Union of India & Ors. v. Larsen & Toubro Limited
Introduction
The judgment in Union of India & Ors. v. Larsen & Toubro Limited was delivered by the Hon’ble Supreme Court of India in a civil appeal arising out of Special Leave Petition (Civil) No. 14989 of 2023. The appeal challenged the judgment of the Hon’ble High Court of Judicature at Allahabad (“High Court”) passed under Section 37 of the Arbitration and Conciliation Act, 1996 (“Act”) which had upheld an arbitral award in favour of Larsen & Toubro Limited.
The case concerns the scope of the power of an Arbitral Tribunal to award interest under Section 31(7) of the Act when the contract between the parties contains an express bar on payment of interest. The Hon’ble Supreme Court examined whether the Arbitral Tribunal could grant pre-award or pendente lite interest in the form of compensation despite the contractual prohibition and whether post-award interest could still be awarded under the statutory scheme of the Act.
Brief Facts
1.The dispute between the parties arose out of an agreement dated 27 January 2011 executed between the Union of India and North Central Railway Administration (“Appellants”); and Larsen & Toubro Limited (“Respondent”) for the modernization of the Jhansi Workshop of the North Central Railways. The contract was awarded at a negotiated value of approximately INR 93.08 crores and the stipulated time for completion of the project was eighteen months, with the original completion date fixed as 18 July 2012. However, the project could not be completed within the stipulated period and the time for completion was extended on several occasions by the Railways until 30 November 2015, resulting in a delay of nearly forty months beyond the original schedule.
2.During the execution of the project, disputes arose between the parties regarding delayed payments, variation in costs and other contractual claims. The General Conditions of Contract (“GCC”), particularly Clause 64contained the arbitration agreement providing for resolution of disputes through arbitration. Invoking this clause, the Respondent sought the constitution of an Arbitral Tribunal and in terms of Clause 64(3) of the GCC a three-member Arbitral Tribunal was constituted which entered into reference on 10 January 2018.
3.Before the Arbitral Tribunal, the Respondent raised several claims including financing charges arising from delay in release of payments against running account bills, variation in foreign exchange components beyond the original contract period, non-payment of the price variation component, indirect costs incurred during the extended stay at the project site, refund of liquidated damages and payment due under the final bill for additional works executed under the contract. The Respondent also sought interest on the claim amounts and costs of arbitration. The Appellants raised a counterclaim alleging that it had suffered losses due to the delayed commissioning of the CNC Portal Wheel Lathe under the project.
4.After considering the material on record, the Arbitral Tribunal passed an award dated 25 December 2018allowing certain claims of the Respondent and directing the Appellants to pay a net sum of INR 5,53,57,597 to the Respondent. The Tribunal further directed that the amount be paid within sixty days, failing which the awarded sum would carry post-award interest at the rate of 12% per annum from the date of the award until realization.
5.Aggrieved by the arbitral award, the Appellants filed an application under Section 34 of the Act before the Commercial Court at Jhansi (“Commercial Court”). The challenge was primarily based on the contention that the Arbitral Tribunal had granted interest contrary to the contractual prohibition contained in Clause 16(3) and Clause 64(5) of the GCC, which barred payment of interest on amounts payable under the contract. The Commercial Court dismissed the application by order dated 15 September 2022 and upheld the arbitral award.
6.The Appellants thereafter filed an appeal under Section 37 of the Act before the Hon’ble High Court. The High Court, vide judgment dated 25 May 2023 dismissed the appeal and affirmed the findings of the Commercial Court as well as the arbitral award. Aggrieved by this decision, the Appellants approached the Hon’ble Supreme Court by way of the present civil appeal.
Submissions by the Parties
Appellants:
7.The Appellants contended that the contractual framework governing the agreement between the parties, particularly Clause 16(3) and Clause 64(5) of the GCC creates a clear and absolute prohibition on the award of interest on amounts payable under the contract. It was submitted that Clause 16(3) of the GCC expressly provides that no interest shall be payable on the earnest money, security deposit or on any amounts payable to the contractor under the contract. According to the Appellants, the claims allowed by the Arbitral Tribunal arose from delayed payments under the contract including amounts under the final bill and price variation component, and therefore such claims squarely fall within the contractual prohibition against payment of interest.
