Currency Conversion Of Foreign Arbitral Awards: A New Benchmark Set By The Supreme Court

Posted On - 26 August, 2024 • By - Aashita Khandelwal

Introduction

The conversion of foreign currency arbitral awards into Indian Rupees presents a complex challenge due to the inherent volatility of exchange rates. The choice of conversion date significantly impacts the final amount payable by the award debtor and received by the award holder. Thus, it becomes important to understand the complexities surrounding currency conversion in the context of international commercial arbitration. This issue has also been dealt with by the Supreme Court recently, which provides crucial guidance on determining the appropriate conversion date for both the entire award amount and partial payments made during enforcement proceedings.

Impact of Exchange Rate Fluctuations: Exchange rate fluctuations can significantly affect the value of arbitral awards when converted into a different currency. For instance, an award of $10,000 might be worth 700,000 INR in January when the exchange rate is 70 INR/USD. However, if the INR weakens to 65 INR/USD by July, the award holder would receive only 650,000 INR, resulting in a loss of 50,000 INR. Conversely, if the INR strengthens to 75 INR/USD, the award’s value would increase to 750,000 INR, yielding a gain of 50,000 INR.

Impact of Different Conversion Dates: The timing of currency conversion can also play a crucial role in determining the final value of an arbitral award. Converting the award on the date of judgment reflects its value at that specific time, capturing the prevailing exchange rate without favoring either party. However, converting on the date of enforcement introduces a variable impact. If the INR strengthens between the award date and enforcement, the award holder benefits. Conversely, if the INR weakens during this period, the debtor could gain an advantage.

The Supreme Court’s Judgment:

Background of the Case

Recently, the Supreme Court dealt with the issue of conversion of a foreign award’s currency to the Indian Rupee in the case DLF Ltd. and Anr. v. Koncar Generators and Motors Ltd.[1]

  • Contractual Dispute: A contract was entered into between Indian company DLF Ltd. and Croatian company Koncar Generator & Motors Ltd. (KGML) for the supply of generators. Disputes arose from this contract.
  • Arbitration and Award: The dispute was referred to the International Chamber of Commerce, Paris, which awarded KGML a sum of Euros 16,73,469.07.
  • Enforcement Proceedings: KGML sought to enforce the award in India, while DLF challenged the award and raised objections to enforcement.
  • Partial Payments: DLF was compelled to deposit a total of INR 8,00,00,000 with the Indian court during the enforcement proceedings.
  • Award Finality: DLF’s challenges to the award were eventually dismissed, and the award attained finality on 01 July 2014.
  • Conversion Issue: The key dispute arose over the appropriate date for converting the Euro award amount into Indian Rupees. KGML argued for the date of award finality, while DLF contended for different dates based on the partial payments made.

Issues

  • Appropriate Date for Conversion: The court had to determine the correct and appropriate date for fixing the foreign exchange rate.
  • Conversion Date for Partial Payments: The court considered the scenario where the award debtor deposits a portion of the award amount during the pendency of proceedings challenging the award. The issue was to determine the conversion date for this deposited amount.

The Court’s Decision and Key Findings

Conversion Date for the Award Amount

  • The appropriate date for determining the foreign exchange rate to convert a foreign currency arbitral award into Indian Rupees is the date when the award becomes enforceable.
  • This means the date when all objections to the award’s enforceability have been finally resolved.
  • The court relied on the Forasol case[2], which supports using the enforceability date for currency conversion.
  • This approach aims to mitigate the impact of exchange rate fluctuations between the award date and enforcement.

Conversion Date for Partial Payments

  • If the award debtor deposits a portion of the award amount before the final determination of the award, the deposited amount should be converted into Indian Rupees on the date of the deposit.
  • The award debtor receives credit for the deposited amount at the exchange rate prevailing on the deposit date.
  • The court reasoned that the award debtor has already parted with the money, benefiting the award holder.
  • If the award holder withdraws the deposited amount, any remaining award portion will be converted using the exchange rate on the award’s enforceability date.
  • This approach ensures consistent treatment of the award amount.

Implications of the Judgment

Benchmark for Conversion:

  • The judgment establishes the enforceability date as the conversion benchmark, aiming to minimize the impact of exchange rate fluctuations on both parties. This protects the award holder from a weakening rupee between the award date and enforceability. Conversely, it prevents the award debtor from being penalized if the rupee strengthens during this period.
  • This approach fosters fairness by using a fixed reference point (enforceability date) for conversion, ensuring neither party benefits unfairly from currency movements.
  • However, there are some potential challenges. Delays in enforcement proceedings could lead to significant time gaps between the award date and enforceability, potentially impacting both parties. Further, the chosen date might not perfectly capture the “true” value of the award, as exchange rates can fluctuate even within a single day.

Conversion of Partial Payments:

  • The court’s decision to convert partial payments at the time of deposit aligns with the economic reality of the situation. The award debtor bears the exchange rate risk for the portion already paid. This introduces an element of finality to the conversion process for the paid portion.
  • However, it creates an asymmetry as the award holder bears the exchange rate risk for the remaining amount. This could lead to differential treatment of different parts of the award.
  • Determining exact deposit dates and corresponding exchange rates might pose practical challenges. The decision could increase administrative burdens and potential disputes.
  • A balanced approach considering both parties’ interests is crucial for effective implementation.

Potential Benefits of the Judgment

  • Reduced Uncertainty and Disputes: By setting clear guidelines for conversion dates, the judgment can reduce uncertainty and disputes that might arise between parties over the applicable exchange rate.
  • Streamlined Enforcement Process: Clear rules for conversion can streamline the enforcement process for foreign currency awards, making it more efficient and predictable.
  • Enhanced Attractiveness of India for Arbitration: The clarity and predictability brought about by the judgment can enhance the attractiveness of India as a venue for international commercial arbitration.

Conclusion

The conversion of foreign currency arbitral awards into Indian Rupees presents a complex issue, primarily due to the fluctuating nature of exchange rates. Recent guidance from the Supreme Court has provided clarity, yet significant challenges persist. Striking a balance between protecting the interests of award holders and debtors, while ensuring legal certainty and predictability, remains a delicate and ongoing task. As India continues to grow its presence in international commerce, the need for a robust and well-defined framework for currency conversion becomes ever more critical.

[1] DLF Ltd. and Anr. v. Koncar Generators and Motors Ltd., Civil Appeal No. 7702 of 2019, https://api.sci.gov.in/supremecourt/2018/21747/21747_2018_15_1501_54502_Judgement_08-Aug-2024.pdf.

[2] Forasol v. Oil and Natural Gas Commission, 1984 Supp SCC 263.

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