# RELIANCE CELLULOSE PRODUCTS LTD v. OIL AND NATURAL GAS CORPORATION LTD

- **Citation:** [2018] 6 S.C.R. 618
- **Court:** Supreme Court of India
- **Decided:** 2018-07-20
- **Case number:** Civil Appeal No. 1110 of 2010
- **Bench:** R. F. Nariman, Indu Malhotra
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/reliance-cellulose-products-ltd-v-oil-and-natural-gas-corporation-ltd-32804
- **Pages:** 30

## Headnote

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,
[2018] 6 S.C.R. 618
618
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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

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RELIANCE CELLULOSE PRODUCTS LTD.
v.
OIL AND NATURAL GAS CORPORATION LTD.
(Civil Appeal No. 1110 of 2010)
JULY 20, 2018
[R. F. NARIMAN AND INDU MALHOTRA, JJ.]
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,
[2018] 6 S.C.R. 618
618
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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
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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]
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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 :
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[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.
Case Law Reference
[1991] 3 Suppl. SCR 417
referred to
Para 7
[1988] 1 SCR 253
referred to
Para 7
[2001] 1 SCR 264
referred to
Para 7
[1995] 6 Suppl. SCR 327
referred to
Para 8
[2005] 3 SCR 232
referred to
Para 9
[2008] 8 SCR 35
referred to
Para 10
[2009] 10 SCR 31
referred to
Para 11
[2009] 10 SCR 1063
referred to
Para 12
[2009] 16 SCR 216
referred to
Para 13
[1998] 2 Suppl. SCR 660
referred to
Para 13
[2010] 10 SCR 487
referred to
Para 14
[2011] 8 SCR 196
referred to
Para 15
[2012] 8 SCR 813
referred to
Para 17
[2015] 6 SCR 488
referred to
Para 18
[2016] 2 SCR 810
referred to
Para 19
(2017) 14 SCC 323
referred to
Para 20
2018 (8 ) SCALE 415
referred to
Para 21
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CIVIL APPELLATE JURISDICTION : Civil Appeal No. 1110
of 2010.
From the Judgment and Order dated 23.08.2006 of the High Court
of Gujarat at Ahmedabad in First Appeal No. 5767 of 1998
WITH
Civil Appeal No. 1111 of 2010.
Sandeep Sethi, ASG, K. V. Viswanathan, Sr. Adv., Shabyashachi
Patra, Sanjeev Kumar (for M/s Khaitan & Co.), P. B. Suresh, Vipin
Nair, Abhay Pratap Singh, Advs.for the appearing parties.
The Judgment of the Court was delivered by
R. F. NARIMAN, J. 1. The present appeals relate to questions
which arise qua the pre-reference and pendente lite interest under the
Arbitration Act, 1940. 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 MT.
2. 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 place.
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3. 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.
4. Shri K.V. Viswanathan, who argued Civil Appeal No.1110/2010,
has argued before us that no good reason is given for reducing interest
from 18% to 10%. Indeed, the only reason that is forthcoming from the
impugned judgment is that interest has been reduced because ONGC is
a Public Sector Undertaking. According to him, therefore, pre-reference,
pendente lite and future interest at 18% all become payable from the
date of the cause of action till 21.01.1999, when the ONGC had deposited
an amount of Rs.1,09,34,323/-, and an amount of Rs.46,86,138/- on
30.04.2003, on account of principal and interest at the rate of 10% per
annum, and differential interest till date.
5. In the ONGC appeal, the learned Additional Solicitor General,
Shri Sandeep Sethi, has argued that though the plea that no pre-reference
or pendente lite interest was payable, there is an express bar to the grant
of such interest between the parties, which was noted by both the learned
Civil Judge and the High Court, but no finding has been given thereon.
According to the learned ASG, clause 16 of the General Conditions of
Contract clearly bars payment of interest for any delay and is set out
hereinbelow:
"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."
