Supreme Court Upholds Compound Interest in Arbitration, Rejects State’s Appeal: UHL Power Company Ltd. vs. State of Himachal Pradesh (2022)

Introduction

Date of the Judgment: January 07, 2022

Citation: 2022 INSC 27

Judges: N.V. Ramana, CJI, A.S. Bopanna, J., Hima Kohli, J. (authored the judgment)

Can an arbitrator award compound interest in the absence of a specific contractual clause? The Supreme Court of India recently addressed this question, along with the issue of whether a Memorandum of Understanding (MoU) merges into an Implementation Agreement, in a dispute between UHL Power Company Ltd. and the State of Himachal Pradesh. The court’s decision clarifies the powers of arbitral tribunals regarding interest and contractual interpretation.

Case Background

UHL Power Company Ltd. (UHL) and the State of Himachal Pradesh (the State) were in dispute over a hydroelectric project. A Memorandum of Understanding (MoU) was signed on February 10, 1992, for UHL to investigate the UHL-III Hydro-electric Project. Subsequently, an Implementation Agreement was executed on August 22, 1997, for the project’s implementation. Disputes arose, leading to arbitration where UHL claimed expenses and interest. The Sole Arbitrator awarded ₹26,08,89,107.35 along with pre-claim compound interest. The State challenged this award.

Timeline:

Course of Proceedings

The State challenged the Arbitrator’s award under Section 34 of the Arbitration and Conciliation Act, 1996. A Single Judge of the High Court of Himachal Pradesh disallowed the entire claim of UHL. UHL then appealed under Section 37 of the Arbitration Act. The Division Bench of the High Court partly allowed UHL’s appeal, reducing the awarded amount to ₹9,10,26,558.74 with simple interest from the date of claim, and disallowed compound interest. Both parties, dissatisfied, appealed to the Supreme Court.

Legal Framework

The case revolves around the interpretation of the Arbitration and Conciliation Act, 1996, specifically Sections 34 and 37, which deal with challenges to arbitral awards and appeals, respectively. The court also examines the clauses of the Implementation Agreement, particularly Clause 2.2 defining “Agreement” to include appendices and annexures, and Clause 4 related to the project’s starting date.

Section 31(7)(b) of the Arbitration Act states:
“A sum directed to be paid by an arbitral award shall, unless the award otherwise directs, carry interest at the rate of two per cent higher than the current rate of interest prevalent on the date of award, from the date of the award to the date of payment.”

Arguments

UHL’s Arguments:

• UHL argued that the Arbitrator correctly awarded compound interest, and that the High Court erred in disallowing it based on the overruled judgment in State of Haryana v. S.L. Arora and Co. [(2010) 3 SCC 690].
• UHL contended that the MoU merged into the Implementation Agreement, making all disputes arbitrable under the latter’s arbitration clause.

State of Himachal Pradesh’s Arguments:

• The State argued that the MoU did not merge into the Implementation Agreement, as they were separate documents with distinct arbitration clauses.
• The State submitted that the Implementation Agreement was prematurely terminated by the State.
• The State contended that the Appellate Court erred in setting aside the Single Judge’s order and restoring the Arbitrator’s findings on the premature termination of the Agreement.
• The State argued that the period of one year available to UHL to commence the construction activity was to be reckoned after the major requirements prescribed in Clause 4.1 could be obtained.

Issues Framed by the Supreme Court

The Supreme Court framed the following issues:

1. Whether the Arbitral Tribunal is empowered to grant compound interest or interest upon interest.
2. Whether the MoU dated 10th February, 1992 merged into the Implementation Agreement dated 22nd August, 1997.
3. Whether the Appellate Court has erred in setting aside the order of the learned Single Judge and restoring the findings of the Sole Arbitrator on the aspect of pre-mature termination of the Implementation Agreement.

Treatment of the Issue by the Court:

Authorities

Cases Relied Upon:

• State of Haryana v. S.L. Arora and Co. [(2010) 3 SCC 690] – High Court of Himachal Pradesh relied on this case to disallow compound interest, but this was overruled by the Supreme Court.
• Hyder Consulting (UK) Ltd. V. Governor, State of Orissa through Chief Engineer [(2015) 2 SCC 189] – Supreme Court relied on this case to hold that post-award interest can be granted on the interest amount awarded.
• MMTC Limited v. Vedanta Limited [(2019) 4 SCC 163] – The Court cited this case to emphasize the limited scope of interference under Section 34 of the Arbitration Act.
• K. Sugumar v. Hindustan Petroleum Corporation Ltd. [(2020) 12 SCC 539] – The Court referred to this case to reiterate the limited power of the court to interfere with an arbitral award.
• Dyna Technologies (P) Ltd. V. Crompton Greaves Ltd. [(2019) 20 SCC 1] – Cited to highlight the limitations on the Court while exercising powers under Section 34 of the Arbitration Act.
• Parsa Kente Collieries Limited v. Rajasthan Rajya Vidyut Utpadan Nigam Limited [(2019) 7 SCC 236] – The Court referred to this case to emphasize that the construction of the terms of a contract is primarily for an Arbitrator to decide.
• South East Asia Marine Engg. & Constructions Ltd.[SEAMAC Limited] V. Oil India Ltd. [(2020) 5 SCC 164] – The Court relied on this case to reiterate that a court can set aside the award only on the grounds provided in the Arbitration Act.

