Arbitration Interest Dispute: Supreme Court Rules on Pre-Reference and Pendente Lite Interest

The case of Reliance Cellulose Products Ltd. v. Oil and Natural Gas Corporation Ltd. involves a significant ruling on the applicability of pre-reference and pendente lite interest under the Arbitration Act, 1940. The Supreme Court adjudicated on whether a contractual clause barred the award of such interest and examined whether the arbitrators were justified in granting interest at a higher rate than what was later reduced by the High Court.

Background of the Case

The dispute arose when ONGC floated a tender for the supply of 1200 Metric Tons (MT) of Sodium Carboxyl Methyl Cellulose (CMC). Reliance Cellulose Products Ltd. submitted a bid quoting Rs.14,999 per MT for quantities exceeding 900 MT. ONGC accepted the offer for 1200 MT, and a separate order was placed for an additional 600 MT. While payments were made at the accepted rate, Reliance sought a higher price per MT, leading to arbitration.

The arbitral tribunal ruled in favor of Reliance, fixing the price at Rs.18,500 per MT for 1200 MT and Rs.20,500 per MT for 600 MT. The tribunal awarded pre-reference, pendente lite, and future interest at 18% per annum. ONGC challenged the award, leading to a reduction of the interest rate to 10% by the High Court.

Arguments by the Parties

Reliance Cellulose Products Ltd.’s Arguments

• The arbitral award of 18% interest was justified based on prevailing financial conditions.
• The High Court’s reduction to 10% was arbitrary and solely based on ONGC’s status as a Public Sector Undertaking (PSU).
• Clause 16 of the General Conditions of Contract did not explicitly bar the award of pre-reference or pendente lite interest.
• Interest should be awarded on the differential amount between Rs.14,999 and the awarded rates from the cause of action until the full payment.

Oil and Natural Gas Corporation Ltd.’s (ONGC) Arguments

• Clause 16 of the contract prohibited any liability for interest due to delayed payment.
• The arbitral tribunal exceeded its authority by awarding interest when the contract explicitly barred it.
• The reduction of interest from 18% to 10% by the High Court was justified and should not be interfered with.

Supreme Court’s Observations

The Supreme Court analyzed the key legal principles regarding pre-reference and pendente lite interest under the Arbitration Act, 1940:

• An arbitrator has the power to grant pre-reference, pendente lite, and future interest, unless expressly prohibited by contract.
• Clause 16 of the ONGC contract did not explicitly bar the award of interest; it only mentioned that ONGC would not be liable for interest due to delayed payments.
• The arbitral tribunal acted within its jurisdiction by awarding interest.
• The High Court’s decision to reduce the interest rate to 10% was based solely on ONGC’s status as a PSU, which was not a legally justifiable reason.

Final Judgment

The Supreme Court allowed the appeal of Reliance Cellulose Products Ltd. and dismissed ONGC’s appeal. The Court reinstated the 18% interest rate for pre-reference and pendente lite interest and clarified:

• ONGC must pay the differential 8% interest (between 10% and 18%) for amounts deposited in 1999 and 2003 within eight weeks.
• Future interest from 1999 onwards was reduced to 6% per annum.
• The ruling reaffirmed that contractual interest bars must be explicit and specific to prohibit an arbitrator from awarding interest.

This judgment sets an important precedent on the interpretation of contractual clauses regarding interest and the discretionary power of arbitrators under the Arbitration Act, 1940.

Petitioner Name: Reliance Cellulose Products Ltd..
Respondent Name: Oil and Natural Gas Corporation Ltd..
Judgment By: Justice R.F. Nariman, Justice Indu Malhotra.
Place Of Incident: Gujarat.
Judgment Date: 20-07-2018.

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