6. He has cited a number of judgments to buttress his submission
that clause 16 would amount to a contractual bar to the payment of any
interest on the facts of this case. On the other hand, Shri Viswanathan
has also referred to various judgments. His argument is that clause 16
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does not apply at all on the facts of this case as there was no delay in
payment, but only the difference between the sum of Rs.14,999/- per
MT and the higher figures mentioned above were payable on account of
the disputes between the parties being resolved through arbitration. In
any case, he submitted that a holistic reading of the various decisions
cited by both the learned ASG as well as by him would show that so far
as the 1940 Act is concerned, interest would be payable only if there is
no express bar in the agreement, and agreements between the parties
have to be construed strictly as interest is the grant of compensation for
value of money lost, as has been held in some of the judgments. This
being so, though there may be a bar inter-se the parties, yet the Arbitrator
is not barred from awarding either pre-reference or pendente lite interest.
It may be added that there is no dispute that future interest is to be
granted, except as to the rate of interest awarded.
7. Two important five-Judge Bench judgments have laid down
that, under the 1940 Act, in the absence of an express bar under the
agreement, the Arbitrator has jurisdiction to award interest for all three
periods, i.e., pre-reference, pendente lite as well as future interest. The
judgment of this Court in Irrigation Department, State of Orissa v.
G.C. Roy, (1992) 1 SCC 508, overruled Jena's case [Executive
Engineer (Irrigation), Balimela v. Abhaduta Jena, (1988) 1 SCC 418]
and held that arbitrators under the 1940 Act would be clothed with the
jurisdiction to award pendente lite interest. Insofar as pre-reference
interest is concerned, another five-Judge Bench in Executive Engineer,
Dhenkanal Minor Irrigation Division, Orissa and Ors. v. N.C.
Budharaj, (2001) 2 SCC 721, held that arbitrators under the 1940 Act
were clothed with the power to award pre-reference interest even before
the 1978 Interest Act came into force. We are concerned in the present
case only with the 1940 Act. The 1996 Act has made a major departure
from the position under the 1940 Act qua pre-reference and pendente
lite interest which will emerge from the conspectus of case law laid
down by this Court.
8. In Board of Trustees for the Port of Calcutta v. EngineersDe-Space-Age, (1996) 1 SCC 516, a two-Judge Bench of this Court
had to consider whether clause 13(g) of the contract barred the award
of interest pendente lite. Clause 13(g) of the contract in that case is set
out hereunder:-
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"No claim for interest will be entertained by the Commissioners
with respect to any money or balance which may be in their hands
owing to any dispute between themselves and the Contractor or
with respect to any delay on the part of the Commissioners in
making interim or final payment or otherwise."
 [at paragraph 2]
After setting out the judgment in G.C. Roy (supra), this Court
held:-
"4. We are not dealing with a case in regard to award of interest
for the period prior to the reference. We are dealing with a case
in regard to award of interest by the arbitrator post reference.
The short question, therefore, is whether in view of sub-clause
(g) of clause 13 of the contract extracted earlier the arbitrator
was prohibited from granting interest under the contract. Now
the term in sub-clause (g) merely prohibits the Commissioner from
entertaining any claim for interest and does not prohibit the
arbitrator from awarding interest. The opening words "no claim
for interest will be entertained by the Commissioner" clearly
establishes that the intention was to prohibit the Commissioner
from granting interest on account of delayed payment to the
contractor. Clause has to be strictly construed for the simple reason
that as pointed out by the Constitution Bench, ordinarily, a person
who has a legitimate claim is entitled to payment within a reasonable
time and if the payment has been delayed beyond reasonable time
he can legitimately claim to be compensated for that delay
whatever nomenclature one may give to his claim in that behalf.
If that be so, we would be justified in placing a strict construction
on the term of the contract on which reliance has been placed.
Strictly construed the term of the contract merely prohibits the
Commissioner from paying interest to the contractor for delayed
payment but once the matter goes to arbitration the discretion of
the arbitrator is not, in any manner, stifled by this term of the
contract and the arbitrator would be entitled to consider the question
of grant of interest pendente lite and award interest if he finds the
claim to be justified. We are, therefore, of the opinion that under
the clause of the contract the arbitrator was in no manner prohibited
from awarding interest pendente lite."
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9. In Bhagwati Oxygen Ltd. v. Hindustan Copper Ltd., (2005)
6 SCC 462, a judgment of two learned judges arising out of the 1940
Act, this Court was concerned with all the three periods relating to interest,
and held that it was open for the Arbitrator acting under the 1940 Act to
award interest for each of these periods provided there is no contractual
bar.
