2018 (10) TMI 708 - SC - Indian Laws

Supreme Court adjusts interest rates in arbitral award, stresses proportionality.

The Supreme Court modified the interest rates awarded by the arbitral tribunal, finding the 15% post-120 days interest rate excessive and unjustified. The ... Interest awarded by the Tribunal - international commercial arbitration - Section 37 of the Arbitration & Conciliation Act, 1996- Held that:- The rate of interest awarded must correspond to the currency in which the award is given, and must be in conformity with the laws in force in the lex fori - In the present case, the international commercial arbitration having its seat in India, the rate of interest to be awarded must be in accordance with the Arbitration and Conciliation Act, 1996. 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. 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 Awarddebtor is entitled to challenge the award within a maximum period of 120 days’ as provided by Section 34(3) of the 1996 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 Awarddebtor 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 Interest awarded by the arbitral tribunal is modified - appeal disposed off. Issues Involved:1. Validity of the arbitral tribunal's award of interest rates.2. Applicability of interest rates on different currency components.3. Proportionality and reasonableness of the interest awarded.4. Applicability of contractual clauses on consequential damages.Issue-wise Detailed Analysis:1. Validity of the arbitral tribunal's award of interest rates:The Appellant challenged the arbitral tribunal's dual rate of interest awarded, which was 9% for 120 days post-award and 15% thereafter. The Supreme Court noted that the dual rate of interest seemed unjustified and arbitrary, especially since the award-debtor is entitled to challenge the award within 120 days as per Section 34(3) of the Arbitration and Conciliation Act, 1996. Imposing a higher rate of interest post-120 days would affect the award-debtor's statutory right to challenge the award. The Court found the 15% interest rate exorbitant and lacking correlation with prevailing international rates, deeming it punitive and without justification from the arbitral tribunal.2. Applicability of interest rates on different currency components:The arbitral tribunal awarded a uniform interest rate of 9% on both INR and EUR components of the claim. The Supreme Court found this approach unjustified, as interest rates vary depending on the currency. The Court held that the arbitral tribunal should have coordinated the choice of currency with the interest rate. Consequently, the Court modified the interest rate for the EUR component to LIBOR + 3 percentage points, prevailing on the date of the award, while maintaining the 9% interest rate for the INR component.3. Proportionality and reasonableness of the interest awarded:The Court emphasized that the discretion to award interest must be exercised reasonably, considering factors such as the loss of use of the principal sum, prevailing international rates, and the economic standpoint. The Court found the 15% interest rate excessive and contrary to the principles of proportionality and reasonableness, as it amounted to almost 50% of the sum awarded. The Court aimed to ensure that the interest awarded was compensatory and not punitive or unconscionable.4. Applicability of contractual clauses on consequential damages:The EPC Contracts contained a clause (35.2.3) stating that no consequential damages would be payable by the Purchaser to the Supplier in the event of termination, as the Supplier would receive 105% of the costs incurred. The Court noted that the Claimant had already been awarded 105% of the costs incurred under the EPC Contracts by the arbitral tribunal. Consequently, awarding high interest on the EUR component was deemed unjustified, as it would result in compensation contrary to the contract's conditions.Conclusion:The Supreme Court modified the interest awarded by the arbitral tribunal. The 15% post-120 days interest rate was deleted, and a uniform rate of 9% was applied to the INR component until realization. For the EUR component, the interest rate was set at LIBOR + 3 percentage points on the date of the award until realization. The appeal was disposed of accordingly.