Arbitration Act | Supreme Court Clarifies That Contractual Bar On Pre-Award Interest Not Applicable To Post-Award Interest

The Supreme Court has said that under the Arbitration and Conciliation Act, pre-award and post-award interest operate in separate fields, and a contractual bar on one cannot automatically be applied to the other. Court clarified that if parties want to exclude post-award interest, such exclusion must be explicit and unambiguous.

A Bench of Justices Sanjay Karol and Vipul M Pancholi said Section 31(7)(b) of the Arbitration and Conciliation Act provides that unless the arbitral award states otherwise, the awarded amount will carry interest from the date of the award until payment is made.

Court said the purpose behind this provision is two-fold: to compensate the successful party for delay in receiving the awarded amount and to ensure timely compliance with the award by the judgment-debtor. It added that post-award interest flows as a matter of law under Section 31(7)(b), unless the parties have clearly agreed to exclude it.

The dispute arose from arbitration proceedings in which the arbitral tribunal directed the appellants, North Central Railway, to pay Rs 5,53,57,597 to respondent L&T within 60 days in connection with modernization work at the Jhansi Workshop. The tribunal further ordered that in case of default, the amount would carry post-award interest at 12% per annum from the date of the award.

In 2022, the commercial court dismissed the Section 34 application filed against the award and upheld the tribunal’s decision. Thereafter, on May 25, 2023, the high court also dismissed the appeal filed by the appellants and upheld the arbitral award. The high court held that Clause 16(3) of the General Conditions of Contract (GCC) applied only to earnest money and security deposits, while Clause 64(5) merely barred pendente lite interest, which had been correctly interpreted by the tribunal.

Examining the appeal, the Supreme Court noted that Clause 16(3) of the GCC specifically stated that no interest would be payable on earnest money, security deposits, or amounts payable to the contractor under the contract.

“The provisions of the Act of 1996, including provisions contained in Section 31(7)(a) give paramount importance to the contract entered into between the parties and categorically restrict the power of an arbitrator to award pre-award/pendente lite interest when the parties have themselves agreed to the contrary. Thus, the AT cannot award pre-award/pendente lite interest, even in the form of compensation, in view of specific Clause 16(3) of GCC read with Clause 64(5) of GCC,” the Bench said.

On post-award interest, however, Court held that a separate legal regime applies. It pointed out that Clause 64(5) of the GCC bars interest only “till the date on which the award is made” and does not prohibit interest for the period after the award.

At the same time, the Bench held that the arbitral tribunal had committed a “serious error” in granting pre-award and pendente lite interest despite the contractual bar. It said both the Commercial Court and the High Court failed to appreciate that the tribunal’s award of pendente lite interest was contrary to the express terms of the contract, warranting interference even within the limited scope of Sections 34 and 37 of the Act.

Court, however, upheld the grant of post-award interest, observing that it was consistent with the statutory framework and intended to ensure timely satisfaction of the award.

The Bench nevertheless found the post-award interest rate of 12% per annum to be excessive and said it would impose an undue financial burden without serving the principle of just compensation. It accordingly reduced the post-award interest rate from 12% to 8% per annum from the date of the award till realization.

The appeal was partly allowed, with the Court setting aside the judgments of the high court and commercial court to the extent they upheld the grant of pre-award and pendente lite interest or amounts in the nature of interest.

Case Title: Union of India & Ors Vs Larsen & Toubro Limited

Bench: Justices Sanjay Karol and Vipul M Pancholi

Date of Judgment: February 27, 2026