Vedanta Limited vs Shenzhen Shandong Nuclear Power Construction Company Limited

(Arising out of SLP (Civil) No. 25819 of 2018)

Vedanta Ltd. …Appellant

Versus

Shenzen Shandong Nuclear Power Construction Co. Ltd. …Respondent

J U D G M E N T

INDU MALHOTRA, J.

Leave granted.

1. The present Special Leave Petition has been filed to Signature Not Verified Digitally signed by ANITA MALHOTRA challenge the judgment and order dated 30 th August, Date: 2018.10.11 17:14:37 IST Reason:

2018 passed by the Delhi High Court in an Appeal filed

1 under Section 37 of the Arbitration & Conciliation Act,

1996 [hereinafter referred to as “the said Act”].

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

as under:

2.1 On 22nd May 2008, the Appellant and the

Respondent­Company entered into four inter­

related contracts for the construction of a 210­

MW Co­Generation Power Plant, viz.: ­

i. Offshore Engineering and Technical Services

Contract ii. Offshore Supply Contract iii. Onshore Services and Construction

Contract iv. Onshore Supply Contract

These contracts are hereinafter collectively

referred to as the ‘EPC Contracts’.

2.2 Each of the four contracts contained an

Arbitration Clause which is identically worded,

which reads as under:

“Article 10 ARBITRATION

10.1 The parties hereto shall endeavor to settle all disputes and

2 difference relating to and/or arising out of the Contract amicably. 10.2 In the event of the parties failing to resolve any dispute amicably the same shall be referred to Arbitration in accordance with the Arbitration & Conciliation Act 1996 with all modifications and re­ enactments thereto, as is prevalent in India. Each party shall be entitled to nominate an Arbitrator and the two Arbitrators so nominated shall jointly nominate a third presiding Arbitrator. The Arbitrators shall give a reasoned award.

10.3 The place of arbitration shall be Mumbai and the language of the arbitration shall be English. 10.4 The parties further agree that any arbitration award shall be final and binding upon the parties. 10.5 The parties hereto agree that the Supplier shall be obliged to carry out its obligations under the Contract even in the event a dispute is referred to Arbitration. It is clarified that the purchaser shall be entitled to retain any sum or portion of Contract Price which has become due and payable, for any unfinished works or any subject matter under arbitration.”

3 2.3 The Governing law of the Contracts is the Law of

India. The relevant Clause is set out herein below

for ready reference:

“ Article 12 GOVERNING LAW AND JURISDICTION 12.1 This contract shall be construed in accordance with and governed by the laws of India and in the event of any litigation the courts in India shall be exclusive jurisdiction. ”

2.4 The EPC Contracts contained a termination

clause which reads as under :

“35.2.1­ The Purchaser may suspend the work in whole or in part at any time by giving Supplier notice in writing to such effect stating the nature, the date and the anticipated duration of such suspension. On receiving the notice of suspension, the Supplier shall stop all such work which the Purchaser has directed to be suspended with immediate effect. The Supplier shall continue to perform other work in terms of the Contract which the Purchaser has not suspended. The Supplier shall resume the suspended work as expeditiously as possible after receipt of such withdrawal of suspension notice.

4 35.2.2­ During suspension, the Supplier shall be entitled to receive from the Purchaser a Variation Order covering reasonable costs if any due to suspension and appropriate adjustment for Completion Schedule, and other terms and conditions of this Contract.

35.2.3­ If such suspension continues for more than 180 (one hundred and eighty) days, at the end of the period, the Supplier shall be by a further 30 (thirty) days prior notice, entitled to terminate the Contract and Purchaser shall pay to the Supplier 105% (one hundred and five percent) of the cost incurred by the Supplier till the date of termination as compensation after adjusting payments already made till the termination. No consequential damages shall be payable by the Purchaser to the Supplier in the event of such suspension.” (Emphasis supplied)

2.5 The EPC Contracts are entered into between the

Petitioner herein an Indian Company, and a

company incorporated in the People’s Republic of

China. The arbitration between these parties is

an international commercial arbitration, having

its seat in India, which would be governed by Part

I of the 1996 Act. The termination clause 5 provided that in the event of termination, the

Purchaser shall pay 105% of the cost incurred by

the Supplier as compensation. The EPC contracts

did not contain any provision on payment of

Interest.

