India: Supreme Court guidance on interest in international commercial arbitrations
In a recent judgment, the Indian Supreme Court has provided guidance on the award of interest in international commercial arbitrations.
In Vedanta Limited v Shenzen Shandong Nuclear Power Construction Company Ltd, the arbitral award included a dual interest rate. The rate awarded was 9% on the award amount, payable from the date of the award until realisation, if the award was satisfied within 120 days. The interest rate increased to 15% if the award was still outstanding beyond 120 days.
Sections 31(7)(a) and (b) of the Indian Arbitration Act 1996 give the arbitrator power to award pre and post-award interest. Despite this, the Indian Supreme Court rejected the dual interest rate awarded and modified the post-award interest to 9% on the award amount in Indian Rupees and 3% over LIBOR on the award amount in Euros. In doing so, the Supreme Court ruled that arbitrators should exercise their discretion in relation to interest reasonably.
The Supreme Court laid down the following factors that must be taken into consideration when awarding interest in international commercial arbitrations:
“(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; and
(viii) proportionality of the count awarded as interest to the principal sums awarded”.
The Supreme Court further stated that, on the one hand, the rate of interest must be compensatory as it is a form of reparation granted to the holder of the award; while on the other hand 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, or where it is not found reasonable nor promotes the interests of justice.
