Supreme Court Draws Line: No Pre-Award Interest Masquerading as Compensation in Face of Contractual Bar

In a significant ruling on arbitration boundaries, the Supreme Court of India has ruled that arbitral tribunals cannot award pre-award or pendente lite interest—even labeled as "compensation"—if the contract explicitly prohibits it. Justices Sanjay Karol and Vipul M. Pancholi partly allowed an appeal by the Union of India against Larsen & Toubro Limited (L&T) in a long-running railway modernization dispute, setting aside interest components worth crores while tweaking post-award interest to 8% from 12%. This 2026 judgment ( 2026 INSC 203 ; ) reinforces party autonomy under the Arbitration and Conciliation Act, 1996 .

Rails, Delays, and Billions: The Jhansi Workshop Odyssey

The saga began with a 2011 turnkey contract worth ₹93.08 crore between North Central Railway (under Union of India ) and L&T for modernizing Jhansi Workshop. Slated for completion by July 2012 , extensions pushed it to November 2015 —a 40-month delay. Disputes erupted over delayed payments, price variations, foreign exchange fluctuations, and indirect costs.

L&T invoked arbitration under Clause 64 of the General Conditions of Contract (GCC) in 2017 . The tribunal, constituted per GCC, awarded L&T ₹5.53 crore net in December 2018 , including "financing charges" (Claim 1: ₹1.78 crore), price variation (Claim 3: ₹1.70 crore), final bill dues (Claim 6: ₹2.29 crore), arbitration costs, against a modest counterclaim allowance. It rejected explicit pendente lite interest (Claim 7) citing GCC Clause 64(5) but folded interest-like sums into the claims as compensation. Post-award interest at 12% kicked in after 60 days.

Commercial Court, Jhansi ( September 2022 ) and Allahabad High Court ( May 2023 ) upheld the award under Sections 34 and 37 , prompting the Supreme Court appeal.

Union Rails In: 'Contract is King'; L&T Counters: 'Admitted Dues Deserve Compensation'

Appellants' Volley (led by ASG Aishwarya Bhati ): GCC Clauses 16(3) and 64(5) absolutely bar interest on "amounts payable to the contractor under the contract," including delayed payments like final bills and PVC. Labeling it "compensation" circumvents the bar, rejected in Sree Kamatchi Amman Constructions (2010). Section 31(7)(a) subordinates arbitrators to contracts ( Bright Power Projects , 2015; Manraj Enterprises , 2022). Section 73 Contract Act yields to express exclusions; post-award interest also barred implicitly.

Respondent's Defense ( Sr. Adv. Meenakshi Arora ): Clause 16(3) limited by ejusdem generis to earnest money/security deposits ( Raveechee & Co. , 2018). Clause 64(5) hits only disputed sums till award date—Claims 3/6 were admitted. Post-award interest mandatory under Section 31(7)(b) ( RP Garg , 2024). Tribunal's equity: " Travesty of justice " to deny on unpaid admitted sums.

Decoding the Contractual Shield: Pre vs. Post-Award Interest Divide

The bench meticulously dissected GCC clauses against the 1996 Act. Clause 16(3): "No interest... upon... amounts payable to the contractor under the contract." Rejecting ejusdem generis , it echoed Manraj Enterprises (2022)—the "or" makes it disjunctive, broad enough to bar all contract sums. Clause 64(5) reinforces till-award prohibition.

Precedents clarified the 1996 Act's shift from 1940 Act: Bright Power (3-judge bench) and Sree Kamatchi bind tribunals to "unless otherwise agreed" in Section 31(7)(a) . Raveechee and Ambica Construction (1940 Act cases) inapplicable. Tribunal erred folding interest into Claims 1,3,6 despite rejecting Claim 7.

Post-award? Section 31(7)(b) stands independent—no contractual override unless explicit. RP Garg (2024) and Gayatri Balasamy (2025) affirm: mandatory unless award directs otherwise, modifiable by courts for equity. 12% deemed excessive sans reasoning; reduced to 8% amid "contemporary economic scenario."

Lower courts erred in limited Section 34/37 scrutiny, overlooking patent illegality.

Key Observations

"The AT has committed serious error by awarding pre-award/ pendente lite interest qua Claim Nos. 1, 3 & 6... in view of... Clause 16(3) and Clause 64(5) of GCC [and] Section 31(7)(a) of the Act." (Para 52)

"The expression 'amounts payable to the contractor under the contract' has to be read independently... principle of ejusdem generis is not applicable." (Para 38, quoting Manraj )

" Post-award interest flows as a matter of law under Section 31(7)(b) , unless... unequivocally agreed to exclude it." (Para 56, citing RP Garg )

"The rate of post-award interest at 12% per annum... is on the higher side... modify... to 8% per annum from the date of award till realization." (Para 60)

Gavel Falls: Partial Win, Clear Roadmap for Arbitrators

Appeal partly allowed: Pre-award interest on Claims 1,3,6 set aside; award, High Court, and trial court judgments modified accordingly. Net effect: L&T's principal dues stand (e.g., final bills, PVC base), minus interest camouflage; post-award at 8%.

This binds future tribunals: Contracts trump equity on pre-award interest ; post-award endures as statutory compulsion, courts can calibrate rates. Railway contracts and beyond gain clarity—no end-runs around GCC bars—bolstering certainty in public procurement arbitrations.