Indus Water Treaty Dispute: Further Developments

On 27th May 2010, we had dealt with the arbitration between Pakistan and India in relation to the Indus Water Treaty, 1960.We had stated that Pakistan had invoked arbitration under the said Treaty alleging that India's plan to build the Kishanganga Hydroelectricity Project was contrary to the Treaty. We had also stated that Pakistan had appointed Jan Paulsson and Justice Bruno Simma as arbitrators. 

The Hindu has reported that the Indian government, after consulting with lawyers R.K.P. Shankar Dass and Fali Nariman (both the said lawyers were reportedly involved in the Baglihar dam dispute under the same Treaty) has planned to appoint Peter Tomka, a judge of the International Court of Justice, and Lucius Caflisch, an academician as India's arbitrators.

As per the Treaty, each party to the arbitration is to appoint two arbitrators and the four arbitrators so appointed would appoint three arbitrators.  The Hindu states that India is supposed to respond within 30 days from the receipt of the notice by Pakistan invoking arbitration. It seems India has received it on 18th May and has to respond by 17 June.

The news report in the Hindu can be accessed from here.

Links of Interest

In the Law and Legal Developments blog, there was a discussion on the UK Supreme Court's case of Inveresk plc (Respondent) v Tullis Russell Papermakers Limited (Appellant) (Scotland), where the Doctrine of Retention was analysed. The said blog has also analysed Indian cases on the point. Really interesting. Do check them out, in case you have not already done so. The posts from the said blog on the said issue can be accessed from here, here, here and here.

The Kasab Judgement, where death penalty was awarded to the Mumbai 26/11 terrorist, can be accessed from here (thanks to Bar and Bench for providing us with the link).

  

In RTS Flexible Systems Limited v. Molkerei Alois Müller Gmbh & Company KG, the UK Supreme Court has dealt with a tricky issue on Letters of Intent . We will be doing a post on this case soon. Till then, you can read the judgement of the UK Supreme Court or, in case you don't have the time, you can read this short press release on the judgement. The judgement can be accessed from here.

By the way, check out the "Law Reviews/ Journals" Gadget on the bottom left of the blog. We have given a list of links to the some most popular law reviews/ law journals. The links lead to the current issues of the journals.Over the next few days, we will be coming up with a comprehensive list of such links. 

Consultation Paper on Amendments to Arbitration Law: Further Comments on Interest Rate and Commercial Division of High Courts

On 8th April 2010, the Ministry of Law and Justice published a document titled Consultation Paper on the Amendments to Arbitration and Conciliation Act, 1996 (CP). On CP, we had four posts touching upon the following aspects:

Post I: Descriptive Analysis of the CP
Post II & III: Analysis of the First Proposal: On Section 2(2) of the Arbitration and Conciliation Act, 1996 (Act) to nullify Bhatia International
Post IV: Amendments to Section 31(7) on the default rate of interest 

This short post is deals with the following aspects

1. Further Observations on Interest Rate under S 31(7)
2. Proposal to amend provisions of the Act for constitution of Commercial Division of High Courts Bill, 2009

Further Observations on S 31(7):
As stated above, in our previous post, we had analysed the proposal for amending S 31(7) of the Act, reducing the interest rate from 18%. One of our observations on the said proposal was that there was no adequate justification for reducing the interest rate from 18% (the only justification of 'economic crisis' is, in our humble opinion, no justification at all when economic crises are temporary phenomena).S 31(7) is quoted below:

"(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 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 eighteen per centum per annum from the date of the award to the date of payment."

In 2001, the Law Commission, in its 176th Report observed:

"After due consideration, the Commission has felt that there is no justification for reducing the rate below 18%. Hence no amendment is necessary in section 31(7)(b)."

Even the Saraf Committee, in its report in 2005, did not find any reason to amend S 31(7). In view of the above, we fail to understand why an amendment is needed to reduce the said rate of 18%. In any case, parties are free to agree for a lesser rate of interest.

Proposal to amend provisions of the Act for constitution of Commercial Division of High Courts Bill, 2009:
In 2009, a Bill was passed in the Lok Sabha on 18 December 2009, known as the Commercial Division of High Courts Bill, 2009. We had written a post on the said Bill, which can be found here. According to the said Bill, "[a]n application under section 34 or section 36 or an appeal under section 37 of the Arbitration and Conciliation Act, 1996 shall be deemed to be a commercial dispute if the amount in dispute or claim relates to a specified value" and shall be dealt with by the Commercial Division of the High Court.

The Arbitration and Conciliation (Amendment) Bill, 2003 provided for the establishment of an Arbitration Division in the High Court of competent jurisdiction consisting of "one or more Division Benches of the High Court" and such Bench shall hear all aspects relating to challenge and execution of arbitral awards.

