Introduction

The Supreme Court’s decision in Union of India v. Larsen & Toubro Ltd. (2026) is a significant contribution to Indian arbitration jurisprudence on when arbitrators can award interest and how far contractual clauses can restrict that power. The Court held that where a government contract expressly bars interest on amounts payable under the contract, an arbitral tribunal has no jurisdiction to grant pre-award (including pendente lite) interest, even if such amounts are described as “financing charges”, “price variation” or other forms of compensation for delay. At the same time, the Court reaffirmed that post-award interest is a statutory consequence under Section 31(7)(b) of the Arbitration and Conciliation Act, 1996, and will continue to apply unless it is clearly and expressly excluded, though courts may revise the rate for reasonableness. For in-house teams, contract drafters, arbitrators and infrastructure contractors, the judgment sharply underscores the primacy of party autonomy under Section 28(3) while preserving a minimum statutory protection for award-holders after the date of the award.

Factual Background

The dispute arose out of a turn-key contract dated 27 January 2011 between North Central Railway (Union of India) and Larsen & Toubro Ltd. for modernization of the Jhansi Workshop, with a contract price of about ₹93.08 crore and an original completion period of 18 months ending on 18 July 2012. Owing to delays, the Railway granted 10 extensions, ultimately pushing completion to 30 November 2015, which meant that the project ran roughly 40 months beyond the original schedule. During execution, disputes emerged regarding delayed payments, additional costs, price variation and the financial impact of the prolonged contract period, and L&T invoked the arbitration clause in the General Conditions of Contract, leading to the constitution of a three-member arbitral tribunal. 

L&T’s revised statement of claim included several substantive monetary claims, such as financing charges for delayed payments, foreign exchange variation, price variation components, indirect costs due to extended stay, refund of liquidated damages, payment of final bills, a specific claim for interest on the claim amounts and a claim for arbitration costs, while the Railways brought a counterclaim linked to alleged losses from late commissioning of equipment. By an award dated 25 December 2018, the tribunal granted L&T a net sum of ₹5,53,57,597 and further directed that if this amount was not paid within sixty days, it would carry interest at 12 per cent per annum from the date of the award until payment. The Railways challenged the award under Section 34 before the Commercial Court at Jhansi on the ground that Clauses 16(3) and 64(5) of the GCC barred interest on amounts payable under the contract, but both the Commercial Court and, in appeal, the Allahabad High Court declined to interfere and upheld the award. This led to the appeal before the Supreme Court under Section 37 of the Arbitration Act.

Contractual Clauses and Legal Issues

Two clauses in the GCC were central to the Supreme Court’s analysis: Clause 16(3) and Clause 64(5). Clause 16(3) provided in substance that no interest would be payable on earnest money, security deposit or the “amounts payable to the contractor under the contract”, while Clause 64(5) prohibited the payment of interest on sums directed to be paid by the arbitrator “from the date on which the cause of action arose until the date on which the award is made”. Read together, these clauses created an express contractual prohibition on interest with respect to contractual amounts up to the date of the award, but said nothing about what would happen after the award was delivered.

Against this backdrop, three questions arose before the Supreme Court. First, whether the arbitral tribunal could nevertheless award pre-award or pendente lite interest (or functionally similar charges) despite this express contractual bar. Second, whether post-award interest could still be granted under Section 31(7)(b) where the contract was silent on the period after the award. Third, whether the Commercial Court and High Court had erred in refusing to set aside or modify the award to the extent that it granted interest in violation of the contractual scheme.

Supreme Court’s Findings on Pre-Award Interest

On pre-award interest, the Supreme Court held that Clauses 16(3) and 64(5) clearly and unambiguously barred interest on contractual sums prior to the date of the award and that this contractual bar must be honoured under Section 31(7)(a) of the Arbitration Act. The Court emphasised that Section 31(7)(a) makes the grant of pre-award interest subject to party agreement, and once parties have agreed that no such interest shall be payable, the arbitral tribunal lacks jurisdiction to award it, whether directly as “interest” or indirectly by relabelling it as “financing charges” or “compensation” for delayed payments.

A particularly notable feature of the case was that the tribunal itself had declined a specific claim for pendente lite interest (Claim 7), holding that such interest was inadmissible under Section 31(7)(a) read with Clause 64(5), yet it proceeded to award certain components under other heads (such as financing charges and delay-related amounts) which, in the Supreme Court’s view, operated in substance as interest contrary to the contractual bar. The Court considered this inconsistent reasoning and therefore set aside the award to the extent that it granted pre-award or pendente lite interest in any form, making it clear that what the contract expressly forbids cannot be achieved through creative labelling by an arbitral tribunal.

Supreme Court’s Findings on Post-Award Interest

On post-award interest, the Supreme Court adopted a different approach grounded in Section 31(7)(b), which provides that a sum directed to be paid by an arbitral award shall, unless the award otherwise directs, carry interest from the date of the award to the date of payment. The Court held that this provision creates a statutory entitlement to post-award interest that is not dependent on party agreement and cannot be excluded by implication; it can only be displaced by a clear and express contractual stipulation that deals with the period after the award.

