Supreme Court: In a special leave petition (SLP) challenging the judgment of the Allahabad High Court dated 25 May 2023, the order of the Commercial Court dated 15 September 2022, and the arbitral award dated 25 December 2018 regarding award of pre-award or pendente lite interest, described as compensation, despite the contractual bar contained in Clause 16(3) and Clause 64(5) of the General Conditions of Contract (GCC), a Division Bench of Sanjay Karol and Vipul M. Pancholi,* JJ., held that the Arbitral Tribunal was not justified in awarding pre-award or pendente lite interest, including amounts in the nature of interest, but was justified in awarding post-award interest, but the rate of interest required modification. Accordingly, the Court set aside the impugned orders and the Arbitral Award to the extent they granted pre-award or pendente lite interest and modified the rate of post-award interest from 12 per cent per annum to 8 per cent per annum, to be applicable from the date of the award until realisation.
The Court held that Arbitral Tribunal cannot award pre-award or pendente lite interest, even under the guise of compensation, where contract expressly prohibits payment of interest on amounts payable under the contract. However, post-award interest is governed by Section 31(7)(b), Arbitration and Conciliation Act, 1996, and unless expressly barred, it may be granted.
Factual Matrix
In the instant matter, the dispute arose out of a contract dated 27 January 2011 executed between the appellant through the North Central Railway Administration and respondent for the modernisation of the Jhansi Workshop of the North Central Railways. The project was awarded at a negotiated contract value of Rs 93,08,07,696 and was required to be completed within 18 months, i.e., by 18 July 2012.
However, during the course of execution, the work suffered substantial delays. The appellants extended the completion time ten times, ultimately extending the deadline to 30 November 2015, resulting in a delay of about 40 months beyond the original completion date. During the execution of the contract, disputes arose between the parties regarding delayed payments and financial consequences arising from the prolonged execution period.
The contract incorporated the General Conditions of Contract which contained an arbitration clause under Clause 64. Pursuant to disputes relating to unpaid amounts and other claims, respondent invoked arbitration on 4 September 2017. A three-member Arbitral Tribunal was constituted and entered reference on 10 January 2018.
The respondent filed several claims before the tribunal including claims for financing charges caused by delayed payments, price variation components, indirect costs during extended project duration, refund of liquidated damages, payment against the final bill, and interest on the claim amounts. The appellants also filed a counter-claim alleging losses caused by the delayed commissioning of equipment.
Procedural History
The Arbitral Tribunal passed an arbitral award dated 25 December 2018, awarded a total sum of Rs 5,84,57,597/- and after adjusting the counter-claim, directed payment of Rs 5,53,57,597/- to respondent. The Tribunal also directed that the amount should be paid within 60 days, failing which post-award interest at 12 per cent per annum would apply until payment.
Aggrieved by the impugned arbitral award, the respondents filed an application under Section 34, Arbitration and Conciliation Act, 1996 (the Act) before the Commercial Court, Jhansi. The principal ground of challenge was that the Arbitral Tribunal had awarded amounts in the nature of interest despite an express contractual prohibition contained in Clause 16(3) and 64(5) GCC.
The Commercial Court dismissed the challenge on 15 September 2022, holding that the scope of interference under Section 34 was limited and that no ground existed for setting aside the award.
The appellants then preferred an appeal under Section 37 of the Act before the Allahabad High Court, which was also dismissed on 25 May 2023. The High Court upheld the interpretation adopted by the Arbitral Tribunal and the Commercial Court. Consequently, the appellants approached the Supreme Court through a special leave petition, which led to the present appeal.
Moot Points
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Whether the Arbitral Tribunal was justified in awarding pre-award or pendente lite interest, described as compensation, despite the contractual bar contained in Clause 16(3) and Clause 64(5) GCC?
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Whether the Tribunal was justified in awarding post-award interest in favour of the contractor?
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Whether the Commercial Court and the High Court committed an error while exercising jurisdiction under Sections 34 and 37 of the Act in upholding the award?
Appellants’ Contentions
The appellants argued that the contract expressly prohibited payment of interest. Reliance was placed on Clause 16(3) GCC, which provided that “no interest will be payable upon the Earnest Money and Security Deposit or amounts payable to the contractor under the contract.”
According to the appellants, the expression “amounts payable to the contractor under the contract” was wide enough to include all monetary claims arising from the contract. Therefore, the Arbitral Tribunal had no jurisdiction to award any interest or compensation arising out of delayed payment.
The appellants further argued that Section 31(7)(a) of the Act clearly subordinates the arbitrator’s power to award interest to the terms agreed upon by the parties. Once the parties had agreed to bar interest, the arbitrator could not circumvent the prohibition by describing interest as compensation.
