VEDANTA LTD. versus SHENZEN SHANDONG NUCLEAR POWER CONSTRUCTION CO. LTD. on 11 October 2018

[2018] 12 S.C.R. 829

VEDANTA LTD.

v.

SHENZEN SHANDONG NUCLEAR POWER CONSTRUCTIONCO. LTD.

(Civil Appeal No.10394 of 2018)

OCTOBER 11, 2018

[R. F. NARIMAN AND INDU MALHOTRA, JJ.]

Arbitration and Conciliation Act, 1996 – ss.34 and 37 –Appellant and the Respondent-Company entered into four inter-related contracts for construction of a Co-Generation Power Plant– Dispute arose between the parties – Respondent-Claimant invokedthe 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 theClaimant in INR and EUR, but rejected the claim made in $ – ArbitralTribunal awarded interest on the amounts payable in INR and EURat the rate of 9% with a condition that if the awarded amounts werenot paid within 120 days, a higher rate of further interest @ 15%till the date of realization of the amount would be imposed – Proprietyof – Held: Not proper – The adoption of dual rate of interest inaward was not justified – The award of a much higher rate of interestafter 120 days was arbitrary, since the Award-debtor was entitledto challenge the award within a maximum period of 120 days’ asprovided by s.34(3) of the 1996 Act – If the award-debtor was madeliable to pay a higher rate of interest after 120 days, it wouldforeclose or seriously affect his statutory right to challenge theAward by filing objections u/s.34 of the said Act – Also, impositionof a high rate of interest @ 15% post-120 days was exorbitant,from an economic standpoint, and has no co-relation with theprevailing 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 wasnot justified, as parties operated in different currency, it wasnecessary to take into account the complications caused bydifferential interest rates – Thus, a uniform rate of interest @ 9%would be applicable for the INR component in entirety till the dateof realization, however, interest payable on the EUR component of

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Athe Award would be as per LIBOR + 3 percentage points on thedate of award, till the date of realization.

Banks/Banking – LIBOR – Held: LIBOR is an average interestrate calculated from time to time, based on inputs given by majorbanks in London as to their interest rates – Under the LIBOR regime,Bbanks give details vis-a-vis actual interest rate that they are paying,or would be required to pay for borrowing from other banks – LIBORis a 3-month rate which has been adopted in some cases of a breachof contract (or other obligation).

Disposing of the appeal, the Court

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HELD: 1.1 The discretion of the arbitrator to award interestmust be exercised reasonably. An arbitral tribunal while makingan award for Interest must take into consideration a host offactors, such as: (i) the ‘loss of use’ of the principal sum; (ii) thetypes of sums to which the Interest must apply; (iii) the timeDperiod over which interest should be awarded; (iv) theinternationally prevailing rates of interest; (v) whether simple orcompound rate of interest is to be applied; (vi) whether the rateof interest awarded is commercially prudent from an economicstand-point; (vii) the rates of inflation, (viii) proportionality of thecount awarded as Interest to the principal sums awarded. [ParaE6] [838-E-G]

1.2 On the one hand, the rate of Interest must becompensatory as it is a form of reparation granted to the award-holder; while on the other it must not be punitive, unconscionableor usurious in nature. Courts may reduce the Interest rateFawarded by an arbitral tribunal where such Interest rate does notreflect the prevailing economic conditions or where it is not foundreasonable, or promotes the interests of justice. [Para 6] [838-G-H; 839-A]

2. In the present case, the arbitral tribunal has adopted aGdual rate of Interest in the Award. The Award directs payment ofInterest @ 9% for 120 days post award; if the amount awarded isnot paid within 120 days’, the rate of Interest is scaled up to 15%on the sum awarded. The dual rate of Interest awarded seems tobe unjustified. The award of a much higher rate of Interest after H

120 days’ is arbitrary, since the Award-debtor is entitled tochallenge the award within a maximum period of 120 days’ asprovided by Section 34(3) of the 1996 Act. If the award-debtor ismade liable to pay a higher rate of Interest after 120 days, itwould foreclose or seriously affect his statutory right to challengethe 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% post-120 days is exorbitant, from an economic standpoint, and has noco-relation with the prevailing contemporary international ratesof Interest. The Award-debtor cannot be subjected to a penalrate of interest, either during the period when he is entitled toexercise the statutory right to challenge the Award, before a Courtof law, or later. Furthermore, the arbitral tribunal has not givenany 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 boththe INR and the EUR component. However, when the parties donot operate in the same currency, it is necessary to take intoaccount the complications caused by differential interest rates.Interest rates differ depending upon the currency. It is necessaryfor the arbitral tribunal to co-ordinate the choice of currency withthe interest rate. A uniform rate of Interest for INR and EURwould therefore not be justified. The rate of 9% Interest on theINR component awarded by the arbitral tribunal will remainundisturbed. However, with respect to the EUR component, theaward-debtor will be liable to pay Interest at the LIBOR rate + 3percentage points, prevailing on the date of the Award. [Para 12][840-E-G]