The Saraf Committee was in consonance with the said Bill stating the recommendation as salutary (but recommended that the provisions of S 37A ought to be modified to make it clear that the Arbitration Bench "will be a Division Bench of not less than two judges"). Broadly, on two counts, this development would prove to be advantageous. One, it would considerably save time and money of business entities. Two, it would (hopefully) lead to a bunch of judges specialised in commercial law.

* Title changed after posting

Interest Rate under the Indian Arbitration and Conciliation Act, 1996

In this blog, we had three posts on the consultation paper (CP) released by the Ministry of Law and Justice (Ministry) proposing to amend the law of arbitration in India. One was a guest post that gave a descriptive analysis of what the CP was all about. The other two posts (which can be found here and here) were on the suggestions of the Ministry regarding the applicability of Part I of the Arbitration and Conciliation Act, 1996 to international commercial arbitrations held outside India. The aim of this post is to analyse the proposal relating to the rate of interest [readers may please note that we have not dealt with the CP in the same order as the CP does; For example, the aspect relating to the applicability of Part I of the Act was designated as (A) in the CP and the proposal relating to interest rate is (E) in the CP. Nevertheless, we will try to cover all the aspects of the CP].

Article 31(7) of the Act provides:

"(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 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 eighteen percentum per annum from the date of the award to the date of payment."

The rate of interest, by default, has been fixed at 18% per annum. The parties could, however, agree to the contrary, providing for a different interest rate.

The CP proposes that since the said 18% per annum rate of interest in this economic scenario is too harsh, the interest rate ought to be linked to the interest rate fixed by the Reserve Bank of India (RBI). Hence, the CP seeks to modify S 31(7)(b) as follows:

'(b) A sum directed to be paid by arbitral award shall carry interest at the rate of one percent higher then the current rate of interest from the date of award to the date of payment.

Explanation- The expression “Current rate of interest” shall have same meaning as assigned to it under clause (b) of Section 2 of the Interest Act, 1978.'

S 2(b) of the Interest Act, 1978 reads as follows:

'(b) "current rate of interest" means the highest of the maximum rates at which interest may be paid on different classes of deposits (other than those maintained in savings account or those maintained by charitable or religious institutions) by different classes of scheduled banks in accordance with the directions given or issued to banking companies generally by the Reserve Bank of India under the Banking Regulation Act, 1949 (10 of 1949).

Explanation.-- In this clause, "scheduled bank" means a bank, not being a co-operative bank, transacting any business authorised by the Banking Regulation Act, 1949 (10 of 1949);'

As per the RBI’s website, the Prime Lending Rates (PLR) of different banks are between 11-12%. This article in Business Standard describes the Benchmark Prime Lending Rates of various Indian Banks.

Effectively, the Ministry proposes to fix the interest rate at around 12%. The only justification it provides is the 'present economic scenario'. We are not sure whether this is an adequate justification. Three points are worth noting here. One, at the time when the CP was released (April 2010), the Indian economy had already started recovering (so did many countries in the world). Two, the amendments proposed are far-reaching amendments, meant to extend the longevity and usefulness of the Act. From this perspective, I am not sure if this provision has to be amended on the basis of a temporary phenomenon like economic crisis. What would happen once the economic crisis is over? cessante ratione legis cessat ipsa lex. Three, what was the basis of fixing the interest rate at 18% in Section 31(7)(b)? The CP does not discuss the reason for the law as it exists.

The point which we are making in this post is that before the said provision is amended as per the Ministry’s proposal, the following must be examined:

1. What was the basis for S 31(7)(b) to fix interest rates at 18%?
2. Why is the new proposal to fix it at the PLR?
3. Prudent basis/ bases for fixing interest rates must be determined and then incorporated in the Act.

Interest is the payment which would an entity would be entitled to (over and above the principal)* , had the principal amount been available to it for its use from a particular point of time in the past. The question is how is this sum to be determined? In general, an entity would be entitled to an interest rate which is equivalent to the interest rate which it would have obtained had it invested the principal amount in the least risky investment available in the market. However, the problem arises when an entity would have used the particular amount to obtain returns at a percentage that is far higher than the interest rate which the least risky investment would give. The ideal solution in such a case would be to link the interest rate to the performance of the entity. This would be the correct compensation that an entity would be entitled to had it been in possession of that principal amount.

We do not pretend to be experts on aspects relating to finance. However, readers may spare some time and read this well-researched thirty page (including end notes) article titled ‘Interest as Damages’ by Sénéchal and Gotanda, 47 Colum. J. Transnat'l L. 491 (2009). The authors have posted a draft of the said article in SSRN (though I am not sure if both are identical) which you can download from here. The authors discuss, inter alia, the bases on which interest rates should be determined and come to a conclusion that interest rates in respect of publicly traded corporations should be calculated by referring to the weighted average cost of capital and for privately held firms, interest ought to be calculated by adding up a risk–free rate (which is theoretically impossible) and risk premium.

* Added after posting