Union of India & Ors. versus Larsen & Tubro Limited (L&T), 2026
The Court reinforced contractual supremacy: arbitral tribunals cannot override explicit contractual prohibitions on interest.
Judgement Details
Court
Supreme Court of India
Date of Decision
9 March 2026
Judges
Justice Sanjay Karol and Justice Vipul M. Pancholi
Citation
Acts / Provisions
Section 13(1)(ia), Hindu Marriage Act, 1955
Section 25, Hindu Marriage Act, 1955
Facts of the Case
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The dispute arose from a 2011 turnkey contract for modernization of North Central Railway’s Jhansi Workshop.
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The project, valued at ₹93.08 crore, faced a 40-month delay.
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L&T sought arbitration for outstanding payments, price variations, and financing charges.
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In 2018, an Arbitral Tribunal (AT) awarded L&T ₹5.53 crore, including "financing charges" for Claims 1, 3, and 6, despite Clause 64(5) of the contract prohibiting pre-award interest.
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The AT framed the interest-like amounts as compensation, ignoring the contractual bar.
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The Commercial Court and Allahabad High Court upheld the AT award.
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The Union of India appealed to the Supreme Court.
Issues
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Whether an arbitral tribunal can grant pre-award (pendente lite) interest or interest-like compensation when the contract expressly prohibits it?
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Whether Section 31(7)(a) of the Arbitration & Conciliation Act, 1996, allows awarding pre-award interest contrary to contractual terms?
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Whether post-award interest can be granted even if pre-award interest is contractually barred?
Held
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Pre-award interest in the form of compensation cannot be awarded when expressly prohibited by the contract.
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Post-award interest is allowed, with modification in rate.
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Arbitral awards must respect express contractual clauses regarding interest.
Analysis
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The Court reinforced contractual supremacy: arbitral tribunals cannot override explicit contractual prohibitions on interest.
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Emphasized Section 37(1)(a): appellate courts may interfere with arbitral awards when legal provisions are violated.
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Clarified Section 31(7)(a): pre-award interest is not automatic, only allowed if the contract permits.
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Differentiated pre-award vs. post-award interest: pre-award barred by contract; post-award remains at court-modified rate.
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The ruling strengthens predictability in arbitration and contract enforcement, limiting tribunals from circumventing contract terms under the guise of compensation.