The Supreme Court of India on Thursday partly allowed an appeal filed by the Union government in a long-running arbitration dispute with engineering giant Larsen & Toubro Limited.
A Bench of Justice Sanjay Karol and Justice Vipul M. Pancholi ruled that the arbitral tribunal could not have granted pre-award interest in view of a clear bar in the contract. However, it upheld the grant of post-award interest - with a modification in rate.
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Background of the Case
The dispute arose from a 2011 contract between the Union of India, acting through North Central Railway, and L&T for modernization of the Jhansi Railway Workshop. The project was valued at over ₹93 crore and was originally to be completed within 18 months.
The deadline was extended multiple times, leading to delays of over three years. Differences surfaced over payments, price variation, foreign exchange components and other claims.
The matter went to arbitration under the Arbitration and Conciliation Act, 1996. In December 2018, a three-member arbitral tribunal awarded L&T over ₹5.53 crore after adjusting counterclaims. It also directed that if the amount was not paid within 60 days, it would carry post-award interest at 12% per annum.
The Railways challenged the award before the Commercial Court and later the Allahabad High Court. Both courts refused to interfere. The Union then approached the Supreme Court.
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What the Government Argued
Appearing for the Union, Additional Solicitor General Aishwarya Bhati argued that the contract clearly barred payment of interest.
She pointed to Clause 16(3) of the General Conditions of Contract, which states that no interest shall be payable on earnest money, security deposit “or amounts payable to the contractor under the contract.” She also relied on Clause 64(5), which bars interest up to the date of the award.
According to the government, once the parties agreed to such a clause, the arbitrator had no power to award interest - even if it was labelled as “compensation.”
Senior Advocate Meenakshi Arora, appearing for L&T, argued that the clause should be read narrowly. She said it mainly concerned deposits like earnest money and security deposit.
She further contended that post-award interest is governed by statute and cannot be excluded unless the contract expressly says so.
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Court’s Observations
The Bench examined the Arbitration Act and past Supreme Court rulings. It noted that Section 31(7)(a) of the Act allows pre-award interest “unless otherwise agreed by the parties.”
“The statutory scheme itself subordinates the discretion of the arbitrator to the contractual provisions,” the Court observed.
The judges rejected the argument that the clause could be read narrowly. They held that the expression “amounts payable to the contractor under the contract” was broad and independent.
The Court concluded that the arbitral tribunal committed an error in awarding pre-award or pendente lite interest under Claim Nos. 1, 3 and 6, even if described as compensation.
However, on post-award interest, the Bench drew a distinction. It referred to Section 31(7)(b), which deals specifically with interest after the award is made.
“Pre-award and post-award interest operate in distinct fields,” the judgment said.
The contract barred interest only till the date of the award. There was no express prohibition against post-award interest.
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The Decision
The Supreme Court set aside the award to the extent it granted pre-award and pendente lite interest under the disputed claims.
At the same time, it upheld the grant of post-award interest but reduced the rate from 12% to 8% per annum from the date of award till realisation.
The Court noted that the arbitral tribunal had not given reasons for fixing the rate at 12%. In the current economic context, it found that rate excessive.
With these modifications, the appeal was partly allowed.
Case Title: Union of India & Ors. v. Larsen & Toubro Limited
Case No.: Civil Appeal arising out of SLP (C) No. 14989 of 2023
Decision Date: February 27, 2026