10. In M.B. Patel and Co. v. ONGC, (2008) 8 SCC 251, the
clause which was said to interdict interest was clause 18 of the
Agreement which provided as follows:
"18. Interest on amounts.-No interest will be payable on the
security deposit or any other amount payable to the contractor
under the contract."
 [at paragraph 4]
The Court held that interest had been awarded in violation of
clause 14 of the Agreement as the Arbitrator did not take into account
this clause at all. On this and other grounds, the Award as a whole was
set aside, and remanded to the Arbitrator to consider the matter afresh.
11. In State of Rajasthan and Anr. v. M/s. Ferro Concrete
Construction (P) Ltd., (2009) 12 SCC 1, a two-Judge Bench decision
of this Court was concerned with pre-reference interest given by an
award under the 1940 Act. This Court restated the position qua prereference interest by referring to the five-Judge Bench referred to
hereinabove and Bhagwati Oxygen (supra). What was highlighted was
the importance of the Interest Act, 1978, under Section 3 of which it is
clear that pre-reference interest can be allowed by an arbitrator unless
there is a bar by virtue of an express provision between the parties (see
paragraphs 63 and 64).
12. In Union of India v. Saraswat Trading Agency, (2009) 16
SCC 504, the question of pendente lite interest arose under the Arbitration
and Conciliation Act, 1996. The clause which was said to bar interest in
the aforesaid case was clause 31 of the Agreement which provided as
follows:
"31. No interest or damage for delay in payment.-No interest
or damage shall be paid to the contractor for delay in payment
of the bill or any other amount due to the contractor for any
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reason whatsoever. The Railway Administration will, however,
make every endeavour for payment of the bills or other amount
due to the contractor within a reasonable time."
 [emphasis supplied]
The judgment in Engineers-De-Space-Age (supra) was
distinguished by stating that clause 31 of the Agreement was materially
different as no interest or damage was payable for any reason
whatsoever, as a result of which it was held:
"33. In the case in hand Clause 31 of the agreement is materially
different. It bars payment of any interest or damage to the
contractor for any reason whatsoever. We are, therefore, clearly
of the view that no pre-reference or pendente lite interest was
payable to the respondent on the amount under Item 3 and the
arbitrator's award allowing pre-reference and pendente lite interest
on that amount was plainly in breach of the express terms of the
agreement. The order of the High Court insofar as pre-reference
and pendente lite interest on the amount under Item 3 is concerned
is, therefore, unsustainable."
This case has later been distinguished as having arisen under the
1996 Act, under which the position qua both pre-reference and pendente
lite interest is materially different.
13. In Madnani Construction Corporation (P) Ltd. v. Union
of India and Ors., (2010) 1 SCC 549, two judges of this Court had to
deal with the grant of pre-reference interest under the Interest Act in an
award passed under the 1940 Act. Paragraphs 22 and 23 of the judgment
set out the clauses which interdict payment of interest as follows:
"22. ... Clause 16(2) of GCC is set out below:
"16. (2) No interest will be payable upon the earnest money or
the security deposit or amounts payable to the contractor under
the contract but government securities deposited in terms of
such Clause (1) of this Clause will be repayable with interest
accrued thereto."
23. ... The relevant portion of Clause 30 relating to interest is set
out below:
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"... That the contractor will have no claim for interest and
damage whatsoever on any account in respect of such
withholding or retention under the lien referred to supra and
duly notified as such to the contractor."
After referring to the Interest Act and Section 29 of the Arbitration
Act, 1940, the Court referred to a three-Judge Bench decision in State
of U.P. v. Harish Chandra and Co., (1999) 1 SCC 63, as follows:
"34. In a subsequent decision of a three-Judge Bench in State of
U.P. v. Harish Chandra and Co. [(1999) 1 SCC 63] there was
stipulation in the arbitration agreement against grant of interest.
The relevant clause, namely, Clause 1.9 to the aforesaid effect is
set out below: (SCC p. 67, para 9)
"9. ... '1.9. No claim for delayed payment due to dispute,
etc.-No claim for interest or damages will be entertained by
the Government with respect to any moneys or balances which
may be lying with the Government owing to any dispute,
difference; or misunderstanding between the Engineer-inCharge in marking periodical or final payments or in any other
respect whatsoever.' "
Considering the said clause, the Court held that the prohibition in
the said clause does not prevent the contractor from raising the
claim of interest by way of damages before the arbitrator on the
relevant items placed for adjudication. (See SCC p. 67, para 10.)
