Reliance Cellulose Products Ltd. v. Oil and Natural Gas Corporation Ltd.
Background
ONGC had contracted with Reliance Cellulose Products Ltd. for supply of a chemical (Sodium Carboxyl Methyl Cellulose), and a price dispute went to arbitration. The arbitrators fixed a higher price than originally quoted and awarded 18% annual interest (pre-reference, pendente lite, and future) on the price difference. A civil court reduced this interest to 10% simply because ONGC was a government-owned company, and the High Court affirmed that reduction; both parties then cross-appealed to the Supreme Court.
Decision Breakdown
The Supreme Court held that a contractual clause barring interest for payment delays did not apply here, because the higher price itself only became payable once the arbitral award was passed: there was no "delay" in paying an amount not yet fixed. On the interest-rate reduction, the Court found that reducing interest from 18% to 10% solely because ONGC was a Public Sector Undertaking, without any finding that the arbitrator's discretion had been exercised perversely, was unjustified. The Court therefore dismissed ONGC's appeal and allowed Reliance's appeal, restoring 18% interest for the pre-award period and directing ONGC to pay the differential interest amount within eight weeks, with reduced future interest only on the balance differential sum from specified payment dates.
Lesson Learnt
Courts will not reduce interest validly awarded by an arbitrator merely because the paying party is a government-owned company: a reduction requires a specific finding that the arbitrator's exercise of discretion was unreasonable or perverse.