Date: Feb 28, 2026

Contractual Bar on Pre-Award Interest Under the Arbitration Act, 1996 Cannot Be Circumvented as “Compensation”; Post-Award Interest is Statutory and Modifiable

1. Introduction

Union of India & Ors. v. Larsen & Tubro Limited (L&T) (Supreme Court of India, decided on 27-02-2026) arises out of a large turnkey contract dated 27.01.2011 for modernization of the Jhansi Workshop of North Central Railways, valued at approximately Rs. 93.08 crores. The work, originally due by 18.07.2012, was extended ten times up to 30.11.2015, resulting in a 40-month delay.

Disputes regarding execution and payments culminated in arbitration under Clause 64 of the General Conditions of Contract (GCC). The arbitral tribunal (AT) rendered an award dated 25.12.2018 granting L&T a net sum of Rs. 5,53,57,597/- and providing for post-award interest at 12% per annum if payment was not made within 60 days. The Union of India challenged the award under Sections 34 and 37 of the Arbitration and Conciliation Act, 1996 (the “Act”), arguing that the contract barred interest by virtue of Clause 16(3) and Clause 64(5) of the GCC.

The Commercial Court and the Allahabad High Court upheld the award. The Supreme Court, while maintaining post-award interest in principle, partially allowed the Union’s appeal by (i) setting aside amounts awarded in the nature of pre-award/pendente lite interest (even if described as “compensation”) for certain claims, and (ii) reducing the post-award interest rate.

Key Issues

Whether the AT could award pre-award/pendente lite interest “by way of compensation” despite Clauses 16(3) and 64(5) of the GCC.
Whether post-award interest was permissible (and at what rate), given the contractual scheme and Section 31(7) of the Act.
Whether the courts below erred under the limited review standards of Sections 34 and 37 by not correcting the interest illegality.

Parties

Appellants: Union of India & Ors. (North Central Railway Administration)
Respondent: Larsen & Tubro Limited (L&T)

2. Summary of the Judgment

The Supreme Court held that the arbitral tribunal could not award pre-award/pendente lite interest (including amounts “in the nature of interest” labeled as “compensation”) because: (a) the Act (Sections 28(3) and 31(7)(a)) subordinates the tribunal’s discretion to the parties’ agreement, and (b) Clause 16(3) of the GCC contains an express bar on interest on “amounts payable to the contractor under the contract,” while Clause 64(5) bars interest “till the date on which the award is made.”

However, the Court held that post-award interest is governed by a distinct statutory regime under Section 31(7)(b), and the GCC did not expressly bar interest after the award. The AT’s conditional grant of post-award interest was therefore upheld in principle, but the rate was reduced from 12% per annum to 8% per annum from the date of award till realization, relying on the Court’s power to modify post-award interest as recognized in Gayatri Balasamy v. M/s. ISG Novasoft Technologies Limited, (2025) 7 SCC 1.

The impugned High Court judgment, the Commercial Court order, and the arbitral award were set aside/modified to the extent they granted pre-award/pendente lite interest or interest-like amounts under Claim Nos. 1, 3 and 6, and to the extent the post-award rate was 12%.

3. Analysis

3.1 Precedents Cited

A. Authorities enforcing contractual bars on pre-award/pendente lite interest under the 1996 Act

Sree Kamatchi Amman Constructions v. Railway Administration, (2010) 8 SCC 767
The Court treated this as a direct answer to attempts to repackage interest as something else: where the parties agreed “no interest,” the tribunal cannot award interest for the period from cause of action to award. In the present case, the Court invoked it to reject L&T’s argument that interest could be granted as “compensation.”
Union of India v. Bright Power Projects (India) (P) Limited, (2015) 9 SCC 695 (three-Judge Bench)
This decision was deployed as the core doctrinal anchor: Section 31(7)(a) begins with “unless otherwise agreed by the parties,” making the tribunal bound by a contractual “no interest” clause. The present Court used Bright Power to reaffirm that an arbitral tribunal, being a “creature of the contract,” cannot override an express bargain excluding interest.
Union of India v. Manraj Enterprises, (2022) 2 SCC 331
Manraj was crucial in two ways: (i) it rejected the application of ejusdem generis to GCC interest-bar clauses where the drafting uses disjunctive language (“or”), and (ii) it reiterated the 1996 Act position that tribunals lack jurisdiction to award interest when the contract bars it. The present judgment relied heavily on Manraj to hold Clause 16(3) wide and independent.

