The timing of conversion, whether at the date of judgment or enforcement, plays a decisive role for parties. Converting at the date of judgment captures the value at a specific moment, while conversion at enforcement reflects the reality of fluctuating exchange rates, potentially allowing one party to strategize delaying payment until the date of enforcement. The Supreme Court’s decision addressed both these concerns, particularly in cases where partial payments are made during enforcement proceedings.

Background

On August 8, 2024, the Supreme Court ruled in Koncar Generators and Motors Ltd. v. DLF Ltd. (formerly known as DLF Universal Ltd) that the date of enforcement of a foreign arbitral award would determine the foreign exchange rate for converting the award into Indian rupees.

This dispute arose from a contract between DLF Ltd., an Indian company, and Koncar Generator & Motors Ltd. (KGML), a Croatian company, for the supply of generators. Disagreements between the parties led to arbitration at the International Chamber of Commerce, Paris, which resulted in an arbitral award in favor of KGML on May 12, 2004, in the amount of €1,093,989, with additional interest and legal costs.

DLF challenged the enforcement of the award in court, leading to protracted legal proceedings in India. While these legal proceedings were ongoing, DLF was ordered to pay a security deposit pursuant to a court order. DLF made this initial deposit of INR 75 million as security on October 22, 2010. On March 6, 2011, DLF was ordered to make a second deposit of INR 5 million, as well as to pay the remaining amount due under the award.

Once the challenges and objections were resolved, the award “attained finality” on July 1, 2014. However, the Trial Court only allowed for funds to be withdrawn at the conclusion of the enforcement proceedings on August 24, 2016. On October 10, 2016, KGML withdrew the two deposits for a total of INR 80 million, along with the interest that accrued on the amount pursuant to an order by the Trial Court.

Discussion and analysis

The significant legal question debated in the case concerned the correct date for converting the award amount and the payments that were deposited into Indian rupees. KGML argued that it should be the date of deposit, while DLF contended that it should be the date of final adjudication of the objections, based on the fluctuating foreign exchange rates.

Despite not withdrawing the deposited amounts until 2016, KGML had, in principle, the ability to benefit from (and withdraw) the first deposit as early as October 22, 2010, the date of the deposit, and its failure to withdraw the funds was seen as an exercise of its own discretion. KGML’s “inability” to withdraw the amount was not due to any inherent legal barrier, but instead its failure to comply with the bank guarantee condition. Therefore, the Supreme Court held that the date of deposit should be the relevant date for currency conversion, and thus applied the exchange rate of €1 = INR 59.17 as of October 22, 2010.

The Supreme Court also held that the exchange rate for converting foreign arbitral awards into Indian rupees should be based on the date of enforcement, rather than the date of judgment, which carries significant implications for currency fluctuations on the final payable amount.

Impact of subsequent deposits and objections

Although the Supreme Court held that the initial deposit of INR 75 million must be converted on the date of the deposit, it treated the second deposit of INR 5 million differently. In this instance, KGML was not permitted to withdraw the deposit until the completion of the enforcement proceedings in 2016. Therefore, KGML could not have benefitted from (or withdrawn) the second deposit as it could have with the first deposit until July 1, 2014, when the objections were finally disposed of.

This distinction between the two deposits emphasizes the principle that the award holder’s ability to benefit from the deposited funds is a crucial factor in determining the appropriate date for currency conversion. The Supreme Court recognized that where the award holder is deprived of the ability to withdraw the deposited funds, it would be inequitable to apply the date of deposit for conversion. Instead, the date on which the award becomes enforceable, i.e., when the objections are finally adjudicated, is the appropriate date for determining the exchange rate.

In reaching its decision, the Supreme Court drew analogies to provisions in the Indian Code of Civil Procedure, which govern the cessation of interest on amounts deposited before a court. The principle underlying these provisions is that once the judgment debtor deposits an amount with the court, interest ceases to accrue on that amount, provided the judgment creditor is notified. The rationale is that the deposit benefits the award holder, who is deemed to have access to the funds even if they choose not to withdraw them. This principle was echoed in the Supreme Court’s reasoning in the present case, where the award holder’s ability to access and utilize the deposited amount was a key factor in determining the relevant date for currency conversion.

Conclusion

In conclusion, the Supreme Court held that the first deposit of INR 75 million made on October 22, 2010 must be converted into euros as of the date of deposit. KGML’s failure to withdraw the amount at that time was found to be an exercise of discretion. For the second deposit of INR 5 million, July 1, 2014, when the objections were finally disposed of, was the effective date for determining the exchange rate, since KGML was not permitted to withdraw the amount until that date.

This decision offers critical guidance on the timing of currency conversion in foreign arbitral award enforcement. By establishing that the date of enforcement – not judgment – determines the applicable exchange rate, and by addressing the nuances surrounding partial payments and the award holder’s ability to withdraw funds, the Supreme Court has provided a more equitable and predictable framework for cross-border arbitration cases.

This decision strikes a careful balance between protecting the interests of both debtors and award holders, while emphasizing the importance of timely compliance with court orders to mitigate the impact of currency fluctuations. As international arbitration continues to grow in importance, this ruling sets a precedent that will enhance fairness and clarity in the enforcement of foreign arbitral awards in India.

Client Alert 2024-214