Legal Provisions Considered:

• Section 34 of the Arbitration and Conciliation Act, 1996 – Deals with challenges to arbitral awards.
• Section 37 of the Arbitration and Conciliation Act, 1996 – Deals with appeals against orders under Section 34.
• Section 31(7)(b) of the Arbitration and Conciliation Act, 1996 – Deals with the interest on the sum directed to be paid by an arbitral award.

Judgment

How each authority was viewed by the Court:

• State of Haryana v. S.L. Arora and Co. [(2010) 3 SCC 690]: Overruled. The court explicitly stated that this case was wrongly decided and that an Arbitral Tribunal has the power to award interest upon interest.
• Hyder Consulting (UK) Ltd. V. Governor, State of Orissa through Chief Engineer [(2015) 2 SCC 189]: Followed. The court relied on this case, which overruled S.L. Arora, to hold that post-award interest can be granted on the interest amount awarded.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the need to uphold the autonomy of arbitral tribunals and to ensure that their decisions are not lightly interfered with by courts. The court emphasized that the jurisdiction under Section 34 of the Arbitration Act is limited and that courts should not act as appellate bodies. The court also highlighted that the interpretation of contracts by arbitrators should be respected unless it is completely unreasonable.

Logical Reasoning:

The Supreme Court considered the arguments presented by both sides and the relevant legal precedents. It rejected the State’s argument that the MoU did not merge with the Implementation Agreement, emphasizing the explicit language of the Implementation Agreement that included all appendices and annexures. The court also rejected the State’s argument that the Implementation Agreement was prematurely terminated, finding that the Arbitrator’s interpretation of the relevant clauses was plausible. The court noted that the Single Judge had exceeded its jurisdiction under Section 34 of the Arbitration Act by re-appreciating the findings of the Arbitral Tribunal.

The court’s reasoning was based on a careful analysis of the contractual terms and the legal framework governing arbitration. It emphasized the importance of respecting the autonomy of arbitral tribunals and the finality of their awards. The court also highlighted the limited scope of judicial review under Section 34 of the Arbitration Act.

The court stated, “The very fact that the State admits to having executed the MoU with UHL on 10th February, 1992 and the said MoU has been mentioned as “Appendix A” in the second recital of the Implementation Agreement… itself demolishes the plea taken by the State.”

The court also noted, “When the parties to the Implementation Agreement were ad idem that the period of one year available to UHL to commence the construction activity was to be reckoned after the major requirements prescribed in Clause 4.1 could be obtained, then any argument sought to be advanced to segregate the obligations under different sub-heads of Clause 4.1 only to lay the blame at the door of UHL…is devoid of merits, besides being completely unreasonable and illogical.”

The court further observed, “the jurisdiction conferred on Courts under Section 34 of the Arbitration Act is fairly narrow…the jurisdiction of an Appellate Court in examining an order, setting aside or refusing to set aside an award, is all the more circumscribed.”

Key Takeaways

• Arbitral tribunals have the power to award compound interest, even in the absence of a specific contractual clause, as long as it is not prohibited by the contract.
• A Memorandum of Understanding (MoU) can merge into an Implementation Agreement if the latter explicitly includes the former as an appendix or annexure.
• Courts have limited jurisdiction to interfere with arbitral awards under Section 34 of the Arbitration Act.
• The interpretation of contracts by arbitrators should be respected unless it is completely unreasonable.

Directions

The Supreme Court partly allowed UHL’s appeal to the extent of restoring the arbitral award on the aspect of interest, and rejected the State’s appeal in its entirety.

Specific Amendments Analysis

Not Applicable.

Development of Law

The judgment clarifies that the ratio decidendi of Hyder Consulting (UK) Ltd. V. Governor, State of Orissa through Chief Engineer [(2015) 2 SCC 189], which overruled State of Haryana v. S.L. Arora and Co. [(2010) 3 SCC 690], is the law of the land. This means that arbitral tribunals have the power to award compound interest, even in the absence of a specific contractual clause, as long as it is not prohibited by the contract. The judgment also reinforces the principle that courts should not interfere with arbitral awards unless there is a clear violation of public policy or a patent illegality.

Conclusion

The Supreme Court’s judgment in UHL Power Company Ltd. vs. State of Himachal Pradesh upholds the autonomy of arbitral tribunals and clarifies the scope of judicial review under the Arbitration Act. The court’s decision to allow compound interest and to recognize the merger of the MoU into the Implementation Agreement reinforces the importance of respecting the decisions of arbitrators and the contractual agreements between parties. The judgment also serves as a reminder that courts should not act as appellate bodies in arbitration matters and should only interfere in cases of clear legal perversity.