8.The Appellants further argued that the attempt by the Respondent to characterize the interest component as “compensation” was merely an attempt to circumvent the contractual bar. In support of this contention reliance was placed on Sree Kamatchi Amman Constructions v. Railway Administration1Sree Kamatchi Amman Constructions v. Railway Administration (2010) 8 SCC 767, wherein the Hon’ble Supreme Court held that when a contract expressly bars the payment of interest, the Arbitral Tribunal cannot award such interest under any form or description.
9.It was also submitted that the Arbitral Tribunal derives its authority from the contract between the parties and therefore cannot act contrary to the contractual terms. The Appellants relied on the decision of the Hon’ble Supreme Court in Union of India v. Bright Power Projects (India) (P) Ltd2Union of India v. Bright Power Projects (India) (P) Ltd. (2015) 9 SCC 695., where it was held that Section 31(7)(a) of the Act makes the power of the arbitrator to award interest subject to the agreement between the parties. The Hon’ble Supreme Court in that case held that once the parties have expressly agreed that interest shall not be payable, the Arbitral Tribunal has no jurisdiction to award interest under any nomenclature.
10.Further reliance was placed on Union of India v. Manraj Enterprises3Union of India v. Manraj Enterprises (2022) 2 SCC 331, wherein the Hon’ble Supreme Court reiterated that where the contract contains a specific prohibition against payment of interest, the arbitrator cannot award interest for any period including pre-reference, pendente lite or future interest. The Appellants argued that the award of interest by the Arbitral Tribunal in the present case directly violates these settled principles of law.
11.The Appellants also contended that the Respondent’s reliance on Section 73 of the Indian Contract Act 1872, which provides for compensation for breach of contract, was misplaced. It was argued that the provision itself recognizes the supremacy of contractual terms by stating that compensation is payable “unless the contract provides otherwise”. Since the contract in the present case expressly excludes the payment of interest, Section 73 of the Indian Contract Act 1872 cannot be invoked to override the contractual prohibition.
12.Lastly, the Appellants submitted that the Respondent’s reliance on R.P. Garg v. Chief General Manager, Telecom Department4RP Garg vs. Chief General Manager, Telecom Department & Ors., 2024 SCC OnLine SC 2928 in support of post-award interest was misconceived. According to the Appellants, that decision applies only in situations where the contract does not prohibit interest on the sums awarded. It was therefore argued that the grant of interest by the Arbitral Tribunal under Claim Nos. 1, 3 and 6 of the award is contrary to the contractual provisions as well as the settled law laid down by the Hon’ble Supreme Court and consequently the arbitral award and the judgment of the Hon’ble High Court deserve to be set aside.
Respondent :
13.The Respondent submitted that the present appeal arises from concurrent findings recorded by both the Commercial Court and the Hon’ble High Court while exercising jurisdiction under Section 34 and Section 37 of the Act, respectively. It was argued that both courts had examined the arbitral award and found no grounds warranting interference and therefore the findings recorded by the Arbitral Tribunal ought not to be disturbed.
14.With respect to the contractual provisions relied upon by the Appellants, the Respondent contended that Clause 16(3) of the GCC should be interpreted in light of the principle of ejusdem generis (of the same kind). This principle of interpretation provides that when general words follow specific words, the general expression must be interpreted to include only items of the same nature as those specifically mentioned. The Respondent relied on the decision of the Hon’ble Supreme Court in Raveechee and Company v. Union of India, where a clause similar to Clause 16(3) of GCC was interpreted to apply only to amounts such as earnest money and security deposits which are voluntarily deposited with the employer and may later be refunded or forfeited depending on performance of the contract. On this basis, it was submitted that Clause 16(3) of GCC does not extend to other amounts payable under the contract and therefore has no application to the present dispute.
