Supreme Court of India: Power to Grant Pre & Post Award Interest in India

Supreme-Court-of-India-1_85138_730x419

In Vedanta Limited vs Shenzhen Shandong Nuclear Power, Civil Appeal No.10394 of 2018, decided on 11 October 2018, the Supreme Court of India set the parameters for the arbitral tribunal to award interest in international commercial arbitrations. While doing so, the Court noticed that the current practice of awarding interest in international commercial arbitrations is riddled with inconsistencies and is criticized for lack of uniformity. Further, there is no consensus on the method or rate of awarding Interest. Brief case analysis given below:

Factual Matrix

An Indian (“Appellant”) and a Chinese company (“Respondent”) entered into four interrelated Engineering, Procurement and Construction contracts (EPC’s) all of which had an identical arbitration clause which is reproduced below (under the heading Arbitration Clause). Dispute arose amongst parties which led to the termination of the EPC’s. The Respondent invoked the arbitration and raised several claims in multiple currencies along with pendent lite and future Interest @ 18% p.a. This was contested by the Appellant in its counter-claim. While rejecting Appellant’s counter claim, the three-member Tribunal passed an award adopting a dual rate of Interest by stipulating the following conditions:

1 If the amounts awarded were paid within 120 days from the 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

Else

2 A higher rate of further Interest @ 15% would be payable till the date of realization of the amount

This award was challenged before the Delhi High Court which was dismissed both by the Single Judge and the Division Bench. This resulted in present proceedings wherein the Appellant assailed the order of the Division Bench of the High Court.

Arbitration Clause

“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.”

The Governing law of the Contracts was the Law of India as stated below:

“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. ”

Applicable Legal Principles

Section 31(7) of the Indian Arbitration and Conciliation Act, 1996 (“Act”) which provides for Interest is reproduced below:

“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 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).”

Judgement

The Court has made following observations:

  • That the arbitration is an international commercial arbitration, having its seat in India, which would be governed by Part I of the Act;
  • That an award of Interest compensates a party for its forgone return on investment, or for money withheld without a justifiable cause.;
  • That 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;
  • That 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;
  • That Section 31(7) is in two parts:
    • subsection (a) pertains to the award of Interest for the pre-reference and pendente lite period, which is subject to the agreement between the parties;
    • subsection (b) pertains to the post-award 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;
  • That the discretion of the arbitrator to award interest must be exercised reasonably;
  • That the 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
  • That 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;
  • That the Courts may reduce the Interest rate awarded by an arbitral tribunal where such Interest rate does not reflect the prevailing economic conditions or where it is nor found reasonable, or promotes the interests of justice;

In light of the above observations, the Court held as under:

  • That the dual rate of Interest awarded is unjustified;
  • That 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 Act;
  • That 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;
  • That 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;
  • That 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;
  • That the arbitration clause 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. Therefore, the award of Interest @ 9% on the Euro component of the Claim is unjustified and unwarranted;
  • 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 and therefore, 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 Court deleted the Interest rate of 15% post 120 days granted on the entire sum and held that a uniform rate of Interest @ 9% will be applicable for the INR component in entirety till the date of realization. Further, 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.

* 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 vis-à-vis actual interest rate that they are paying, or would be required to pay for borrowing from other banks.

My Comment

From the instant case, it is clear that Section 31(7) of the Act, by using the words “unless otherwise agreed by the parties” categorically clarifies that the Arbitrator is bound by the terms of the contract insofar as interest for the pre-award period is concerned. Therefore, where the parties had agreed that no interest shall be payable, the Arbitral Tribunal cannot award interest for pre-award period. Similar view was taken by the Supreme Court of India in Sree Kamatchi Amman Constructions v. Divisional Railway Manager (Works), Palghat and Ors. (2010) 8 SCC 767.

Further, Section 31(7)(a) of the Act provides for interest, separately for the pre-award period, and independently for the post-award period. The question of determining an alternative rate of interest for the pre-award period has been left to the arbitrator, subject to one condition, namely, that the parties have not accepted an agreed rate of interest, in the contract itself. This view is supported by the ruling of the Supreme Court of India in B. Radhakrishna vs. Maharashtra Apex Corporation Limited (2017) 4 MLJ 492. Section 31(7)(b) pertains to the post-award 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.

