2018 (7) TMI 2273 - SC - Indian Laws

Court reinstates 18% interest rate in arbitration dispute, emphasizing contractual clauses and arbitrator's discretion.

RELIANCE CELLULOSE PRODUCTS LTD. Versus OIL AND NATURAL GAS CORPORATION LTD. AND VICE-VERSA

The Supreme Court dismissed ONGC's appeal and allowed Reliance's appeal, reinstating the 18% interest rate for pre-reference and pendente lite periods. ... Pre- reference and pendente lite interest under the Arbitration Act, 1940 - supply of 1200 Metric Tons of Sodium Carboxyl Methyl Cellulose - parties ultimately went to arbitration in order to decide what should be the contract price for supply of 1200 MT of CMC - HELD THAT:- Section 31(7) of the Act, by using the words “unless otherwise agreed by the parties”, categorically specifies that the arbitrator is bound by the terms of the contract so far as award of interest from the date of cause of action to date of the award is concerned. Therefore, where the parties had agreed that no interest shall be payable, the Arbitral Tribunal cannot award interest - Section 31(7)(a) of the Act ought to have been read and interpreted by the Arbitral Tribunal before taking any decision with regard to awarding interest. In STATE OF U.P. VERSUS HARISH CHANDRA & CO. [1998 (11) TMI 677 - SUPREME COURT] a different version of Clause 1.09 was considered. Having regard to the restrictive wording of that clause, this Court held that it did not bar award of interest on a claim for damages or a claim for payments for work done and which was not paid. This Court held that the said clause barred award of interest only on amounts which may be lying with the Government by way of security deposit/retention money or any other amount, refund of which was withheld by the Government - But in the present case, clause G1.09 is significantly different. It specifically provides that no interest shall be payable in respect of any money that may become due owing to any dispute, difference or misunderstanding between the Engineer-in-Charge and contractor or with respect to any delay on the part of the Engineer-in-Charge in making periodical or final payment or in respect of any other respect whatsoever. The bar under Clause G1.09 in this case being absolute, the decision in Harish Chandra will not assist the appellant in any manner. In the present case, clause 16 of the General Conditions of Contract only speaks of any delay in payment not making ONGC liable for interest. There is nothing in this clause which refers even obliquely to the Arbitrator’s power to grant interest - Since interest is compensatory in nature and is parasitic upon a principal sum not having been paid in time, this Court has frowned upon clauses that bar the payment of interest. It has therefore evolved the test of strict construction of such clauses, and has gone on to state that unless there is a clear and express bar to the payment of interest that can be awarded by an arbitrator, clauses which do not refer to claims before the Arbitrators or disputes between parties and clearly bar payment of interest, cannot stand in the way of an arbitrator awarding pre-reference or pendente lite interest. Thus, for pre-reference, pendent lite and future interest, ONGC is to pay the differential amount of interest of 8% till 21.01.1999 and 30.04.2003 within a period of eight weeks from today. In the interest of justice, we clarify that on and from 21.01.1999, till payment, future interest is to be paid at 6% per annum on the balance differential sum of interest, being the difference between 10% and 18%, and similarly, on the balance differential sum of interest between 10% and 18% on and from 30.04.2003 till payment. Appeal allowed. Issues Involved:1. Pre-reference and pendente lite interest under the Arbitration Act, 1940.2. Validity and applicability of contractual clauses barring interest.3. Reduction of interest rate from 18% to 10% by lower courts.Detailed Analysis:1. Pre-reference and pendente lite interest under the Arbitration Act, 1940:The appeals primarily concern the award of pre-reference and pendente lite interest under the Arbitration Act, 1940. The ONGC had floated a tender for the supply of Sodium Carboxyl Methyl Cellulose (CMC), which Reliance Cellulose Products Ltd. (Reliance) won. Disputes arose regarding the contract price, leading to arbitration. The Arbitrators fixed prices higher than initially agreed and awarded pre-reference, pendente lite, and future interest at 18% per annum. The Civil Judge reduced this interest to 10%, a decision upheld by the High Court.2. Validity and applicability of contractual clauses barring interest:The ONGC argued that clause 16 of the General Conditions of Contract barred the payment of interest for any delay. The clause stated: 'any delay in payment will not make the Commission liable for any interest.' The Supreme Court reviewed numerous judgments to determine if such clauses barred arbitrators from awarding interest. It concluded that under the 1940 Act, arbitrators could award interest unless there was an express contractual bar. The Court found that clause 16 did not explicitly bar the arbitrator from awarding pre-reference or pendente lite interest, as it only addressed delays in payment and not disputes resolved through arbitration.3. Reduction of interest rate from 18% to 10% by lower courts:Reliance's appeal argued that no valid reason was provided for reducing the interest rate from 18% to 10%, except that ONGC is a Public Sector Undertaking. The Supreme Court agreed, stating that the arbitrator's discretion in awarding 18% interest was not exercised perversely, given the interest rates at the time. The Court restored the interest rate to 18% for pre-reference and pendente lite periods.Conclusion:The Supreme Court dismissed ONGC's appeal and allowed Reliance's appeal, reinstating the 18% interest rate for pre-reference and pendente lite periods. It ordered ONGC to pay the differential interest amount within eight weeks and clarified future interest rates. The judgment emphasized that contractual clauses must explicitly bar interest to prevent arbitrators from awarding it and upheld the arbitrator's discretion in determining interest rates.