The Supreme Court in its recent judgment in Vedanta v Shenzen Shandong Nuclear Power Construction Co[[1]] has laid down guidelines to be followed by arbitrators for awarding interest in international commercial arbitrations which have a seat in India. The principles of reasonableness and proportionality were applied by the Court while determining the quantum of interest.
Facts
An award was passed in an international commercial arbitration between Vedanta Ltd ('Vedanta') and Shenzen Shandong Nuclear Power Construction Co Ltd ('Shenzen') in a set of Engineering Procurement and Constructions (EPC) Contracts. The seat of arbitration was India. The arbitral tribunal passed an award against Vedanta on various claims in multiple currencies i.e. INR and EUR. Further, the award granted interest to Shenzen at different rates and in different currencies.
Interest was awarded at the rate of 9% from the date of institution of the arbitration if the awarded sum was paid within 120 days from the date of the award. Further interest was to be awarded at the rate of 15% in the event the awarded sum was not paid within 120 days. Vedanta unsuccessfully challenged the award before the Delhi High Court and the matter reached the Supreme Court of India.
Findings of the Supreme Court
The Supreme Court in its judgment ruled that the dual rate of interest awarded by the arbitral tribunal was unjustified and arbitrary. It noted that the 15% interest rate to be levied after the expiry of the period of 120 days in fact discouraged Vedanta from challenging the award within a period of 120 days as provided under §34(3) of the Arbitration & Conciliation Act, 1996 ('the Act') and such a practice could not be permitted.
The Court also stated that the imposition of the 15% rate of interest had no co-relation with the prevailing international rates and was therefore exorbitant and penal, especially since under the provisions of the EPC, Shenzen was entitled and had been awarded 105% of the cost incurred. A uniform rate of 9% was accordingly applied for the INR component of the award. Observing that granting the same interest for both the INR and EUR components of the award was unjustified, the interest rate for the EUR component was modified and awarded at the LIBOR rate + 3 percentage points.
The Supreme Court then proceeded to lay down guidelines that should be followed while deciding the quantum of interest to be awarded. Referring to the provisions of the Act, the Court noted that §31(7) of the Act leaves the question of quantum of interest at the discretion of the arbitrator. This discretion however must be exercised reasonably and factors such as loss of use of the principal sum, time period over which interest should be awarded, internationally prevailing rates of interest, rate of inflation and whether the rate of interest is commercially prudent must be considered.
Given the time taken for commercial disputes to sometimes reach a conclusion, the quantum of interest awarded in commercial disputes often amounts to a figure larger that the principal sum itself. The judgment is a welcome step as it lays down tangible guidelines which would help in rationalising the interest rate to be awarded by arbitral tribunals.
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[1] Civil Appeal No 10394 of 2018.
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