Arbitration Act, 1940 - Pre-reference, pendente lite interest and future interest – Power of arbitrator to award – On facts, disputes between parties referred to arbitration with regard to price for supply of goods – Fixation of price by arbitrator and award of pre-reference, pendente lite and future interest all at the rate of 18% per annum – Reduction of the interest to 10% per annum by the Civil Judge – High Court upheld the same – On appeal, held: Under the Arbitration Act, an arbitrator has power to grant pre-reference interest under the Interest Act, as well as pendente lite and future interest – However, he is constricted only by the fact that an agreement between the parties may contain an express bar to the award of pre-reference and/or pendente lite interest – In the instant case, clause 16 of the General Conditions of Contract clearly bars payment of interest for any delay – There is nothing in this clause which refers even obliquely to the Arbitrator’s power to grant interest – There was no delay on account of the higher price as it became payable only on and from the date of the award – Even if clause 16 were to have application, both pre-reference and pendente lite interest are not barred – Only reason given for reducing interest from 18% to 10% being that ONGC is a Public Sector Undertaking, would not suffice to set aside what was within the Arbitrator’s discretion – Further, there is no finding that arbitrator exercised the discretion perversely – Thus, the grant of interest at the rate of 18% as pre-reference, pendente lite and future interest upheld – Interest Act, 1978.
Allowing Reliance’s appeal and dismissing ONGC’s appeal, the Court
HELD: 1.1 Under the Arbitration Act, 1940, an arbitrator has power to grant pre-reference interest under the Interest Act, 1978 as well as pendente lite and future interest. However, he is constricted only by the fact that an agreement between the parties may contain an express bar to the award of pre-reference and/or pendente lite 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, when one contrasts a clause such as the clause in the *Second Ambica Construction Case with the clause in **Tehri Hydro Development Corporation Ltd., it becomes clear that unless a contractor agrees that no claim for interest will either be entertained or payable by the other party owing to dispute, difference, or misunderstandings between the parties or in respect of delay on the part of the engineer or in any other respect whatsoever, leading the Court to find an express bar against payment of interest, a clause which merely states that no interest will be payable upon amounts payable to the contractor under the contract would not be sufficient to bar an arbitrator from awarding pendente lite interest under the 1940 Act. As has been held in the ***First Ambica Construction Case the grant of pendente lite interest depends upon the phraseology used in the agreement, clauses conferring power relating to arbitration, the nature of claim and dispute referred to the Arbitrator, and on what items the power to award interest has been taken away and for which period. The position as explained in some of the judgments under Section 31(7) of the 1996 Act, is wholly different, inasmuch as Section 31(7) of the 1996 Act sanctifies agreements between the parties and states that the moment the agreement says otherwise, no interest becomes payable right from the date of the cause of action until the award is delivered. [Para 22] [645-D-H; 646-A-C]
1.2 In the instant 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. This Court finds that the said clause is narrower than the clause considered by the three-Judge Bench in the *Second Ambica Construction Case which states that no interest will be payable on amounts payable to the contractor under the contract. Clause
16 in the present case confines itself only to delay in payment and not to any other amounts payable to the contractor under the contract. Also, unlike the clause in **Tehri Hydro Development Corporation Ltd., clause 16 does not contain language which is so wide in nature that it would interdict an arbitrator from granting pendente lite interest. It will be remembered that the clause in **Tehri Hydro Development Corporation Ltd. 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. goes much further and makes it clear that no claim for interest is payable “in any other respect whatsoever.” It is, thus, clear that clause 16 cannot possibly interdict the payment of pendente lite interest on the facts of the present case. [Para 23] [646-D-G]
1.3 The submission that, in any case, on the facts of the present case, clause 16 is not at all attracted inasmuch as factually there was no delay in payment as a sum of Rs.14,999/- per MT had, in fact, been paid for both 1200 MT and 600 MT, but that the balance only became payable on and from the date of the award, 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. In this view of the matter, it is clear that no delay on account of the higher price ever took place as it became payable only on and from the date of the award, Rs.14,999/- per MT having been paid on time earlier. This being the case, it is clear that even if clause 16 were to have application, both pre-reference and pendente lite interest are not barred. [Para 24] [646-H; 647-A-C]
1.4 The only reason given for reducing interest from 18% to 10% being that ONGC is a Public Sector Undertaking, would not suffice to set aside what was within the Arbitrator’s discretion. There is no finding that this discretion has been exercised perversely, given the interest rates at the time of the award. The grant of interest at the rate of 18% as pre-reference and pendente lite interest is upheld. Considering the fact that ONGC has deposited the difference in the principal sums payable, and prereference, pendent lite and future interest, all at the rate of 10% being a sum of Rs.1,09,34,323/- till 21.01.1999, and a sum of Rs.46,86,138/- on 30.04.2003, it is made clear that recovery of interest till the two aforementioned dates will be at the rate of 18%. 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, it is clarified 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. [Para 25] [647-D-G]
Irrigation Department, State of Orissa v. G.C. Roy (1992)
1 SCC 508 : [1991] 3 Suppl. SCR 417 ; Executive Engineer (Irrigation), Balimela v. Abhaduta Jena (1988) 1 SCC 418 : [1988] 1 SCR 253 ; Executive Engineer, Dhenkanal Minor Irrigation Division, Orissa and Ors. v. N.C. Budharaj (2001) 2 SCC 721 :
[2001] 1 SCR 264 ; Board of Trustees for the Port of Calcutta v. Engineers-De-Space-Age, (1996) 1 SCC
516 : [1995] 6 Suppl. SCR 327 ; Bhagwati Oxygen Ltd. v. Hindustan Copper Ltd., (2005) 6 SCC 462 : [2005] 3 SCR 232 ; M.B. Patel and Co. v. ONGC (2008)
8 SCC 251 : [2008] 8 SCR 35 ; State of Rajasthan and Anr. v. M/s. Ferro Concrete Construction (P) Ltd. (2009)
12 SCC 1: [2009] 10 SCR 31 ; Union of India v. Saraswat Trading Agency (2009) 16 SCC 504 : [2009]
10 SCR 1063; Madnani Construction Corporation (P) Ltd. v. Union of India and Ors. (2010) 1 SCC 549 : [2009] 16 SCR 216 ; State of U.P. v. Harish Chandra and Co. (1999) 1 SCC 63 : [1998] 2 Suppl. SCR 660 ; Sree Kamatchi Amman Constructions v. The Divisional Railway Manager (Works), Palghat and Ors., (2010) 8 SCC 767 : [2010] 10 SCR 487; Union of India v. Krafters Engineering and Leasing (P) Ltd. (2011) 7 SCC
279 : [2011] 8 SCR 196 ; **Tehri Hydro Development Corporation Ltd. v. Jai Prakash Associates Ltd. (2012)
12 SCC 10 : [2012] 8 SCR 813 ; Union of India v. Bright Power Projects (India) (P) Ltd. (2015) 9 SCC
695 : [2015] 6 SCR 488 ; ***Union of India v. Ambica Construction (“First Ambica Construction Case”), (2016) 6 SCC 36 : [2016] 2 SCR 810; *Ambica
Construction v. Union of India (“Second Ambica Construction Case”) (2017) 14 SCC 323 ;
M/s Raveechee v. Union of India 2018 (8) SCALE 415 – referred to.
As published in the Supreme Court Reports, Supreme Court of India. Text from the Indian Supreme Court Judgments open data set (Dattam Labs), CC BY 4.0.
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