The Supreme Court has made it clear that arbitral tribunals cannot award pre-award or pendente lite interest when a contract explicitly forbids it, even if such payments are framed as compensation.
A bench comprising Justices Sanjay Karol and Vipul M. Pancholi overturned part of an order of the Allahabad High Court that had allowed such interest to be granted despite a clear contractual prohibition.
The ruling reaffirmed that under the Arbitration and Conciliation Act, 1996, particularly Section 31(7)(a), interest before the award is not automatic and must align with the terms of the contract between the parties. Where an agreement expressly blocks such payments, tribunals cannot bypass that restriction by labeling the amount differently.
Dispute Rooted in Railway Workshop Project
The dispute traces back to a 2011 turnkey contract for the modernization of the Jhansi Workshop of the North Central Railway. The project, worth about ₹93 crore, encountered delays stretching nearly 40 months.
Contractor Larsen & Toubro later sought arbitration, raising claims related to pending payments, price adjustments, and financing costs.
In 2018, an arbitral tribunal awarded the company roughly ₹5.53 crore. While acknowledging that Clause 64(5) of the contract barred interest on any amount until the award date, the tribunal still granted payments resembling interest under the label of “financing charges” for certain claims.
Those findings were subsequently upheld by a commercial court and later by the Allahabad High Court, prompting the Union of India to challenge the decision before the apex court.
Supreme Court Finds “Serious Error”
The Supreme Court concluded that the tribunal had overstepped by granting interest-like compensation for the period before the award, despite the contractual prohibition.
The bench observed that the tribunal could not sidestep the contractual clause by describing the payment as compensation when, in substance, it amounted to interest. That portion of the award was therefore struck down.
Post-Award Interest Allowed — But Reduced
While rejecting pre-award and pendente lite interest, the court maintained that post-award interest could still be granted. However, it revised the rate fixed by the tribunal.
The original rate of 12% per annum was reduced to 8% per annum, payable from the date of the award until the amount is realized.
With these modifications, the appeal was partly allowed, narrowing the financial liability while leaving the core award intact.
