“REPORTABLE”

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO.10394 OF 2018

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

Vedanta Ltd.           …Appellant

Versus

Shenzhen 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

challenge the judgment and order dated 30

th

 August,

2018 passed by the Delhi High Court in an Appeal filed

under Section 37 of the Arbitration & Conciliation Act,

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

1

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

as under: 

2.1On   22

nd

  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’.

2.2Each   of   the   four   contracts   contained   an

Arbitration Clause which is identically worded,

which reads as under:

“Article 10

ARBITRATION 

10.1The   parties   hereto   shall

endeavor to settle all disputes and

difference relating to and/or arising

out of the Contract amicably.

2

10.2In   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. 

10.3The place of arbitration shall be

Mumbai   and   the   language   of   the

arbitration shall be English.

10.4The parties further agree that

any arbitration award shall be final

and binding upon the parties.

10.5The   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.”

2.3The Governing law of the Contracts is the Law of

India. The relevant Clause is set out herein below

for ready reference:

“ Article 12

3

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. ”

2.4The   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.

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. 

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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)

2.5The 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

provided   that   in  the   event   of   termination,  the

Purchaser shall pay 105% of the cost incurred by

the Supplier as compensation. The EPC contracts

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did   not   contain   any   provision   on   payment   of

Interest.

2.6Disputes   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. 

2.7The   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. 

2.8The Claimant­Respondent herein raised various

Claims in multiple currencies amounting to Rs.

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

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121,723,214 along with  pendent lite  and future

Interest @ 18% p.a.

2.9The   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.

2.10The   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/­

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

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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

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

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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.

2.11Aggrieved   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.

2.12Aggrieved by the judgment of the Single Judge,

the Appellant award­debtor filed an Appeal before

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. 

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2.13Aggrieved 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

inconsistencies, and is criticized for lack of uniformity

1 32 HALSBURY’S LAWS OF ENGLAND para 106 (4

th

 Ed., 1980)

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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

money,   the   arbitral   tribunal   may

include   in   the   sum   for   which   the

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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 reasonable

3

, or promotes the interests of

justice

4

.

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 Act

6

. 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. 

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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

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