Arbitrators Cannot Grant Pre-Award Or Pendente Lite Interest As Compensation If Contract Bars It: Supreme Court

The Supreme Court on Friday held that an arbitral tribunal cannot award pre-award or pendente lite interest when the contract expressly bars payment of interest, even if such amounts are granted in the guise of compensation.

A Bench of Justice Sanjay Karol and Justice Vipul M. Pancholi ruled that “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."

The dispute arose between the Union of India and North Central Railway on one side and Larsen & Toubro Limited on the other. It concerned an Agreement dated January 27, 2011 for modernization of the Jhansi Workshop of North Central Railways. The contract value was Rs. 93,08,07,696/-. The original completion date was July 18, 2012. The time was extended ten times until November 30, 2015. This resulted in a delay of 40 months beyond the original deadline.

Disputes arose regarding execution of work and outstanding payments. A three-member arbitral tribunal was constituted under Clause 64 of the General Conditions of Contract. On December 25, 2018, the tribunal awarded a total of Rs. 5,84,57,597/- under various claims. After adjusting the counter-claim of Rs. 31,00,000/-, the net award payable to L&T was Rs. 5,53,57,597/-. The tribunal directed that the amount be paid within 60 days, failing which it would carry “post-lite interest @12% per annum with effect from date of award till actual payment.”

The Commercial Court, Jhansi dismissed the Union's challenge under Section 34. The Allahabad High Court dismissed the appeal under Section 37 and upheld the award.

Before the Supreme Court, the Union argued that Clause 16(3) of the GCC expressly provided: “no interest will be payable upon the Earnest Money and Security Deposit or amounts payable to the Contractor under the Contract, but Government Securities deposited in terms of Sub-Clause (1) of this clause will be payable with interest accrued thereon”. It relied on Section 31(7)(a), which begins with the words: “Unless otherwise agreed by the parties”. It contended that once interest was contractually barred, the tribunal had no jurisdiction to award it.

L&T argued that certain claims were admitted amounts and that the tribunal had granted compensation. It relied on earlier judgments interpreting similar clauses.

Accepting the Union's submissions, the Court held, "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 noted that the tribunal itself had recorded, "The interest so claimed is therefore not admissible as per Section 31(7)(a) of the Act read with Clause 64(5) of the GCC & Clause 7.35 of SCC of the contract agreement signed between the two parties. Tribunal did not therefore consider to award any interest on the award sum as claimed by the Claimant. Therefore, Arbitral Tribunal declare Nil Award against this claim.”

Despite this, the tribunal awarded amounts in the nature of interest under three claims. The Supreme Court held: “We are of the view that the AT has committed serious error by awarding pre-award/pendente lite interest qua Claim Nos. 1, 3 & 6.”

On post-award interest, the Court drew a distinction. It referred to Section 31(7)(b), which provides: “A sum directed to be paid by an arbitral award shall, unless the award otherwise directs, carry interest at the rate of two per cent. higher than the current rate of interest prevalent on the date of award, from the date of award to the date of payment.”

The Court held, “Pre-award and post-award interest operate in distinct fields and a contractual bar applicable to the former cannot, by implication, be extended to the latter, and thus, any exclusion of post-award interest must be explicit and unambiguous.”

However, it found the rate excessive. The bench observed: “In the absence of any justification in the award for fixing the rate at 12% per annum and keeping in view the contemporary economic scenario, such rate would result in an excessive financial burden and would not subserve the principle of just compensation.”

The court reduced the rate to 8% per annum from the date of award till realization.

Allowing the appeal in part, the Court concluded, "The AT is not justified in awarding pre-award/pendente lite interest, by way of compensation, while passing the award in favour of the respondent-claimant, and more particularly in view of Clause 16(3) and Clause 64(5) of the GCC. The award of such interest is not in accordance with the agreement, and liable to be set aside.”

It further held, “The AT is justified in awarding post-award interest in favour of the respondent-claimant, however, the rate of post-award interest is modified from 12% per annum to 8% per annum from the date of award till realization.”

For Appellants (Union of India & Ors.): Additional Solicitor General Aishwarya Bhati, 

For Respondent (Larsen & Toubro Limited): Senior Advocate Meenakshi Arora,