AN ENIGMA OF INTEREST IN ARBITRATION

Payal Chawla[1]

The grant of Interest is a seemingly uncontroversial subject. Although the contentious issues surrounding Interest are few, it is mystifying that the same issues have confounded the debate on Interest, literally, from time immemorial.

A Brief History of Interest

Both, Interest and the debate surrounding it, are historical. Interest pre-dates money[2]. The aversion to Interest can be traced back to usury. Usury was typically seen as ‘extorting an unreasonable rate for money’[3]. Usury laws were founded as a defense to the economic exploitation of the poor. Thomas Acquines famously said it is ‘illicit to accept a price for the use of money loaned’[4].  Most ancient civilizations provided for usury laws, including Roman Law and Jewish Law, influences of which traversed into Christian Europe, China as well as India. In fact, the ‘earliest record of laws dealing with interest in ancient India date back to 2000-1400 BC’[5].

Interestingly, the ‘law relating to interest in ancient India’ had ‘an admirably high degree of sophistication and development’. In ancient times, Vasistha laid down rules with regard to rate of interest according to which the rate of Interest depended on the risk taken by the creditor. Unsecured debt carried a higher rate of Interest as compared to a secured debt; exceptional risk permitted high rate of interest; in certain instances, it was permissible to charge Interest even in absence of a definite contract. Failure to pay debt within the defined period would invite interest from expiry of the period. In the absence of a defined period, the creditor could, after ‘the expiry of a specified interval (six months according to Narada, and a year according to Vishnu)’, charge Interest at the legal rate. Katyayana, however, recommended that Interest should not run until there had been a previous demand. Vijnaneshwara propounded that where there is no Interest provided for, Interest would still be payable but from the date of demand.[6]

The incipience of democracy in Athens also saw the ‘rise of sophisticated systems of credit and security ….. However historical prejudices’[7] against Interest continued. Aristotle remained the strongest and most influential voice against Interest. Practical considerations surrounding the enhancement of trade in the eleventh century began to question usury, which was posing to be a hindrance to the continuance of commerce without credit. ‘In 1215, the Magna Carta placed limits on usury’[8] and in 1220[9] the modern expression ‘Interest’ came into being. The renaissance saw the emergence of several economic theories justifying Interest[10]. As economic justifications gained acceptance, usury laws came to be modified and replaced by modern Interest legislations worldwide.

Despite the Interest legislations, the contentious interplay between usury and economic compulsions continued to dominate the debate on Interest, the effect of which can be seen in arbitral awards and judgements worldwide, including India. The discourse on Interest is although no longer on whether Interest should exist or not – Interest is here to stay. The discussion is limited to rates of Interest, types of Interest, periods of Interest – but the omnipresence of usury continues to loom in the shadows. The most recent example in India came in 2018, where the Supreme Court observed, ‘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’.[11]

Interest in Arbitration

While there are several legislations that deal with Interest, in regard to arbitration, the primary provision is s.31(7)[12] of the Arbitration and Conciliation Act, 1996 (‘ACA’). The Explanation to s.37 of the ACA refers to s.2(b)[13] of the Interest Act, 1978 (‘Interest Act’). Therefore, the Interest Act applies to arbitration to this limited extent of post-award default rate of Interest. As regards s.34 of the Code of Civil Procedure, 1908 (‘CPC’), it is now well settled that the same has no application to arbitration proceedings[14].

S.31(7) in its present form is slightly different from the unamended 1996 Act[15]. The amendment is limited to s.31(7)(b), whereby the default post-award Interest of 18% has been amended to ‘current rate of interest’. The said amendment was carried out with effect from 23.10.2015, pursuant to the recommendation of the 246th Law Commission Report[16] (‘LCR’) in order to ‘move away from the existing rate of 18% to a market based determination in line with commercial realities’ as regards the default interest[17].

S.31(7) is in two parts: sub-section (a) pertains to the award of Interest for the pre-reference and pendente-lite period (‘pre-award’) and sub-section (b) pertains to the post-award period.

