SC Rules No Pre-Award Interest If Contract Bars It; Raising Concerns For MSME Payment Recovery

New Delhi, Mar 9 (KNN) The Supreme Court has ruled that an arbitral tribunal cannot grant pre-award or pendente lite interest as compensation if the underlying contract expressly prohibits such payments.

This decision could have implications for MSMEs, which often rely on arbitration to recover delayed payments. 

If contracts bar pendente lite interest, smaller firms may not be able to claim compensation for financing costs during disputes, potentially increasing financial strain—particularly in public sector projects where such clauses are common.

A bench of Justices Sanjay Karol and Vipul M. Pancholi set aside part of a ruling by the Allahabad High Court that had upheld the award of pre-award interest.

Referring to Sections 37(1)(a) and 31(7)(a) of the Arbitration and Conciliation Act, 1996, the court held that granting pre-award interest is not mandatory and must comply with contractual terms.

Dispute Linked to Railway Modernisation Project

The case arose from a 2011 turnkey contract for the modernisation of the North Central Railway Jhansi Workshop, valued at about Rs 93.08 crore. After a reported 40-month delay, Larsen & Toubro initiated arbitration seeking payments, price variations and financing charges.

In 2018, the arbitral tribunal awarded the company Rs 5.53 crore. Despite a clause in the General Conditions of Contract (GCC) prohibiting interest until the award date, the tribunal granted financing charges and interest-like amounts for certain claims by treating them as compensation.

The award was later upheld by a commercial court and the Allahabad High Court, prompting the Union of India to appeal before the Supreme Court.

Court Allows Post-Award Interest

Partly allowing the appeal, the Supreme Court ruled that the tribunal could not grant pre-award or pendente lite interest due to the contractual prohibition.

However, it upheld the award of post-award interest, while reducing the rate from 12 per cent per annum to 8 per cent per annum from the date of the award until realisation.

(KNN Bureau)