Case: Union of India & ORS. v. Larsen & Turbo Limited (L&T)
Petition Number: SLP (Civil) No. 14989 of 2023
Citation: 2026 INSC 203
Date of Judgement: 27.02.2026
Hon’ble Judge/ Corum: Justice Sanjay Karol and Justice Vipul M. Champoli
Introduction
Justice Sanjay Karol and Justice Vipul M. Champoli, on February 27, 2026, upheld the Clause 16(3) and Clause 64(5) of General Conditions of Contract (GCC), stating that the arbitral tribunal cannot award pre-award interest or pendente lite interest under the guise of compensation when the aforementioned Clause 16(3) clearly bars it stating that, ‘no interest will be payable upon the Earnest Money and Security Deposit or amounts payable to the Contractor under the Contract’.
The bench, on the other hand, partly allowed the appeal against the arbitral tribunal’s award, allowing the post award interest granted under section 31(7)(b) of the Arbitration and Conciliation Act, 1996 (Act) while reducing it from 12% to 8% per annum from the date of the award until its realisation.
Factual Matrix
The Union of India through Northern Central Railway Administration (appellant) contracted Larson & Turban Ltd [L&T] (respondents) for modernisation of the Jhansi Workshop of Northern Central Railways, the project was valued at ₹93 Crores and the agreement was executed January 27, 2011.
While the decided timeline for the project was 18 months, the date for completion was extended by the appellants 10 times, resulting in a delay of 40 months from the original date of delivery. During this period of extension, multiple other disputes, including payment delays, price variation, execution of work, financial charges, etc., arose between the parties.
Procedural History
The respondents, invoking Clause 64(5) of the General Conditions of Contract, filed an application for the appointment of an Arbitral Tribunal, which, upon adjudicating the case, awarded ₹5.53 Crores and post-award interest at 12% per annum in favour of the respondents.
Further, an application was filed before the Commercial Court, Jhansi, under Section 34 of the Act, and thereafter an arbitral appeal before the High Court of Judicature at Allahabad under Section 37 of the Act. Both the Courts dismissed the application and the appeal, upholding the arbitral award passed by the Arbitral Tribunal.
Issues of the Case
The core issues framed by the Supreme Court were:
- Whether the Arbitral Tribunal is 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 GCC?
- Whether the Arbitral Tribunal is justified in awarding post award interest in favour of the respondent-claimant?
- Whether the Courts below committed any error while dealing with Issue (A) and Issue (B) referred hereinabove while exercising the powers under Section 34 and Section 37 of the Act?
Arguments of the Parties
The Appellant, represented by the Learned Additional Solicitor General Adv. Aishwarya Bhati contended that pendente lite interest cannot be awarded, as Clause 16(3) of GCC categorically bars payment of interest to any amounts payable to the contractor under the contract. The interest so awarded under the guise of compensation was violating the contractual bar.
Further, it was argued that the arbitrator’s discretion is subordinate to the terms of the contract as per section 31(7)(a) of the Act. Thus, once the parties had agreed to the terms of the contract, the arbitrator had no jurisdiction to award the interest.
The Respondent, represented by Senior Counsel Adv Meenakshi Arora, argued that Clause 16(3) of GCC should be interpreted as per the principle of ejusdem generis, which means, when a general word or phrase follows a list of specific persons or things, the general word or phrase will be interpreted to include only persons or things of the same type as those listed and confined to deposits such as earnest money and security deposit. Further, it was argued that Clause 64(5) only prohibited interest “till the date on which the award is made”. Therefore, it did not bar post-award interest.
Judgement and Analysis
The Court examined the relevant provisions governing the award and noted that Section 28(3) of the Act mandates the Tribunal to adjudicate the matter in compliance with the agreement between the parties. Further, they agreed that the arbitrator’s discretion is subordinate to the terms of the contract as per Section 31(7)(a) of the Act. Lastly, they observed the specific clause 16(3) and clause 64(5) of GCC and held that the Tribunal could not have awarded the pendente lite interest, even in the form of compensation, and thus, had erred by awarding such amounts.
The bench observed the contract between the parties and held that since it did not explicitly prohibit post-award interest, the tribunal was justified in awarding the same. However, they considered that the rate 12% per annum was excessive and, considering the current economic conditions, reduced the interest to 8% per annum.
Conclusion
Hence, the appeal was partly allowed, and it was held that the Arbitral Tribunal was not justified in awarding the pendente lite interest, and the specific claims of the party including Delay in release of payments against running account bills, Non-payment of Price Variation Component (PVC) and Payment due against the final bill/variation for the additional works as per the contract were set aside. However, the Arbitral Tribunal was acting within the jurisdiction when awarding the post-award interest, even though the rate of the interest required alteration from 12% per annum to 8% per annum.