Under s.31(7)(a) parties have primacy to decide the quantum of Interest for the pre-award period in view of the words  – ‘Unless otherwise agreed by the parties’. In the event the parties have not agreed on a rate of Interest for the pre-award period, the arbitrator has the power to decide the same. Where the parties contractually agree that no Interest shall be granted during the pre-reference period, the arbitrator has no power to grant Interest[18]. However, where the contract is silent on Interest, the arbitrator is at liberty to decide ‘such rate as it deems reasonable’ and ‘either on the whole, or any part of the sum awarded’[19]. The words ‘sum for which the award is made’[20] means ‘a particular amount of money’[21] and may include both the ‘principal’ and ‘Interest’[22]. Therefore, when Interest is awarded on the principal sum or damages, for the stage and purposes of s.31(7)(a), the two components’ i.e. principal sum/damages and Interest, lose their ‘separate identities[23] and merge.

S.31(7)(b), on the other hand, pertains to the post-award period i.e. from the date of the award to the date of realization’[24]. As opposed to s.31(7)(a), the parties have no power to contractually agree to Interest post-award, since the phrase ‘unless otherwise agreed by the parties’ is absent in 31(7)(b)[25]. The word ‘sum’ in 31(7)(b) is inclusive of Interest pendente lite[26]. Once the ‘sum’ (which could include interest on principal) has been awarded under s.31(7)(a), the arbitrator may direct Interest to be paid on such ‘sum’ for the post-award period under s.31(7)(b)[27]. However, the grant of Interest under s. 31(7)(b) is mandatory. In the event the arbitrator fails to grant interest for the post-award period, the award shall carry default interest at the rate of two percent higher than the ‘current rate of interest’[28] prevalent on the date of the award, from the date of award to the date of payment.

The, S.31(7)(b) provides for default Interest to be ‘two percent higher than the current rate of interest prevalent on the date of the award’. ‘Current rate of interest’ has been defined as the ‘highest of the maximum rates at which interest may be paid on different classes of deposits …… by different classes of scheduled banks in accordance with the directions given or issued to banking companies generally by the Reserve Bank of India under the Banking Regulation Act, 1949 (10 of 1949)’[29].  ‘Scheduled bank’ has been defined in the Explanation to mean ‘a bank, not being a co-operative bank, transacting any business authorised by the Banking Regulation Act, 1949[30]’.

Limitations under s.31(7)

First, let us examine if there are any fetters on the parties to agree to a quantum under s.31(7)(a). From a bare perusal of the language of s.31(7)(a), there appear to be none. However, a closer examination of s.74[31] of the Indian Contract Act, 1872 (‘Contract Act’) may have the effect of imposing some limits on parties from agreeing to any rate of Interest under s.37(1)(a). The rate of Interest cannot be in the nature of penalty[32]. If Interest takes the form of a penalty, it will fall within the mischief of s.74 of the Contract Act. The language of S.74 is wide enough to include Interest within the wording ‘any other stipulation by way of penalty’. If and when Interest takes the form of penalty, it shall fall outside the purview of s.31(7) of the ACA and shall be subject to s.74 of the Contract Act. In essence, Interest takes the form of liquidated damages.

At this stage, it would be important to mention that there is a distinction in law between Interest awarded on damages and Interest awarded as damages[33]. When Interest (awarded on damages/principal sum) in arbitrations is agreed between the parties the same is covered by s.31(7)(a).  There is no requirement under law to prove the loss suffered for the award of this Interest by the claimant. However, if such agreed Interest takes the form of a stipulation by way of a penalty, the same will fall outside the purview of Interest under s.31(7)(a) and within the mischief of liquidated damages under s.74 of the Contract Act. In case of the latter, the said Interest (sought to be treated as damages) shall be subject to conditions applicable to liquidated damages, including it being incumbent on the claimant to prove the loss suffered, and the quantum of Interest mentioned in the contract being treated as a capped amount[34].  However, importantly, Interest can be awarded on Interest which is awarded as damages, as well.

