The Supreme Court in Vedanta Ltd. v. Shenzhen Shandong Nuclear Power Construction Co. Ltd.1 has provided salutary guidance to arbitrators regarding the grant of interest in both pre-award and post-award situations. Arbitral tribunals are reminded by the Court that the rate of interest awarded should be compensatory and not punitive in nature.
Vedanta Ltd. (the Appellant), a company incorporated in India, entered into four inter-related contracts (EPC Contracts) with Shenzhen Shandong Nuclear Power Construction Co. Ltd. (the Respondent), a company incorporated in the People's Republic of China, for the construction of a power plant in India. The EPC Contracts provided for Indian seated arbitration but made no provision for payment of interest on delayed payments.
Disputes arose between the parties resulting in termination of the EPC Contracts by the Respondent which was referred to arbitration and culminated in an award in favour of the Respondent. The Respondent's claim was in three different currencies- USD, Euro and INR.
The award passed by the arbitral tribunal granted the Respondent a part of its claim in INR and in Euro but rejected its USD claim. The tribunal adopted a dual rate of interest for both INR and Euro uniformly in the following manner:
|9% payable from the date of institution of the arbitral proceedings||if amount paid within 120 days from the passing of the award|
|15% payable post 120 days until the date of realization of the amounts||if amount not paid within 120 days from the passing of the award|
Before the Supreme Court, Vedanta restricted its ground of challenge to disputing the rate of interest awarded by the tribunal.
The Supreme Court whilst criticizing the ad hocism and lack of uniformity in the method and rate of interest being awarded by arbitral tribunals, ruled that unless otherwise agreed by the parties, the rate of interest awarded must: i) be governed by the law of the seat of arbitration and ii) correspond to the currency in which the award is given.
The Court found that (absent agreement) the award of interest at the rate of 15% per annum for delayed payment in excess of 120 days, was exorbitant and contrary to the principles of proportionality and reasonableness. The Court accordingly struck down that portion of the award granting interest at the rate of 15% per annum.
Furthermore, the Court reduced the grant of interest at the rate of 9% per annum on the Respondent's claim in Euro, to the LIBOR rate on the date of publishing of the award and cautioned tribunals not to adopt a uniform rate of interest for all currencies.
The EPC Contracts provided for the Respondent to be paid 105% of the amounts expended by it upon termination. In light of this contractual provision, the Court ruled that the tribunal had erred by awarding interest at the rate of 9% per annum on the Respondent's Euro claim, as that rate was in excess of the contractual arrangement and was consequently unjustified.
The Court reasoned that the award debtor cannot be subjected to a penal rate of interest, during the period that it is statutorily entitled to challenge the award before the Court or anytime thereafter.2
The judgement succinctly sets out the legal principles governing the grant of interest by arbitral tribunals seated in India. The golden rule is that the award of interest must in the circumstances of the case be reasonable and proportionate and the interest rate awarded must match the claim currency.
1 Civil Appeal No. 10394 of 2018, decided on October 11, 2018
2 Under Section 34 (3) of the Arbitration and Conciliation Act, 1996 (as amended), an application for setting aside an arbitral award is to be made within 3 months (i.e. 120 days) from the date of receipt of award.
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