Supreme Court clarifies interest on arbitration awards under the 1940 Act: Reliance Cellulose vs. ONGC (20 July 2018)

Introduction

Date of the Judgment: 20 July 2018
Citation: (2018) INSC 653
Judges: R.F. Nariman, J., Indu Malhotra, J.
Can a contractual clause that bars interest on delayed payments prevent an arbitrator from awarding interest on the disputed amount? The Supreme Court of India recently examined this question, focusing on the powers of an arbitrator under the Arbitration Act, 1940, specifically regarding pre-reference and pendente lite interest. This case involved a dispute between Reliance Cellulose Products Ltd. and Oil and Natural Gas Corporation Ltd. (ONGC) concerning the price of goods supplied. The core issue was whether a clause in their contract barring interest on delayed payments also barred the arbitrator from awarding interest on the disputed amount. The judgment was delivered by a division bench comprising Justice R.F. Nariman and Justice Indu Malhotra, with Justice Nariman authoring the opinion.

Case Background

In 1988, ONGC issued a tender for the supply of 1200 Metric Tons (MT) of Sodium Carboxyl Methyl Cellulose (CMC). Reliance submitted a tender quoting Rs. 14,999 per MT for quantities above 900 MT. ONGC accepted Reliance’s offer for 1200 MT. However, Reliance later insisted on a higher price. This disagreement led to arbitration to determine the correct contract price for the 1200 MT supply. A separate order for 600 MT of CMC was also placed. Reliance supplied the goods on time, and ONGC paid Rs. 14,999 per MT for both contracts.

In October 1990, Reliance filed a Special Civil Application before the Gujarat High Court, which referred the pricing dispute for both the 1200 MT and 600 MT supplies to arbitration via an order dated 11.10.1990. The original Arbitral Tribunal consisted of Justice V.S. Deshpande and Mr. S. Tibrewal. Following Justice Deshpande’s death, Justice B.J. Divan was appointed in his place.

Timeline:

Course of Proceedings

The Arbitral Tribunal, on 29.12.1993, fixed the price of 1200 MT of CMC at Rs. 18,500 per MT and the 600 MT of CMC at Rs. 20,500 per MT. The arbitrators also awarded pre-reference, pendente lite, and future interest at 18% per annum. ONGC filed objections to the award. The Civil Judge rejected these objections on 30.07.1998 but reduced the interest for all three periods to 10% per annum. The appeals filed before the High Court yielded the same result via the impugned judgment dated 23.08.2006.

Legal Framework

The case primarily revolves around the interpretation of the Arbitration Act, 1940, and the power of arbitrators to award interest. The Interest Act, 1978, also plays a role in determining pre-reference interest. The contract between ONGC and Reliance contained clause 16 of the General Conditions of Contract, which states:

“16. Our standard terms of payment are within 30 days of receipt of stores and inspection at site. But any delay in payment will not make the Commission liable for any interest.”

Arguments

Reliance’s Arguments:

• Reliance argued that the reduction of interest from 18% to 10% was not justified. The only reason given was that ONGC is a Public Sector Undertaking.
• Reliance contended that clause 16 of the contract does not apply because there was no delay in payment of the initially agreed amount of Rs. 14,999 per MT. The additional amount became payable only after the arbitration.
• Reliance argued that, under the 1940 Act, interest is payable unless there is an express bar in the agreement, and that the arbitrator is not barred from awarding pre-reference or pendente lite interest.

ONGC’s Arguments:

• ONGC argued that clause 16 of the General Conditions of Contract expressly bars the payment of any interest for any delay.
• ONGC cited several judgments to support the argument that clause 16 constitutes a contractual bar to the payment of any interest.

The innovativeness of the argument by Reliance was that they distinguished between the delay in payment of the initially agreed amount and the payment of the additional amount as determined by the arbitrator. They argued that the bar on interest applied only to the former, not the latter.

Issues Framed by the Supreme Court

The Supreme Court considered the following issues:

1. Whether the arbitrator was justified in awarding pre-reference and pendente lite interest under the Arbitration Act, 1940.
2. Whether clause 16 of the General Conditions of Contract barred the payment of interest.
3. Whether the reduction of interest from 18% to 10% was justified.

Treatment of the Issue by the Court:

Authorities

The Supreme Court considered the following authorities:

Judgment

How each authority was viewed by the Court:

