Award of Interest by Arbitrator

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.  Courts may reduce the Interest rate awarded by an arbitral   tribunal   where   such   Interest   rate   does   not reflect the prevailing economic conditions (IOC v. Lloyds Steel Industries Ltd 2007­ (4) Arb LR 84 (Delhi) at Pg. 103)  or where it is nor found reasonable ((2009) 17 SCC 296), or promotes the interests of justice (FCI v. AM Ahmed AIR 2007 SC 829).

LIBOR based interest:

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 vis­a­vis actual interest rate that they are paying, or would be required to pay for borrowing from other banks. LIBOR is a 3­month rate which has been adopted in some cases of a breach of contract (or other obligation) [Gisele Stephens–Chu & Joshua Kelly, Awards of Interest in International Arbitration: Achieving Coherence Through Purpose, Indian Journal of Arbitration Law, Volume 7, Issue 1 (July 2018)]

Award of higher interest after 120 days:

In the present case, the arbitral tribunal has adopted a dual rate of Interest in the Award. The Award directs payment of Interest @ 9% for 120 days post award; if the amount awarded is not paid within 120 days’, the rate   of   Interest   is   scaled   up   to   15%   on   the   sum awarded.

The   dual   rate   of   Interest   awarded   seems   to   be unjustified.   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   1996   Act6.   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.

The imposition of a high rate of interest @ 15% post­ 120 days is exorbitant, from an economic standpoint, and   has   no   co­relation   with   the   prevailing contemporary   international   rates   of   Interest.   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.   Furthermore,   the arbitral tribunal has not given any reason for imposing a 15% rate of Interest post 120­days.

The award of Interest @ 9% on the Euro component of the Claim is unjustified and unwarranted. The levy of such a high rate of Interest on a claim made in a foreign currency, would result in the Claimant being awarded compensation, contrary to the conditions stipulated in the Contract.

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 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.

Final Relief:

In light of the above­ mentioned discussion, the Interest awarded by the arbitral tribunal is modified only to the extent mentioned hereinbelow :­

(i) The  Interest rate of 15% post 120 days granted on the entire sum awarded stands deleted.  A   uniform   rate   of   Interest   @   9%   will   be applicable for the INR component in entirety till the date of realization.

(ii) 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.

[Source: Vedanta Limited vs Shenzhen Shandong Nuclear Power Corporation Ltd., decided by SC on 11 October, 2018]
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