Recently an interesting judgment on the issue of interest awarded in an arbitration has been passed by the Hon’ble Supreme Court of India in the matter of Vedanta Limited Vs. Shenzen Shandong Nuclear Power Construction Co. Ltd. The Supreme Court observed that the discretion of the arbitrator to award interest must be exercised reasonably and it also listed factors that must be taken into consideration by the arbitrator while awarding interest.

History of interest and rate of interest is as old as history of trade and commerce. In the last 5000 years of recorded history rate of interest has never been constant and has changed from country to country and from time to time. Behold:

• Mesopotamia, c. 3000 BC: 20%
• Babylon, Code of Hammurabi, 1772 BC: codified earlier Sumerian custom of 20%.
• Persian conquest (King Cyrus takes Babylon), 539 BC: rates of 40+%.
• Greece, Temple at Delos, c. 500 BC: 10%
• Rome, Twelve Tables, 443 BC: 8.33%
• Athens/Rome: circa the first two Punic Wars, 300-200 BC: 8%
• Rome: 1 AD: 4%
• Rome, under Diocletian, 300 AD: 15% (estimated)
• Byzantine Empire, under Constantine, 325 AD: limit 12.5%
• Byzantine Empire, Code of Justinian, 528 AD: limit 8%
• Italian cities, c. 1150: 20%
• Venice, 1430s: 20%
• Venice, (Leonardo da Vinci paints “The Last Supper in Milan”), 1490s: 6.25%
• Holland, beginning of the Eighty Years’ War, 1570s: 8.13%
• England, 1700s: 9.92%
• US, West Florida annexed by the US, 1810s: 7.64%
• US, circa World War II, 1940s: 1.85%
• US, Reagan administration, 1980s: 15.84%
• US, Fed does not hike rates in September 2015: 0-0.25%
• US, Fed does hike rates in December 2015: 0.25-0.5%

It is not therefore, possible to have a uniform rate of interest which is applicable to all the times and across all the economies. The rate varies because of several factors such as the government’s directives to the central bank to accomplish the government’s goals, the currency of the principal sum lent or borrowed, the term to maturity of the investment, the perceived default probability of the borrower, supply and demand in the market as well as other factors.

In the Vedanta Limited Vs. Shenzen Shandong Nuclear Power Construction Co. Ltd parties had entered into four inter related contracts for the construction of 210 MW Co- Generation Power Plant on 28th May, 2008. Disputes arose between the parties, which resulted in the termination of the EPC Contracts vide notice dated 25.02.2011. The disputes emanating out of the EPC Contract were referred to Arbitration.

Shorn of the other details it is suffice to state that for the present purpose 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 also awarded interest and for that it adopted a dual rate of Interest. 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. 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 Hon’ble Supreme Court considered whether it is justified to have one single rate of interest on the amounts payable in two different currencies. The Court has held 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.

The Court observed that 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 Court held that 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 award debtor will be liable to pay Interest at the LIBOR rate + 3 percentage points, prevailing on the date of the award.

It is common knowledge that one INR is not equal to one Euro and similarly the rate of interest on INR and Euro is not and have never been the same. The dispute in the matter before that Court arose in 2011 when one Euro was equal to 69.30 INR and as on date One Euro is equal to 85.50 INR. It would be safe to say that during the pendency of the dispute there has been a Rs. 15 deprecations in the value of the INR. The LIBOR Rate as on date is 2.26 and the SBI PLR rate is 13.70 (the difference being about 6 times). At the end, one may wonder, who is the real winner in this case –the gains of interest have been substantially offset by the depreciation of currency.

This judgment raises several important issues and concerns which may be interesting to ponder upon. Would it had made a difference if it was as institutional arbitration where the award would have suffered a scrutiny before it was signed, may be may be not? This was an ad hoc arbitration. The Hon’ble Supreme Court has laid down host of factors which the arbitrator must take into account while determining the rate of interest. This is fair but would make the task of arbitrator difficult and onerous. It would require an arbitrator to be an expert economist to determine the reasonable rate of interest if he was to consider all the factors which have been prescribed. Would it have made a difference if an expert opinion or evidence was adduced on the issue of applicable rate of interest? Is it time for the parties to consider expert opinion more often than not?

The courts are increasingly becoming more and more averse to interfere with international arbitration awards and even in cases where the mistake may be apparent on the face of record, it is for the jurist and the commercial world to decide whether it is good or bad. In the present case such a glaring mistake with respect to rate of interest could only be rectified at the stage of Supreme Court.