Vedanta Ltd. vs Shenzen Shandong Nuclear Power Construction Co. Ltd. - Supreme Court

 Vedanta Ltd. vs Shenzen Shandong Nuclear Power Construction Co. Ltd. - Supreme Court Important Judgment 2018 - 

On 11th October, 2018, in the case of Vedanta Ltd. v. Shenzen Shandong Nuclear Power Construction Co. Ltd. [Civil Appeal No.10394 of 2018], wherein the rate of interest awarded by the arbitral tribunal was under challenge, the Supreme Court observed that “the discretion of the arbitrator to award interest must be exercised reasonably.” It was held that “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 stand-point; (vii) the rates of inflation, (viii) proportionality of the count awarded as Interest to the principal sums awarded.” It was held that “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.”

The Supreme Court held 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” and “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.” In the present case, it was held that “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.”

It was further held that in the present case, the arbitral tribunal was unjustified in adopting a dual rate of interest i.e. payment of interest @ 9% for 120 days post award; and @ 15% if the amount awarded was not paid within 120 days’. It was held that “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 34(3) of the Arbitration and Conciliation Act, 1996. The imposition of a high rate of interest @ 15% post-120 days was also held to be “exorbitant, from an economic standpoint”, and having “no co-relation with the prevailing contemporary international rates of Interest.” It was held 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.”

Noticing that the arbitral tribunal had granted a part of the claim in INR, while the other component was awarded in EUR, but granted a uniform rate of 9% SI on both the INR and the EUR component, the Supreme Court observed that “interest rates differ depending upon the currency” and “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” was directed to “remain undisturbed.” However, with respect to the EUR component, it was directed that “the award-debtor will be liable to pay Interest at the LIBOR rate + 3 percentage points, prevailing on the date of the Award.”