SC: Interest awarded w.r.t an award should be compensatory, not punitive.

Today i.e. on 11.10.2018, the Hon’ble Supreme Court, in the matter of Vedanta Ltd. v. Shenzen Shandong Nuclear Power Construction Co. Ltd. while modifying the interest awarded by the arbitral tribunal held that the Award­ debtor cannot be subjected to a penal rate of interest, either during the period when he is entitled to file an appeal to challenge the Award, before a Court of law, or later. The rate of interest must be compensatory, not punitive in nature.

The Hon’ble Apex Court observed that:

In essence, an award of Interest compensates a party for its forgone return on investment, or for money withheld without a justifiable cause. (Para 3)

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. (Para 4)

(Para 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;

(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 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.  (Para 9)

Copy of Judgement: Judgement 11-Oct-2018

-Tushar Kaushik

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