There is no clear-cut guideline as to when Interest is merely treated as Interest and when it is treated as damages. There are some guiding examples though. It has been held that an arbitrator may award Interest by way of damages for retention of money[35]. Claims arising out of additional work, breach of the terms of the agreement can be compensated by grant of interest[36]. Award of Interest from its date but for an earlier period and future interest till realization of decree did not amount to grant of damages on damages[37]. Where Interest is awarded by way of damages, Interest thereon can also be awarded. “Award of interest by way of compensation makes it the award of principal amount. Interest could naturally be awarded on such amount.”[38]. It would, in this context, also be appropriate to make a mention of the Explanation to S.74 which states ‘A stipulation of increased interest from the date of default may be a stipulation by way of penalty’.

Recently, in the Vedanta Ltd. matter, the Supreme Court read the award of Interest at 9% on the Euro component of the award to be consequential damages/compensation[39] . In the peculiar facts and circumstances, the Court modified the 9% interest on the Euro component as being violative of a clause in the contract between the parties[40] which prohibited the award of consequential damages. To fully appreciate the issue, it may be relevant to review the facts of the Vedanta Ltd. matter briefly –   Disputes arose between one Vedanta Limited (‘Vedanta’) and Shenzhen Shandong Nuclear Power Construction Ltd. (‘Shenzhen’) inter-alia in relation to four contracts entered into between the parties on 22.05.2008, primarily relating to offshore engineering and technical services. The four contracts contained an identically worded arbitration clause. The termination clause in the agreement provided that in the event of termination, the purchaser (Vedanta) would be liable to pay 105% of the cost incurred by the supplier (Shenzhen) as compensation and no consequential damages would be payable[41]. The contract also did not provide for payment of Interest. The agreed seat / place of arbitration was New Delhi, India. The governing law of the contract was the law of India, and jurisdiction of Indian courts was exclusive. In view of the fact that the Respondent Shenzhen was a company incorporated in China, the same was an International Commercial Arbitration, albeit governed by Part 1 of the 1996 Act. Shenzhen filed a claim with the arbitral tribunal seeking an award which had an INR, USD and EUR component along with pendente lite and future interest at the rate of 18% per annum until payment along with cost of arbitration. Vedanta refuted the allegations of Shenzhen and made a counter-claim seeking an award in its favour for an INR amount  along with pendente lite and future interest at the rate of 18% per annum until the date of payment. The Arbitral Tribunal awarded to Shenzhen INR and EURO component (not USD) along-with Interest at the rate of 9% from the date of institution of the arbitration proceedings   provided   the   amount   is paid/deposited   within   120   days   of the award. The Tribunal further provided that in the event Vedanta failed to pay the aforesaid amount within 120 days from the date of the Award, then Shenzhen would be entitled to further Interest at the rate of 15% till the date of realization of the amount. The Tribunal also awarded cost of Rs. 50,00,000/-  to Shenzhen. Vedanta challenged the Award by filing a s.34 ACA application, primarily challenging the Award on two grounds – the 105% cost (issue we are not concerned with for purposes of this article) and rate of Interest awarded in favour of Shenzhen, especially with respect to the Euro component. The Single Judge found no infirmity with the Award. As regards Interest, the Single Judge held, ‘As far as the grant of interest on the amounts awarded to be paid in “Euro” is concerned, the Arbitral Tribunal has held that the amount so awarded would be valued at the exchange rate as prevalent on the date of filing of the claim petition and it would be the rate of interest payable thereon that would protect the respondent’s interest due to the exchange rate fluctuations. The Arbitral Tribunal has, therefore, arrived at a balance between the two competing interest and cannot be faulted only on one part, while trying to take benefit of the other’. Aggrieved, Vedanta filed a s.37 application, which too was dismissed, leading Vedanta to the Supreme Court. On the issue of the grant of the 9% Interest on the Euro component, the Apex Court was of the view that the same, being excessive, amounted to ‘compensation’[42]. Consequential damages having been specifically barred by the contract, the said Interest awarded as compensation, would be in the teeth of the contract[43]. It appears that the Court considered a monetary amount to be the basis or the standard for reading Interest as[44] damages.  The Court read the 9% Interest on the Euro component as Interest as[45] damages, and modified the same with a LIBOR plus 3% rate.  Interestingly, the Court appears to have read the 9% Interest on the INR amount as Interest on damages, which the Court left as is[46].

