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.
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.