In saying so, the learned Judges relied on the ratio in B.N.
Agarwalla [(1997) 2 SCC 469] and G.C. Roy [(1992) 1 SCC
508]."
It then referred to Engineers-De-Space-Age (supra) in
paragraph 35 and Saraswat Trading Agency (supra) in paragraphs 37
and 38. Finally, however, the two-Judge Bench held:-
"39. In the instant case also the relevant clauses, which have
been quoted above, namely, Clause 16(2) of GCC and Clause 30
of SCC do not contain any prohibition on the arbitrator to grant
interest. Therefore, the High Court was not right in interfering
with the arbitrator's award on the matter of interest on the basis
of the aforesaid clauses. We therefore, on a strict construction of
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those clauses and relying on the ratio in Engineers [(1996) 1 SCC
516] find that the said clauses do not impose any bar on the arbitrator
in granting interest."
14. In Sree Kamatchi Amman Constructions v. The
Divisional Railway Manager (Works), Palghat and Ors., (2010) 8
SCC 767, a two-Judge Bench of this Court, after referring to some of
the earlier judgments of this Court, held: -
"18. At the outset it should be noticed that Engineers-De-SpaceAge [(1996) 1 SCC 516] and Madnani [(2010) 1 SCC 549] arose
under the old Arbitration Act, 1940 which did not contain a provision
similar to Section 31(7) of the new Act. This Court, in Sayeed
Ahmed [(2009) 12 SCC 26] held that the decisions rendered under
the old Act may not be of assistance to decide the validity of grant
of interest under the new Act. The logic in Engineers-De-SpaceAge [(1996) 1 SCC 516] was that while the contract governed
the interest from the date of cause of action to date of reference,
the arbitrator had the discretion to decide the rate of interest from
the date of reference to date of award and he was not bound by
any prohibition regarding interest contained in the contract, insofar
as pendente lite period is concerned. This Court in Sayeed Ahmed
[(2009) 12 SCC 26] held that the decision in Engineers-De-SpaceAge [(1996) 1 SCC 516] would not apply to cases arising under
the new Act. We extract below, the relevant portion from Sayeed
Ahmed [(2009) 12 SCC 26] : (SCC p. 36, paras 23-24)
"23. The observation in Engineers-De-Space-Age [(1996) 1
SCC 516] that the term of the contract merely prohibits the
department/ employer from paying interest to the contractor
for delayed payment but once the matter goes to the arbitrator,
the discretion of the arbitrator is not in any manner stifled by
the terms of the contract and the arbitrator will be entitled to
consider and grant the interest pendente lite, cannot be used to
support an outlandish argument that bar on the Government or
department paying interest is not a bar on the arbitrator
awarding interest. Whether the provision in the contract bars
the employer from entertaining any claim for interest or bars
the contractor from making any claim for interest, it amounts
to a clear prohibition regarding interest. The provision need
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not contain another bar prohibiting the arbitrator from awarding
interest. The observations made in the context of interest
pendente lite cannot be used out of contract.
24. The learned counsel for the appellant next contended on
the basis of the above observations in Engineers-De-SpaceAge [(1996) 1 SCC 516], that even if Clause G 1.09 is held to
bar interest in the pre-reference period, it should be held not to
apply to the pendente lite period, that is, from 14-3-1997 to 317-2001. He contended that the award of interest during the
pendency of the reference was within the discretion of the
arbitrator and therefore, the award of interest for that period
could not have been interfered with by the High Court. In view
of the Constitution Bench decisions in G.C. Roy [(1992) 1 SCC
508] and N.C. Budharaj [(2001) 2 SCC 721] rendered before
and after the decision in Engineers-De-Space-Age [(1996) 1
SCC 16], it is doubtful whether the observation in EngineersDe-Space-Age [(1996) 1 SCC 516] in a case arising under
the Arbitration Act, 1940 that the arbitrator could award interest
pendente lite, ignoring the express bar in the contract, is good
law. But that need not be considered further as this is a case
under the new Act where there is a specific provision regarding
award of interest by the arbitrator."
