Alerts & Updates 21st Feb 2022

Supreme Court Reiterates That An Arbitral Tribunal Has The Power To Award Interest On Interest; Yet Again Sets Out The Narrow Scope Of Setting Aside Proceedings.

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UHL Power Company Ltd. v. State of Himachal Pradesh, 2022 SCC OnLine SC 19

  • Facts
    • On 22 August 1997, an Implementation Agreement (IA) was executed between UHL Power Company Ltd. (UHL) and State of Himachal Pradesh (State of H.P.) for developing a hydro-electric power generation project. Disputes arose between the parties when the IA was terminated by State of H.P for failure to obtain certain clearances within the contractually stipulated period.
    • On 5 June 2005, an award was made in favor of UHL (Award). In terms of the said Award, the arbitral tribunal awarded the following to UHL:

    i. A sum of INR 26,08,89,107.35/- towards expenses claimed along with pre-claim interest capitalized annually on the expenses so incurred.
    ii. Compound interest @ 9% p.a. till the date of claim.
    iii. In the event the awarded amount was not paid within a period of six months from the date of making the award, future interest @ 18% per annum on the principal claim with interest.

    • Aggrieved by the Award, State of H.P. challenged the award under Section 34 of the Arbitration and Conciliation Act, 1996 (the Act). Vide an order dated 16 December 2008 ( 34 Order), the court disallowed the entire claim of UHL.
    • Thereafter, the S. 34 Order came to be challenged by UHL under Section 37 of the Act. Vide an order dated 24 May 2011[1] (Impugned Order), the court allowed UHL’s appeal and restored the Award to the extent of INR 9,10,26,558.74/- as principal along with simple interest @ 6% p.a. from the date of filing of the claim, till the date of realization of the awarded amount.
    • Aggrieved by the Impugned Order, both UHL and State of H.P. preferred appeals before the Supreme Court (SC).
  • Findings Of The Court

    On the Arbitral Tribunal’s power to grant interest on interest or compound interest.

    • In refusing to grant compound interest as per the Award, the Impugned Order had relied upon the judgement in State of Haryana v. S.L. Arora & Co.[2] (L. Arorawhich had held that compound interest could only be awarded if there was a specific contract, or authority under a statute for compounding interest. Since there existed no general discretion in courts/tribunal to award the same. S.L. Arora had further held that in the absence of a provision in the contract providing interest upon interest, the arbitral tribunal did not have the power to award the same, either for the pre-award period or post-award period
    • At the outset, the SC observed that the position of law regarding an arbitral tribunal awarding compound interest was no longer res integra in view of the judgement in Hyder Consulting (UK) Ltd. v. Governor, State of Orissa Through Chief Engineer[3] (Hyder Consulting), which had already over-ruled the judgement in L. Arora.
    • In Hyder Consulting, the SC after interpreting the provisions of Section 31(7)(a) and Section 31(7)(b) of the Act, had clarified that in case, an arbitral tribunal awarded interest at the time of making the award, the interest component would become part and parcel of the award. An award would thus be made in respect of a “sum” which included within itself the component of interest, if any. Thus, as per the SC, the question on there being “interest on interest” did not arise since interest under Section 31(7)(b) of the Act was granted on the “sum” directed to be paid by an arbitral award wherein the “sum” was nothing more than what was arrived under clause Section 31(7)(a) of the Act.
    • In view of this observation, the SC reversed the findings in the Impugned Order regarding the arbitral tribunal not being empowered to grant interest on interest or compound interest and re-instated the Award to that effect. Accordingly, the appeal preferred by the UHL was partially allowed by the SC.

    On the merits of State of H.P.’s appeal

    • On the merits of its appeal, the State of H.P. raised the following key contentions:

    i. That prior to the execution of the IA, a Memorandum of Understanding dated 10.02.1992 (MoU) was also executed between the parties. This MoU contained a separate arbitration clause. However, the Award allowed claims towards expenses incurred pursuant to the MoU but prior to the IA. On this aspect, the Impugned Order had erred in interpreting the terms of the IA to mean that the MoU stood merged with the IA.
    ii. That the Impugned Order had erroneously held the termination of the IA as pre-mature i.e., before the expiry of the period prescribed in the IA for getting the requisite clearances.

    • The SC first opined that the scope of enquiry permissible under Section 34 and Section 37 of the Act was fairly constricted. In this regard, it relied upon the decision in MMTC Limited v. Vedanta Limited[4] and Sugumar v. Hindustan Petroleum Corporation Ltd.[5] Thereafter, the SC relied upon the decisions in Dyna Technologies (P) Ltd. v. Crompton Greaves Ltd.[6] and Parsa Kente Collieries Ltd. v. Rajasthan Rajya Vidyut Utpadan Nigam Ltd.[7] to reiterate that if a reasonable/plausible interpretation of the terms of a contract was done by the arbitrator, the award ought not to be set aside.
    • Upon assessing the State of H.P.’s contentions from a factual and contractual perspective, the SC found that the Section 34 Order had exceeded its jurisdiction by questioning the interpretation given to the IA under the Award since such interpretation was backed by logic. Thus, the restoration of the Award by the Impugned Order was held to be proper by the SC and accordingly, the appeal preferred by State of H.P. was dismissed.
  • Analysis
    • The position of law regarding an arbitral tribunal’s power to award compound interest has had a tumultuous journey culminating with the judgement in Hyder Consulting. Notably, in interpreting Section 31(7) of the Act in the manner explained above, Hyder Consulting has applied the following rationale:

    9. The purpose of enacting this provision is clear, namely, to encourage early payment of the awarded sum and to discourage the usual delay, which accompanies the execution of the award in the same manner as if it were a decree of the court vide Section 36 of the Act.”

    • An extension of this rationale also appears in the form of Section 31A(4)(g) to the Act. Section 31A(4)(g), which was inserted by the Arbitration and Conciliation (Amendment) Act, 2015, bestows the arbitral tribunal with the discretion to direct payment of interest even on costs that are awarded.
    • Thus, by relying upon the Hyder Consulting judgement to re-instate the relevant portion of the Award, the present case has rightly upheld the spirit of the Act. While it cannot be said with certainty that ‘compound interest’ or ‘interest on interest’ has ensured timely payment of awards, in the Indian enforcement landscape, the award of such interest is of great significance as it compensates an award holder for the delay in receiving payment under an award.
    • The SC, while clarifying the issue of award of interest by an arbitrator, has further underscored the scope of Section 34 proceedings in the present judgement. Numerous decisions of the SC and the High Courts have consistently held that the scope of Section 34 proceedings lies in a narrow compass and until the time interpretation of the terms of the contract are reasonable, an arbitral award must not be interfered with. The present judgement validates the said line of reason.
  • References

    [1] UHL Power Co. Ltd. v. State of H.P., 2011 SCC OnLine HP 1828
    [2] (2010) 3 SCC 690
    [3] (2015) 2 SCC 189
    (2019) 4 SCC 163
    (2020) 12 SCC 539
    (2019) 20 SCC 1
    (2019) 7 SCC 236