• Irrigation Department, State of Orissa v. G.C. Roy, (1992) 1 SCC 508:* The Court reiterated that this case established the arbitrator’s power to award pendente lite interest under the 1940 Act.
• Executive Engineer, Dhenkanal Minor Irrigation Division, Orissa and Ors. v. N.C. Budharaj, (2001) 2 SCC 721:* The Court noted that this case confirmed the arbitrator’s power to award pre-reference interest under the 1940 Act.
• Board of Trustees for the Port of Calcutta v. Engineers-De-Space-Age, (1996) 1 SCC 516:* The Court clarified that this case held that a clause prohibiting the Commissioner from entertaining claims for interest does not prohibit the arbitrator from awarding interest. However, the court also clarified that this observation was not of general application.
• Bhagwati Oxygen Ltd. v. Hindustan Copper Ltd., (2005) 6 SCC 462:* The Court cited this case to support the view that an arbitrator under the 1940 Act can award interest for all three periods (pre-reference, pendente lite, and future) if there is no contractual bar.
• M.B. Patel and Co. v. ONGC, (2008) 8 SCC 251:* The Court distinguished this case, noting that the award was set aside because the arbitrator did not consider the contractual bar on interest.
• State of Rajasthan and Anr. v. M/s. Ferro Concrete Construction (P) Ltd., (2009) 12 SCC 1:* The Court referred to this case to restate the position on pre-reference interest and the importance of the Interest Act, 1978.
• Union of India v. Saraswat Trading Agency, (2009) 16 SCC 504:* The Court distinguished this case, noting that it arose under the 1996 Act and involved a materially different clause.
• Madnani Construction Corporation (P) Ltd. v. Union of India and Ors., (2010) 1 SCC 549:* The Court clarified that this case held that clauses in the contract did not prohibit the arbitrator from granting interest. However, the court also clarified that this case followed the decision in Engineers-De-Space-Age and the same is required to be diluted.
• Sree Kamatchi Amman Constructions v. The Divisional Railway Manager (Works), Palghat and Ors., (2010) 8 SCC 767:* The Court noted that this case held that decisions under the 1940 Act may not be applicable to the 1996 Act.
• Union of India v. Krafters Engineering and Leasing (P) Ltd., (2011) 7 SCC 279:* The Court cited this case to support the view that where the parties had agreed that no interest shall be payable, the arbitrator cannot award interest.
• Tehri Hydro Development Corporation Ltd. v. Jai Prakash Associates Ltd., (2012) 12 SCC 10:* The Court distinguished this case, noting that the clauses in that case imposed a clear bar on the payment of interest.
• Union of India v. Bright Power Projects (India) (P) Ltd., (2015) 9 SCC 695:* The Court referred to this case to highlight that Section 31(7) of the 1996 Act gives more respect to the agreement between the parties.
• Union of India v. Ambica Construction, (2016) 6 SCC 36:* The Court referred to this case to highlight that if the contract expressly bars the award of interest pendente lite, the same cannot be awarded by the arbitrator.
• Ambica Construction v. Union of India, (2017) 14 SCC 323:* The Court referred to this case to highlight that a clause barring interest on amounts payable under the contract is not sufficient to deny pendente lite interest.
• M/s Raveechee v. Union of India (Civil Appeal Nos. 5964-5965 of 2018):* The Court referred to this case to highlight that a clause barring interest on amounts payable under the contract is not sufficient to deny pendente lite interest.

What weighed in the mind of the Court?

The Court’s reasoning was primarily influenced by the principle that interest is compensatory in nature and should be awarded unless there is a clear and express bar in the contract. The Court emphasized that clauses barring interest must be strictly construed and that general clauses against interest on delayed payments would not suffice to bar the arbitrator’s power to award pre-reference or pendente lite interest. The Court also noted that the arbitrator’s discretion should not be interfered with unless exercised perversely. The Court was also influenced by the fact that there was actually no delay in the payment of the originally agreed amount.

Logical Reasoning:

The Court considered alternative interpretations of clause 16, such as that it could be construed as a bar to all interest claims. However, the Court rejected this interpretation, holding that such clauses must be strictly construed and that the language of clause 16 did not expressly bar the arbitrator’s power to grant interest.

The decision was reached by examining the language of clause 16, comparing it with clauses in previous cases, and applying the principle that interest is compensatory and should be awarded unless expressly barred.

The Court decided that clause 16 of the General Conditions of Contract did not bar the arbitrator from awarding pre-reference and pendente lite interest. The Court also held that the reduction of interest from 18% to 10% was not justified.

Reasons for the decision:

• Clause 16 of the General Conditions of Contract was not an express bar to the payment of interest.
• The clause only referred to delay in payment and not to the arbitrator’s power to grant interest.
• There was no delay in payment of the initially agreed amount.
• The reduction of interest from 18% to 10% was not justified.

“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.”

“It will be remembered that the clause in Tehri Hydro Development Corporation Ltd. (supra) spoke of no claim for interest being entertained or payable in respect of any money which may be lying with the Government owing to disputes, difference or misunderstanding between the parties and not merely in respect of delay or omission; Further, the clause in Tehri Hydro Development Corporation Ltd . (supra) goes much further and makes it clear that no claim for interest is payable “in any other respect whatsoever.”

“Shri Viswanathan is right, as it is nobody’s case that there was delay in payment on the facts of this case. It is only after Reliance went in a Writ Petition before the High Court that it became clear that a higher price would be payable, which was left to the Arbitrator to determine vide the High Court’s judgment referring the issue of price to an arbitrator, which was accepted by ONGC.”

There was no minority opinion in this case.

Key Takeaways

• Contractual clauses barring interest must be strictly construed.
• A general clause barring interest on delayed payments is not sufficient to bar an arbitrator from awarding pre-reference or pendente lite interest under the Arbitration Act, 1940.
• Arbitrators have the power to award interest unless there is a clear and express bar in the contract.
• The arbitrator’s discretion in awarding interest should not be interfered with unless exercised perversely.

This judgment reinforces the principle that interest is compensatory and should be awarded unless expressly barred by a clear and unambiguous contractual clause. It also clarifies the extent of an arbitrator’s power under the Arbitration Act, 1940, regarding the award of interest. This decision will likely influence future cases involving similar contractual clauses and arbitration proceedings.

Directions

The Supreme Court directed that:

• 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 the date of judgment.
• On and from 21.01.1999, till payment,interest at 18% per annum is payable.