Comparison of position in India with Singapore and the UK

Let me compare the corresponding Sections of the Indian Arbitration Act, the English Arbitration Act and the International Arbitration Act of Singapore

Section 31(7) of the Indian Arbitration Act Section 49(3) & (4) of the English Arbitration Act Section 20 of International Arbitration Act of Singapore
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 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).”

49. Interest

(3) The tribunal may award simple or compound interest from such dates, at such rates and with such rests as it considers meets the justice of the case—

(a) on the whole or part of any amount awarded by the tribunal, in respect of any period up to the date of the award;

(b) on the whole or part of any amount claimed in the arbitration and outstanding at the commencement of the arbitral proceedings but paid before the award was made, in respect of any period up to the date of payment.

(4) The tribunal may award simple or compound interest from the date of the award (or any later date) until payment, at such rates and with such rests as it considers meets the justice of the case, on the outstanding amount of any award (including any award of interest under subsection (3) and any award as to costs).

20. Interest on awards

(1) Subject to subsection (3), unless otherwise agreed by the parties, an arbitral tribunal may, in the arbitral proceedings before it, award simple or compound interest from such date, at such rate and with such rest as the arbitral tribunal considers appropriate, for any period ending not later than the date of payment on the whole or any part of —

(a) any sum which is awarded by the arbitral tribunal in the arbitral proceedings;

(b) any sum which is in issue in the arbitral proceedings but is paid before the date of the award; or

(c) costs awarded or ordered by the arbitral tribunal in the arbitral proceedings.

(2) Nothing in subsection (1) shall affect any other power of an arbitral tribunal to award interest.

(3) Where an award directs a sum to be paid, that sum shall, unless the award otherwise directs, carry interest as from the date of the award and at the same rate as a judgment debt.

The English Arbitration Act and the International Arbitration Act of Singapore clearly provides two types of interest which can be awarded by the Arbitral Tribunal in terms of award i.e. simple or compound. This choice is absent in the Indian Arbitration Act. But the position of law in this regard is settled by the Supreme Court of India in Hyder Consulting (UK) Ltd. v. State of Orissa wherein the Court inter alia held that “the Arbitral Tribunal does not have the power to award interest upon interest, or compound interest either for the pre-award period or for the post-award period.”

The Indian Arbitration Act stipulates that the post award interest shall be granted at the rate 2%, higher than the current rate of interest prevalent on the date of award. The expression “current rate of interest” takes its meaning from the Interest Act, 1978. The English Arbitration Act does not provide any such definite scheme of rate and its totally upon the discretion of the arbitral tribunal “as it considers meets the justice of the case”. Like the Indian Arbitration Act, the International Arbitration Act of Singapore, also provides a specific rate of interest to be award by the tribunal under Section 20(3) by using the expression “at the same rate as a judgment debt”. This means that unless the award otherwise provides, the sum awarded carries interest at the same rate as a judgement debt, although it is not clear whether compound interest can be awarded by the arbitrators as well as interest at a higher rate rather than the judgement debt rate. Presently in Singapore , interest rates on post-judgment debts, default judgments, costs and under Order 30 Rule 6(2) of the Rules of Court are fixed at 6% per annum pursuant to the Rules of Court of Singapore.

In my view, one major difference in the Indian Arbitration Act and the International Arbitration Act of Singapore is that while in Indian Arbitration Act under 31(7)(a), parties can decid the pre-award interest, the same is not true in post award situation. The phrase “unless otherwise agreed by the parties” present in Section 31(7)(a) is absent from Section 31(7)(b). Rather Section 31(7)(b) specifies a statutory rate of Interest which is 2% higher than the current rate of Interest prevalent on the date of the award. On the other hand, under the International Arbitration Act of Singapore, there is no such demarcation with regard to the rate of interest between the pre and post award period as evident from the expression “for any period ending not later than the date of payment…(a) any sum which is awarded by the arbitral tribunal in the arbitral proceedings; (post-award) (b) any sum which is in issue in the arbitral proceedings but is paid before the date of the award (pre-award)”. The English Arbitration Act also follows the similar approach.

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