IOC v. Lloyds Steel Industries Ltd.2007- (4) Arb LR84 (Delhi) @ Pg. 103;Manalal Prabhudayal v.Oriental Insurance Co. Ltd. (2009) 17 SCC 296 : [2006]4 Suppl. SCR 666;FCI v. AM AhmedAIR 2007 SC 829 :[2006] 8 Suppl. SCR 148 – referred to.

Halsbury’s Laws of England 4[th] Edition 1980 – referredto.

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AGisele Stephens – Chu & Joshua Kelly, Awards ofInterest in International Arbitration: AchievingCoherence Through Purpose, Indian Journal of ArbitrationLaw, Volume 7, Issue 1 (July 2018) – referred to.

Case Law Reference

CIVIL APPELLATE JURISDICTION : Civil Appeal No. 10394

of 2018C

From the Judgment and Order dated 30.08.2018 of the HighCourt of Delhi at New Delhi in FAO (OS) (Comm.) 35 of 2018.

Kapil Sibal, Dhruv Mehta, Sr.Advs., Ms. Ranjana Roy Gawai,Ms. Vasudha Sen, Ms. Aayushi Singh, Ms. Divya Roy, Advs. for theDappellant.

C. S. Vaidyanathan, Ms. Meenakshi Arora, Balbir Singh, Sr. Advs.,Ranjeet Prakash, Anshuman Pande, Ms. Mahima Sareen, AbhinavRaghuvanshi, Ms. Anannya Ghosh, Advs. for the respondent.

The Judgment of the Court was delivered byE

INDU MALHOTRA, J. Leave granted.

1. The present Special Leave Petition has been filed to challengethe judgment and order dated 30[th] August, 2018 passed by the DelhiHigh Court in an Appeal filed under Section 37 of the Arbitration &FConciliation Act, 1996 [hereinafter referred to as “the said Act”].

2. The factual matrix of the present case, briefly stated, is asunder:

2.1On 22[nd] May 2008, the Appellant and the Respondent-Companyentered into four inter-related contracts for the construction of aG210-MW Co-Generation Power Plant, viz.: -

i.Offshore Engineering and Technical Services Contract

ii.Offshore Supply Contract

iii. Onshore Services and Construction Contract

iv. Onshore Supply ContractH

These contracts are hereinafter collectively referred to asthe ‘EPC Contracts’.

2.2Each of the four contracts contained an Arbitration Clause whichis identically worded, which reads as under:

“Article 10

ARBITRATION

10.1 The parties hereto shall endeavor to settle all disputesand difference relating to and/or arising out of the Contractamicably.

10.2 In the event of the parties failing to resolve any disputeamicably the same shall be referred to Arbitration inaccordance with the Arbitration & Conciliation Act 1996with all modifications and re-enactments thereto, as isprevalent in India. Each party shall be entitled to nominatean Arbitrator and the two Arbitrators so nominated shalljointly nominate a third presiding Arbitrator. The Arbitratorsshall give a reasoned award.

10.3 The place of arbitration shall be Mumbai and thelanguage of the arbitration shall be English.

10.4 The parties further agree that any arbitration awardshall be final and binding upon the parties.

10.5 The parties hereto agree that the Supplier shall beobliged to carry out its obligations under the Contract evenin the event a dispute is referred to Arbitration. It is clarifiedthat the purchaser shall be entitled to retain any sum orportion of Contract Price which has become due andpayable, for any unfinished works or any subject matterunder arbitration.”

2.3The Governing law of the Contracts is the Law of India. Therelevant Clause is set out herein below for ready reference:

“ Article 12

GOVERNING LAW AND JURISDICTION

12.1 This contract shall be construed in accordance withand governed by the laws of India and in the event of anylitigation the courts in India shall be exclusive jurisdiction.”

