ICC Awards

• Source of authority for granting interest

• Applicable period

• Rate of interest

Respondent, an Indian corporation, entered into a construction contract with, amongst others, the two Canadian Claimants in this arbitration. The contract, which was governed by Indian law, gave rise to a dispute over the proper meaning and application of price variation formulae it contained. Claimants considered that they were entitled to additional sums, whereas Respondent refuted this claim and maintained that, on the contrary, it had overpaid one of the Claimants. Claimants sought interest on the principal sums claimed, whereas Respondent considered that no interest was due. The arbitral tribunal awards sums to each of the Claimants, with interest.

'6.1 Article 20.3 of the Contract provides that it shall be governed by Indian law. Claims for interest in respect of sums unpaid are classified differently under different legal systems as substantive or procedural. In the present case claims for interest relate to three separate stages. Interest prior to the institution of proceedings; interest between that stage and the making of the award; and interest from the date of the award until payment.

6.2 (i) Interest prior to institution of proceedings. So far as interest prior to the institution of proceedings is concerned, liability to pay it by the law of India is a substantive matter governed by the Interest Act 1978. By s.3(1) the court (which includes an arbitrator) is empowered to allow interest in any proceedings for the recovery of any debt or damages for certain periods. One such period is "(a) if the proceedings relate to a debt payable by virtue of a written instrument at a certain time, then, from the date when the debt is payable to the date of institution of the proceedings". On behalf of the Claimants it was submitted that the Tribunal was entitled by virtue of that provision to award interest on each invoice for which sums were outstanding or paid late until 18th February 1994 when the Request for Arbitration was submitted. Since the rate of interest as opposed to the entitlement to interest was a procedural matter by Indian law, they sought interest at a rate equal to the French legal rate on a matter governed by the lex fori in accordance with Article 1153 of the French Civil Code.

6.3 For the Respondents it was submitted that Indian law applied to the question of interest for the pre-reference period. No claim for interest by way of damages was permissible (Union of India v. Rallia Ram AIR 1963 S.C. 1685). Further, the preconditions of s.3(1)(a) had not been fulfilled. The Tribunal was only empowered to act if proceedings related to a debt payable by virtue of a written instrument at a certain time. Here there was no such written instrument. The Tribunal's attention was directed to the commentary to the Interest Act 1978 . . . The issuing of disputed invoices did not amount to the creation of a debt payable by virtue of a written instrument at a certain time. The relevant written instrument must be a document executed by the parties. The Claimants' response was to argue that the Contract itself was the written instrument and that the invoices were simply evidence of what the debt is. On this matter the Tribunal considers that the approach of the Respondents is correct. The issuing of invoices, challenge to which is the main subject matter of this arbitration, does not constitute them a written instrument within the meaning of s.3(1)(a) of the Interest Act. The claim for interest is therefore rejected in so far as it relates to the period prior to 14th February 1994.

6.4 (ii) Interest during the dependence of the hearing. In this respect there was a conflict of view. The Claimants pointed out that under the Contract the arbitration had to take place in Paris. Article 20.3 of the Contract provides that the Contract shall be governed by Indian law. It does not provide expressly that Indian law should govern the entitlement to interest on unpaid amounts. The Claimants therefore submitted in the first instance that the Tribunal should apply that part of Article 13(3) of the ICC Rules "In the absence of any indication by the parties as to the applicable law, the arbitrator shall apply the law designated as the proper law by the rule of conflict which he deems appropriate",¹ and that by Indian conflict of law rules, matters of procedural law are governed by the lex fori, namely the laws of France. In the alternative they submitted that application of French conflict of law rules would make Indian law the law applicable to this matter. Accordingly they submitted in the first instance that interest should be payable on the sums claimed at the French legal rate (8.4% for 1994 and 5.82% for 1995); or in the alternative at what the Indian courts would regard as a reasonable rate, namely 6%. The Respondents submitted that no issue of conflict of law arose, in that by Article 20.3 of the Contract Indian law is the proper law of the Contract and is to govern all matters related to the Contract including the interest on unpaid amounts. Both parties sought to found on the case of National Thermal Power Corporation v. The Singer Company JT 1992(3) S.C 198; and in addition the Respondents founded on Renusagar Power Co. Ltd. v. General Electric Co. AIR 1994 S.C. 860. The latter case held expressly that in an international commercial arbitration, award of interest falls under specified periods including (ii) period during which the arbitration proceedings were pending before the arbitrators; and (iii) period from the date of award till the date of institution of proceedings in a Court for enforcement of the award, and that interest covered by these two items would be governed by the law governing the arbitral proceedings.

