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Union of India & Orsv.Larsen & Tubro Limited L&T

Citation:
2026 INSC 203
Date:
27 February 2026
Reading time:
15 min read

Synopsis

This Supreme Court judgment arises from a challenge to an arbitral award passed in favor of Larsen & Tubro (L&T) against the Union of India. The core dispute centered on whether the Arbitral Tribunal (AT) could award interest (both pre-award and post-award) despite specific clauses in the General Conditions of Contract (GCC) that barred the payment of interest on amounts payable to the contractor. The Court, after analyzing the contractual clauses and the relevant provisions of the Arbitration and Conciliation Act, 1996, held that the AT had erred in granting pre-award/pendente lite interest, as such interest was expressly prohibited by the contract. However, it upheld the grant of post-award interest, though it modified the rate from 12% to 8% per annum, finding the original rate to be excessive and unjustified.


1. Basic Information of the Judgment

Case Title: Civil Appeal arising out of Special Leave Petition (Civil) No. 14989 of 2023 – Union of India & Ors. vs. Larsen & Tubro Limited (L&T)

Citation: 2026 INSC 203

Court: Supreme Court of India

Jurisdiction: Civil Appellate Jurisdiction (Article 136)

Coram: Justice Sanjay Karol and Justice Vipul M. Pancholi

Nature of Bench: Division Bench

Date of Judgment: February 27, 2026


2. Legal Framework & Key Precedents

The judgment is a significant exposition of the law on interest in arbitration, particularly the distinction between pre-award and post-award interest.

  • Primary Legislation:
    Arbitration and Conciliation Act, 1996 (the Act):
    Section 28(3): Mandates that the arbitral tribunal shall decide the dispute in accordance with the terms of the contract.
    Section 31(7): Deals with the power of the arbitral tribunal to award interest.
    Section 31(7)(a): Governs pre-award/pendente lite interest (from the date of cause of action to the date of award). This power is expressly made subject to the phrase "unless otherwise agreed by the parties." This means parties can contract out of pre-award interest.
    Section 31(7)(b): Governs post-award interest (from the date of award to the date of payment). It states a sum directed to be paid shall carry interest, "unless the award otherwise directs." This phrase qualifies only the rate of interest, not the entitlement. Post-award interest is not subject to party autonomy.
    Indian Contract Act, 1872:
    Section 73: Deals with compensation for loss or damage caused by breach of contract. It is expressly made subject to "the contract providing otherwise."

  • Key Judicial Precedents:
    Union of India vs. Bright Power Projects (India) (P) Ltd. (2015) 9 SCC 695 (Three-Judge Bench): Held that Section 31(7)(a) subordinates the arbitrator's power to the contract. If parties have agreed to bar interest, the arbitrator has no jurisdiction to award it.
    Union of India vs. Manraj Enterprises (2022) 2 SCC 331: This is the most directly applicable precedent. The Court considered similar GCC clauses and held that the arbitrator could not award pendente lite or future interest (meaning pre-award) due to the express contractual bar. It clarified that decisions under the 1940 Act (like Ambica Construction) were not applicable under the 1996 Act.
    Sree Kamatchi Amman Constructions vs. Railways (2010) 8 SCC 767: Reiterated that where parties have agreed that no interest shall be payable, the AT cannot award interest between the date of cause of action and the date of award.
    R.P. Garg vs. Chief General Manager, Telecom Department (2024 SCC OnLine SC 2928): Authoritatively clarified the distinction between pre-award and post-award interest. It held that post-award interest under Section 31(7)(b) is not subject to party autonomy. The phrase "unless the award otherwise directs" only qualifies the rate, not the entitlement. Post-award interest flows as a matter of law.
    Gayatri Balasamy vs. M/s. ISG Novasoft Technologies Limited (2025) 7 SCC 1: Held that courts retain the power to modify post-award interest under Section 31(7)(b) where the facts justify such modification, especially when the rate awarded is excessive and without justification.


3. Relevant Facts of the Case

  • The Contract: A turnkey agreement was executed on 27.01.2011 for the modernization of the Jhansi Workshop of North Central Railways, valued at approximately ₹93 Crores. The work was to be completed by 18.07.2012.

  • Delay and Disputes: The contract was extended ten times until 30.11.2015, resulting in a 40-month delay. Disputes arose over payments.

  • Arbitral Award (25.12.2018): The AT awarded L&T a net sum of ₹5,53,57,597/-. Critically, this sum included amounts under Claim No. 1 (Financing charges), Claim No. 3 (Non-payment of PVC & interest), and Claim No. 6 (Payment due against final bill & interest) . The AT itself had rejected a separate claim for pendente lite interest (Claim No. 7) but, under the guise of "compensation," included interest-like components in the principal sum for the pre-award period. The AT also awarded post-award interest at 12% per annum if payment was not made within 60 days.

