Arbitral Tribunal Can't Grant Pre-Award & Pendente Lite Interest When Contract Prohibits It : Supreme Court

The Supreme Court has ruled that pre-award interest or pendente lite interest cannot be granted by a arbitral tribunal in form of a compensation when the contract expressly prohibits it.

A bench of Justices Sanjay Karol and Vipul M Pancholi set aside that part of the Allahabad High Court's order, which had upheld the grant of pre-award interest to the Respondents in a form of compensation despite the contract expressly prohibits it.

Taking note of Section 37(1)(a) of the Arbitration & Conciliation Act, the Court reiterated that granting a pre-award interest is not a mandate unless otherwise stated in the contract.

Since, the contract expressly prohibits grant of pre-award interest, the Court held:

“We are of the view that the AT has committed serious error by awarding pre-award/pendente lite interest qua Claim Nos. 1, 3 & 6, though AT has observed that the said amount are awarded by way of compensation, however, in view of the peculiar clause of GCC as well as provisions contained in Section 31(7)(a) of the Act of 1996 and the decisions rendered by this Court, the AT could not have awarded the pre-award/pendente lite interest.”

The case originated from a 2011 turnkey agreement for the modernization of the North Central Railway's Jhansi Workshop. Valued at approximately ₹93.08 crore, the project suffered a 40-month delay, leading L&T to seek arbitration for outstanding payments, price variations, and financing charges.

In 2018, an Arbitral Tribunal (AT) awarded L&T ₹5.53 crore. While the AT acknowledged a contractual bar on interest as Clause 64(5) of the contract prohibited interest on any part of the money for any period "till the date on which the award is made". Ignoring the express bar, the AT nonetheless awarded "financing charges" and interest-like amounts for specific claims (Claims 1, 3, and 6), framing them as compensation. This award was upheld by both the Commercial Court and the Allahabad High Court, prompting Union of India to appeal to the Supreme Court.

Partly allowing the appeal, the judgment authored by Justice Vipul M. Pancholi observed that while granting interest in the form of compensation for the pre-award stage was impermissible due to express contractual prohibitions, the grant of post-award interest remained justified.

“The AT is not justified in awarding pre award/pendente lite interest, by way of compensation, while passing the award

in favour of the respondent-claimant, and more particularly in view of Clause 16(3) and Clause 64(5) of the GCC. The award of

such interest is not in accordance with the agreement, and liable to be set aside.”

The court upheld the award of post award interest, modifying the rate of the interest.

“The AT is justified in awarding post award interest in favour of the respondent claimant, however, the rate of post- award interest is modified from 12% per annum to 8% per annum from the date of award till realization.”, the court said.

The appeal was partly allowed.

Cause Title: UNION OF INDIA & ORS. VERSUS LARSEN & TUBRO LIMITED (L&T)

Citation : 2026 LiveLaw (SC) 214

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