15.The Respondent further submitted that Clause 64(5) of the GCC merely restricts the payment of interest on sums awarded under the arbitral award until the date of the award. According to the Respondent, this clause applies only to amounts that are disputed and subject to adjudication. It was argued that in the present case certain amounts particularly those covered under Claim Nos. 3 i.e., non-payment of price Variation Component with interest and Claim 6 i.e., payment due against the final bill along with interest, were admitted dues and therefore would not fall within the scope of Clause 64(5) of the GCC. Consequently, the Respondent contended that it was entitled to interest on these admitted sums from the date they became due until the date of payment.
16.With regard to post-award interest, the Respondent relied upon the decision of the Hon’ble Supreme Court in R.P. Garg v. Chief General Manager, Telecom Department5Supra 4. It was submitted that the Hon’ble Supreme Court in that case clarified that Section 31(7)(b) of the Act mandates that the sum directed to be paid by an Arbitral Tribunal shall carry post-award interest from the date of the award until realization. Therefore, even if contractual provisions restrict interest for the period prior to the award, they cannot exclude the statutory entitlement to post-award interest.
17.Lastly, the Respondent argued that the judicial precedents relied upon by the Appellants were distinguishable and did not apply to the facts of the present case. It was emphasized that the Arbitral Tribunal had awarded interest as compensation for delayed payment of admitted dues and had observed that it would be unjust to deny such compensation where the principal amounts payable to the contractor had remained unpaid without any justification. Accordingly, the Respondent submitted that the appeal filed by the Appellants was devoid of merit and deserved to be dismissed.
Issues
18.The Hon’ble Supreme Court heard the submissions of both parties and examined the material on record. The Court framed the following issues for determination:
- Whether the Arbitral Tribunal was justified in awarding pre-award or pendente lite interest in favour of the Respondent, particularly in light of Clause 16(3) of the GCC and Clause 64(5) of the GCC;
- Whether the Arbitral Tribunal was justified in granting post-award interest; and
- Whether the courts below had committed any error while exercising their jurisdiction under Section 34 and Section 37 of the Act.
Analysis and Findings
19.At the outset, the Hon’ble Supreme Court examined the relevant contractual and statutory provisions. Clause 16(3) of the GCC provides that no interest shall be payable on earnest money, security deposits or on amounts payable to the contractor under the contract. Clause 64(5) of the GCC further stipulates that where an arbitral award directs payment of money, no interest shall be payable on the awarded sum for any period until the date on which the award is made. The Court also referred to Section 28(3) of the Act which requires the Arbitral Tribunal to decide disputes in accordance with the terms of the contract and Section 31(7) of the Act which governs the power of an Arbitral Tribunal to award interest.
20.Upon examining these provisions, the Hon’ble Supreme Court observed that the statutory scheme itself makes the power of an arbitrator to award interest subject to the terms agreed upon by the parties. Since Clause 16(3) of the GCC expressly bars payment of interest on amounts payable under the contract, the contractual prohibition must prevail. The Respondent argued that the expression “amounts payable to the contractor under the contract” should be interpreted narrowly by applying the principle of ejusdem generis, so that it would apply only to amounts akin to earnest money or security deposits. However, the Hon’ble Supreme Court rejected this contention and relied upon its earlier decision in Union of India v. Manraj Enterprises6Union of India v. Manraj Enterprises6 (2022) 2 SCC 331, where it was held that the phrase “amounts payable to the contractor under the contract” is independent and cannot be restricted by applying the rule of ejusdem generis.
21.The Hon’ble Supreme Court further relied on the three-Judge Bench decision in Union of India v. Bright Power Projects (India) (P) Ltd.7Supra 2, where it was held that once the parties have expressly agreed that interest shall not be payable on amounts due under the contract, the Arbitral Tribunal has no jurisdiction to award interest. The Court also referred to Sree Kamatchi Amman Constructions v. Railway Administration8Supra 1, which reaffirmed that the power to award interest under Section 31(7)(a) of the Act is subject to the contractual terms agreed by the parties.