The same reasoning applies to the decision in Madnani [(2010)
1 SCC 549] also as that also relates to a case under the old
Act and did not independently consider the issue but merely
relied upon the decision in Engineers-De-Space-Age [(1996)
1 SCC 516].
19. Section 37(1) [Sic Section 31(7)] of the new Act by using the
words "unless otherwise agreed by the parties" categorically
clarifies that the arbitrator is bound by the terms of the contract
insofar as the award of interest from the date of cause of action
to the date of award. Therefore, where the parties had agreed
that no interest shall be payable, the Arbitral Tribunal cannot award
interest between the date when the cause of action arose to the
date of award."
 [emphasis supplied]
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15. In Union of India v. Krafters Engineering and Leasing
(P) Ltd. (2011) 7 SCC 279, a two-Judge Bench considered as to whether
clause 1.15 of the contract in that case would bar pendente lite interest.
Clause 1.15 reads as follows:
"1.15. Interest on amounts.-No interest will be payable upon
the earnest money or the security deposit or amounts payable to
the contractor under the contract but government securities
deposited in terms of Clause 1.14.4 will be repayable with interest
accrued thereon."
This Court, after referring to Engineers-De-Space-Age (supra)
and Sayeed Ahmed [Sayeed Ahmed and Co. v. State of U.P., (2009)
12 SCC 26], then held that they were of the view that Sayeed Ahmed
(supra) having held to the contrary, Engineers-De-Space-Age (supra)
could not possibly be followed. Same was the position with Madnani
Construction (supra) which was dismissed by saying that it did not
independently consider the issue but merely relied upon the decision in
Engineers-De-Space-Age (supra). The Court then went on to state:-
"20. In the light of the above discussion, the following conclusion
emerges: reliance based on the ratio in Engineers-De-SpaceAge [(1996) 1 SCC 516] is unacceptable since the said view has
been overruled in Sayeed Ahmed and Co. [(2009) 12 SCC 26 :
(2009) 4 SCC (Civ) 629] and insofar as the ratio in Madnani
Construction Corpn. (P) Ltd. [(2010) 1 SCC 549 : (2010) 1 SCC
(Civ) 168] which is also unacceptable for the reasons mentioned
in the earlier paras, we reject the stand taken by the counsel for
the respondent. On the other hand, we fully accept the stand of
the Union of India as rightly projected by Mr. A.S. Chandhiok,
learned ASG. We reiterate that where the parties had agreed that
no interest shall be payable, the arbitrator cannot award interest
for the amounts payable to the contractor under the contract.
Where the agreement between the parties does not prohibit grant
of interest and where a party claims interest and the said dispute
is referred to the arbitrator, he shall have the power to award
interest pendente lite. As observed by the Constitution Bench in
G.C. Roy case [(1992) 1 SCC 508], in such a case, it must be
presumed that interest was an implied term of the agreement
between the parties. However, this does not mean that in every
case, the arbitrator should necessarily award interest pendente
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lite. In the subsequent decision of the Constitution Bench i.e. N.C.
Budharaj case [(2001) 2 SCC 721], it has been reiterated that in
the absence of any specific stipulation or prohibition in the contract
to claim or grant any such interest, the arbitrator is free to award
interest.
21. In the light of the above principle and in view of the specific
prohibition of contract contained in Clause 1.15, the arbitrator
ceases to have the power to grant interest. We also clarify that
the Arbitration Act, 1940 does not contain any specific provision
relating to the power of arbitrator to award interest. However, in
the Arbitration and Conciliation Act, 1996, there is a specific
provision with regard to award of interest by the arbitrator. The
bar under Clause 1.15 is absolute and interest cannot be awarded
without rewriting the contract."
16. Clearly, the conclusion of the Court that Engineers-DeSpace-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 Act.
17. In Tehri Hydro Development Corporation Ltd. v. Jai
Prakash Associates Ltd., (2012) 12 SCC 10, a three-Judge Bench of
this Court dealt with an award passed under the 1940 Act. The relevant
clauses barring interest under the agreement in that case are set out
herein below:-
"14. ... Clauses 1.2.14 and 1.2.15 on which much arguments
have been advanced by the learned counsel for both sides may
now be extracted below:
 "PART II
CONDITIONS OF CONTRACT
1.2.14. No claim for delayed payment due to dispute, etc.-
The contractor agrees that no claim for interest of damages
will be entertained or payable by the Government in respect of
any money or balances which may be lying with the
Government owing to any disputes, differences or
misunderstandings between the parties or in respect of any
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delay or omission on the part of the engineer-in-charge in
making immediate or final payments or in any other respect
whatsoever.
