The Supreme Court of India, in a significant ruling on arbitration law, has held that a contractual clause that merely bars the payment of interest on delayed payments does not, by itself, prevent an arbitral tribunal from awarding pendente lite interest (interest for the period during which the legal proceedings are pending). The division bench of Justice P. S. Narasimha and Justice Manoj Misra dismissed an appeal filed by the Oil and Natural Gas Corporation Ltd. (ONGC), thereby upholding an arbitral award that granted interest to M/S G & T Beckfield Drilling Services Pvt. Ltd. from the date its claim was filed.
Background of the Case
The dispute originated from an arbitral award dated November 21, 2004, where a three-member tribunal directed ONGC to pay G & T Beckfield Drilling a total of USD 6,56,272.34. The tribunal also awarded interest at a rate of 12% per annum on this amount, calculated from December 12, 1998—the date the statement of claim was affirmed—until the recovery of the sum.
Aggrieved by the award, ONGC challenged it before the District Judge, Sivasagar, under Section 34 of the Arbitration and Conciliation Act, 1996. ONGC argued, among other things, that Clause 18.1 of their agreement barred the payment of interest. The District Judge, in an order dated November 15, 2007, set aside the arbitral award, finding it to be non-reasoned and in violation of Section 31(3) of the Act.
G & T Beckfield Drilling then appealed this decision to the Gauhati High Court under Section 37 of the Act. The High Court, by its judgment dated March 8, 2019, allowed the appeal, set aside the District Judge’s order, and affirmed the original arbitral award. This led ONGC to file a Special Leave Petition before the Supreme Court. The Supreme Court issued a limited notice, confining the scope of the appeal solely to the question of whether the interest awarded by the arbitral tribunal was permissible.
Arguments of the Parties
The counsel for the appellant, ONGC, centered their argument on Clause 18.1 of the agreement, which states:
“No interest shall be payable by ONGC on any delayed payment/disputed claim.”
ONGC contended that this clause constituted an express bar on the award of interest. They argued that under Section 31(7)(a) of the 1996 Act, the power of an arbitral tribunal to award interest is subject to any agreement to the contrary between the parties. Therefore, the award of pendente lite interest was in direct contravention of the contract.
Conversely, the counsel for the respondent, G & T Beckfield Drilling, submitted that the clause, when read in its entirety, did not proscribe the payment of pendente lite interest. They highlighted that the arbitral tribunal had already declined to award interest for the pre-reference period (from the date the cause of action arose to the filing of the claim) and had only granted interest from the date the claim was affirmed before the tribunal. They argued that once the tribunal found that ONGC had unjustifiably withheld the amounts, the award of interest was lawful.
Court’s Analysis and Reasoning
The Supreme Court framed the central issue as “whether clause 18.1 proscribes payment of even pendente lite interest on the sum awarded.”
The bench, led by Justice Misra, began by analyzing Section 31(7) of the 1996 Act, which governs the award of interest. The Court noted that the power to award pre-reference and pendente lite interest under Section 31(7)(a) is subject to the agreement between the parties. However, post-award interest under Section 31(7)(b) is statutorily governed and cannot be contracted out by the parties.
To determine if Clause 18.1 constituted a bar, the Court reviewed several key precedents. It referred to the Constitution Bench decision in Irrigation Deptt., State of Orissa v. G.C. Roy and the three-judge bench ruling in Union of India v. Ambica Construction, which established that “the bar to award interest on delayed payment by itself will not be readily inferred as express bar to award pendente-lite interest by the arbitral tribunal.” The Court emphasized that the ouster of an arbitrator’s power must be clear and specific.
The judgment drew a sharp contrast between the clause in the present case and the more comprehensively worded clauses in cases like Sayeed Ahmed & Co. v. State of Uttar Pradesh and Tehri Hydro Development Corpn. Ltd. v. Jai Prakash Associates Ltd. In those cases, the contractual clauses barred claims for interest “in any other respect whatsoever,” which was interpreted as an absolute and unequivocal prohibition.
Applying this legal standard, the Court found that Clause 18.1 did not contain such sweeping language. The judgment observed:
“The clause merely says that there would be no interest payable by the Corporation on any delayed payment / disputed claim. Neither it bars the arbitral tribunal from awarding pendente lite interest nor it says that interest would not be payable in any respect whatsoever as was the phraseology of the interest proscribing clause in Sayeed Ahmed & Co. (supra) and THDC First (supra).”
The Court concluded that to denude an arbitral tribunal of its power to award pendente lite interest, the agreement must bar it either explicitly or by necessary implication.
Final Decision
Based on its analysis, the Supreme Court held that Clause 18.1 did not limit the statutory power of the arbitral tribunal to award pendente lite interest. Finding no error in the award of interest, the Court dismissed ONGC’s appeal and upheld the judgment of the Gauhati High Court, which had affirmed the arbitral award in its entirety.