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SUPREME COURT REPORTS

A2.4The EPC Contracts contained a termination clause which readsas under :

“35.2.1- The Purchaser may suspend the work in whole orin part at any time by giving Supplier notice in writing tosuch effect stating the nature, the date and the anticipatedBduration of such suspension. On receiving the notice ofsuspension, the Supplier shall stop all such work which thePurchaser has directed to be suspended with immediate effect.The Supplier shall continue to perform other work in termsof the Contract which the Purchaser has not suspended. TheSupplier shall resume the suspended work as expeditiouslyCas possible after receipt of such withdrawal of suspensionnotice.

35.2.2- During suspension, the Supplier shall be entitled toreceive from the Purchaser a Variation Order coveringreasonable costs if any due to suspension and appropriateDadjustment for Completion Schedule, and other terms andconditions of this Contract.

35.2.3- If such suspension continues for more than 180 (onehundred and eighty) days, at the end of the period, theSupplier shall be by a further 30 (thirty) days prior notice,Eentitled to terminate the Contract and Purchaser shall payto the Supplier 105% (one hundred and five percent) of thecost incurred by the Supplier till the date of termination ascompensation after adjusting payments already made till thetermination. No consequential damages shall be payable bythe Purchaser to the Supplier in the event of suchFsuspension.”

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(Emphasis supplied)

2.5 The EPC Contracts are entered into between the Petitioner hereinan Indian Company, and a company incorporated in the People’sRepublic of China. The arbitration between these parties is anGinternational commercial arbitration, having its seat in India, whichwould be governed by Part I of the 1996 Act. The terminationclause provided that in the event of termination, the Purchasershall pay 105% of the cost incurred by the Supplier ascompensation. The EPC contracts did not contain any provisionHon payment of Interest.

2.6Disputes arose between the parties, which resulted in thetermination of the EPC Contracts by the Respondent vide noticedated 25.02.2011. The Respondent called upon the Petitionerherein to pay the outstanding dues as mentioned in the said notice.

2.7The Respondent-Claimants invoked the Arbitration Clause videNotice dated 18.04.2012. The disputes emanating out of the EPCcontracts were referred to arbitration by a three-member tribunalin terms of the agreement between the parties. At the first sittingof the arbitral tribunal on 17.10.2012, the parties mutually agreedto a change of the seat/place of arbitration from Mumbai to NewDelhi.

2.8The Claimant-Respondent herein raised various Claims in multiplecurrencies amounting to Rs. 4,472,106,315; US $ 2,380,000; andEUR 121,723,214 along with pendent lite and future Interest @18% p.a.

2.9The present Appellant filed a Counter Claim amounting to Rs.2458,34,89,367 along with Interest @18% p.a. for determinationbefore the arbitral tribunal.

2.10 The arbitral tribunal passed a detailed Award dated 09.11.2017,wherein the Tribunal awarded the following amounts:

“134. Thus, in light of the aforesaid, the following amountsare awarded in favour of the Claimant and the Respondentis liable to pay the same to the Claimant within a period of120 days from the date of this award:

I. Under the First Claim:

a) Rs. 46,71,41,942/- and Euro 23,717,437; and

b) Rs. 12,19,69,047

II. Under the Second claim:

a) Rs. 25,47,325/-; and

b) Rs. 6,06,707/-

c)Rs. 1,31,10,990/-

135. The aforesaid amount shall be payable along withinterest at the rate of 9% from the date of institution of thepresent arbitration proceedings provided the amount is paid/deposited within 120 days of the award.

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A136. In case the respondent fails to pay the aforesaidamounts within 120 days from the date of the Award, theclaimant shall be entitled to further interest at the rate of15% till the date of realization of the amount.

137. Considering the overall facts and circumstances of theBcase and the expenditure incurred in the arbitrationproceedings, we consider it appropriate to award Rs.50,00,000.00/- (Rupees Fifty Lakh) towards costs and legalexpenses to the claimant, which according to us would meetthe ends of justice. The claim of payment of cost of theRespondent is rejected.”C

The arbitral tribunal in the Award granted a part of the First Claimin INR, while the other component was awarded in EUR. The claimmade in US $ was rejected. The arbitral tribunal adopted a dual rate ofInterest. If the amounts awarded were paid within 120 days’ from thepassing of the Award, the awarded sum would carry a 9% rate of InterestDon both the components of the Award i.e. the amounts payable in INRand EUR. However, if the awarded amounts were not paid within 120days’, the arbitral tribunal imposed a higher rate of further Interest @15% till the date of realization of the amount.

