Arbitration and Conciliation Act, 1996 – ss.34 and 37 – Appellant and the Respondent-Company entered into four interrelated contracts for construction of a Co-Generation Power Plant – Dispute arose between the parties – Respondent-Claimant invoked the Arbitration clause and raised claims in multiple currencies i.e. Indian Rupee (INR), United States Dollar ($) and European Union (EUR) – Arbitral Tribunal awarded the amounts in favour of the Claimant in INR and EUR, but rejected the claim made in $ – Arbitral Tribunal awarded interest on the amounts payable in INR and EUR at the rate of 9% with a condition that if the awarded amounts were not paid within 120 days, a higher rate of further interest @ 15% till the date of realization of the amount would be imposed – Propriety of – Held: Not proper – The adoption of dual rate of interest in award was not justified – The award of a much higher rate of interest after 120 days was arbitrary, since the Award-debtor was entitled to challenge the award within a maximum period of 120 days’ as provided by s.34(3) of the 1996 Act – If the award-debtor was 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 u/s.34 of the said Act – Also, imposition of a high rate of interest @ 15% post-120 days was exorbitant, from an economic standpoint, and has no co-relation with the prevailing contemporary international rates of interest – Therefore, interest rate of 15% granted on the entire sum awarded not justified – Furthermore, a uniform rate of 9% interest for INR and EUR was not justified, as parties operated in different currency, it was necessary to take into account the complications caused by differential interest rates – Thus, a uniform rate of interest @ 9% would be applicable for the INR component in entirety till the date of realization, however, interest payable on the EUR component of the Award would be as per LIBOR + 3 percentage points on the date of award, till the date of realization.
Banks/Banking – LIBOR – Held: 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 vis-a-vis actual interest rate that they are paying, or would be required to pay for borrowing from other banks – LIBOR is a 3-month rate which has been adopted in some cases of a breach of contract (or other obligation).
Disposing of the appeal, the Court
HELD: 1.1 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 stand-point; (vii) the rates of inflation, (viii) proportionality of the count awarded as Interest to the principal sums awarded. [Para 6] [838-E-G]
1.2 On the one hand, the rate of Interest must be compensatory as it is a form of reparation granted to the awardholder; 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 or where it is not found reasonable, or promotes the interests of justice. [Para 6] [838G-H; 839-A]
2. 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 Act. 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. [Para 8] [839-C-E]
3. The imposition of a high rate of interest @ 15% post120 days is exorbitant, from an economic standpoint, and has no co-relation 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 120-days. [Para 9] [839-E-F; 840-A-B]
4. 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 co-ordinate 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. [Para 12] [840-E-G]
IOC v. Lloyds Steel Industries Ltd. 2007- (4) Arb LR
84 (Delhi) @ Pg. 103; Manalal Prabhudayal v.
Oriental Insurance Co. Ltd. (2009) 17 SCC 296 : [2006]
4 Suppl. SCR 666; FCI v. AM Ahmed AIR 2007 SC 829 : [2006] 8 Suppl. SCR 148 – referred to.
Halsbury’s Laws of England 4th Edition 1980 – referred to.
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) – referred to.
As published in the Supreme Court Reports, Supreme Court of India. Text from the Indian Supreme Court Judgments open data set (Dattam Labs), CC BY 4.0.
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