22.The Court also considered the authorities relied upon by the Respondent, particularly Raveechee and Company v. Union of India9Supra 5 and Ambica Construction v. Union of India, where the Hon’ble Supreme Court had allowed pendente lite interest despite contractual clauses restricting interest. However, the Hon’ble Supreme Court clarified that those decisions were rendered in the context of the Arbitration Act, 1940 whereas the present dispute is governed by the Act which contains a specific statutory provision in Section 31(7)(a) making the grant of pre-award interest subject to the agreement between the parties.
23.In light of these principles, the Hon’ble Supreme Court held that the Arbitral Tribunal had committed a serious error by awarding pre-award or pendente lite interest in respect of Claim Nos. 1, 3 and 6, even though it attempted to characterize such amounts as compensation. The Court observed that once the contract expressly bars interest through Clause 16(3) of the GCC read with Clause 64(5) of the GCC, the a Arbitral Tribunal cannot circumvent the prohibition by granting the same amount under another label. The Court also noted that the Arbitral Tribunal itself had acknowledged this prohibition while rejecting Claim No. 7, which sought pendente lite interest, thereby demonstrating inconsistency in its approach.
24.With respect to post-award interest, the Hon’ble Supreme Court observed that Section 31(7)(b) of the Act creates a distinct statutory regime governing interest payable after the date of the award. The provision mandates that the sum directed to be paid by an arbitral award shall carry interest from the date of the award until payment, unless the award itself directs otherwise. The Hon’ble Supreme Court relied on R.P. Garg v. Chief General Manager, Telecom Department10Supra 4 (2024), which clarified that the statutory entitlement to post-award interest is not subject to contractual restrictions applicable to pre-award interest. The Hon’ble Supreme Court also referred to Morgan Securities & Credits (P) Ltd. v. Videocon Industries Ltd.11Morgan Securities & Credits (P) Ltd. v. Videocon Industries Ltd (2023) 1 SCC 602, where it was held that the phrase “unless the award otherwise directs” in Section 31(7)(b) relates only to the rate of interest and not to the entitlement itself.
25.The Hon’ble Supreme Court therefore held that Clause 64(5) of the GCC bars interest only up to the date of the award and does not prohibit interest for the period after the award. Accordingly, the conditional grant of post-award interest by the Arbitral Tribunal, which would apply only if payment was not made within sixty days, was held to be consistent with the statutory framework of Section 31(7)(b) of the Act.
26.However, the Hon’ble Supreme Court observed that the Arbitral Tribunal had fixed the rate of post-award interest at 12% per annum without providing any justification. Considering the contemporary economic conditions, the Hon’ble Supreme Court found the rate to be excessive. In this regard, reliance was placed on Gayatri Balasamy v. ISG Novasoft Technologies Limited12Gayatri Balasamy v. ISG Novasoft Technologies Limited (2025) 7 SCC 1, where the Court held that courts possess the authority to modify the rate of post-award interest under Section 31(7)(b) of the Act where circumstances justify such modification.
27.Applying these principles, the Hon’ble Supreme Court concluded that while the Arbitral Tribunal was not justified in granting pre-award or pendente lite interest, the grant of post-award interest was legally permissible. Nevertheless, the rate of such interest was modified by the Hon’ble Supreme Court from 12% per annum to 8% per annum from the date of the award until realization.
28.The Hon’ble Supreme Court further held that the Commercial Court and the Hon’ble High Court had failed to appreciate that the Arbitral Tribunal had granted pendente lite interest in violation of an express contractual bar. This constituted a jurisdictional error which warranted interference even within the limited scope of review under Section 34 and Section 37 of the Act.
Conclusion
The judgment clarifies the legal position regarding the award of interest under the Act where the contract between the parties contains an express bar on such payment. The Hon’ble Supreme Court held that the Arbitral Tribunal cannot award pre-award or pendente lite interest in violation of a clear contractual prohibition. However, the Court also recognized that post-award interest operates under a distinct statutory framework under Section 31(7)(b) of the Act and is not automatically excluded by a contractual bar applicable to the pre-award period. Accordingly, the Hon’ble Supreme Court partly allowed the appeal by setting aside the award of pre-award and pendente lite interest, while upholding the grant of post-award interest but reducing its rate from 12% per annum to 8% per annum from the date of the award until realization.
