The Hon’ble Supreme Court of India (“SC”) has in its judgement dated January 7, 2022 (“Judgement”), in the matter of UHL Power Company Limited v. State of Himachal Pradesh [Civil Appeal Nos. 10341 and 10342 of 2011], held that an arbitrator has the power to grant post-award interest on the interest amount awarded under the Arbitration and Conciliation Act, 1996 (“Act”).

Facts

UHL Power Company Limited (“UHL”) and the State of Himachal Pradesh (“State of H.P.”) executed a memorandum of understanding dated February 10, 1992 (“MoU”) and implementation agreement dated August 22, 1997 (“Implementation Agreement”) with respect to construction of a project. However, after execution of the MoU and the Implementation Agreement, differences arose between the parties and arbitration proceedings were initiated between UHL and the State of H.P., wherein the learned sole arbitrator, by award dated June 05, 2005, awarded a sum of INR 26,08,89,107.35/- in favour of UHL towards expenses claimed along with pre-claim interest capitalized annually, on the expenses so incurred. In addition, the arbitrator also awarded compound interest in favour of UHL at the rate of 9% per annum till the date of claim and in the event the awarded amount is not realized within a period of six months from the date of making the award, future interest at the rate of 18% per annum was also awarded on the principal claim with interest (“Award”).

Dissatisfied with the Award, the State of H.P. challenged the Award under Section 34 of the Act before the High Court of Himachal Pradesh (“High Court”). The High Court, by judgment dated December 16, 2008, disallowed the Award. The said judgment was challenged by UHL under Section 37 of the Act before the division bench of the High Court. The division bench of the High Court, on the conclusion that the Implementation Agreement was prematurely terminated by the State of H.P., awarded the payment of actual principal amount of INR 9,10,26,558.74/- in favour of UHL along with simple interest at the rate of 6% per annum from the date of filing of the claim till the date of realization of the awarded amount. However, relying on the judgement of State of Haryana v. S.L. Arora and Co [(2010) 3 SCC 690] (“S.L. Arora case”) wherein it was held that compound interest can be awarded only if there is a specific contract or authority under a Statute for compounding of interest, and that there is no general discretion vested in courts or tribunals to award compound interest, the High Court denied the Award of compound interest and stated that in the absence of any provision for interest upon interest in the contract, an arbitrator does not have the power to award interest upon interest, or compound interest, either for the pre-award period or for the post-award period (“Impugned Judgement”). Aggrieved by the Impugned Judgement, both UHL and the State of H.P. challenged the Impugned Judgement before the SC by filing different appeals which was clubbed by the SC.

Issue

Whether an arbitrator has the power to grant post-award interest on the interest amount awarded under the Act.

Arguments

Contentions raised by UHL:

The UHL, inter alia, contended that the ratio of S. L. Arora, case on which reliance has been placed in the Impugned Judgement, was set aside by a three-judge bench of the SC in Hyder Consulting (UK) Ltd. v. Governor, State of Orissa through Chief Engineer [(2015) 2 SCC 189] (“Hyder Consulting Case”) wherein it was held that post-award interest can be granted by an arbitrator on the interest amount awarded. As the judgment of S.L. Arora case has been overruled by the SC, UHL contended that the findings of the Impugned Judgment insofar as it relates to grant of the compound interest should be reversed while restoring the Award on the above aspect in favour of UHL.

Contentions raised by the State of H.P.:

The State of H.P. contended that, the Impugned Judgement is gravely erred and failed to appreciate that the MoU did not merge into the Implementation Agreement as both were distinct documents, and that the MoU and the Implementation Agreement contained separate arbitration clauses. Secondly, the State of H.P. argued that the arbitral tribunal in the Award has committed a grave error in arriving at the conclusion that the Implementation Agreement was prematurely terminated by the State of H.P. much before the expiry of the prescribed period.

Observations of the Supreme Court:

The SC, first, noted that, since the judgment of S.L. Arora case has been overruled by the Hyder Consulting Case, the findings returned by the High Court in the Impugned Judgment to the effect that an arbitrator is not empowered to grant compound interest or interest upon interest is quashed and set aside.

Secondly, the SC, analysing the facts of the case, stated that the fact that the State of H.P. admits to having executed the MoU with UHL and the MoU being annexed as “Appendix A” to the Implementation Agreement itself demolishes the plea taken by the State of H.P. that the MoU did not merge into the Implementation Agreement. This was also reinforced on a reading of the definition of the word “agreement” in the Implementation Agreement which clearly stated that the word “agreement”, wherever used in the Implementation Agreement, included all its appendices and annexures. Therefore, the MoU having been described as Appendix A to the Implementation Agreement would have to be treated as having merged with the Implementation Agreement for all effects and purposes. Thus, the disputes that were referable to arbitration under the Implementation Agreement included disputes arising under the MoU, even though the latter did contain a separate arbitration clause. On this basis, the SC held that the contention that the MoU forms a part of the Implementation Agreement, does not deserve any interference.

Thirdly, the SC noted that a plain reading of clauses 4.1(a) and (b) of the Implementation Agreement leaves no doubt that UHL was required to commence construction of a project within a period of one year from the effective date of Implementation Agreement only after obtaining the necessary clearances. However, it was agreed by the parties that since obtaining of the relevant clearances was not entirely in the hands of UHL, in the event of any delay beyond a period of three months reckoned from the effective date, the stipulated period of one year contemplated in the Implementation Agreement could be extended. In the light of the aforesaid clauses of the Implementation Agreement, the SC noted that the submission made by the State of H.P. is unmerited.

Lastly, the SC, by citing various judicial pronouncements, concluded by stating that the jurisdiction conferred on courts under Section 34 of the Act is fairly narrow and when it comes to the scope of an appeal under Section 37 the Act, the jurisdiction of an appellate court in examining an order, setting aside or refusing to set aside an award, is all the more circumscribed. Therefore, the interpretation of the relevant clauses of the Implementation Agreement, as arrived at by the learned arbitrator in the Award, are both, possible and plausible.

Decision of the Supreme Court:

In view of the above, the SC partly allowed the appeal by UHL by stating that the arbitrator has the power to grant post-award interest and rejected the appeal of the State of H. P. in toto.

VA View:
In the Judgement, the SC throws additional clarity on two important aspects of arbitration law in India. The SC, in line with the recent judgement with respect to the power of arbitrators to grant interest and pendente-lite interest in the cases of Punjab State Civil Supplies Corporation Limited v. Ganpati Rice Mills [LL 2021 SC 591] and M/s Garg Builders v. M/s Bharat Heavy Electronics Limited (Civil Appeal No. 6216 of 2021), held that an arbitrator has the power to grant post-award interest on the interest amount awarded. In light of these judgements, the parties, while drafting the agreement, may consider explicitly mentioning about the power of arbitrator to grant post award or any other form of interest to avoid any uncertainty and confusion at a later stage.

Secondly, with respect to the judicial review of arbitral awards, the SC rightly stated that the jurisdiction conferred on courts under Section 34 of the Act is fairly narrow and when it comes to the scope of an appeal under Section 37 of the Act, the jurisdiction of an appellate court is more circumscribed and when there are two plausible interpretations of the terms and conditions of the contract, then no fault can be found if the arbitrator proceeds to accept one interpretation as against the other.

DOWNLOAD NEWSLETTER