The arbitral tribunal also awarded Rs. 50,00,000 (Fifty LakhsERupees) towards Costs and Legal Expenses to the Claimant/Respondentherein.

The arbitral tribunal rejected the Counter-Claims filed by theAppellant/Award-Debtor.

F2.11 Aggrieved by the said Award, the present Appellant filedObjections under Section 34 before the Delhi High Court whichcame to be rejected vide Order dt. 12.02.2018.

2.12 Aggrieved by the judgment of the Single Judge, the Appellantaward-debtor filed an Appeal before a Division Bench of theDelhi High Court under Section 37 of the said Act. The DivisionGBench dismissed the Appeal vide Order dt. 30.08.2018.

2.13 Aggrieved by the judgment of the Division Bench, the Appellanthas preferred the present Special Leave Petition.At the time of arguments, the Appellant restricted thechallenge to the rate of Interest awarded by the arbitral tribunal.

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The challenge on the Interest awarded by the Tribunal isbeing considered in the peculiar facts and circumstances of thepresent case, and the specific clauses of the Contracts in question.

3. ‘Interest’ is defined as “the return or compensation for theuse or retention by one person for a sum of money belonging to or ownedby any reason to another”[1]. In essence, an award of Interest compensatesa party for its forgone return on investment, or for money withheld withouta justifiable cause.

The current practice of awarding Interest in international commercialarbitrations is riddled with inconsistencies, and is criticized for lack ofuniformity In internationalcontracts, there is no consensus on the methodor rate of awarding Interest.

4. In an international commercial arbitration, in the absence ofan agreement between the parties on Interest, the rate of Interestawarded would be governed by the law of the Seat of arbitration.

The rate of interest awarded must correspond to the currency inwhich the award is given, and must be in conformity with the laws inforce in the lex fori.

5. In the present case, the international commercial arbitrationhaving its seat in India, the rate of interest to be awarded must be inaccordance with the Arbitration and Conciliation Act, 1996.

Section 31(7) of the 1996 Act which provides for Interest, is setout herein below for ready reference:

—“31. Form and content of arbitral award

(7) …

(a) Unless otherwise agreed by the parties, where and in sofar as an arbitral award is for the payment of money, thearbitral tribunal may include in the sum for which the awardis made interest, at such rate as it deems reasonable, on thewhole or any part of the money, for the whole or any part ofthe period between the date on which the cause of actionarose and the date on which the award is made.

[(b)A sum directed to be paid by an arbitral award shall,unless the award otherwise directs, carry interest at the rate 132 HALSBURY’S LAWSOF ENGLAND para 106 (4th Ed., 1980)

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of two per cent, higher than the current rate of interestprevalent on the date of award, from the date of award tothe date of payment.

Explanation – The expression “current rate of interest” shallhave the same meaning as assigned to it under clause (b) ofBsection 2 of the Interest Act, 1978 (14 of 1978).]

Section 31(7) is in two parts: sub-section (a) pertains to the awardof Interest for thepre-reference and pendente lite period, which is subjectto the agreement between the parties. This would be evident from theCopening words of Section 31(7)(a) – ‘unless otherwise agreed by theparties’. Absent an agreement between the parties, the arbitral tribunalhas the discretion to award interest; as it deems reasonable. Interestmay be awarded either on the whole, or any part of the sum awarded.

Section 31(7)(b) pertains to the post-award period i.e. from theDdate of the award to the date of realization, and is not subject to partyautonomy or an agreement between the parties. This would be apparentfrom the manner in which clause (b) of S. 31(7) is framed. The phrase“unless otherwise agreed by the parties” is absent from this provision.The statutory rate of Interest is 2% higher than the current rate of InterestEprevalent on the date of the award.

6. The discretion of the arbitrator to award interest must beexercised reasonably. An arbitral tribunal while making an award forInterest 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 theFInterest must apply; (iii) the time period over which interest should beawarded; (iv) the internationally prevailing rates of interest; (v) whethersimple or compound rate of interest is to be applied; (vi) whether therate of interest awarded is commercially prudent from an economic stand-point; (vii) the rates of inflation, (viii) proportionality of the count awardedas Interest to the principal sums awarded.

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On the one hand, the rate of Interest must be compensatory as itis a form of reparation granted to the award-holder; while on the other itmust not be punitive, unconscionable or usurious in nature.

Courts may reduce the Interest rate awarded by an arbitral tribunalwhere such Interest rate does not reflect the prevailing economic H

conditions[2] or where it is nor found reasonable[3], or promotes the interestsof justice[4].

