In the Union of India & Ors. v. Larsen & Turbo Limited, the Hon’ble Supreme Court has clarified the scope of an arbitral tribunal’s power to grant interest under Section 31(7) of the Arbitration and Conciliation Act, 1996. The Supreme Court of India held that an arbitral tribunal cannot award pre-award or pendente lite interest when the contract between the parties expressly prohibits the grant of such interest.
The dispute arose out of a turnkey contract dated 27 January 2011 between the Union of India and Larsen & Toubro Limited for modernization of the Jhansi Workshop of North Central Railways. The contract, valued at more than ₹93 crore, was originally to be completed within eighteen months. However, the project witnessed significant delays and the completion period was extended multiple times, resulting in a delay of nearly forty months.
Disputes subsequently arose between the parties regarding delayed payments, price variation components, financing charges and other contractual claims. The matter was referred to arbitration in accordance with Clause 64 of the General Conditions of Contract. The Arbitral Tribunal awarded certain amounts in favour of the contractor and granted post-award interest at the rate of 12% per annum in case of default.
The award was upheld by Ld. Commercial Court under Section 34 of the Arbitration and Conciliation Act, 1996 and later affirmed by the Hon’ble High Court under Section 37. Aggrieved by the grant of interest, the Union of India approached the Hon’ble Supreme Court. The Hon’ble Supreme Court examined the contractual clauses as well as the statutory framework governing interest under the Arbitration and Conciliation Act, 1996.
The Hon’ble Court made the following observations:
The power of an arbitral tribunal to award pre-award or pendente lite interest under Section 31(7)(a) of the Arbitration and Conciliation Act, 1996 is subject to the agreement between the parties.
Where the contract expressly prohibits payment of interest, the arbitral tribunal cannot circumvent such prohibition by awarding the amount in the form of “compensation”.
An arbitral tribunal derives its authority from the contract and must operate strictly within the terms agreed upon by the parties.
Post-award interest is governed by a distinct statutory regime under Section 31(7)(b) of the Arbitration and Conciliation Act, 1996 and operates independently of the principles governing pre-award interest.
While upholding the grant of post-award interest, the Hon’ble Supreme Court observed that the rate of 12% per annum awarded by the tribunal was excessive in the absence of any recorded justification.
Thus, the arbitral tribunal further modified the rate of post-award interest from 12% per annum to 8% per annum from the date of award till realization.
Accordingly, the Hon’ble Supreme Court set aside the award of pre-award and pendente lite interest granted contrary to the contractual prohibition, while maintaining that post-award interest may operate in accordance with the statutory scheme.