Since Clauses 16(3) and 64(5) only barred interest up to the date of the award and were silent on the post-award period, the Court concluded that the tribunal was entitled to grant post-award interest under Section 31(7)(b) and that there was no illegality in doing so. However, examining the reasonableness of the rate, the Court considered 12 per cent per annum to be on the higher side in the absence of specific justification and in light of prevailing economic conditions and recent precedents that permit courts to calibrate interest rates. Accordingly, while upholding the entitlement to post-award interest, the Supreme Court reduced the rate from 12 per cent to 8 per cent per annum from the date of the award until realization.

Contractual Primacy and Statutory Design

The judgment is firmly anchored in the principle that arbitration is a creature of contract and that tribunals are bound by Section 28(3) of the Arbitration Act to decide in accordance with the terms of the contract, along with applicable trade usages. The Court reiterated that party autonomy is foundational in arbitration: when parties expressly agree that no interest shall be payable on amounts due under the contract before the award, that agreement must be enforced, even if the result appears harsh for the contractor.

At the same time, the Court drew a sharp distinction between Section 31(7)(a) and Section 31(7)(b), characterizing the former as a discretionary, party-driven regime for pre-award interest and the latter as a statutory rule governing post-award interest that applies unless clearly excluded. This distinction explains why parties may successfully contract out of pre-award interest, but cannot be taken to have contracted out of post-award interest unless the contract speaks in explicit and unambiguous terms covering the period after the award. The Court’s reading aligns with earlier authorities which recognize that the phrase “unless the award otherwise directs” in Section 31(7)(b) empowers the tribunal to vary the rate or even withhold post-award interest, but does not permit parties to impliedly oust the statutory default merely by being silent.

Critical Observations and Policy Concerns

The decision represents a strict enforcement of party autonomy but raises important questions of fairness in long-duration infrastructure contracts where state entities often control both drafting and performance conditions. In this case, the project experienced an approximate forty-month delay beyond the original schedule, largely due to extensions granted by the employer, and L&T undoubtedly incurred substantial carrying and financing costs during this extended period. Nonetheless, the contractual prohibition on interest meant that L&T could not recover pre-award interest or interest-like compensation for that delay through arbitration, leaving it undercompensated for the time value of money. 

The Supreme Court acknowledged, at least implicitly, that this outcome is stringent from the contractor’s perspective but maintained that equitable considerations cannot override a clear contractual term agreed to by commercially sophisticated parties. For arbitrators and courts, the decision sends a clear message that they must resist the temptation to “do equity” by stretching the meaning of compensation or damages when the contract contains a direct prohibition on interest. For public bodies and employers, the judgment confirms that widely used “no interest” clauses in standard form contracts are enforceable and that tribunals cannot circumvent them by awarding delay costs that are, in substance, interest.

At the same time, by preserving post-award interest at a moderated rate of 8 per cent per annum, the Court attempted to strike a limited balance between enforcing the bargain on pre-award interest and ensuring that once an award crystallises, the award-holder is not entirely exposed to the risk of delayed realisation without any interest relief. Judicial power to adjust the rate of post-award interest, as reaffirmed in this case, also operates as a soft check on excessive or arbitrary interest awards while avoiding the drastic step of setting aside the entire award. 

Practical Takeaways for Stakeholders

For contractors and project participants, this judgment is a strong reminder to scrutinise interest clauses at the contract negotiation stage rather than relying on arbitral discretion later. If a contract bars interest on “amounts payable to the contractor under the contract”, contractors should not assume that tribunals will be able to grant pendente lite interest or finance charges for delayed payments and should instead consider negotiating for alternative protections, such as carefully drafted extension-of-time provisions, liquidated damages mechanisms that fairly allocate delay risk or specific clauses permitting compensation for prolonged deployment of resources.

For employers, particularly government entities, the decision validates the continued use of broad “no interest” clauses while also indicating how such clauses will be interpreted. If an employer genuinely intends to exclude all forms of interest, including post-award interest, it must do so in explicit terms that address the period after the award as well, failing which courts will apply Section 31(7)(b) by default. For arbitrators, the case underscores the need to begin with the contract, to analyse interest clauses expressly in their awards, and to avoid awarding delay-related amounts that effectively replicate interest where the contract clearly forbids it. Arbitrators should also record clear reasons for the rate of post-award interest they choose, given that excessive or unjustified rates remain vulnerable to judicial recalibration.

From a broader policy standpoint, Union of India v. L&T deepens the Indian law distinction between contractual and statutory aspects of interest in arbitration and is likely to be frequently cited in future disputes on Section 31(7), especially in public infrastructure and EPC contracts. It may also influence drafting practices on both sides: employers may refine standard clauses to close any perceived gaps, while contractors may factor the risk of non-compensated delay into pricing and risk allocation, or push harder at the negotiation table for balanced interest and extension provisions.

Conclusion

The ratio of Union of India v. Larsen & Toubro Ltd. can be stated succinctly: an arbitral tribunal cannot ignore or dilute an express contractual bar on pre-award or pendente lite interest, even by framing delay-related losses as compensation, but post-award interest is rooted in statute and will ordinarily stand unless the contract clearly excludes it, with courts free to moderate an unreasonable rate. The judgment therefore reaffirms the centrality of party autonomy in arbitration while preserving a statutory floor of protection for award-holders after the award.