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

 Contractual bar on interest binds the arbitrator under the Arbitration Act, 1996; pre-award interest cannot be granted despite being styled as compensation, but post-award interest flows statutorily and may be judicially moderated.

Background

The dispute arose from a 2011 turnkey contract for modernization of Jhansi Workshop. Delays led to claims by L&T. The Arbitral Tribunal (25.12.2018) awarded ₹5.53 crore (net), including amounts under Claim Nos. 1, 3 and 6 that incorporated pre-award/pendente lite interest, and granted post-award interest @12% if unpaid within 60 days .

Challenges under s. 34 Arbitration and Conciliation Act, 1996 and s. 37 Arbitration and Conciliation Act, 1996 were dismissed by the Commercial Court and High Court.

Issues Framed

A. Whether the AT was justified in awarding pre-award/pendente lite interest in view of Clause 16(3) and Clause 64(5) of the GCC.
B. Whether post-award interest was justified.
C. Whether courts below erred under s. 34 Arbitration and Conciliation Act, 1996 and s. 37 Arbitration and Conciliation Act, 1996.

Court’s Reasoning

Issue A: Pre-award / Pendente Lite Interest

  • Clause 16(3) GCC barred interest on “earnest money and security deposit or amounts payable to the contractor under the contract” .

  • Clause 64(5) GCC barred interest “for any period till the date on which the award is made” .

  • Under s. 31(7)(a) Arbitration and Conciliation Act, 1996, the arbitrator’s power to award pre-award interest is subject to party agreement.

  • Relying on Bright Power Projects (2015) and Manraj Enterprises (2022), the Court held that where the contract expressly bars interest, the arbitrator has no jurisdiction to award it—even if styled as “compensation.”

  • The ejusdem generis argument was rejected; “amounts payable” is wide and independent.

  • Therefore, the AT erred in granting pre-award/pendente lite interest under Claim Nos. 1, 3 and 6.

Issue B: Post-award Interest

  • s. 31(7)(b) Arbitration and Conciliation Act, 1996 governs post-award interest and is not subject to party autonomy unless expressly excluded.

  • Clause 64(5) bars interest only “till the date of award”; it does not exclude post-award interest.

  • Following R.P. Garg (2024) and Morgan Securities, post-award interest flows statutorily.

  • However, 12% was excessive; applying Gayatri Balasamy (2025), the Court reduced it to 8% per annum.

Issue C: Error by Courts Below

  • Failure to correct the award of pre-award interest despite an express contractual bar amounted to jurisdictional error under s. 34 and s. 37.

Decision / Disposition

  • Appeal partly allowed.

  • Award set aside to the extent of pre-award/pendente lite interest under Claim Nos. 1, 3 and 6.

  • Post-award interest modified from 12% to 8% per annum from date of award till realization .

Ratio

Under s. 31(7)(a) Arbitration and Conciliation Act, 1996, an arbitral tribunal cannot award pre-award or pendente lite interest in the face of an express contractual bar, even if termed compensation; however, post-award interest under s. 31(7)(b) operates independently of party autonomy unless expressly excluded and may be judicially modified for reasonableness.

Case Details

Citation: 2026 INSC 203
Decided on: 27 February 2026
Case Title: Union of India & Ors. v. Larsen & Toubro Limited (L&T)
Court: Supreme Court of India
Bench: Sanjay Karol, J. and Vipul M. Pancholi, J.


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