2.6 Disputes arose between the parties, which

resulted in the termination of the EPC Contracts

by the Respondent vide notice dated 25.02.2011.

The Respondent called upon the Petitioner herein

to pay the outstanding dues as mentioned in the

said notice.

2.7 The Respondent­Claimants invoked the

Arbitration Clause vide Notice dated 18.04.2012.

The disputes emanating out of the EPC contracts

were referred to arbitration by a three­member

tribunal in terms of the agreement between the

parties. At the first sitting of the arbitral tribunal

on 17.10.2012, the parties mutually agreed to a

change of the seat/place of arbitration from

Mumbai to New Delhi.

6 2.8 The Claimant­Respondent herein raised various

Claims in multiple currencies amounting to Rs.

4,472,106,315; US $ 2,380,000; and EUR

121,723,214 along with pendent lite and future

Interest @ 18% p.a.

2.9 The present Appellant filed a Counter Claim

amounting to Rs. 2458,34,89,367 along with

Interest @18% p.a. for determination before 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 amounts are awarded in favour of the Claimant and the Respondent is liable to pay the same to the Claimant within a period of 120 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/­ 7

c) Rs. 1,31,10,990/­

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

136. In case the respondent fails to pay the aforesaid amounts within 120 days from the date of the Award, the claimant shall be entitled to further interest at the rate of 15% till the date of realization of the amount.

137. Considering the overall facts and circumstances of the case and the expenditure incurred in the arbitration proceedings, we consider it appropriate to award Rs.

50,00,000.00/­ (Rupees Fifty Lakh) towards costs and legal expenses to the claimant, which according to us would meet the ends of justice. The claim of payment of cost of the Respondent is rejected.” The arbitral tribunal in the Award granted a

part of the First Claim in INR, while the other

component was awarded in EUR. The claim made

in US $ was rejected. The arbitral tribunal

adopted a dual rate of Interest. If the amounts

awarded were paid within 120 days’ from the 8 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% till the date of realization of the

amount.

The arbitral tribunal also awarded Rs.

50,00,000 (Fifty Lakhs Rupees) towards Costs

and Legal Expenses to the Claimant/Respondent

herein.

The arbitral tribunal rejected the Counter­

Claims filed by the Appellant/Award­Debtor.

2.11 Aggrieved by the said Award, the present

Appellant filed Objections under Section 34

before the Delhi High Court which came to be

rejected vide Order dt. 12.02.2018.

2.12 Aggrieved by the judgment of the Single Judge,

the Appellant award­debtor filed an Appeal before 9 a Division Bench of the Delhi High Court under

Section 37 of the said Act. The Division Bench

dismissed the Appeal vide Order dt. 30.08.2018.

2.13 Aggrieved by the judgment of the Division Bench,

the Appellant has preferred the present Special

Leave Petition.

At the time of arguments, the Appellant

restricted the challenge to the rate of Interest

awarded by the arbitral tribunal.

The challenge on the Interest awarded by the

Tribunal is being considered in the peculiar facts

and circumstances of the present case, and the

specific clauses of the Contracts in question.

3. ‘Interest’ is defined as “the return or compensation for

the use or retention by one person for a sum of money

belonging to or owned by any reason to another” 1. In

essence, an award of Interest compensates a party for

its forgone return on investment, or for money

withheld without a justifiable cause.

The current practice of awarding Interest in

international commercial arbitrations is riddled with 1 32 HALSBURY’S LAWS OF ENGLAND para 106 (4th Ed., 1980) 10 inconsistencies, and is criticized for lack of uniformity

In international contracts, there is no consensus on

the method or rate of awarding Interest.

4. In an international commercial arbitration, in the

absence of an agreement between the parties on

Interest, the rate of Interest awarded would be

governed by the law of the Seat of arbitration.

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.

5. 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.

