Case: Reliance Cellulose Products Ltd Vs. Oil and Natural Gas Corporation Ltd

The ONGC floated a notice inviting tender for the supply of 1200 Metric Tons (hereinafter referred to as "MT") of Sodium Carboxyl Methyl Cellulose (hereinafter referred to as "CMC"). Reliance Cellulose Products Ltd. (hereinafter referred to as "Reliance") submitted its tender quoting a price of Rs. 14,999/- per MT for quantities above 900 MT. It is not disputed that the offer of Reliance was accepted for the supply of 1200 MT of CMC, and accordingly, a supply order dated 01.12.1988 was placed on Reliance. Since Reliance agreed to supply 1200 MT only if the price is higher than Rs. 14,999/- per MT, the parties ultimately went to arbitration in order to decide what should be the contract price for supply of 1200 MT of CMC. A separate order, referred to as the repeat order, was also placed for supply of 600 MT of CMC. It is undisputed that the supply was made on time and payments were received for both contracts at the rate of Rs. 14,999/- per MT2. In October 1990, the Petitioner filed a Special Civil Application before the Gujarat High Court in the course of which, by an order dated 11.10.1990, the disputes between the parties were referred to arbitration, which were with regard to the price for the supply of 1200 MT and 600 MT of CMC respectively. The original Arbitral Tribunal consisted of Justice V.S. Deshpande and Mr. S. Tibrewal. Shri Deshpande having died, Justice B.J. Divan was appointed in his place3. By an award dated 29.12.1993, the Arbitrators fixed the price of 1200 MT at Rs. 18,500/- per MT, and Rs. 20,500/- per MT insofar as 600 MT of CMC was concerned. The Arbitrators awarded pre-reference, pendente lite and future interest all at the rate of 18% per annum. Objections were filed to the award by the ONGC. The learned Civil Judge, by his judgment dated 30.07.1998, rejected these objections, but ultimately reduced the interest for all three periods to 10% per annum. Needless to state, this interest was payable on the difference between Rs. 14,999/- and Rs. 18,500/- and Rs. 20,500/- respectively. The appeals that were filed to the High Court yielded the same result vide the impugned judgment dated 23.08.2006. Both parties are in appeal before us.

Reasoning:
16. Clearly, the conclusion of the Court that Engineers-De-Space-Age (supra) had been overruled by Sayeed Ahmed (supra) is incorrect for two reasons: first, a Bench of two learned Judges cannot overrule a coordinate Bench of two learned Judges; and second, the Court in Sayeed Ahmed (supra) was not deciding a case arising under the 1940 Act, but was deciding a case arising under the 1996 ActA perusal of the conclusions drawn by this Court in the above judgment, rendered by a three-Judge Division Bench, leaves no room for any doubt, that the bar to award interest on the amounts payable under the contract, would not be sufficient to deny payment of pendente lite interest. In the above view of the matter, we are satisfied, that the Clause relied upon by the learned Counsel for the Union of India, to substantiate his contention, that pendente lite interest could not be awarded to the Appellant, was not a valid consideration, for the proposition being canvassed. We are therefore satisfied, that the arbitrator, while passing his award dated 28-6-1999, was fully justified in granting interest pendente lite to the Appellant22. A conspectus of the decisions that have been referred to above would show that under the 1940 Act, 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 (supra) with the Clause in Tehri Hydro Development Corporation Ltd. (supra), 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 (supra), 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. We hasten to add that the position as has been explained in some of the judgments above 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 delivered23. 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 Arbitrators power to grant interest. This Court finds that the aforesaid Clause is narrower than the Clause considered by the three-Judge Bench in the Second Ambica Construction Case (supra) 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 contractAlso, unlike the Clause in Tehri Hydro Development Corporation Ltd. (supra), 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. (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." It is, thus, clear that Clause 16 cannot possibly interdict the payment of pendente lite interest on the facts of the present caseShri Viswanathan is right, as it is nobodys 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 Courts 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 barred25. Coming to Shri Viswanathans appeal, we think that 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 Arbitrators discretion. There is no finding that this discretion has been exercised perversely, given the interest rates at the time of the award.