B. Authorities invoked to argue for a narrower reading (and how the Court dealt with them)

Raveechee and Company v. Union of India, (2018) 7 SCC 664
L&T relied on Raveechee for two propositions: (i) reading Clause 16(3)-type language through ejusdem generis, and (ii) suggesting that such a bar does not bind the arbitrator regarding pendente lite interest. The Court neutralized this reliance by aligning itself with Manraj’s interpretation and stating that Raveechee (and related reasoning) was rendered while deciding under the Arbitration Act, 1940, whereas the present case is governed by the 1996 Act’s express statutory scheme (Section 31(7)).
Ambica Construction v. Union of India, (2017) 14 SCC 323, Union of India v. Ambica Construction, (2016) 6 SCC 36, and Irrigation Deptt., State of Orissa v. G.C. Roy, (1992) 1 SCC 508
These cases were cited (within the Raveechee discussion) to support the idea that interest pendente lite can be awarded even if the contract bars interest. The Court again treated them as inapplicable in the 1996 Act setting because Section 31(7)(a) expressly makes pre-award interest subject to party agreement.

C. Authorities on post-award interest as statutory and not “contract-out-able”

RP Garg v. Chief General Manager, Telecom Department & Ors., 2024 SCC OnLine SC 2928
The Court relied on RP Garg to draw a sharp statutory distinction: Section 31(7)(a) (pre-award interest) is qualified by party autonomy; Section 31(7)(b) (post-award interest) is not. The Court used RP Garg to reject the Union’s argument that a contractual bar automatically eliminates post-award interest.
Morgan Securities & Credits (P) Ltd. v. Videocon Industries Ltd.
Quoted via RP Garg, Morgan Securities was used to interpret the placement of the words “unless the award otherwise directs” in Section 31(7)(b) as qualifying the rate of post-award interest, not the entitlement to post-award interest.

D. Authority on judicial power to modify post-award interest

Gayatri Balasamy v. M/s. ISG Novasoft Technologies Limited, (2025) 7 SCC 1
This case supplied the remedial tool the Court used: instead of setting aside an award over an unreasonable post-award rate, courts may modify the post-award interest rate under Section 31(7)(b) where justified. The Court applied this to reduce the rate from 12% to 8%.

E. Additional precedents referenced in the extracted discussion (supporting the same interest-bar doctrine)

Sayeed Ahmed & Co. v. State of U.P., (2009) 12 SCC 26
BHEL v. Globe Hi-Fabs Ltd., (2015) 5 SCC 718
Chittaranjan Maity v. Union of India, (2017) 9 SCC 611
Garg Builders v. BHEL, (2022) 11 SCC 697 : 2021 SCC OnLine SC 855 (quoted analysis)

Collectively, these authorities reinforce the proposition that under the 1996 Act, the tribunal’s power to grant pre-award interest is contractually subordinated, and that wide “no interest” language is not to be cut down by interpretive devices like ejusdem generis when the wording is disjunctive and expansive.

3.2 Legal Reasoning

A. Statutory architecture: contract primacy for pre-award interest

The Court’s reasoning begins with the 1996 Act’s internal logic: Section 28(3) obliges tribunals to decide disputes taking into account the terms of the contract, and Section 31(7)(a) authorizes pre-award interest only “unless otherwise agreed by the parties.” This makes pre-award/pendente lite interest a domain where party autonomy is decisive.

B. Interpreting Clause 16(3): rejecting ejusdem generis

Clause 16(3) stated: “no interest will be payable upon the Earnest Money and Security Deposit or amounts payable to the Contractor under the Contract…”. L&T attempted to confine “amounts payable… under the contract” to deposit-like sums by invoking ejusdem generis.

The Court rejected this on the basis of Manraj Enterprises, emphasizing the disjunctive “or” and treating “amounts payable to the contractor” as an independent, wide category. The interpretive move is significant: the Court treated Clause 16(3) as a general prohibition on interest for contract payables (not merely EMD/security-related amounts).

C. No “relabeling” interest as “compensation”

Even though the AT purported to award certain components as “compensation” (e.g., “financing charges” due to delayed payments), the Court treated them as substantively interest for the pre-award period. It held that, given the contract and Section 31(7)(a), an arbitrator cannot do indirectly what it cannot do directly—an approach consistent with Sree Kamatchi Amman Constructions v. Railway Administration and Bright Power Projects.

D. Internal inconsistency in the award strengthened the case for interference

The AT itself rejected Claim No. 7 (pendente lite interest) as barred by “Section 31(7)(a) … read with Clause 64(5) …”. Yet it effectively granted interest-like sums within Claim Nos. 1, 3 and 6. The Court viewed this as a serious legal error: the tribunal acknowledged the bar, but still awarded pre-award interest in another form.

E. Post-award interest: distinct field under Section 31(7)(b)

For post-award interest, the Court applied the statutory distinction emphasized in RP Garg: Section 31(7)(b) is not qualified by “unless otherwise agreed by the parties.” Rather, it creates a default statutory consequence that attaches to the awarded sum from the date of award to payment, unless the award specifies a rate.

