Award-Debtor Cannot Be Subjected To A Penal Rate Of Interest

In Vedanta Ltd. vs Shenzen Shandong Nuclear Power Construction Co. Ltd., the arbitral tribunal adopted a dual rate of Interest. If the amounts awarded were paid within 120 days’ from the passing of the Award, the awarded sum would carry a 9% rate of Interest on both the components of the Award i.e. the amounts payable in INR and EUR. However, if the awarded amounts were not paid within 120 days’, the arbitral tribunal imposed a higher rate of further Interest @ 15% the date of realization of the amount.

The appeal against the order of the tribunal was rejected by the Single Judge of the Delhi High Court and the divisional bench as well.

On appeal the Supreme Court decided that 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.

The dual rate of Interest awarded seems to be unjustified. The imposition of a high rate of interest @ 15% post-120 days is exorbitant, from an economic standpoint, and has no co­rrelation 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.