In an international commercial arbitration, in the absence of an agreement between the parties on interest, the rate of interest shall be governed by the law of the Seat of arbitration.
IN THE SUPREME COURT OF
Vedanta Ltd. v. Shenzen Shandong Nuclear Power Construction Co. Ltd.
(Arising out of SLP (Civil) No. 25819 of 2018)
[JUDGEMENT ON 11.10.2018]
The Appellant and Respondent Company had entered into four inter-related contracts for construction of a 210MW Co-Generation Power Plant. These four contracts together comprised of EPC contracts between the appellant and respondent.
All the EPC contracts provided for an Arbitration clause. The Arbitration clause specified the seat of arbitration as India and also specified applicability of Arbitration & Conciliation Act 1996 with all modifications and re-enactments.
The EPC Contracts contained a termination clause that specified that after giving due written notice, the purchaser may suspend work, wholly or partly and the supplier, in accordance with the terms of notice, would continue or abstain from work specified under terms of the contract and the notice.
If such suspension continues for more than 180 days, at the end of the period, the Supplier shall be by a further 30 days prior notice, entitled to terminate the Contract and Purchaser shall pay to the Supplier 105% of the cost incurred by the Supplier till the date of termination as compensation after adjusting payments already made till the termination.
Disputes arose between the parties, which resulted in the termination of the EPC Contracts by the Respondent vide notice dated 25.02.2011. The Respondent called upon the Appellant to pay the outstanding dues.
The Respondent invoked the Arbitration Clause vide Notice dated 18.04.2012. The disputes were then emanating out of the EPC contracts were referred to arbitration.
The Respondent raised various Claims in multiple currencies amounting to Rs. 4,472,106,315; US $ 2,380,000; and EUR 121,723,214 along with pendent lite and future Interest @ 18% p.a.
In response, the Appellant filed a Counter Claim amounting to Rs. 2458, 34, 89,367 along with Interest @18% p.a. before the arbitral tribunal.
On 9/11/2017, the arbitral tribunal passed an award in favor of the Respondents and directed the Appellant to pay within 120 days @9% interest the following amounts:
I. Under First Claim
- Rs. 46,71,41,942/and Euro 23,717,437;
- Rs. 12,19,69,047
II. Under the Second claim:
- Rs. 25,47,325/; and
- Rs. 6,06,707/
- Rs. 1,31,10,990/
The Arbitral tribunal also awarded 50 lakhs rupees as cost and legal expense to the Respondent and also specified that if the appellant did not pay the amount within 120 days then interest would be applicable @15% till the date of realization.
Aggrieved by the said Award, the Appellant filed an appeal under Section 34 before the Delhi High Court which came to be rejected vide Order dated 12/02/2018.
Aggrieved by the judgment of the Single Judge, the Appellant filed an Appeal before a Division Bench of the Delhi High Court under Section 37 of the said Act. The Division Bench too dismissed the Appeal vide Order dated 30/08/2018.
Hence the Appellant preferred a Special Leave Petition in the Supreme Court.
ISSUES BEFORE SC
The Appellant restricted the challenge to the rate of Interest awarded by the arbitral tribunal.
Thus the issue before the Supreme Court was whether the dual rate of interest adopted by the tribunal in their award is justified in law?
The Court observed that a reasonable discretion must be exercised by the arbitrator while awarding interest.
The court noted that an award debtor cannot be subjected to a penal rate of interest, even during the period when he is entitled to exercise his statutory right to challenge the award before a court and not even after that period.
The Court also observed that:
"An arbitral tribunal while making an award for Interest must take into consideration a host of factors, such as:
- the 'loss of use' of the principal sum;
- the types of sums to which the Interest must apply;
- the time period over which interest should be awarded;
- The internationally prevailing rates of interest;
- Whether simple or compound rate of interest is to be applied;
- Whether the rate of interest awarded is commercially prudent from an economic standpoint;
- The rates of inflation;
- Proportionality of the count awarded as Interest to the principal sums awarded.
The Court, according to the factual position, concluded that it would be contrary to the principle of proportionality and reasonableness if grant of 15% Interest is allowed as it is excessive.
The award of Interest @ 9% on the Euro component of the Claim is unjustified and unwarranted. The levy of such a high rate of Interest on a claim made in a foreign currency would result in the Respondent being awarded compensation, contrary to the conditions stipulated in the Contract.
With respect to the EUR component, the award debtor will be liable to pay Interest at the LIBOR rate +3 percentage points, prevailing on the date of the Award.
REASON OF JURISPRUDENCE
The Court reasoned that –
When the parties do not operate in the same currency, it is necessary to take into account the complications caused by differential interest rates. Interest rates differ depending upon the currency.
"The award of a much higher rate of Interest after 120 days' is arbitrary, since the Award debtor is entitled to challenge the award within a maximum period of 120 days' as provided by Section 34(3) of the 1996 Act, and If the award debtor is made liable to pay a higher rate of Interest after 120 days, it would foreclose or seriously affect his statutory right to challenge the Award by filing objections under Section 34 of the said Act."
This judgement has brought about much needed clarity in arbitral awards by giving guidelines and factors for arbitrators to consider when deciding upon rate of interest over an arbitral award.
Further, the readiness of court in referral of LIBOR exchange rates also signifies judiciary's inherent interest in bringing local proceedings in sync with international standards.
This content is purely an academic analysis under "Legal intelligence series".
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