  • Contractual Clauses:
    Clause 16(3) of GCC: "No interest will be payable upon the Earnest Money and Security Deposit or amounts payable to the Contractor under the Contract..."
    Clause 64(5) of GCC: "Where the arbitral award is for the payment of money, no interest shall be payable on whole or any part of the money for any period till the date on which the award is made. "

  • Proceedings Below: The Commercial Court (under Section 34) and the High Court (under Section 37) upheld the award. The Union of India appealed to the Supreme Court.


4. Issues Before the Supreme Court

  1. Whether the Arbitral Tribunal was justified in awarding pre-award/pendente lite interest (by way of "compensation") in favor of the respondent, in view of the express prohibitions contained in Clause 16(3) and Clause 64(5) of the GCC and the mandate of Section 31(7)(a) of the Act?

  2. Whether the AT was justified in awarding post-award interest, and if so, was the rate of 12% per annum reasonable?

  3. Whether the Commercial Court and the High Court erred in failing to set aside or modify the award on these grounds under Sections 34 and 37 of the Act?


5. Ratio Decidendi & Court's Reasoning

The Supreme Court partly allowed the appeal. The core reasoning is as follows:

  • On Pre-Award/Pendente Lite Interest (Issue 1):
    Primacy of Contract: The Court reiterated that under Section 31(7)(a), the arbitrator's power to grant pre-award interest is expressly subject to the terms of the contract. The words "unless otherwise agreed by the parties" are paramount.
    Interpretation of Clause 16(3): The Court rejected the respondent's argument that the principle of ejusdem generis should restrict the phrase "amounts payable to the contractor" to sums akin to earnest money/security deposit. Relying on Manraj Enterprises, it held that the word "or" between "earnest money," "security deposit," and "amounts payable" makes the latter an independent, wide category. The clause clearly bars interest on all amounts payable under the contract.
    Interpretation of Clause 64(5): This clause explicitly bars interest on any part of the money awarded "for any period till the date on which the award is made." This is a complete prohibition on pre-award interest.
    "Compensation" Cannot Circumvent the Bar: The AT's attempt to award "financing charges" and "interest" under Claim Nos. 1, 3, and 6 was a clear attempt to circumvent the express contractual bar. The AT itself had acknowledged the bar by rejecting Claim No. 7 for pendente lite interest. The Court held that one cannot do indirectly what is directly prohibited. The award of these amounts was in violation of the contract and Section 31(7)(a).
    Distinguishing 1940 Act Cases: The Court clarified that precedents like Ambica Construction and Raveechee & Co., decided under the Arbitration Act, 1940, were not applicable, as that Act did not have a provision analogous to Section 31(7)(a) of the 1996 Act.

  • On Post-Award Interest (Issue 2):
    Post-Award Interest is a Statutory Right: Relying on R.P. Garg, the Court held that post-award interest under Section 31(7)(b) operates in a distinct legal regime. It is not subject to party autonomy. The contractual bar in Clause 16(3) and Clause 64(5) applies only to the period till the award. Clause 64(5) explicitly says "till the date on which the award is made."
    No Express Bar for Post-Award Period: In the absence of an express contractual clause barring post-award interest, such interest flows as a matter of law to ensure prompt compliance with the award.
    Modification of Interest Rate: However, the Court found the AT's award of 12% post-award interest to be without any reasoning and excessive. Applying the principle from Gayatri Balasamy, which allows modification of post-award interest where the facts justify it, the Court reduced the rate from 12% to 8% per annum.


6. Legal Principles Established & Clarified

This judgment provides crucial clarifications on the law of interest in arbitration:

  • Clear Distinction Between Pre-Award and Post-Award Interest: It firmly establishes that these are two separate legal concepts governed by different sub-sections of Section 31(7) with different rules. A contractual bar on pre-award interest does not automatically, or by implication, extend to post-award interest.

  • Party Autonomy Over Pre-Award Interest is Absolute: Section 31(7)(a) gives paramount importance to the contract. If parties have clearly agreed to bar pre-award interest (using words like "no interest shall be payable"), the arbitrator has no jurisdiction to award it, regardless of the label used ("compensation," "financing charges").

  • Post-Award Interest is Not Subject to Party Agreement: Section 31(7)(b) creates a statutory entitlement to post-award interest. Parties cannot "contract out" of this entitlement. They can only influence the rate by agreement or by the award itself.