The Court further held that Clause 64(5) only barred interest “till the date” of the award and did not speak to interest thereafter. Therefore, post-award interest remained available. It rejected the argument that a bar on pre-award interest automatically extends to post-award interest by implication.

F. Rate control and modification: applying Gayatri Balasamy

While upholding post-award interest entitlement, the Court reduced the rate from 12% to 8% for two reasons: (i) the AT gave no reasons for selecting 12%, and (ii) “contemporary economic scenario” made it excessive. Relying on Gayatri Balasamy v. M/s. ISG Novasoft Technologies Limited, the Court affirmed that courts can modify post-award interest to avoid the disproportionate remedy of setting aside an award solely on the interest-rate issue.

G. Sections 34 and 37: limited review does not immunize an award from contractual/statutory illegality

The Supreme Court criticized the Commercial Court and High Court for failing to appreciate that the award granted pendente lite interest in the teeth of an express contractual bar and the Act’s controlling provisions. The Court treated this as a reviewable error even within the constrained framework of Sections 34 and 37.

3.3 Impact

A. For arbitral tribunals (especially in government/GCC contracts)

Substance over labels: “Financing charges,” “compensation,” or similar headings will be scrutinized; if they operate as time-value-of-money for pre-award periods, they will be treated as interest and can be struck down where the contract bars interest.
Interpretive discipline: Wide disjunctive language (“or amounts payable…”) will likely defeat ejusdem generis arguments seeking to narrow the scope of interest bars.

B. For drafting and contract administration

Parties seeking to regulate interest must draft with precision. The Court’s approach makes clear that: (i) a clear contractual bar will be enforced for pre-award interest under Section 31(7)(a), and (ii) Clause 64(5)-type drafting (barring interest only till award) leaves room for post-award interest.
Contract managers should expect that admitted sums may still not attract pre-award interest if the contract bars it, but delayed payment after award will attract post-award interest as a statutory incident (subject to rate control).

C. For courts exercising Section 34/37 jurisdiction

Courts are reminded that “limited scope” review is not a shield for awards that contravene express contractual bars and Section 31(7)(a).
The judgment reinforces a pragmatic remedy: instead of setting aside an award due to an excessive post-award interest rate, courts may modify the rate (per Gayatri Balasamy), promoting finality and efficiency.

D. Doctrinal clarification on post-award interest

The decision strengthens the post-2024 line that post-award interest is primarily statutory (Section 31(7)(b)) and not governed by the contract in the same way as pre-award interest—thereby encouraging award-debtors to satisfy awards promptly and reducing incentives for strategic delay.

4. Complex Concepts Simplified

Pre-award / Pendente lite interest: Interest for the period before the arbitral award is made (including during the arbitration proceedings). Under Section 31(7)(a), it can be awarded only if the contract does not bar it (“unless otherwise agreed”).
Post-award interest: Interest from the date of award until payment. Under Section 31(7)(b), it attaches by statutory design; disputes typically focus on the rate, not entitlement.
Ejusdem generis: A rule of interpretation: when general words follow specific words, the general words may be limited to the same type as the specific list. The Court held it inapplicable here because “amounts payable… under the contract” was separated by “or,” making it an independent category.
“Creature of the contract” (in arbitration): Arbitration exists because the parties agreed to it. Therefore, arbitrators generally cannot grant remedies that directly contradict express contractual terms, especially where the statute (Section 31(7)(a)) defers to party agreement.
Sections 34 and 37 review: Courts do not re-hear the dispute on merits; they intervene on limited grounds. However, an award granting pre-award interest contrary to an express contractual bar and Section 31(7)(a) is a legal error that can warrant interference.

5. Conclusion

This judgment crystallizes a practical and rule-based approach to interest in arbitrations governed by the Arbitration and Conciliation Act, 1996: party autonomy is decisive for pre-award interest, while post-award interest is anchored in statute and is subject to judicial rate calibration.

No end-run around “no interest” clauses: Pre-award/pendente lite interest cannot be awarded under another label such as “compensation” or “financing charges” if the contract bars it.
Clause 16(3) is wide: “Amounts payable to the contractor under the contract” is not confined to deposits; ejusdem generis is unavailable on this wording.
Post-award interest survives: Clause 64(5) barred interest only till the award date; Section 31(7)(b) governs thereafter.
Courts may modify post-award interest rates: Applying Gayatri Balasamy, the Court reduced 12% to 8% as excessive and unreasoned.
Section 34/37 courts must correct contract/statute violations: Deference to arbitral awards does not extend to enforcing an award that breaches express contractual and statutory limits on interest.