Union of India & Ors. Vs Larsen & Tubro Limited (L&T) (Supreme Court of India)
Conclusion: Once the parties had contractually agreed to exclude interest, Arbitral Tribunal, being a creature of the contract, could not award pre-award or pendente lite interest even in the guise of “compensation”. However, post-award interest stood on a different footing. Since the GCC barred interest only till the date of the award, the Arbitral Tribunal was justified in granting post-award interest.
Held: The dispute arose from a turnkey contract between North Central Railway (Union of India) and Larsen & Toubro Ltd. for modernization of the Jhansi Workshop valued at ₹93.08 crores. Owing to delays in execution and payments, disputes arose between the parties and were referred to arbitration under Clause 64 of the GCC. The Arbitral Tribunal by award granted several claims of the contractor and directed payment of ₹5,53,57,597, with post-award interest @12% p.a. in case of default. The Railway challenged the award under Section 34, contending that the award of interest violated Clauses 16(3) and 64(5) of the GCC, which barred payment of interest on amounts payable under the contract. The Commercial Court dismissed the challenge, and the High Court upheld the award under Section 37. Aggrieved, the Union of India filed the present appeal. It was held that section 31(7)(a) of the Arbitration Act expressly subordinates the arbitrator’s power to award pre-award interest to the terms of the contract. Clause 16(3) of the GCC clearly stipulated that no interest shall be payable on amounts payable to the contractor under the contract, and the expression could not be restricted through the principle of ejusdem generis. Once the parties had contractually agreed to exclude interest, the arbitral tribunal, being a creature of the contract, could not award pre-award or pendente lite interest even in the guise of “compensation”. Consequently, the award of interest in respect of Claim Nos. 1, 3 and 6 was contrary to the contractual prohibition and liable to be set aside. However, post-award interest stood on a different footing. Under Section 31(7)(b), interest from the date of award till realization flows as a statutory consequence unless expressly excluded by the contract. Since the GCC barred interest only till the date of the award, the Arbitral Tribunal was justified in granting post-award interest. Nevertheless, the rate of 12% per annum awarded by Tribunal was considered excessive and was modified to 8% per annum from the date of award till realization. Accordingly, Arbitral Award, as affirmed by the Commercial Court and the High Court, was set aside to the extent it granted pre-award/pendente lite interest, and modified by reducing the rate of post-award interest from 12% to 8% per annum. The appeal was partly allowed.
1. Leave granted.