  • Power to Modify Post-Award Interest Rate: Courts, in exercise of their powers under Sections 34 and 37 (and ultimately under Article 136), can modify the rate of post-award interest if it is found to be excessive, unreasonable, or awarded without any justification. This power, affirmed in Gayatri Balasamy, prevents the need to set aside an entire award on the sole ground of an unreasonable interest rate.


7. Judicial Examination & Analytical Concepts

  • Textual and Contextual Interpretation: The Court meticulously interpreted the contractual clauses (Clause 16(3) and 64(5)) and the statutory provisions (Section 31(7)(a) and (b)), giving effect to their plain and ordinary meaning.

  • Doctrine of Ejusdem Generis Rejected: The Court correctly rejected the application of this doctrine, as the structure of Clause 16(3) with the use of the disjunctive "or" created independent categories, not a genus followed by general words.

  • Distinguishing Precedents Based on Statutory Regime: The judgment is a model of how to distinguish cases based on the applicable legal framework. It clearly demarcated the position under the 1940 Act from that under the 1996 Act.

  • Substance Over Form: The Court pierced the label of "compensation" to recognize that the amounts awarded under Claim Nos. 1, 3, and 6 were, in substance, interest for the pre-award period, which was contractually barred.


8. Critical Analysis & Final Outcome

  • Final Decision & Directions:
    The Supreme Court partly allowed the appeal.
    The impugned judgment of the High Court, the order of the Commercial Court, and the Arbitral Award were set aside to the extent of the grant of pre-award/pendente lite interest (or amounts in the nature of interest) qua Claim Nos. 1, 3, and 6.
    The Arbitral Award was modified to the extent that the rate of post-award interest was reduced from 12% to 8% per annum from the date of award till realization.

  • Significance & Impact:
    Authoritative on Interest in Arbitration: This is a landmark judgment that definitively settles the law on the award of interest under the Arbitration Act, 1996. It provides clear, practical guidance to arbitrators, litigants, and courts.
    Upholds Sanctity of Contracts: It strongly reinforces the principle that arbitral tribunals are creatures of the contract and must respect its express terms, especially when the statute itself (Section 31(7)(a)) makes the contract paramount.
    Balances Interests: By upholding post-award interest while reducing an excessive rate, the Court balances the successful party's right to be compensated for delayed payment with the need to avoid imposing a disproportionate financial burden on the judgment-debtor.

  • Critical Viewpoint: The judgment is a masterful and necessary clarification of a frequently litigated issue. It rectifies a common error where arbitrators, in a well-meaning attempt to do "complete justice," circumvent explicit contractual bars. By firmly stating that such circumvention is impermissible, the Court upholds the rule of law and the primacy of contracts. The reduction of the post-award interest rate from 12% to 8% is a pragmatic application of the power to modify, preventing an unjust outcome while preserving the core of the award. This judgment will be the definitive reference point for all future disputes involving contractual bars on interest.


(MCQs)


1. Under which clause of the Arbitration and Conciliation Act, 1996, is the power of an arbitral tribunal to award pre-award interest expressly made subject to the terms of the contract ("unless otherwise agreed by the parties")?
a) Section 31(7)(b)
b) Section 28(3)
c) Section 31(7)(a)
d) Section 34(2)(a)


2. According to the Supreme Court, what is the primary reason that the contractual bar on interest (Clause 16(3) of the GCC) could not be applied to post-award interest in this case?
a) The contract did not specifically use the word "post-award."
b) Post-award interest under Section 31(7)(b) is a statutory entitlement not subject to party autonomy, and the bar only applies to the period "till the date on which the award is made" (Clause 64(5)).
c) The Union of India had waived its right to object to post-award interest.
d) The High Court had already decided the issue in favor of L&T.


3. Which recent Supreme Court judgment was relied upon by the Court to modify the rate of post-award interest from 12% to 8%?
a) R.P. Garg vs. Chief General Manager, Telecom Department
b) Union of India vs. Manraj Enterprises
c) Gayatri Balasamy vs. M/s. ISG Novasoft Technologies Limited
d) Sree Kamatchi Amman Constructions vs. Railways


4. What was the fundamental flaw in the Arbitral Tribunal's approach regarding Claim Nos. 1, 3, and 6?
a) It awarded these claims without any evidence.
b) It exceeded the pecuniary limit of its jurisdiction.
c) It awarded amounts that were, in substance, interest for the pre-award period, which was a direct violation of the express contractual bar in Clauses 16(3) and 64(5) of the GCC.
d) It failed to give the Union of India an opportunity to be heard on these claims.

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