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 awardin favour of the respondent-claimant, and more particularly in view of Clause 16(3) and Clause 64(5) of the GCC. The award ofsuch 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.HeadnoteArbitration and Conciliation Act, 1996; Section 31(7)(a) and 31(7)(b) — General Conditions of Contract (GCC); Clause 16(3) and 64(5) — Pre-award/Pendente lite Interest — Post-award Interest — The Arbitral Tribunal cannot award pre-award or pendente lite interest, even in the form of "compensation," if the contract expressly prohibits interest on amounts payable to the contractor - a contractual bar on pre award interest does not automatically extend to post-award interest - Post-award interest is a statutory mandate under Section 31(7)(b) and is not subject to "contracting out" by parties unless the exclusion is explicit and unambiguous - The Court retains the power to modify the rate of post-award interest if it is deemed excessive or lacks justification - Key Findings and Relied-on Decisions: i. Contractual Supremacy in Pre-award Interest: Under Section 31(7)(a), the arbitrator's power to award pre-award interest is subordinate to the terms of the agreement. If a contract (like Clause 16(3) of the GCC) bars interest on "amounts payable to the contractor," the arbitrator lacks jurisdiction to grant it. Ii. Rejection of Ejusdem Generis: The phrase "amounts payable to the contractor under the contract" in Clause 16(3) is independent and distinct from "earnest money" or "security deposits." It cannot be read down to only include deposits; iii. Statutory Mandate of Post-award Interest: Section 31(7)(b) is not subject to party autonomy. The expression "unless the award otherwise directs" refers to the rate of interest, not the entitlement to it; iv. Power to Modify Interest Rate: Courts can modify post award interest rates to avoid excessive financial burdens and ensure "just compensation" based on contemporary economic scenarios – Appeal partly allowed. [Relied on Union of India v. Manraj Enterprises (2022) 2 SCC 331; RP Garg v. Chief General Manager, Telecom Department 2024 SCC OnLine SC 2928; Gayatri Balasamy v. M/s ISG Novasoft Technologies Limited (2025) 7 SCC 1; Union of India v. Bright Power...

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

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

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