Disputes arose between Vedanta and Shenzen Shedong under four EPC contracts; each providing for arbitration seated in Mumbai governed by Indian law. While Shenzen sought damages in US Dollars, Euros and Indian Rupees, the tribunal allowed only the latter two. The tribunal also awarded a 9% uniform interest on the decretal amount, calculated from the date of institution of the arbitration until the date of realization. However, the interest rate would be scaled up to 15% if Vedanta failed to satisfy the award within a period of 120 days from the date of the Award, i.e. 9th November 2017.

Aggrieved, Vedanta unsuccessfully requested the Delhi High Court to set aside the Award under Section 34 of the Arbitration and Conciliation Act, 1996 (Arbitration Act). Vedanta’s appeal under Section 37 was also dismissed by a Division Bench of the Delhi HC (DB). In particular, the DB observed that the award does not disclose any patent illegality or any finding which no reasonable person would have rendered.  

Eventually in Vedanta Ltd. v. Shenzen Shadong Nuclear Power Construction Co. Ltd. , the Apex Court allowed Vedanta’s leave to appeal against the DB’s order, and observed that the dual interest rate awarded was exorbitant, unjustified, unwarranted and penal. The Hon’ble Court also held arbitrary the Tribunal’s decision to apply the same interest rate to the INR and EUR amounts. Consequently, the Hon’ble Court deleted the 15% interest rate, retained the 9% interest rate for the INR amount, and reduced the interest rate on the EUR component from 9% to LIBOR+3% on the date of the Award till the date of realization.  

Statutory Bar

The Apex Court affirmed the power vested in courts to reduce the interest rate awarded by an arbitral tribunal where the interest rate is either unreasonable or does not reflect prevailing economic conditions or when such reduction promotes the interest of justice.

In this regard, the Hon’ble Court relied on its previous decisions in Food Corporation of India  v. AM Ahmed (2007) and  Manalal Prabhudayal v. Oriental Insurance (2009) as well as the Delhi High Court’s decision in Indian Oil Corporation v Lloyds Steel Industries (2007). Not only were these judgments rendered prior to the 2015 amendments to the Arbitration Act, but also pertained to awards passed in domestic arbitrations.  While the Supreme Court’s interference in Vedanta may have been well intended, the amended Arbitration Act categorically provides against such judicial interference in the case of international commercial arbitrations.

In 2015, Section 34 of the Arbitration Act was amended to include a subsection (2-A), which reads as follows:

“An arbitral award arising out of arbitrations other than international commercial arbitrations, may also be set aside by the Court, if the Court finds that the award is vitiated by patent illegality appearing on the face of the award:

Provided that an award shall not be set aside merely on the ground of an erroneous application of the law or by re-appreciation of evidence.”

In Vedanta the Hon’ble Court’s characterization of the interest rate as arbitrary, unjustified, exorbitant, penal and lacking correlation with the contemporary rates of interest is but a finding of patent illegality in the Award. Given that the dispute in the underlying was an international arbitration seated in India, Section 34(2A) operates as a bar on the Hon’ble Court’s jurisdiction to interfere with an ICA award even if it suffers from a patent illegality. In the circumstances, it is respectfully submitted that the Tribunal’s determination of interest was not liable be interfered with.

Critics may argue that the Supreme Court is nevertheless entitled to interfere with the Award in exercise of its plenary powers under Article 142 of the Constitution, in order to ensure that the ends of justice and fairness are met. A similar argument was made in National Aluminium Co. Ltd. v. Pressteel & Fabrications (P) Ltd. (2004), where the Applicant requested inter alia that the award-debtor be directed to deposit the amount awarded with the court competent to hear the latter’s Section 34 application, so that the Applicant could enjoy the fruits of the award during the pendency of the Section 34 proceedings. Pertinently, the Applicant had been deprived of the decretal amount for around 16 years owing to statutory stay of the award under the extant Section 34. Even though the Court was inclined to allow this request on an interim basis, the Supreme Court categorically decided against exercising its discretion in light of the mandatory language of Section 34. Similarly, the Award in Vedanta would call for similar judicial restraint.  

In the circumstances, it is respectfully submitted that Vedanta is in per incuriam Section 34(2A) of the Arbitration Act.

On Reasonableness

The Arbitration Act per se creates no bar on the Tribunal’s jurisdiction to award interest at a penal rate. For instance, in Roshan Lal Gupta v Parasram Holdings (2009), the rate of interest during the pendency of the S. 34 Petition was reduced by the Delhi HC from 18% to 12%, considering that the transaction between the parties was a commercial transaction. However, the Court also categorically held that if the award-debtor failed to pay the amount within 30 days of the Court’s order, the award-holder shall thereafter again be entitled to interest at 18% per annum. Therefore, the 6% extra interest was meant to operate as a penalty for non-compliance with the Court’s order.

In any case, the interpretation of contractual terms as well as the reasonableness and proportionality of the quantum and rates of interest awarded are issues which should be raised before and decided by the Tribunal.

While Shenzen had claimed for interest at 18% p.a., in the arbitration, the Tribunal allowed interest to be awarded only at 9% with a provision for increase to 15% only if the amount was not paid within 120 days. Besides, Vedanta itself had also sought for 18% interest on the amounts sought under its counterclaim. Even assuming the dual interest rate was penal and therefore arbitrary, it is respectfully submitted that interest reduction for the EUR component may have been entirely unwarranted.

Silver Lining?

The Hon’ble Court criticized the prevailing practice of interest determination in international commercial arbitrations as being riddled with inconsistencies and bereft of uniformity. Accordingly, the Apex Court enumerated the following guiding principles:

• In the absence of a specific agreement, the rate of interest awarded would be governed by the law of the seat of arbitration. If seated in India, the provisions of the Arbitration Act will be binding;  
• The interest rate must correspond to the currency in which the award is given;
• Interest must be compensatory as opposed to being punitive, unconscionable or usurious;
• The tribunal’s discretion must be exercised in a reasonable manner whilst giving due regard to :
  • The award-holder’s loss of use of the principal sum;
  • The time period over which interest should be awarded;
  • The prevailing rates of interest in the international market;
  • Whether a simple or compound interest rate will be applied;
  • Whether the rate of interest awarded is commercially prudent from an economic view; and
  • Proportionality of the amount awarded as interest when compared with the principal amount.

Concluding remarks

The Supreme Court relied upon an academic piece titled “Awards of Interest in International Arbitration: Achieving Coherence Through Purpose” while explaining the LIBOR interest mechanism. In contrast with the Supreme Court’s observations in Vedanta, this paper argues against an undue emphasis on uniformity and consistency and advocates in favour of maintaining a tribunal’s flexibility in determining the interest component of an award.

The authors also recognize that international arbitration has left behind the march for towards uniformity, arguing that tribunals should adopt a purposive approach in deciding the interest on a case-to-case basis. Perhaps these aspects of the paper could also have been considered by the Hon’ble Court in its assessment of the Tribunal’s interest award in Vedanta.