Arbitration Award in Vedanta Ltd. vs. Shenzhen Shandong Nuclear: Supreme Court Modifies Interest Rates

The Supreme Court of India, in a significant judgment, ruled on the arbitration dispute between Vedanta Ltd. and Shenzhen Shandong Nuclear Power Construction Co. Ltd.. The case revolved around an international commercial arbitration concerning the construction of a 210-MW Co-Generation Power Plant. The Supreme Court primarily addressed the issue of excessive interest rates imposed by the arbitral tribunal and made critical modifications to ensure fairness and adherence to legal standards.

Background of the Case

The dispute arose out of four inter-related contracts between Vedanta Ltd. and Shenzhen Shandong, collectively referred to as the ‘EPC Contracts.’ These agreements, signed on May 22, 2008, covered:

• Offshore Engineering and Technical Services Contract
• Offshore Supply Contract
• Onshore Services and Construction Contract
• Onshore Supply Contract

Each contract included an arbitration clause stipulating that disputes would be resolved through arbitration in Mumbai under the Arbitration and Conciliation Act, 1996, with Indian law as the governing law.

Dispute and Arbitration Proceedings

The dispute emerged when Vedanta terminated the contracts on February 25, 2011, citing deficiencies. Shenzhen Shandong invoked arbitration on April 18, 2012, and a three-member arbitral tribunal was constituted. During the first tribunal session on October 17, 2012, both parties mutually agreed to change the seat of arbitration from Mumbai to New Delhi.

Claims and Counterclaims

Shenzhen Shandong filed claims amounting to:

• INR 4,472,106,315
• USD 2,380,000
• EUR 121,723,214
• Pendente lite and future interest at 18% per annum

Vedanta filed counterclaims amounting to:

• INR 24,58,34,89,367
• Interest at 18% per annum

Arbitral Tribunal’s Award

The arbitral tribunal ruled in favor of Shenzhen Shandong and awarded:

• INR 46,71,41,942 and EUR 23,717,437
• INR 12,19,69,047 under the first claim
• INR 25,47,325, INR 6,06,707, and INR 1,31,10,990 under the second claim
• Interest at 9% from the initiation of arbitration proceedings, increasing to 15% if unpaid within 120 days
• Legal costs of INR 50,00,000
• Rejection of Vedanta’s counterclaims

Vedanta’s Appeal

Aggrieved by the decision, Vedanta challenged the award under Section 34 of the Arbitration Act before the Delhi High Court, which dismissed the objections on February 12, 2018. Vedanta then filed an appeal under Section 37, which was also dismissed on August 30, 2018. The matter finally reached the Supreme Court.

Petitioner’s Arguments (Vedanta Ltd.)

• The company limited its challenge to the excessive interest rates imposed by the arbitral tribunal.
• The tribunal’s dual interest rate of 9% initially and 15% after 120 days was punitive and arbitrary.
• The 15% interest post-120 days violated Vedanta’s statutory right to challenge the award under Section 34.
• The tribunal’s award of uniform 9% interest on INR and EUR components disregarded international financial norms.

Respondent’s Arguments (Shenzhen Shandong)

• The respondent justified the tribunal’s decision, arguing that the interest rates ensured timely payment.
• They maintained that 15% post-120 days was a valid deterrent against delayed compliance.
• They contended that the tribunal had exercised discretion within its legal scope under Section 31(7) of the Arbitration Act.

Supreme Court’s Observations and Ruling

The Supreme Court analyzed the legality of interest rates in arbitration awards, referencing Section 31(7) of the Arbitration Act, which allows tribunals to grant reasonable interest. The Court noted:

• “The imposition of a high rate of interest at 15% post-120 days is exorbitant and lacks justification.”
• “A dual-rate structure penalizes the award debtor and affects their statutory right to challenge the award.”
• “Interest on foreign currency claims must align with internationally accepted financial rates.”

Modifications Ordered by the Supreme Court

The Supreme Court modified the tribunal’s award as follows:

• The post-120 days interest rate of 15% was deleted.
• A uniform interest rate of 9% per annum was imposed on the INR component until realization.
• For the EUR component, interest was set at LIBOR + 3%, prevailing on the date of the award.

Impact of the Judgment

The Supreme Court’s ruling has significant implications for international arbitration in India:

• Protection Against Unfair Interest Rates: The judgment sets a precedent against excessive penal interest rates in arbitration.
• Fair Treatment of Foreign Currency Claims: The decision aligns interest rates on foreign currency awards with internationally accepted financial principles.
• Safeguarding the Right to Challenge Awards: By eliminating excessive post-120-day interest, the Court upheld the rights of award debtors under Section 34 of the Arbitration Act.

Conclusion

The Supreme Court’s ruling in Vedanta Ltd. vs. Shenzhen Shandong Nuclear Power Construction Co. Ltd. reinforces the principles of fairness and proportionality in arbitration awards. By modifying the interest rates, the Court has ensured that arbitration remains a just and balanced dispute resolution mechanism. This landmark judgment will guide future arbitrations involving complex financial disputes and international contracts.

Petitioner Name: Vedanta Ltd..
Respondent Name: Shenzhen Shandong Nuclear Power Construction Co. Ltd..
Judgment By: Justice Rohinton Fali Nariman, Justice Indu Malhotra.
Place Of Incident: New Delhi.
Judgment Date: 11-10-2018.

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