India: Supreme Court Lays Down Guidelines To Determine The Interest Payable On Arbitral Awards In International Commercial Arbitrations

On 11 October 2018, the Supreme Court of India (Supreme Court), in Vedanta Limited v Shenzen Shandong Nuclear Power Construction Company Limited (Civil Appeal No. 10394 of 2018), laid down the guidelines to be followed by arbitrators while awarding interest in an arbitral award pursuant to an international commercial arbitration. These guidelines take into account international best practices and the law of the seat of arbitration. Importantly, the Supreme Court has provided that such interest cannot be penal in nature, despite the interest awarded being a form of reparations.

Background

The dispute pertains to four contracts (EPC contracts) between the purchaser, Vedanta Limited (Appellant) and the supplier, Shenzen Shandong Nuclear Power Construction Company Limited, a company incorporated in China (Respondent). The EPC contracts contained four identical arbitration agreements which designated Mumbai, India as the seat of arbitration. The contracts contained detailed clauses regarding the suspension and termination of the contract and the compensation payable to the Respondent in the event of such termination However, the EPC Contracts did not contain provisions regarding the award of interest on compensation payable. When a dispute arose regarding the EPC Contracts, the Respondent initiated arbitration proceedings against the Appellant. These proceedings constituted an international commercial arbitration governed by Part I of the Arbitration and Conciliation Act, 1996 (Act).

The arbitral tribunal's award contained separate sums of money payable under each claim (Award Amount). Under the first claim, a portion of the Award Amount was designated in Indian Rupees, while the rest was designated in Euros. Additionally, the arbitral award imposed an interest rate of 9% on the Award Amount payable from the date of the arbitral award, subject to the condition that the Award Amount is paid by the Appellant to the Respondent within 120 days of the date of the award. The arbitral award further stipulated that if the Award Amount was not paid to the Respondent within this 120 day period, the interest on the Award Amount would be payable at the rate of 15% till the date the amount was paid / date of realization.

The arbitral award was challenged by the Appellant before a single bench of the High Court of Delhi (High Court) under Section 34 of the Act. The single bench of the High Court dismissed the challenge. Thereafter, the Appellant filed an appeal before the division bench of the High Court under Section 37 of the Act. The appeal was dismissed by the division bench of the High Court. Ultimately, the Appellants preferred a special leave petition (SLP) before the Supreme Court. The contentions of the SLP were restricted to the rate of interest awarded on the Award Amount.

Analysis of the Supreme Court's Judgment

The Supreme Court modified the interest rates awarded by the arbitral tribunal considerably, keeping in mind Section 31(7)(b) of the Act and internationally recognized norms regarding interest rates in arbitral awards. Over the course of its analysis of Section 31(7) of the Act, the Supreme Court observed that an award of interest compensates a party for its forgone return on investment, or for money withheld without justifiable cause. It went on to differentiate between the interest as referred to in Section 31(7)(a) of the Act, which pertains to the time period when the case is pendente lite, and Section 31(7)(b) of the Act, which deals with interest on award amount after the date of the award. The Supreme Court observed that the crucial difference between the sub-clauses was the discretion accorded to the tribunal. While Section 31(7)(a) of the Act left the determination to the discretion of the arbitral tribunal, Section 31(7)(b) of the Act denies the tribunal such discretion and mandates that the rate of interest be 2% higher than the current rate of interest, as on the date of the award.

Accounting for the above, the Supreme Court did not uphold the interest rates stipulated by the arbitral award on the following two grounds:

Ground One

The Supreme Court held that the dual interest rate of 9% and 15% is penal, as opposed to being compensatory in nature. The Supreme Court observed that the increase in the interest amount was steep, and that the time period it was based on was arbitrary because 120 days is the time within which an appeal to an arbitral award may be filed, as per Section 34 of the Act. A penal rate of interest cannot be imposed during the statutory time period of an appeal, or afterwards.

The Supreme Court further observed that there are no standard rules for the award of interest in international commercial arbitration, and the process is "riddled with consistencies". However, such awards must be made keeping in mind reasonableness and the following eight considerations:

     "(i)       the 'loss of use' of the principal sum;

  1. the types of sums to which the Interest must apply;
  2. the time period over which interest should be awarded;
  3. the internationally prevailing rates of interest;
  4. whether simple or compound rate of interest is to be applied;
  5. whether the rate of interest awarded is commercially prudent from an economic standpoint;
  6. the rates of inflation and
  7. proportionality of the count awarded as Interest to the principal sums awarded."

Therefore, the dual interest rate was rejected by the Supreme Court and a rate of 9% till the date of realization of the arbitral award was determined for the portion of the Award Amount to be paid in Indian Rupees.

Ground Two

The Supreme Court modified the impugned arbitral award because it imposed a flat interest rate on two sums of different international currencies. Interest at the rate of 9% for the award amount in Euros was observed to be unduly high, and in the nature of compensation, which was not provided for in the EPC contracts. The Supreme Court modified the arbitral award and mandated that interest on the Euro component of the Award Amount be paid as per LIBOR with a margin of 3%. In doing so, the Supreme Court acknowledged the importance of LIBOR, which is the average interest rate calculated on the interest rates paid by various banks in London on the amount they pay after borrowing from other banks.

Comment

This judgment adds to the catena of recent judgments by the Supreme Court that aim at strengthening India's capacity to deal with international commercial arbitrations and the improvement of the international community's perception of the same. A judgment which lays down clear guidelines regarding the levy of interest on arbitral awards contributes significantly towards streamlining the substantive and procedural considerations to be used by arbitrators while granting awards. Furthermore, reference to international benchmarks such as LIBOR not only align arbitration law in India to global best practices, but also ensure that the tenets of reasonableness and non-arbitrariness are adhered to. This allays the concerns of the school of thought that believes that the globalization of India's arbitration regime cannot account for due process.

The content of this document do not necessarily reflect the views/position of Khaitan & Co but remain solely those of the author(s). For any further queries or follow up please contact Khaitan & Co at legalalerts@khaitanco.com

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Sign Up
Gain free access to lawyers expertise from more than 250 countries.
 
Email Address
Company Name
Password
Confirm Password
Position
Industry
Mondaq Newsalert
Select Topics
Select Regions
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions