Pre-Award Interest in Indian Arbitration: Supreme Court Limits Awards Against Contractual Clauses

The Supreme Court of India has clarified the law on pre-award interest in domestic arbitration proceedings, holding that an arbitral tribunal cannot award pendente lite interest where the contract between the parties expressly excludes or restricts it. In Union of India v. Larsen and Toubro Ltd., the Court examined a long-running dispute over a government infrastructure contract that contained an explicit clause restricting the contractor's right to claim interest on disputed amounts. The ruling reinforces the primacy of contractual terms in determining the scope of an arbitral tribunal's power to award interest, while also addressing the rate at which post-award interest may be modified by courts.

The Legal Framework for Interest in Arbitration

Section 31(7) of the Arbitration and Conciliation Act, 1996 governs interest in arbitral awards. Under Section 31(7)(a), the tribunal may award interest on the whole or part of the award amount for the pre-award period, including the period of the dispute before arbitration was commenced, unless the award is for interest itself or relates to a sum already carrying interest. Section 31(7)(b) governs post-award interest, prescribing that interest at 2 percent above the current rate of interest shall run from the date of the award unless the award directs otherwise. The crucial qualification in Section 31(7)(a) is that the tribunal's power to award pre-award interest is subject to any agreement to the contrary between the parties.

What the Court Held

The Supreme Court held that a contractual clause that clearly restricts the right to claim interest on disputed amounts constitutes an agreement to the contrary under Section 31(7)(a), and the arbitral tribunal has no power to award pendente lite interest in the face of such a clause. The Court rejected the argument that the tribunal's equitable powers or the general law of unjust enrichment could override an express contractual restriction. On the question of post-award interest, the Court held that while Section 31(7)(b) provides for interest at 2 percent above the current rate, courts can modify this rate under their supervisory jurisdiction, and reduced the applicable rate from 12 percent to 8 percent, finding the original rate unduly onerous given current market conditions.

Practical Implications for Contracting Parties

Government entities and public sector undertakings that regularly include no-interest or restricted-interest clauses in their procurement and construction contracts now have clearer authority that these clauses will be enforced in arbitration. Private parties entering long-term contracts should be attentive to whether their contracts contain such clauses, since the time value of money is a significant component of any disputed claim in a long-running arbitration. Claimants in arbitrations with interest-restricting contracts should focus their claims and strategy on recovering the principal amounts and seek substantive relief rather than relying on interest to compensate for delay.

Impact on Arbitration Claims and Award Enforcement

The ruling has direct implications for the quantum of arbitral awards in infrastructure, construction, and government contract disputes, where interest can account for a substantial portion of the total claim value, particularly in disputes that take years to resolve. Legal counsel advising claimants in such matters should carefully review the interest clauses in the underlying contract before structuring the arbitration claim. For respondents in arbitration proceedings who have previously been awarded high rates of interest in passed awards that are in enforcement proceedings, the Court's willingness to moderate the post-award interest rate provides a potential avenue for seeking reduction at the execution stage.