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The recovery of compound interest would not contravene any fundamental policy of Indian law: High Court of Delhi

It is also a norm of the banking industry to charge compound interest with either monthly or quarterly rests. Therefore an arbitral award cannot be held to be contrary to the fundamental policy of Indian law only because one of the parties is awarded compound interest. This was held in STEEL AUTHORITY OF INDIA LIMITED v.  M/S JALDHI OVERSEAS PTE LTD. [O.M.P. (COMM.) 168 of 2021] in the High Court of Delhi by a single bench consisting of JUSTICE VIBHU BAKHRU.

The facts are that the respondent is a company incorporated in Singapore and was the claimant before Arbitral Tribunal. Petitioner is a PSE, engaged in the manufacture of steel. The arbitration between the parties was an international commercial arbitration as per Section 2(1)(f) of the A&C Act. Petitioner has filed the present petition under S.34 of the Arbitration and Conciliation Act, 1996 impugning an Arbitral Award.

The counsel for the petitioner submitted that the award of interest at the rate of 12% per annum compounded with quarterly rests, is excessive and disproportionate.

The  Counsel for the respondent submitted that 12% interest compounded on quarterly rests was not contrary to the public policy of Indian law. He stated that there are number of legislations, which specifically provide for compound interest. In particular, he referred to Section 16 of Micro, Small and Medium Enterprises Development Act, 2006.

The court made reference to the judgement of Apex court in Renusagar Power Co Ltd. V. General Electric Co, wherein it was observed that “It is important to notice that the ground for interference insofar as it concerns ―interest of India‖ has since been deleted, and therefore, no longer obtains. Equally, the ground for interference on the basis that the award is in conflict with justice or morality is now to be understood as a conflict with the ―most basic notions of morality or justice‖. This again would be in line with paras 36 to 39 of Associate Builders [Associate Builders v. DDA, (2015) 3 SCC 49 : (2015) 2 SCC (Civ) 204], as it is only such arbitral awards that shock the conscience of the court that can be set aside on this ground”.

The court also made reference to the judgment of Apex Court in Associate Builders v. DDA, wherein it was observed that,   Equally, disregarding orders passed by the superior courts in India could also be a contravention of the fundamental policy of Indian law, but the recovery of compound interest on interest, being contrary to statute only, would not contravene any fundamental policy of Indian law ”.

Considering the facts of the case and the legal precedents, the court observed that interest on amounts payable in different currencies to parties operating in their respective currencies would necessarily have to take into account the economic environment, which is relevant to the currencies, in which the parties operate. The said decision is not an authority for the proposition that awarding 12% compound interest with quarterly rests on an award in US dollars, violates the fundamental policy of Indian law. While dismissing the petition.

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