In this context, it would be important to consider if excessive Interest is being considered as damages, this argument ought to have been raised by Vedanta in its pleadings before the arbitral tribunal. In the interest of disclosure, at the time of writing this article, the pleadings were not had sight of, but there is nothing in the judgements of either the Single Judge or the Division Bench that suggests that such an argument had been led by Vedanta. Assuming and if indeed Vedanta failed to plead that Interest on the Euro component amounted to Interest as damages as opposed to Interest on damages during the arbitration, Shenzhen would have been deprived of the opportunity to prove these damages in terms of the scheme of s.73 and s.74 of the Contract Act. As a general principle, where Interest is awarded ‘as and by way of compensation/damages’, ‘it must be shown that there is a relationship between the amount awarded and the default/unjustifiable delay/ harassment[47].

Now, coming to the issue on whether there are any limitations on the power of the arbitral tribunal under either s. 31(7) (a) or (b)- it appears from a plain reading of s.31(7), under sub-section (a), that the tribunal is required to exercise discretion as ‘it deems reasonable’. As regards sub-section (b), the power appears to be completely unfettered. The default rate of Interest is prescribed as the ‘current rate of interest’. It appears that the arbitrator has the power to grant Interest below or above the same.

However, judicial pronouncements have, over time, imposed certain limitations. The arbitrator has a duty to act fairly[48]. The arbitrator is also required to give reasons[49]. The Supreme Court has required that ‘the discretion of the arbitrator to award interest must be exercised reasonably[50]. In this regard it is pertinent to mention that a bare perusal of the language of s.31(7)(a) does not reveal any such interpretation. Per contra, the language is lucid in the grant of discretion to the arbitral tribunal to decide Interest as ‘it deems reasonable’. The latter interpretation would also be in line with the scheme of the ACA, where appreciation of evidence lies within the domain of the arbitrator. In this context, the arbitrator would be the sole judge of reasonableness of Interest in the peculiar facts and circumstances of a case. This would be even more apropos in cases of international commercial arbitration, where the test of ‘patent illegality’ is not applicable.

The Supreme Court has also recently laid down guidelines for arbitral tribunals while making an award on Interest- to ‘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 stand-point; (vii) the rates of inflation (viii) proportionality of the count awarded as Interest to the principal sums awarded.”[51]

The Supreme Court has also required the award of Interest not to be ‘excessive’, or ‘contrary to the principle of proportionality and reasonableness’. The Court held that where the Interest component of the Award is ‘almost 50% of the sum awarded’ the same is excessive[52]. It is respectfully submitted that this observation is based on principles of usury and will have the effect of nullifying the principle of compound Interest, which is specifically recognised under Indian law.

Power of the Supreme Court under Article 142

There can be no doubt that the power to modify the award exists with the Supreme Court under Article 142, to do ‘complete justice between the Parties’[53]. In the past, lower courts too have been modifying awards qua Interest[54]. In my respectful submission, the power of modification of an award is not available to the courts (except the Supreme Court) under the ACA. But the Supreme Court appears to have granted such sanction to courts qua Interest. The Supreme Court has stated, ‘Courts may reduce the Interest rate awarded by an arbitral tribunal where such interest rate does not reflect the prevailing economic conditions or where it is nor found reasonable or promotes the interest of justice’[55]. In my respectful submission, the Supreme Court may need to reconsider this observation, as no power of modification is granted by the ACA to the courts.