Section 31(7) of the 1996 Act which provides for

Interest, is set out herein below for ready reference:

“31. Form and content of arbitral award— (7)…

(a) Unless otherwise agreed by the parties, where and in so far as an arbitral award is for the payment of

11 money, the arbitral tribunal may include in the sum for which the award is made interest, at such rate as it deems reasonable, on the whole or any part of the money, for the whole or any part of the period between the date on which the cause of action arose 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 of two per cent, higher than the current rate of interest prevalent on the date of award, from the date of award to the date of payment.

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

Section 31(7) is in two parts: sub­section (a)

pertains to the award of Interest for the pre­reference

and pendente lite period, which is subject to the

agreement between the parties. This would be evident

from the opening words of Section 31(7)(a) – ‘unless

otherwise agreed by the parties’. Absent an agreement

between the parties, the arbitral tribunal has the

discretion to award interest; as it deems reasonable.

12 Interest may be awarded either on the whole, or any

part of the sum awarded.

Section 31(7)(b) pertains to the post­award period

i.e. from the date of the award to the date of

realization, and is not subject to party autonomy or an

agreement between the parties. This would be

apparent from 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 Interest prevalent on the date of the award.

6. 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;

13

(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 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 2 or where it

is nor found reasonable3, or promotes the interests of

justice4.

7. During the course of hearing, a suggestion was made

to apply Interest in accordance with LIBOR plus a

margin (between 1 to 3%).

2 IOC v. Lloyds Steel Industries Ltd 2007­ (4) Arb LR 84 (Delhi) @ Pg. 103 3 (2009) 17 SCC 296 4 FCI v. AM Ahmed AIR 2007 SC 829 14 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 vis­a­vis actual interest rate

that they are paying, or would be required to pay for

borrowing from other banks. LIBOR is a 3­month rate

which has been adopted in some cases of a breach of

contract (or other obligation)5.

8. 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 5 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) 15 34(3) of the 1996 Act6. If the award­debtor 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.

9. 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.

10. The Petitioner in his Written Submissions submitted a

chart which shows that the Interest component of the

6 Section 34 (3) – An application for setting aside may not be made after three months have elapsed from the date on which the party making that application had received the arbitral award or, if a request had been made under section 33, from the date on which that request had been disposed of by the arbitral tribunal: Provided that if the Court is satisfied that the applicant was prevented by sufficient cause from making the application within the said period of three months it may entertain the application within a further period of thirty days, but not thereafter. 16 Award amounts to almost 50% of the sum awarded.

The grant of 15% Interest is excessive and contrary to

the principle of proportionality and reasonableness.

11. It is also relevant to note that as per Clause 35.2.3

(supra) of the Conditions of Contract, it was expressly

provided that there would be no consequential

damages payable by the Purchaser to the Supplier in

the event of termination of the contract, as the

supplier would get 105% of the costs incurred.

The Claimant/Respondent has, in fact been

awarded 105% of the costs incurred under the EPC

Contracts by the arbitral tribunal.

The award of Interest @ 9% on the Euro

component of the Claim is unjustified and

unwarranted. The levy of such a high rate of Interest

on a claim made in a foreign currency, would result in

the Claimant being awarded compensation, contrary to

the conditions stipulated in the Contract.

17

12. 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 co­ordinate 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 award­debtor will be liable to pay

Interest at the LIBOR rate + 3 percentage points,

prevailing on the date of the Award.

13. In light of the above­mentioned discussion, the Interest

awarded by the arbitral tribunal is modified only to the

extent mentioned hereinbelow :­

(i) The Interest rate of 15% post 120 days granted

on the entire sum awarded stands deleted.

18 A uniform rate of Interest @ 9% will be

applicable for the INR component in entirety till

the date of realization.

(ii) The Interest payable on the EUR component of

the Award will be as per LIBOR + 3 percentage

points on the date of Award, till the date of

realization.

The Appeal is disposed of accordingly.

…………….........................J. (ROHINTON FALI NARIMAN)

.……………………J. (INDU MALHOTRA)

New Delhi, October 11, 2018

19