7. During the course of hearing, a suggestion was made to applyInterest in accordance with LIBOR plus a margin (between 1 to 3%).

LIBOR is an average interest rate calculated from time to time,based on inputs given by major banks in London as to their interestrates. Under the LIBOR regime, banks give details vis-a-vis actualinterest rate that they are paying, or would be required to pay for borrowingfrom other banks. LIBOR is a 3-month rate which has been adopted insome cases of a breach of contract (or other obligation)[5].

8. In the present case, the arbitral tribunal has adopted a dualrate of Interest in the Award. The Award directs payment of Interest @9% for 120 days post award; if the amount awarded is not paid within120 days’, the rate of Interest is scaled up to 15% on the sum awarded.

The dual rate of Interest awarded seems to be unjustified. Theaward of a much higher rate of Interest after 120 days’ is arbitrary,since the Award-debtor is entitled to challenge the award within amaximum period of 120 days’ as provided by Section 34(3) of the 1996Act[6]. If the award-debtor is made liable to pay a higher rate of Interestafter 120 days, it would foreclose or seriously affect his statutory rightto challenge the Award by filing objections under Section 34 of the saidAct.

9. The imposition of a high rate of interest @ 15% post-120 daysis exorbitant, from an economic standpoint, and has no co-relation withthe prevailing contemporary international rates of Interest. The Award- 2IOC v. Lloyds Steel Industries Ltd 2007- (4) Arb LR 84 (Delhi) @ Pg. 103

3(2009) 17 SCC 296

4FCI v. AM Ahmed AIR 2007 SC 829

5Gisele 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)

6Section 34 (3) – An application for setting aside may not be made after threemonths have elapsed from the date on which the party making that application hadreceived the arbitral award or, if a request had been made under section 33, from thedate on which that request had been disposed of by the arbitral tribunal: Providedthat if the Court is satisfied that the applicant was prevented by sufficient causefrom making the application within the said period of three months it may entertainthe application within a further period of thirty days, but not thereafter.

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Adebtor cannot be subjected to a penal rate of interest, either during theperiod when he is entitled to exercise the statutory right to challenge theAward, before a Court of law, or later. Furthermore, the arbitral tribunalhas not given any reason for imposing a 15% rate of Interest post 120-days.

B10. The Petitioner in his Written Submissions submitted a chartwhich shows that the Interest component of the Award amounts to almost50% of the sum awarded. The grant of 15% Interest is excessive andcontrary to the principle of proportionality and reasonableness.

11. It is also relevant to note that as per Clause 35.2.3 (supra) ofCthe Conditions of Contract, it was expressly provided that there wouldbe no consequential damages payable by the Purchaser to the Supplierin the event of termination of the contract, as the supplier would get105% of the costs incurred.

The Claimant/Respondent has, in fact been awarded 105% of theDcosts incurred under the EPC Contracts by the arbitral tribunal.

The award of Interest @ 9% on the Euro component of the Claimis unjustified and unwarranted. The levy of such a high rate of Intereston a claim made in a foreign currency, would result in the Claimantbeing awarded compensation, contrary to the conditions stipulated in theContract.E

12. The Award has granted a uniform rate of 9% S.I. on both theINR and the EUR component. However, when the parties do not operatein the same currency, it is necessary to take into account the complicationscaused by differential interest rates. Interest rates differ depending uponFthe currency. It is necessary for the arbitral tribunal to co-ordinate thechoice of currency with the interest rate. A uniform rate of Interest forINR and EUR would therefore not be justified. The rate of 9% Intereston the INR component awarded by the arbitral tribunal will remainundisturbed. However, with respect to the EUR component, the award-debtor will be liable to pay Interest at the LIBOR rate + 3 percentageGpoints, prevailing on the date of the Award.

13. In light of the above-mentioned discussion, the Interestawarded by the arbitral tribunal is modified only to the extent mentionedhereinbelow :- H

VEDANTA LTD. v. SHENZEN SHANDONG NUCLEARPOWER CONSTRUCTION CO. LTD. [INDU MALHOTRA, J.]

(i) The Interest rate of 15% post 120 days granted on the entiresum awarded stands deleted.

A uniform rate of Interest @ 9% will be applicable for theINR component in entirety till the date of realization.

(ii) The Interest payable on the EUR component of the Award willbe as per LIBOR + 3 percentage points on the date of Award,till the date of realization.

The Appeal is disposed of accordingly.

Ankit Gyan Appeal disposed of.

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