Interest Award in International Commercial Arbitration

An international commercial arbitration where India is the seat of arbitration[56]/[57] or where the lex arbitri (i.e. Arbitration and Conciliation Act, 1996)[58] is applicable, the award of Interest shall be governed by the s.31(7) of the ACA. The Court in Vedanta modified the 9% Interest award on the EURO component to LIBOR + 3% from the date of the award till realization. It is most respectfully submitted that in view of the default provision, if the impugned award required modification, the Court ought to have applied the ‘current rate of interest’ as per the mandate of s.31(7)(b). It is unclear how the leap to LIBOR + 3% Interest was made.

Dual Rate of Interest

In the Vedanta Ltd. matter, the arbitrator had ‘adopted a dual rate of Interest’ whereby the award-debtor was directed to pay 9% Interest up to 120 days post-award. In the event of non-compliance, the rate of Interest would be 15% on the sum awarded. The Court found this dual rate interest to be ‘unjustified’ and the 120 days to be ‘arbitrary’[59]. The Court held that the award of 15% post 120 days was ‘exorbitant from an economic standpoint’ and ‘ha(d) no correlation with prevailing contemporary international rates of Interest’[60] and interfered with the right of the award-debtor to challenge the award within a maximum period of 120 days as provided by s.34(3) of the ACA[61]. Strictly speaking, the award of Interest does not require a correlation to prevailing contemporary international rates of Interest. The 246th LCR recommended the addition of the explanation to s. 31(7) in order to ‘move away from the existing rate of 18% to a market based determination in line with commercial realities’ as regards the default interest. Rate of Interest should be according to the current market rate[62]. The Reserve Bank of India would typically also prescribe rates for foreign currency accounts. Furthermore, post-award Interest is to ensure speedy payment in compliance with award[63]. ‘In general, it is open to arbitrators to set the rate of the post-award interest in any amount that they deem appropriate’[64]. The party seeking the grant of Interest is not under any obligation to prove that the Contract was a commercial contract, or what the prevailing rate of Interest was during the period for which Interest is sought.[65]

Conclusion

An unfortunate fall-out of the 2018 Vedanta Ltd. judgement is, that it does appear that challenges of awards on ground of Interest are likely to enhance. That said, from a perusal of the law and various judgements, the law on Interest as it stands today is:

  • As regard pre-award Interest, the parties are free to decide on Interest on the principal sum/damages. They should, however, be careful to ensure that such contractual Interest does not fall in the category of a penalty in terms of s.74 of the Contract Act;
  • Where Interest is claimed as damages, the claimant would need to meet the burden of proof for the criteria of damages;
  • Where no Interest is agreed between the parties in the pre-award period, the arbitrator can decide on the Interest, subject to following the guidelines prescribed by the judgement in Vedanta Ltd.;
  • The Interest awarded in the pre-award period shall form part of the ‘sum’ for purposes of the post-award period;
  • For the post-award period, the arbitrator shall be at liberty to award Interest on the ‘sum’ subject to the guidelines framed by the Supreme Court;
  • In the event of failure by the arbitrator to award Interest for the post-award period, the award shall carry default Interest at two percent higher than the ‘current rate of interest.[66]

[1] Payal Chawla is the founder of JusContractus a Delhi based full service law firm, with primary focus on arbitrations and is a director of the Nani Palkhivala Arbitration Centre. The author recognises the able assistance of Ms. Snigdha Dash, Advocate at JusContractus.

[2] A History of Interest Rates (John Wiley & Sons 2017, 4th edn.) – Sidney Homer and Richard Sylla.

[3] Tomlins Law Dictionary

[4] St. Thomas Aquires, quoted by Thomas F. Devine in Encyclopedia Americana, Vol.27, Page 824.

[5] ‘Interest in Arbitration’, Matthew Secomb, para 2.09

[6] The source of this material for the above paragraph is ‘History of Interest and Usury’ (Chapter 2), 63rd Report by the Law Commission of India

[7] para 2.13, ‘Interest in International Arbitration’, Matthew Secomb; OUP 2019

[8] Ibid, Para 2.31

[9] Ibid, para 2.32

[10] ‘Productive Approach to Interest Theory’ of Adam Smith, which in essence was ‘money will be borrowed and interest paid, so long as the return that can be earned on the borrowed funds exceeds the interest rate. Interest was, therefore, paid because income could be derived from the use of money’. There was also the theory of “Time Preference’ enunciated by Euqen Bohm – Bewerk in 1880s according to which – ‘worth of a sum of money presently held is greater than the worth of the same sum payable at some time in the future. The preference of lender for money to use now over money promised in the future causes him to require some premium’[10]. These basic theories were varied in later years with various theories including liquidity preference etc. For a more detailed reading and analysis, the reader may peruse Chapter 2, ‘Interest in Arbitration’, Matthew Secomb.

