CASE NAME: Union of India & Others v. Larsen & Toubro Limited (L&T)
CASE No.: Civil Appeal No. of 2026 (@ Special Leave Petition (Civil) No. 14989 of 2023)
COURT: Supreme Court of India
DATE: 27-02-2026
QUORUM: THE Hon’ble Mr Justice Sanjay Karol & Hon’ble Mr Justice Vipul M. Pancholi
FACTS
The present appeal was filed by the Union of India before the Supreme Court, challenging the judgment of the High Court of Allahabad upholding the arbitral tribunal’s award. The Arbitral Tribunal constituted under Clause 64 of the General Conditions of Contract (GCC) awarded a sum of Rs. 5,53,57,597/-, to be paid by the appellants (North Central Railway) to the respondent (L&T) within 60 days with a 12% yearly interest from the award date upon any default.
The dispute arose from an Agreement dated 27.01.2011 between the Union of India and North Central Railway Administration (appellants) and Larsen & Toubro Limited (L&T) (respondent). The contract was for modernization of the Jhansi Workshop of North Central Railways at a value of ₹93,08,07,696/-. The work was to be completed by 18.07.2012 within 18 months, but the time was extended ten times till 30.11.2015, by the appellants, leading to a delay of about 40 months.
Due to issues regarding the execution of work and pending payments, disputes arose between the parties. As per Clause 64 of the GCC, the respondent invoked arbitration on 04.09.2017. A three-member Arbitral Tribunal was constituted and entered into reference on 10.01.2018. On 25.12.2018, the Tribunal passed an Award directing payments as mentioned above.
ISSUES
- Whether the Arbitral Tribunal was correct in granting pre-award or pendente lite interest as compensation to the respondent, especially when Clause 16(3) and Clause 64(5) of the General Conditions of Contract (GCC) appear to restrict payment of interest.
- Whether the Arbitral Tribunal was justified in awarding post-award interest in favour of the respondent.
- Whether the Commercial Court and the High Court committed any error while deciding these issues under Sections 34 and 37 of the Arbitration and Conciliation Act, 1996.
LEGAL PROVISIONS
- Clause 16(3) of the General Conditions of Contract (GCC)
- Clause 64(5) of the GCC
- Section 28(3) of the Arbitration and Conciliation Act, 1996
- Section 31(7)(a) of the Arbitration and Conciliation Act, 1996
- Section 31(7)(b) of the Arbitration and Conciliation Act, 1996
- Section 73 of the Indian Contract Act, 1872
ARGUMENTS
APPELLANTS (Union of India):
The appellants argued that Clauses 16(3) and 64(5) of the GCC clearly prohibit payment of interest on any amount under the contract. According to them, this is an absolute bar and cannot be ignored by the Arbitral Tribunal.
It was further contended that arbitration is governed strictly by the contract between the parties, and therefore, the Tribunal cannot go beyond what is agreed in the contract. Since the contract expressly excludes interest, even Section 73 of the Contract Act cannot override that agreement.
Lastly, they argued that the grant of interest under Claim Nos. 1, 3 and 6 is against the terms of the contract and settled law, and therefore the Award and the judgment upholding it should be set aside.
RESPONDENTS (L&T and Others):
The respondent argued that Clause 16(3) of the GCC should not be read as a complete ban on interest. They contended that this clause shall be read using the principle of ejusdem generis, which means that “amounts payable under the contract” should be understood in the same context as earnest money and security deposit, which means not as covering every type of payment under the contract.
They further argued that Clause 64(5) is written under the heading of “Settlement of Disputes” and it applies only to amounts that are actually disputed and decided through arbitration. Since arbitration deals with resolving disputes, only disputed sums would fall under this restriction, claim no. 3 and 6 were admitted amounts and therefore should not be affected by Clause 64(5).
ANALYSIS
First, the Court examined Sections 28(3) and 31(7) of the 1996 Arbitration and Conciliation Act. It was very obvious to the court that while an arbitral tribunal may grant interest, this authority is not absolute. According to Section 31(7)(a) itself, “unless otherwise agreed by the parties,” the parties’ contract will always take precedence. Additionally, Section 28(3) mandates that the tribunal resolve the dispute in accordance with the terms of the contract. Therefore, the tribunal cannot override the provisions of a contract that restrict interest.
The GCC’s Clause 16(3) expressly declares that no interest will be paid on earnest money, security deposits, or contractual amounts. The respondent attempted to prove that this clause should be interpreted narrowly by applying the ejusdem generis principle, which states that “amounts payable” should only refer to items that are similar to earnest money or security deposits.
However, the Court dismissed this claim and provided that the phrase “amounts payable under the contract” stands independently and has a broad scope because the clause’s wording employs the word “or,” according to the Manraj Enterprises ruling, (2022) 2 S.C.C. 331 (India). As a result, it cannot be read down or restricted. It was decided that the ejusdem generis principle did not apply in this case.
The Court also cited earlier rulings in cases such as Bright Power Projects (2015) 9 S.C.C. 695 (India) and Sree Kamatchi Amman Constructions (2010) 8 S.C.C. 767 (India), which made it abundantly evident that the arbitrator could not grant pre-award or pendente lite interest if the contract forbade interest. Parties are obligated to abide by their agreement that no interest will be paid, and even the tribunal cannot reverse it.
JUDGMENT
The Supreme Court held that the Arbitral Tribunal was wrong in granting pre-award or pendente lite interest because the contract itself clearly restricted payment of interest. Therefore, the interest awarded under Claim Nos. 1, 3 and 6 was set aside.
At the same time, the Court said that granting post-award interest was proper. However, it felt that 12% per annum was on the higher side, so it reduced the rate to 8% per annum from the date of the award until the amount is paid.
The Court also pointed out that both the Commercial Court and the High Court made an error in upholding the award of pre-award interest while exercising their powers under Sections 34 and 37 of the Act.
CONCLUSION
To sum up, the Supreme Court made it clear that the terms of the contract are binding in arbitration. Since the GCC clearly barred payment of interest, the Arbitral Tribunal was wrong in granting pre-award and pendente lite interest. However, post-award interest was allowed, but reduced from 12% to 8%.
This judgment effectively lays down that tribunals must strictly follow the contract and cannot go beyond what the parties have agreed to.
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WRITTEN BY: KISLAY RAJ
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