Thursday, 11 October 2018

Golden rules for determining rate of interest in Arbitration proceeding

 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 awardholder;
while on the other it must not be
punitive, unconscionable or usurious in nature.
Courts may reduce the Interest rate awarded by an
arbitral tribunal where such Interest rate does not
reflect the prevailing economic conditions2 or where it
is nor found reasonable3, or promotes the interests of
justice4.

2 IOC v. Lloyds Steel Industries Ltd 2007( 4) Arb LR 84 (Delhi)    @   Pg. 103
3 (2009) 17 SCC 296
4 FCI v. AM Ahmed AIR 2007 SC 829

REPORTABLE”
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL NO.10394 OF 2018
(Arising out of SLP (Civil) No. 25819 of 2018)

Vedanta Ltd. Vs Shenzen Shandong Nuclear
Power Construction Co. Ltd. 

INDU MALHOTRA, J.
Dated:October 11, 2018

Leave granted.
1. The present Special Leave Petition has been filed to
challenge the judgment and order dated 30th August,
2018 passed by the Delhi High Court in an Appeal filed

under Section 37 of the Arbitration & Conciliation Act,
1996 [hereinafter referred to as “the said Act”].
2. The factual matrix of the present case, briefly stated, is
as under:
2.1 On 22nd May 2008, the Appellant and the
RespondentCompany
entered into four interrelated
contracts for the construction of a 210MW
CoGeneration
Power Plant, viz.: i.
Offshore Engineering and Technical Services
Contract
ii. Offshore Supply Contract
iii. Onshore Services and Construction
Contract
iv. Onshore Supply Contract
These contracts are hereinafter collectively
referred to as the ‘EPC Contracts’.
2.2 Each of the four contracts contained an
Arbitration Clause which is identically worded,
which reads as under:
“Article 10
ARBITRATION
10.1 The parties hereto shall
endeavor to settle all disputes and

