Apex court clears the mist on Interest – Pre- reference, Pendente Lite and Post Award in the case titled as Vedanta Ltd. v. Shenzen Shandong Nuclear Power Construction Co. Ltd.1
On 22 May 2018, the parties entered into the four EPC contracts for the construction of a 210 MW Co-Generation Power Plant. Each of the four contracts contained an identical arbitration clause. The arbitration is seated in India, and Part I of the Arbitration and Conciliation Act, 1996 (“Act”) is consequently applicable. They also all contained the same termination clause, which stated that if the Purchaser suspends production for longer than 180 days, “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.” The Respondent used this clause to terminate the contract on 25 February 2011, and proceedings were initiated on 18 April 2012.
The relevant part of the order of the arbitral tribunal is that it granted a part of the First Claim in INR, while the other component was awarded in EUR. The arbitral tribunal 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. After multiple appeals failed, this order was finally challenged in an SLP, and the contention was limited to the quantum of the interest payable.
There are two parts to the ratio.
Three grounds: First, 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 Act. This ground is not properly analyzed – a preliminary doubt arises as to how a right to challenge under Section 34 the Act, which at best extends to four months even if the Court grants a month-long extension, is impacted by a higher rate being payable after the elapse of 4 months. The 2015 Amendment becomes relevant here – earlier, under Section 36, the filing of a Section 34 application to set aside the award in itself rendered the award unenforceable. After the Amendment, though as per Section 36 the Act, the filing of such an application shall not by itself render that award unenforceable, unless the Court grants an order of stay on a separate application made for that purpose. Section 26 of the Act read with the judgement of this Court in BCCI v. Kochi Cricket2 makes amply clear that the amended Section 36 is applicable here. Hence, the contention makes sense – if after a Section 34application, a Section 36 application also needs to be filed, heard, and decided within 120 days of the order being passed for the higher rate to kick in, the party cannot afford to take the full time they would normally take under Section 34 to file this challenge, and its statutory right to challenge the Award is undoubtedly affected.
Secondly, the imposition of a rate as high as 15% is exorbitant, from an economic standpoint, and has no correlation with the prevailing contemporary international rates of Interest. The Award debtor cannot be subjected to a penal rate of interest at any point. Interest component of the 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. This is made worse because the reasoning behind imposing a 15% rate of interest post 120 days has not been given.
Thirdly, this amounts to giving consequential damages, which the contract explicitly bars. 105% of the costs incurred under the EPC Contracts, which was envisaged as the result of a termination, has been awarded. Granting exorbitant interest above and beyond that would be in violation of contractual terms, as it would effectively amount to consequential damages. More analysis was required on this point – there was no real analysis of at what point interest becomes consequential damages, which needs to be done to explain why interest is allowed to be granted in a contract barring consequential damages.
The judgement stated that 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, and not at 9%. The rationale is that 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 judgement is correct in this regard – interest rates on INR, administered by the RBI, are usually a good 4-6% higher than on the EUR, administered by the European Central Bank, and it would consequently be financially unconscientious to impose the same interest rate upon both of those consequences.
The above judgement of the Hon’ble Supreme Court would go a long way in the arbitration proceeding and the disposal will be key factor without spending time on the issue of awarding interest. Certainly, it is a significant step forward to instil the faith in the Indian and International Commercial Arbitration held in India.
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