The Supreme Court held that an arbitral tribunal cannot grant pre-award or pendente lite interest when the contract between the parties expressly prohibits such payment. The Court ruled that if a contractual clause clearly bars the grant of interest up to the date of the arbitral award, the tribunal cannot circumvent this restriction by awarding amounts in the form of compensation or financing charges that effectively operate as interest. The decision was delivered while partly allowing an appeal filed by the Union of India in a dispute arising from a railway modernization project.
The dispute originated from a turnkey agreement executed in 2011 between the Union of India and Larsen & Toubro for the modernization of the Jhansi Workshop of the North Central Railway. The project was valued at approximately ₹93.08 crore. During the course of execution of the project, delays occurred and the completion of the work was delayed by around forty months. Following these delays and related financial issues, Larsen & Toubro initiated arbitration proceedings seeking recovery of certain outstanding amounts, including payments relating to price variations, financing charges, and other claims associated with the delay.
The arbitration proceedings resulted in an arbitral award delivered in 2018. The tribunal awarded approximately ₹5.53 crore in favour of the contractor. While examining the claims, the arbitral tribunal noted that the contract between the parties contained a clause that expressly prohibited the payment of interest on any amount for any period prior to the date of the arbitral award. Despite acknowledging this clause, the tribunal granted amounts in relation to certain claims by treating them as compensation or financing charges rather than interest.
The tribunal awarded these amounts with respect to certain specific claims raised by the contractor. Although the tribunal described these payments as compensation, the effect of the award was that the claimant received monetary amounts for the period prior to the date of the arbitral award. In substance, these payments functioned as pre-award and pendente lite interest even though they were not explicitly described as such.
The Union of India challenged the arbitral award before the Commercial Court. However, the challenge was unsuccessful and the court upheld the award. The Union of India then approached the Allahabad High Court, which also refused to interfere with the arbitral award and affirmed the decision of the Commercial Court. After these decisions, the Union of India filed an appeal before the Supreme Court challenging the legality of the award of pre-award and pendente lite interest.
While considering the appeal, the Supreme Court examined the provisions of the Arbitration and Conciliation Act governing the power of arbitral tribunals to grant interest. The Court observed that the statutory framework allows arbitral tribunals to award interest unless the agreement between the parties contains a provision that restricts or prohibits such payment. When the contract expressly bars the grant of interest for a specified period, the tribunal must respect that contractual limitation.
The Court observed that in the present case the arbitral tribunal had clearly acknowledged the existence of a clause prohibiting the payment of interest up to the date of the award. Despite recognizing this contractual restriction, the tribunal proceeded to grant amounts described as compensation or financing charges in relation to certain claims. The Supreme Court examined the substance of these payments and concluded that they effectively represented interest for the period prior to the arbitral award.
The Court held that the arbitral tribunal could not avoid the contractual prohibition by merely changing the terminology used to describe the payment. Even if the payment was labelled as compensation or financing charges, the actual effect of the award remained the same because it compensated the claimant for the use or retention of money during the period prior to the arbitral award. According to the Court, this amounted to granting interest in a form that was prohibited by the contract.
The Supreme Court emphasized that arbitral tribunals are bound by the terms of the contract between the parties. Arbitration proceedings derive their authority from the agreement between the parties, and therefore the tribunal must operate within the limits imposed by the contractual provisions. When the contract clearly prohibits the grant of interest for a particular period, the tribunal cannot override that restriction by awarding equivalent payments under another description.
Based on this reasoning, the Court concluded that the arbitral tribunal had committed a serious error by granting amounts that effectively constituted pre-award and pendente lite interest despite the explicit contractual prohibition. The Court held that this portion of the arbitral award was inconsistent with both the contractual terms and the legal principles governing arbitration.
However, the Court distinguished between interest for the period prior to the arbitral award and interest for the period after the award. The Court explained that once an arbitral award has been delivered, the claimant may be entitled to receive interest on the awarded amount until it is paid. This type of interest, commonly referred to as post-award interest, is permissible under the law even when the contract prohibits interest for the period prior to the award.
In the present case, the arbitral tribunal had awarded post-award interest at the rate of twelve percent per annum from the date of the award until the amount was realized. The Supreme Court examined this aspect of the award and held that the grant of post-award interest itself was legally permissible. However, the Court considered the rate of interest to be excessive in the circumstances of the case.
After examining the facts and the financial context of the dispute, the Court decided to modify the rate of post-award interest. The Court reduced the rate from twelve percent per annum to eight percent per annum. It held that this revised rate would apply from the date of the arbitral award until the payment of the awarded amount.
By partly allowing the appeal filed by the Union of India, the Supreme Court set aside the portion of the arbitral award that granted pre-award and pendente lite interest in the form of compensation or financing charges. At the same time, the Court upheld the entitlement of the contractor to receive post-award interest at the modified rate of eight percent per annum.
The judgment clarified the legal position regarding the power of arbitral tribunals to award interest in cases where the contract between the parties contains restrictions on such payments. The Court reaffirmed that arbitral tribunals must strictly adhere to the terms of the contract and cannot bypass contractual prohibitions by awarding similar payments under different descriptions.
The decision also emphasized the distinction between interest awarded for the period prior to the arbitral award and interest awarded after the award has been made. While the contractual clause may restrict the grant of interest before the award, post-award interest may still be granted in accordance with the law.
Through this ruling, the Supreme Court reaffirmed the principle that the contractual agreement between the parties remains the primary framework governing arbitration proceedings. The tribunal’s powers are limited by the terms of the agreement, and any relief granted in arbitration must remain consistent with the contractual provisions that define the rights and obligations of the parties.
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