SUPREME COURT RULES THAT AWARD-DEBTOR CANNOT BE SUBJECT TO A PENAL RATE OF INTEREST

The Supreme Court in Vedanta vs. Shenzen Shandong Nuclear Power Construction Co. Ltd, held that, “the rate of interest must be compensatory as it is a type of reparation conceded to the award holder; while on the other hand it must not be punitive, unconscionable or usurious in nature.”

Concurring the case, on May 2008, Vedanta Ltd. and the Shenzen Shandong Nuclear Power Construction Co. Ltd. (Chinese Corporation) went into Engineering Procurement and Construction Contracts (the EPC Contract) for development of a 210MW Co-Generation Power Plant. Each of the four contracts contained an Arbitration Clause.

As one of the parties was a foreign party, thus, the arbitration was deemed to be International Commercial Arbitration (ICA), having its seat in India and governed by Arbitration and Conciliation Act, 1996 (the Act).

The termination proviso in the Contract provided that, in case of termination, the Purchaser will compensate 105% of the expense brought about by the Supplier. The EPC contracts did not contain any clause or provision on instalment of Interest.

In International Contracts, there was no accord on rate of granting interest. Therefore, in the absence of an agreement between the parties on interest, the rate of interest granted would be administered by the Law of the Seat of Arbitration.

Therefore, according to Section 31(7)(a) of the Act which relates to the award of Interest for the preference and, pendente lite period, or, in other words, the agreement between the parties. The expression “unless otherwise agreed by the parties” is missing from this section. And, the statutory rate of Interest is 2% higher than the current rate of interest predominant on the date of the award.

Therefore, the Supreme Court observed that “The discretion of the arbitrator to award interest must be exercised reasonably. An arbitral tribunal while making an award for Interest must take into consideration a host of factors, such as: (i) the ‘loss of use’ of the principal sum; (ii) the types of sums to which the Interest must apply; (iii) the time period over which interest should be awarded; (iv) the internationally prevailing rates of interest; (v) whether simple or compound rate of interest is to be applied; (vi) whether the rate of interest awarded is commercially prudent from an economic standpoint; (vii) the rates of inflation, (viii) proportionality of the count awarded as Interest to the principal sums awarded. On the one hand, the rate of Interest must be compensatory as it is a form of reparation granted to the award holder; while on the other it must not be punitive, unconscionable or usurious in nature.”

Further, in this case, the Arbitral Tribunal adopted a dual rate of Interest in the Award. The Award relates to instalment of Interest @ 9% for 120 days post grant; if the sum granted isn’t paid inside 120 days, the rate of Interest is scaled up to 15% on the entire sum awarded.

The Supreme Court also observed that “The dual rate of interest awarded seems to be unjustified. 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 said Act, 1996. 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. The imposition of a high rate of interest @ 15% post- 120 days is exorbitant, from an economic standpoint, and has no correlation with the prevailing contemporary international rates of interest. The Award Debtor cannot be subjected to a penal rate of interest, either during the period when he is entitled to exercise the statutory right to challenge the Award, before a Court of law, or later. Furthermore, the Arbitral Tribunal has not given any reason for imposing a 15% rate of Interest post 120 days.”

The Chinese Corporation has, in fact been awarded 105% of the costs incurred under the EPC Contracts by the Arbitral Tribunal. The award of interest @ 9% on the Euro component of the Claim is unjustified and unwarranted.
Therefore, the Supreme Court said that, “The Award has conceded a uniform rate of 9% S.I. (Simple Interest) on both the INR and the EUR part. Be that as it may, when the parties don’t operate in a same currency, it is important to consider the intricacies caused by differential rates of interest. Rate of interest contrasts depending on the currency. It is vital for the Arbitral Tribunal to coordinate the choice of the currency along with the interest rates. A uniform rate of Interest for INR and EUR would thus not be supported. The rate of 9% Interest on the INR segment granted by the Arbitral Tribunal is undisputed. However, as for the EUR segment, the Award Debtor has liability to pay interest at the LIBOR rate (London Inter-Bank Offered Rate) + 3 rate points, prevailing on the date of the Award. Along these lines, there was modification by the Arbitral Court on the award dictated. The interest rate of 15% post 120 days allowed on the whole sum granted stands erased. A uniform rate of interest @ 9% will be relevant for the INR segment in total till the date of acknowledgment or realization”.

Satyam Singh Pal
Associate
The Indian Lawyer