6.5 If the law governing the arbitral proceedings is Indian law as the Respondents suggest, then it is clear that the law of India will determine the entitlement to interest and its rate in respect of both the periods mentioned. If Indian law does not in the first instance apply, this Tribunal is required by Article 13(3) of the ICC Rules to apply the law designated as the proper law by the rule of conflict which the Tribunal deems appropriate. Under French conflict of law rules issues of substantive law should be governed by the governing law of the Contract, and procedural matters are governed by the lex fori. However under these rules, issues of liability to pay interest, the period and the rate of interest are all classified as questions of substantive law and not as matters of procedure. Accordingly, applying these rules, Indian law also should apply to all questions relative to interest.

6.6 The Tribunal is of the view that if conflict of law rules are to be applied at all, the appropriate law in relation to these questions as to interest is French law. Application of that law results in Indian law being applied, since questions relating to interest are treated as substantive under the French conflict rules.

6.7 The currency of account is Canadian, the place of performance of the Contract is India, but the parties are either Indian or Canadian. There seems no reason given that the parties expressly chose Paris as the place of arbitration (a point of distinction from the National Thermal Power Corporation v. The Singer Company case where no place had been chosen by the parties and the ICC appointed London) for doing other than apply the rules of the lex fori including its conflict rules to these issues.

6.8 Upon that basis, it was argued by the Respondents that interest for the period between the reference to arbitration was at the discretion of the Tribunal, that no claim for interest could rightfully arise until after the adjudication by the Tribunal and that no interest should be considered for the period prior to the adjudication of the award. The tribunal rejects this submission. Given that the Tribunal has determined that the basis upon which claims for price variation were submitted by the Claimants was correct, the result is that monies which upon a correct interpretation of the Contract should have been paid to them earlier have not been so paid, and the Respondents have been able to retain monies to which they were not in the event entitled for that period. The Tribunal considers that in the exercise of its discretion this is an appropriate case to award interest at a reasonable rate (which is agreed under Indian law to be 6% per annum) from 14th February 1994 until the date of this award.

6.9 (iii) Interest from date of award until payment. Under Article 34 of the Code of Civil Procedure 1908 the Tribunal is empowered to award interest on sums awarded by way of principal from the date of the award until payment at such rate as the Tribunal deems reasonable. That rate may not exceed the rate at which moneys are lent or advanced by nationalised banks in relation to commercial transactions. The Respondents have furnished the Tribunal with a circular from such a bank dated 1st May 1995 showing that from that date the prime lending rate was increased from 15% per annum to 15.5% per annum. In the whole circumstances the Tribunal considers that it would be reasonable to award interest at the rate of 10% per annum from the date of this award until the date of payment.

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Decision of the Tribunal

For the reasons above stated the Tribunal answers the questions raised in the Terms of Reference as follows:

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8.8 Is the successful party entitled to recover interest in this arbitration and if so from what date or dates and at what rate or rates?

Yes. Each of [Claimants] is entitled to interest on the whole sum to which they have been found entitled at the rate of 6% (per cent) per annum from 14th February 1994 until the date of this award, and at the rate of 10% (per cent) per annum thereafter until payment.'