Respondent’s Contentions
The respondent contended that Clause 16(3) should be interpreted using the principle of ejusdem generis. The clause primarily concerned deposits such as earnest money and security deposits, and therefore the expression “amounts payable to the contractor under the contract” should be restricted to similar categories of deposits.
The respondent further argued that Clause 64(5) only prohibited interest “till the date on which the award is made”. Therefore, it did not bar post-award interest. It was also contended that interest could be awarded as compensation under Section 73, Contract Act, 1872 (Contract Act), particularly where admitted amounts had been withheld without justification. The respondent relied on R.P. Garg v. Chief General Manager, Telecom Department, 2024 SCC OnLine SC 2928, which recognised that post-award interest flows from Section 31(7)(b) of the Act.
Court’s Analysis
The Court examined the relevant contractual provisions and statutory framework governing the award of interest and noted that Section 28(3) of the Act mandates that the Arbitral Tribunal must decide disputes in accordance with the terms of the contract. Further, Section 31(7)(a) allows the arbitrator to award interest “unless otherwise agreed by the parties”. The Court held that these provisions make it clear that the arbitrator’s discretion is subordinate to the contractual terms governing interest.
The Court rejected the respondent’s reliance on the doctrine of ejusdem generis. It observed that the clause used the word “or” between “earnest money,” “security deposit,” and “amounts payable to the contractor under the contract.” The phrase “amounts payable to the contractor under the contract” is independent and of wide amplitude. Therefore, it was held that the clause constituted a clear contractual prohibition against payment of interest on contractual dues.
The Court relied on precedents cited by the appellant, including Union of India v. Manraj Enterprises, (2022) 2 SCC 331 and Union of India v. Bright Power Projects (India) (P) Ltd., (2015) 9 SCC 695, which had emphasised that where the contract expressly bars interest, the Arbitral Tribunal cannot award interest even under the guise of compensation. It was further noted that the Arbitral Tribunal itself had rejected a claim for pendente lite interest in one part of the award, acknowledging the contractual prohibition.
The Court observed that despite this contractual prohibition, the Arbitral Tribunal awarded amounts under Claims 1, 3 and 6, which effectively represented interest or compensation for delayed payments. The Court held that Tribunal “cannot award pre-award/pendente lite interest, even in the form of compensation, in view of specific Clause 16(3) of GCC read with Clause 64(5) of GCC” and therefore had committed a serious error by awarding such amounts despite the explicit contractual bar.
The Court emphasised that under the Arbitration and Conciliation Act, where the contract bars interest, the arbitrator cannot award pre-award or pendente lite interest even in the guise of compensation.
With respect to post-award interest, the Court drew a distinction between pre-award interest and post-award interest. The Court noted that 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. It further observed that Clause 64(5) only barred interest until the date of the award, and therefore it did not prohibit post-award interest.
The Court held that since the contract did not explicitly prohibit post-award interest, the Tribunal was justified in awarding it. However, it found that the rate of 12 per cent per annum was excessive and unsupported by reasons in the arbitral award. Considering contemporary economic conditions and principles of just compensation, the Court considered it appropriate to reduce the rate.
Court’s Decision
The Court partly allowed the appeal and held that:
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The Arbitral Tribunal was not justified in awarding pre-award or pendente lite interest, even in the form of compensation, in view of the contractual prohibition contained in Clause 16(3) and Clause 64(5) of the GCC.
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The award granting such interest under Claims 1, 3 and 6 was therefore liable to be set aside.
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The Tribunal was justified in awarding post-award interest, but the rate of interest required modification.
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The rate of post-award interest was reduced from 12 per cent per annum to 8 per cent per annum from the date of the award until realisation.
Accordingly, the Court set aside the impugned orders and the Arbitral Award to the extent they granted pre-award or pendente lite interest and modified the rate of post-award interest from 12 per cent per annum to 8 per cent per annum, to be applicable from the date of the award until realization.
[Union of India v. Larsen & Tobro Ltd., 2026 SCC OnLine SC 327, decided on 27-2-2026]
*Judgment by Justice Vipul M. Pancholi
Advocates who appeared in this case :
Mrs. Aishwarya Bhati, A.S.G., Mr. Annirudh Sharma II, Adv., Mr. Digvijay Dam, Adv., Mrs. Ruchi Kohli, Adv., Mr. Raman Yadav, Adv., Mr. Sachin Sharma, Adv., Mr. Amrish Kumar, AOR, Counsel for the Appellants
Mr. Amitesh Chandra Mishra, Adv., Ms. Vishakha Jha, Adv., Ms. Tishya Pandey, Adv., M/s. Acm Legal, AOR, Counsel for the Respondent