difference relating to and/or arising
out of the Contract amicably.
10.2 In the event of the parties
failing to resolve any dispute
amicably the same shall be referred
to Arbitration in accordance with the
Arbitration & Conciliation Act 1996
with all modifications and reenactments
thereto, as is prevalent
in India. Each party shall be entitled
to nominate an Arbitrator and the
two Arbitrators so nominated shall
jointly nominate a third presiding
Arbitrator. The Arbitrators shall give
a reasoned award.
10.3 The place of arbitration shall be
Mumbai and the language of the
arbitration shall be English.
10.4 The parties further agree that
any arbitration award shall be final
and binding upon the parties.
10.5 The parties hereto agree that
the Supplier shall be obliged to carry
out its obligations under the Contract
even in the event a dispute is
referred to Arbitration. It is clarified
that the purchaser shall be entitled
to retain any sum or portion of
Contract Price which has become
due and payable, for any unfinished
works or any subject matter under
arbitration.”
3
2.3 The Governing law of the Contracts is the Law of
India. The relevant Clause is set out herein below
for ready reference:
“ Article 12
GOVERNING LAW AND
JURISDICTION
12.1 This contract shall be construed
in accordance with and governed by
the laws of India and in the event of
any litigation the courts in India
shall be exclusive jurisdiction. ”
2.4 The EPC Contracts contained a termination
clause which reads as under :
“35.2.1The
Purchaser may suspend
the work in whole or in part at any
time by giving Supplier notice in
writing to such effect stating the
nature, the date and the anticipated
duration of such suspension. On
receiving the notice of suspension,
the Supplier shall stop all such work
which the Purchaser has directed to
be suspended with immediate effect.
The Supplier shall continue to
perform other work in terms of the
Contract which the Purchaser has
not suspended. The Supplier shall
resume the suspended work as
expeditiously as possible after
receipt of such withdrawal of
suspension notice.
4
35.2.2During
suspension, the
Supplier shall be entitled to receive
from the Purchaser a Variation Order
covering reasonable costs if any due
to suspension and appropriate
adjustment for Completion Schedule,
and other terms and conditions of
this Contract.
35.2.3If
such suspension continues
for more than 180 (one hundred and
eighty) days, at the end of the
period, the Supplier shall be by a
further 30 (thirty) days prior notice,
entitled to terminate the Contract
and Purchaser shall pay to the
Supplier 105% (one hundred and five
percent) of the cost incurred by the
Supplier till the date of termination
as compensation after adjusting
payments already made till the
termination. No consequential
damages shall be payable by the
Purchaser to the Supplier in the event
of such suspension.”
(Emphasis supplied)
2.5 The EPC Contracts are entered into between the
Petitioner herein an Indian Company, and a
company incorporated in the People’s Republic of
China. The arbitration between these parties is
an international commercial arbitration, having
its seat in India, which would be governed by Part
I of the 1996 Act. The termination clause
5
provided that in the event of termination, the
Purchaser shall pay 105% of the cost incurred by
the Supplier as compensation. The EPC contracts
did not contain any provision on payment of
Interest.
2.6 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 Petitioner herein
to pay the outstanding dues as mentioned in the
said notice.
2.7 The RespondentClaimants
invoked the
Arbitration Clause vide Notice dated 18.04.2012.
The disputes emanating out of the EPC contracts
were referred to arbitration by a threemember
tribunal in terms of the agreement between the
parties. At the first sitting of the arbitral tribunal
on 17.10.2012, the parties mutually agreed to a
change of the seat/place of arbitration from
Mumbai to New Delhi.
6
2.8 The ClaimantRespondent
herein 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.
2.9 The present Appellant filed a Counter Claim
amounting to Rs. 2458,34,89,367 along with
Interest @18% p.a. for determination before the
arbitral tribunal.
2.10 The arbitral tribunal passed a detailed Award
dated 09.11.2017, wherein the Tribunal awarded
the following amounts:
“ 134. Thus, in light of the aforesaid,
the following amounts are awarded
in favour of the Claimant and the
Respondent is liable to pay the same
to the Claimant within a period of
120 days from the date of this
award:
I. Under the First Claim:
a) Rs. 46,71,41,942/and
Euro
23,717,437; and
b) Rs. 12,19,69,047
II. Under the Second claim:
a) Rs. 25,47,325/;
and
b) Rs. 6,06,707/7
c) Rs. 1,31,10,990/135.
The aforesaid amount shall be
payable along with interest at the
rate of 9% from the date of institution
of the present arbitration
proceedings provided the amount is