[11] Para 12, Vedanta Ltd. v. Shenzen Shangdong Nuclear Power Construction Co. Ltd.; [2018 SCC OnLine SC 1922] (hereinafter ‘Vedanta Ltd.’)

[12] 31(7) (a) Unless otherwise agreed by the parties, where and in so far as an arbitral award is for the payment of 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 percent higher than the current rate of interest prevalent on the date of the 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)

[13] S.2(b) of the Interest Act, 1978 – [“current rate of interest” means the highest of the maximum rates at which interest may be paid on different classes of deposits (other than those maintained in savings account or those maintained by charitable or religious institutions) by different classes of scheduled banks in accordance with the directions given or issued to banking companies generally by the Reserve Bank of India under the Banking Regulation Act, 1949 (10 of 1949). Explanation. —In this clause, “scheduled bank” means a bank, not being a co-operative bank, transacting any business authorised by the Banking Regulation Act, 1949 (10 of 1949);]

[14] Bhagwati Oxygen Ltd. v. Hindustan Copper Ltd., [(2005) 6 SCC 462]

[15][31 (7) (a) Unless otherwise agreed by the parties, where and in so far as an arbitral award is for the payment of 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 eighteen per centum per annum from the date of the award to the date of payment.]   

[16] “INTEREST ON SUMS AWARDED

65.The issue on whether future interest is payable not only on the principal sum but also on the interest accrued till the date of the award remains controversial notwithstanding the clear wording of section 31(7). Initially, the position under the 1940 Act was that there was an express bar on awarding compound interest. This was evident in reading section 3(3)(c) of the Interest Act, 1978, section 29 of the Arbitration Act, 1940 and section 34 of the CPC, 1908.

66.However, the Supreme Court in Renusagar Power Co Ltd v. General Electric, 1994 Supp (1) SCC 644, held that awarding compound interest was not a violation of public policy of India. It is pertinent to note that these observations were made in the context of a case where the arbitral tribunal had expressly pointed out that they were not concerned with a contract to pay compound interest but were awarding compound interest as a remedy for a breach of contract in order to put the injured party in the same economic position it would have been in if the contract had been duly performed. This award was held to be in consonance with the public policy of India. Furthermore, as set out above, it was explicitly stated that compound interest can be awarded when it is permissible to do so under the statute.

67.Under the 1996 Act, the words that have been used are of far wider import and the scheme of the relevant provisions indicates that award of interest on interest is not only permitted but also the norm. Yet, a two judge bench of the Supreme Court, in State of Haryana v. L. Arora & Co., (2010) 3 SCC 690, held as follows “section 31(7) makes no reference to payment of compound interest or payment of interest upon interest. Nor does it require the interest 34 which accrues till the date of the award, to be treated as part of the principal from the date of award for calculating the post-award interest.” Apart from being contrary to the statutory scheme of the Act, the decision in Arora is also against the decision of (co-ordinate) two judge benches of the Supreme Court in ONGC v. M.C. Clelland Engineers S.A, (1999) (4) SCC 327 and UP Cooperative Federation Ltd v. Three Circles, (2009) 10 SCC 374.

68.Recognising this conflict of judicial opinion, the Supreme Court, in Hyder Consulting (U.K.) v. Governor of Orissa, (2013) 2 SCC 719 has referred this issue for determination to a three judge bench.

69.It is in this context that the Commission has recommended amendments to section 31 to clarify the scope of powers of the arbitral tribunal to award compound interest, as well as to rationalize the rate at which default interest ought to be awarded and move away from the existing rate of 18% to a market based determination in line with commercial realities.”

