UNION OF INDIA v. LARSEN AND TUBRO LIMITED (L AND T)
Arbitrator Lacks Jurisdiction to Award Pre-Award Interest Against Express Contractual Bars; Court Retains Power to Modify Post-Award Interest Rates under the 1996 Act.
Court: Supreme Court of India
Citation: 2026 INSC 203
Decision Date: 27-02-2026
List of Laws
The Arbitration and Conciliation Act, 1996; The Indian Contract Act, 1872; General Conditions of Contract (GCC); Interpretation of Statutes - Ejusdem Generis Principle; The Interest Act, 1978
- Facts: The dispute arose from a 2011 turnkey agreement between the Union of India (North Central Railway) and Larsen & Tubro Limited (L&T) for the modernization of the Jhansi Workshop. The project faced a 40-month delay, leading to multiple extensions and subsequent disputes over payments. An Arbitral Tribunal (AT) was constituted, which passed an award in 2018 granting several claims to L&T, including "financing charges" and interest components under Claims 1, 3, and 6, while also awarding post-award interest at 12% per annum if not paid within 60 days. The appellants challenged the award, specifically contesting the grant of interest in light of Clause 16(3) and Clause 64(5) of the General Conditions of Contract (GCC), which prohibited interest on amounts payable to the contractor and pendente lite interest respectively.
- Procedural Posture: The appellants first challenged the award under Section 34 of the Arbitration and Conciliation Act, 1996, before the Commercial Court, Jhansi, which dismissed the application. A subsequent appeal under Section 37 was dismissed by the High Court of Judicature at Allahabad. The appellants then approached the Supreme Court of India via a Special Leave Petition.
- Issue: (A) Whether the Arbitral Tribunal was justified in awarding pre-award or pendente lite interest, even if termed "compensation", in the face of express contractual prohibitions in the GCC. (B) Whether the tribunal was justified in awarding post-award interest and if the court has the power to modify the rate of such interest.
- Holding: (A) No, the AT was not justified in awarding pre-award/pendente lite interest as it violated the express terms of the contract. (B) Yes, post-award interest is permissible unless specifically excluded, but the court modified the rate from 12% to 8% per annum.
- Reasoning: The Court reasoned that under Section 31(7)(a) of the Act, the arbitrator’s power to award pre-award interest is "subject to the agreement between the parties". Since Clause 16(3) and 64(5) of the GCC explicitly barred such interest, the AT lacked jurisdiction to grant it under any nomenclature, including "compensation". The Court distinguished between pre-award interest (governed by party autonomy) and post-award interest (governed by Section 31(7)(b)), noting that a bar on the former does not automatically bar the latter. Relying on "Gayatri Balasamy v. M/s. ISG Novasoft Technologies Limited", the Court held that it possesses the power to modify the rate of post-award interest to avoid an excessive financial burden, reducing it to 8% to reflect contemporary economic realities.
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