1.2.15. Interest on money due to the contractor.-No
omission on the part of the engineer-in-charge to pay the amount
due upon measurement or otherwise shall vitiate or make void
the contract, nor shall the contractor be entitled to interest upon
any guarantee or payments in arrears nor upon any balance
which may on the final settlement of his accounts be due to
him."
After referring to Krafters Engineering (supra) and some of
the earlier judgments, it was held:
"16. In Krafters Engg. case [(2011) 7 SCC 279 : (2011) 3 SCC
(Civ) 533] the somewhat discordant note struck by the decisions
of this Court in Port of Calcutta v. Engineers-De-Space-Age
[(1996) 1 SCC 516] and Madnani Construction Corpn. (P) Ltd.
v. Union of India [(2010) 1 SCC 549 : (2010) 1 SCC (Civ) 168]
were also taken note of. Thereafter, it was also noticed that the
decision in Engineers-De-Space-Age case [(1996) 1 SCC 516]
was considered in Sayeed Ahmed & Co. v. State of U.P. [(2009)
12 SCC 26 : (2009) 4 SCC (Civ) 629] and the decision in Madnani
Construction case [(2010) 1 SCC 549 : (2010) 1 SCC (Civ) 168]
was considered in Sree Kamatchi Amman Constructions v.
Railways [(2010) 8 SCC 767 : (2010) 3 SCC (Civ) 575] . In Sayeed
Ahmed case [(2009) 12 SCC 26 : (2009) 4 SCC (Civ) 629] (SCC
para 24) it was held that in the light of the decisions of the
Constitution Bench in G.C. Roy case[(1992) 1 SCC 508] and
N.C. Budharaj case [(2001) 2 SCC 721] it is doubtful whether
the observations in Engineers-De-Space-Age case [(1996) 1
SCC 516] to the effect that the arbitrator could award interest
pendente lite, ignoring the express bar in the contract, is good law.
In Sree Kamatchi Amman Constructions case [(2010) 8 SCC
767 : (2010) 3 SCC (Civ) 575] while considering Madnani case
[(2010) 1 SCC 549 : (2010) 1 SCC (Civ) 168] this Court noted
that the decision in Madnani case [(2010) 1 SCC 549 : (2010) 1
SCC (Civ) 168] follows the decision in Engineers-De-SpaceAge case[(1996) 1 SCC 516]."
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In this view of the matter, the Court held:
"19. Clauses 1.2.14 and 1.2.15, already extracted and analysed,
imposed a clear bar on either entertainment or payment of interest
in any situation of non-payment or delayed payment of either the
amounts due for work done or lying in security deposit. On the
basis of the discussions that have preceded we, therefore, take
the view that the grant of pendente lite interest on the claim of Rs
10,17,461 lakhs is not justified. The award as well as the orders of
the courts below are accordingly modified to the aforesaid extent.
20. However, the grant of interest for the post-award period would
stand on a somewhat different footing. This very issue has been
elaborately considered by this Court in B.N. Agarwalla [(1997) 2
SCC 469] in the light of the provisions of Section 29 of the
Arbitration Act, 1940. Eventually this Court took the view that in
a situation where the award passed by the arbitrator granting
interest from the date of the award till the date of payment is not
modified by the Court "... the effect would be as if the Court
itself had granted interest from the date of the decree till the date
of payment...". In view of the above, the grant of interest on the
amount of Rs 10,17,461 lakhs from the date of the award till the
date of the decree or date of payment, whichever is earlier, is
upheld. In the facts of the case we are of the view that the rate of
interest should be 12% per annum as determined in the arbitration
proceeding between the parties."
18. In Union of India v. Bright Power Projects (India) (P)
Ltd., (2015) 9 SCC 695, a three-Judge Bench of this Court had to deal
with interest awarded by an arbitral award under the 1996 Act. This
judgment, like Sree Kamatchi Amman Constructions (supra), sets
out how Section 31(7)(a) is a complete departure from the position under
the 1940 Act. This Court held:-
"12.