[17] Ibid, para 69

[18] Reliance Cellulose Products Limited v. Oil and Natural Gas Corporation Limited; [(2018) 9 SCC 266]

[19] Section 31(7)(a) of the ACA

[20] Ibid.

[21] Hyder Consulting (UK) Ltd. v. Governor, State of Orissa; [(2015) 2 SCC 189] (hereinafter ‘Hyder Consulting’), para 4

[22] Ibid., para 7

[23] Ibid., para 13

[24] Vedanta Ltd. (supra), Para 11

[25] Ibid, Para 11,

[26] Hyder Consulting (supra), Para 10

[27] Ibid., para 13

[28] Explanation to S.31 (7)(b) of ACA

[29] S.29, Interest Act, 1978

[30] Explanation to s.29, Interest Act, 1978

[31] 74. Compensation for breach of contract where penalty stipulated for.—1 [When a contract has been broken, if a sum is named in the contract as the amount to be paid in case of such breach, or if the contract contains any other stipulation by way of penalty, the party complaining of the breach is entitled, whether or not actual damage or loss is proved to have been caused thereby, to receive from the party who has broken the contract reasonable compensation not exceeding the amount so named or, as the case may be, the penalty stipulated for. Explanation.—A stipulation for increased interest from the date of default may be a stipulation by way of penalty.] Exception.—When any person enters into any bail-bond, recognizance or other instrument of the same nature, or, under the provisions of any law, or under the orders of the 2 [Central Government] or of any 3 [State Government], gives any bond for the performance of any public duty or act in which the public are interested, he shall be liable, upon breach of the condition of any such instrument, to pay the whole sum mentioned therein. Explanation.—A person who enters into a contract with Government does not necessarily thereby undertake any public duty, or promise to do an act in which the public are interested. Illustrations (a) A contracts with B to pay B Rs. 1,000, if he fails to pay B Rs. 500 on a given day. A fails to pay B Rs. 500 on that day. B is entitled to recover from A such compensation, not exceeding Rs. 1,000, as the Court considers reasonable. (b) A contracts with B that, if A practises as a surgeon within Calcutta, he will pay B Rs. 5,000. A practises as a surgeon in Calcutta. B is entitled to such compensation; not exceeding Rs. 5,000, as the Court considers reasonable. (c) A gives a recognizance binding him in a penalty of Rs. 500 to appear in Court on a certain day. He forfeits his recognizance. He is liable to pay the whole penalty. 4 [(d) A gives B a bond for the repayment of Rs. 1,000 with interest at 12 per cent. at the end of six months, with a stipulation that, in case of default, interest shall be payable at the rate of 75 per cent. from the date of default. This is a stipulation by way of penalty, and B is only entitled to recover from A such compensation as the Court considers reasonable. (e) A, who owes money to B a money-lender, undertakes to repay him by delivering to him 10 maunds of grain on a certain date, and stipulates that, in the event of his not delivering the stipulated amount by the stipulated date, he shall be liable to deliver 20 maunds. This is a stipulation by way of penalty, and B is only entitled to reasonable compensation in case of breach. 1. Subs. by Act 6 of 1899, s. 4, for the first paragraph of s. 74. 2. Subs. by the A.O. 1937, for “Government of India”. 3. Subs. by the A.O. 1950, for “Provincial Government”. 4. Added by Act 6 of 1899, s. 4. 32 (f) A undertakes to repay B a loan of Rs. 1,000 by five equal monthly instalments, with a stipulation that in default of payment of any instalment, the whole shall become due. This stipulation is not by way of penalty, and the contract may be enforced according to its terms. (g) A borrows Rs. 100 from B and gives him a bond for Rs. 200 payable by five yearly instalments of Rs. 40, with a stipulation that, in default of payment of any instalment, the whole shall become due. This is a stipulation by way of penalty.]

[32] paragraph titled ‘Rate of Interest’, page 1182, the Indian Contract & Specific Relief Act Vol 2, Pollock & Mulla, 15th Edition.

