Introduction
Can an Arbitral Tribunal award interest as a matter of equity or compensation when the underlying contract expressly prohibits it? In its landmark ruling in Union of India & Ors. v. Larsen & Toubro Limited (L&T)1, the Supreme Court of India reaffirmed the principle of party autonomy, declaring that the statutory framework of the Arbitration and Conciliation Act, 1996, subordinates the arbitrator’s discretion to the specific terms agreed upon by the parties. The apex court held that where a contract categorically bars pre-award and pendente lite interest, any such award even if framed as “compensation” is a jurisdictional error that warrants judicial intervention.
The dispute originated from a 2011 turnkey agreement between the North Central Railway and L&T for the modernization of the Jhansi Workshop. While the project was slated for completion within 18 months, ten extensions were granted, leading to a cumulative delay of 40 months. This delay birthed a series of claims by L&T for financing charges, price variations, and unpaid bills. The Arbitral Tribunal (AT) ultimately awarded L&T over ₹5.53 crores, which included interest/compensation on several claims. The Union of India challenged this award, arguing that Clause 16(3) and Clause 64(5) of the General Conditions of Contract (GCC) created an absolute prohibition on interest for any amounts payable under the contract. Although the Commercial Court and the High Court of Allahabad initially upheld the award, the Supreme Court was tasked with deciding whether the AT had exceeded its mandate.
The Supreme Court’s rationale centered on the interpretation of Section 31(7)(a) of the Act, which permits interest awards “unless otherwise agreed by the parties.” The Court clarified that this provision gives paramount importance to the contract. L&T had argued that Clause 16(3) which barred interest on earnest money, security deposits, or “amounts payable to the contractor” should be interpreted using the principle of ejusdem generis, suggesting it only applied to deposit-like sums. However, the Court rejected this, citing Union of India v. Manraj Enterprises2 to hold that the word “or” in the clause indicated that “amounts payable to the contractor” must be read independently and disjunctively. Furthermore, the Court dismissed the respondent’s reliance on Raveechee and Company v. Union of India3 and Ambica Construction v. Union of India4, noting that those cases were decided under the older 1940 Act. Unlike the 1940 Act, the 1996 Act contains an express provision that respects contractual bars on interest. Drawing from Union of India v. Bright Power Projects (India) (P) Limited5, a three-judge bench decision, the Court reiterated that once parties agree to exclude interest, an arbitrator cannot award it under any other nomenclature, such as “compensation” or “interest as damages.”
While the Court struck down the pre-award and pendente lite interest, it provided a distinct analysis for post-award interest. Under Section 31(7)(b)6, a sum directed to be paid by an award shall carry interest from the date of the award to the date of payment unless the award directs otherwise. The Court found that the contractual bar in the GCC primarily targeted the period “till the date on which the award is made,” as specified in Clause 64(5). Consequently, the AT was justified in granting post-award interest, though the Court exercised its discretion to modify the rate from a “penal” 12% per annum to a more reasonable 8% per annum, ensuring it aligned with current commercial realities.
Conclusion
The judgment serves as a definitive reminder that the Arbitral Tribunal is a creature of the contract and cannot transcend its boundaries to apply subjective notions of justice. By invalidating the interest awarded for the pre-award period, the Supreme Court protected the sanctity of the agreement while simultaneously ensuring that the respondent was not left without a remedy for post-award delays. This balanced approach reinforces India’s pro-arbitration stance while demanding strict adherence to the bargained-for terms of commercial agreements.
Expositor(s): Adv. Jahnobi Paul