paid/deposited within 120 days of
the award.
136. In case the respondent fails to
pay the aforesaid amounts within
120 days from the date of the
Award, the claimant shall be entitled
to further interest at the rate of 15%
till the date of realization of the
amount.
137. Considering the overall facts
and circumstances of the case and
the expenditure incurred in the
arbitration proceedings, we consider
it appropriate to award Rs.
50,00,000.00/(
Rupees Fifty Lakh)
towards costs and legal expenses to
the claimant, which according to us
would meet the ends of justice. The
claim of payment of cost of the
Respondent is rejected.”
The arbitral tribunal in the Award granted a
part of the First Claim in INR, while the other
component was awarded in EUR. The claim made
in US $ was rejected. The arbitral tribunal
adopted a dual rate of Interest. If the amounts
awarded were paid within 120 days’ from the
8
passing of the Award, the awarded sum would
carry a 9% rate of Interest on both the
components of the Award i.e. the amounts
payable in INR and EUR. However, if the awarded
amounts were not paid within 120 days’, the
arbitral tribunal imposed a higher rate of further
Interest @ 15% till the date of realization of the
amount.
The arbitral tribunal also awarded Rs.
50,00,000 (Fifty Lakhs Rupees) towards Costs
and Legal Expenses to the Claimant/Respondent
herein.
The arbitral tribunal rejected the CounterClaims
filed by the Appellant/AwardDebtor.
2.11 Aggrieved by the said Award, the present
Appellant filed Objections under Section 34
before the Delhi High Court which came to be
rejected vide Order dt. 12.02.2018.
2.12 Aggrieved by the judgment of the Single Judge,
the Appellant awarddebtor
filed an Appeal before
9
a Division Bench of the Delhi High Court under
Section 37 of the said Act. The Division Bench
dismissed the Appeal vide Order dt. 30.08.2018.
2.13 Aggrieved by the judgment of the Division Bench,
the Appellant has preferred the present Special
Leave Petition.
At the time of arguments, the Appellant
restricted the challenge to the rate of Interest
awarded by the arbitral tribunal.
The challenge on the Interest awarded by the
Tribunal is being considered in the peculiar facts
and circumstances of the present case, and the
specific clauses of the Contracts in question.
3. ‘Interest’ is defined as “the return or compensation for
the use or retention by one person for a sum of money
belonging to or owned by any reason to another”1. In
essence, an award of Interest compensates a party for
its forgone return on investment, or for money
withheld without a justifiable cause.
The current practice of awarding Interest in
international commercial arbitrations is riddled with
1 32 HALSBURY’S LAWS OF ENGLAND para 106 (4th Ed., 1980)
10
inconsistencies, and is criticized for lack of uniformity
In international contracts, there is no consensus on
the method or rate of awarding Interest.
4. In an international commercial arbitration, in the
absence of an agreement between the parties on
Interest, the rate of Interest awarded would be
governed by the law of the Seat of arbitration.
The rate of interest awarded must correspond to
the currency in which the award is given, and must be
in conformity with the laws in force in the lex fori.
5. In the present case, the international commercial
arbitration having its seat in India, the rate of interest
to be awarded must be in accordance with the
Arbitration and Conciliation Act, 1996.
Section 31(7) of the 1996 Act which provides for
Interest, is set out herein below for ready reference:
“31. Form and content of arbitral
award—
(7)…
(a) Unless otherwise agreed by the
parties, where and in so far as an
arbitral award is for the payment of
11
money, the arbitral tribunal may
include in the sum for which the
award is made interest, at such rate
as it deems reasonable, on the whole
or any part of the money, for the
whole or any part of the period
between the date on which the cause
of action arose and the date on
which the award is made.
[(b) A sum directed to be paid by an
arbitral award shall, unless the
award otherwise directs, carry
interest at the rate of two per cent,
higher than the current rate of
interest prevalent on the date of
award, from the date of award to the
date of payment.
Explanation – The expression
“current rate of interest” shall have
the same meaning as assigned to it
under clause (b) of section 2 of the
Interest Act, 1978 (14 of 1978).]
(Emphasis supplied)
Section 31(7) is in two parts: subsection
(a)
pertains to the award of Interest for the prereference
and pendente lite period, which is subject to the
agreement between the parties. This would be evident
from the opening words of Section 31(7)(a) – ‘unless
otherwise agreed by the parties’. Absent an agreement
between the parties, the arbitral tribunal has the
discretion to award interest; as it deems reasonable.