[33] Emphasis supplied by the Author

[34] For conditions on liquidated damages, the reader may refer to Kailash Nath Associates v. Delhi Development Authority; [(2015) 4 SCC 136]

[35] State of Orissa v. Gokulchandra Kanungo AIR; [1981 SCC OnLine Ori 42]

[36] Union of India v. Pradeep Vinod Construction; [2005 SCC OnLine Del 1279]

[37] Union of India v. S.B. Patel; [1999 SCC OnLine AP 254]

[38] Delhi Development Authority v. Saraswati Construction Co.; [2004 SCC OnLine Del 836]

[39] Vedanta Ltd. (supra), paras 19 and 21

[40] Clause 35.2.3 of the General Conditions of the Contract between Vedanta and Shenzhen; Vedanta Ltd. (supra), para 19

[41] Emphasis supplied by Author

[42] Vedanta Ltd. (supra), para 21

[43] Vedanta Ltd. (supra), para 19

[44] Ibid.

[45] Ibid.

[46] Vedanta Ltd. (supra), para 22

[47] Ghaziabad Development Authority v. Balbir Singh – para 6 & 8; [(2004) 5 SCC 65]

[48] Van der Giessen-De-Noord Shipbuilding Division BV v. Imtech Marine & Offshore B.V. [(2008) EWHC 2904] – held that awarding a rate higher than that claimed by the Claimant in the pleading would be against the duty of fairness by the arbitrator

[49] Vedanta Ltd. (supra), para 17

[50] Vedanta Ltd. (supra), para 12

[51] Vedanta Ltd. (supra), para 12

[52] Vedanta Ltd. (supra), Para 18

[53] Ssangyong Engineering and Construction Co. Ltd. v. National Highway Authority of India, [2019 SCC OnLine SC 677]; para 156, McDermott International Inc. v. Burn Standard Co. Ltd., [(2006) 11 SCC 181]

[54] Delhi Development Authority v. Anand and Associates (2008) Arb LR 490, 498 (rates of interest prevailing during the period for which the same is awarded must be kept in mind); Hindustan Construction v. DDA (2009) 2 Arb LR 321, 324 (Del – DB) (prevailing rates of inflation to be kept in mind); Sayeed Ahmed & Co. v. State of Uttar Pradesh (2009) 3 Arb LR 29, 37 (‘Unless the award of interest is found to be unwarranted for reasons to be recorded, the Court should not alter the rate of interest awarded by the arbitrator’);  Hydel Constructions Ltd. v. HPSEB (1999) 2 RAJ 483 (DB) (Court reduced 18% interest to 12% in view of fluctuation in bank rates relating to commercial transactions)

[55] Vedanta Ltd. (supra), para 12

[56] Vedanta Ltd. (supra), para 6. It is important to mention that the Court also held in para 7 ,’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.’

[57] ‘In some jurisdictions, for example Bermuda, Hong Kong, England, and Scotland, the power to award interest is governed by the law of the place of arbitration. In others, for example under German conflict-of-laws rules, the liability to pay interest is a question of substantive law and thus governed by the law of the contract’ –Redfern and Hunter on International Arbitration, Sixth Edition, para 9.73

[58] Vedanta Ltd. (supra), para 8

[59] Vedanta Ltd. (supra), para 16

[60] Vedanta Ltd. (supra), para 17

[61] S.34(3) of 1996 Act- (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.

[62] Palmyra Tsiris Lines S.A. of Piraeus C/o Transport Counsellors International Ltd. v. Union of India, [1998 SCC OnLine Del 177]

[63] Hyder Consulting (supra), para 26

[64] Redfern and Hunter on International Arbitration, Sixth Edition, para 9.83

[65] Maneesh Pharmaceutical Ltd. v. Contract Advertising India Pvt. Ltd.; [2013 (2) Arb LR 68]

[66] Section 2(b) of the Interest Act, 1978.

This article was first published in the DIAC Journal of Arbitration, 2021.