest components contrary to the contractual prohibition.
Accordingly, the grant of pre-award/pendente lite interest was set aside.
On the issue of post-award interest, the Court drew a distinction between Section 31(7)(a) (pre-award interest) and Section 31(7)(b) (post-award interest).
It held that post-award interest operates under a different statutory regime and is not subject to party autonomy in the same manner. Clause 64(5) of the GCC barred interest only “till the date on which the award is made,” and did not prohibit post-award interest.
Case Details
Case Title: Torrent Power Ltd. Versus Ashish Arjunkumar Rathi & Others
Citation: JURISHOUR-150-SC-2026
Case No.: Civil Appeal Nos.11746-11747 Of 2024
Date: February 27, 2026