Interest may be awarded either on the whole, or any
part of the sum awarded.
Section 31(7)(b) pertains to the postaward
period
i.e. from the date of the award to the date of
realization, and is not subject to party autonomy or an
agreement between the parties. This would be
apparent from the manner in which clause (b) of S.
31(7) is framed. The phrase “unless otherwise agreed
by the parties” is absent from this provision. The
statutory rate of Interest is 2% higher than the current
rate of Interest prevalent on the date of the award.
6. 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 awardholder;
while on the other it must not be
punitive, unconscionable or usurious in nature.
Courts may reduce the Interest rate awarded by an
arbitral tribunal where such Interest rate does not
reflect the prevailing economic conditions2 or where it
is nor found reasonable3, or promotes the interests of
justice4.
7. During the course of hearing, a suggestion was made
to apply Interest in accordance with LIBOR plus a
margin (between 1 to 3%).
2 IOC v. Lloyds Steel Industries Ltd 2007(
4) Arb LR 84 (Delhi) @ Pg. 103
3 (2009) 17 SCC 296
4 FCI v. AM Ahmed AIR 2007 SC 829
14
LIBOR is an average interest rate calculated from
time to time, based on inputs given by major banks in
London as to their interest rates. Under the LIBOR
regime, banks give details visavis
actual interest rate
that they are paying, or would be required to pay for
borrowing from other banks. LIBOR is a 3month
rate
which has been adopted in some cases of a breach of
contract (or other obligation)5.
8. In the present case, the arbitral tribunal has adopted a
dual rate of Interest in the Award. The Award directs
payment of Interest @ 9% for 120 days post award; if
the amount awarded is not paid within 120 days’, the
rate of Interest is scaled up to 15% on the sum
awarded.
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 Awarddebtor
is entitled to challenge the award within a
maximum period of 120 days’ as provided by Section
5 Gisele Stephens–Chu & Joshua Kelly, Awards of Interest in International Arbitration:
Achieving Coherence Through Purpose, Indian Journal of Arbitration Law, Volume 7, Issue
1 (July 2018)
15
34(3) of the 1996 Act6. If the awarddebtor
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.
9. The imposition of a high rate of interest @ 15% post120
days is exorbitant, from an economic standpoint,
and has no corelation
with the prevailing
contemporary international rates of Interest. The
Awarddebtor
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 120days.
10. The Petitioner in his Written Submissions submitted a
chart which shows that the Interest component of the
6 Section 34 (3) – An application for setting aside may not be made after three months
have elapsed from the date on which the party making that application had received the
arbitral award or, if a request had been made under section 33, from the date on which
that request had been disposed of by the arbitral tribunal: Provided that if the Court is
satisfied that the applicant was prevented by sufficient cause from making the
application within the said period of three months it may entertain the application within
a further period of thirty days, but not thereafter.
16
Award amounts to almost 50% of the sum awarded.
The grant of 15% Interest is excessive and contrary to
the principle of proportionality and reasonableness.
11. It is also relevant to note that as per Clause 35.2.3
(supra) of the Conditions of Contract, it was expressly
provided that there would be no consequential
damages payable by the Purchaser to the Supplier in
the event of termination of the contract, as the
supplier would get 105% of the costs incurred.
The Claimant/Respondent 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. The levy of such a high rate of Interest
on a claim made in a foreign currency, would result in
the Claimant being awarded compensation, contrary to
the conditions stipulated in the Contract.

12. The Award has granted a uniform rate of 9% S.I. on
both the INR and the EUR component. However, 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. It is necessary for
the arbitral tribunal to coordinate
the choice of
currency with the interest rate. A uniform rate of
Interest for INR and EUR would therefore not be
justified. The rate of 9% Interest on the INR component
awarded by the arbitral tribunal will remain
undisturbed. However, with respect to the EUR
component, the awarddebtor
will be liable to pay
Interest at the LIBOR rate + 3 percentage points,
prevailing on the date of the Award.
13. In light of the abovementioned
discussion, the Interest
awarded by the arbitral tribunal is modified only to the
extent mentioned hereinbelow :(
i) The Interest rate of 15% post 120 days granted
on the entire sum awarded stands deleted.
18
A uniform rate of Interest @ 9% will be
applicable for the INR component in entirety till
the date of realization.
(ii) The Interest payable on the EUR component of
the Award will be as per LIBOR + 3 percentage
points on the date of Award, till the date of
realization.
The Appeal is disposed of accordingly.
…………….........................J.
(ROHINTON FALI NARIMAN)
.……………………J.
(INDU MALHOTRA)
New Delhi,
October 11, 2018

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