caselaws
Supreme Court of India
Uhl Power Company Ltd. vs The State Of Himachal Pradesh … on 7 January, 2022Author: Hon’Ble Ms. Kohli
Bench: Hon’Ble The Justice, A.S. Bopanna, Hon’Ble Ms. Kohli
CIVIL APPEAL NO. 10341 OF 2011
REPORTABLE
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL NO. 10341 OF 2011
UHL POWER COMPANY LTD. ….. APPELLANT
VERSUS
STATE OF HIMACHAL PRADESH ….. RESPONDENT
WITH
CIVIL APPEAL NO. 10342 OF 2011
STATE OF HIMACHAL PRADESH ….. APPELLANT
VERSUS
UHL POWER COMPANY LTD. ….. RESPONDENT
JUDGMENT
HIMA KOHLI, J.
1. Both the present appeals arise from a common judgment dated 24 th May, 2011,
passed by the High Court of Himachal Pradesh partly allowing Arbitration Appeal No. 2
of 2009 filed by UHL Power Company Limited 1 under Section 37 of the Arbitration and
Conciliation Act, 19962. UHL has filed Civil Appeal No. 10342 of 2011 and the State of
Himachal Pradesh3 has filed Civil Appeal No. 10342 of 2011, as both the parties are
aggrieved by the impugned judgment.
Signature Not Verified
Digitally signed by
SATISH KUMAR YADAV
Date: 2022.01.07
17:38:15 IST
Reason:
1
For short ‘UHL’
2
For short ‘the Arbitration Act’
3
For short ‘the State’
Page 1 of 15
CIVIL APPEAL NO. 10341 OF 2011
2. Though several grounds have been taken by UHL in its appeal to assail the
impugned judgment, Mr. Jaideep Gupta, learned senior counsel for UHL has confined
his grievance to the disallowance of the pre-claim interest i.e., interest from the date
when expenses were incurred by UHL, till the date of lodging the claim. It may be noted
that in terms of the award dated 05 th June, 2005, the learned Sole Arbitrator had
awarded a sum of ₹26,08,89,107.35p. (Rupees Twenty six crores eight lakhs eighty nine
thousand one hundred and seven and thirty five paise) in favour of UHL towards
expenses claimed along with pre-claim interest capitalized annually, on the expenses so
incurred. Further, compound interest was awarded in favour of UHL @ 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 was awarded @ 18%
per annum on the principal claim with interest.
3. Dissatisfied with the award, when the State of H.P. filed a petition under Section
34 of the Arbitration Act, vide judgment dated 16 th December, 2008, the learned Single
Judge disallowed the entire claim of UHL. The said judgment was challenged by UHL in
a petition filed under Section 37 of the Arbitration Act that has been decided by the
impugned judgment whereunder, the Division Bench of the High Court has awarded a
sum of ₹9,10,26,558.74 (Rupees Nine crores ten lakhs twenty six thousand five hundred
fifty eight and seventy four paise) in favour of UHL, being the actual principal amount
along with simple interest @ 6% per annum from the date of filing of the claim, till the
date of realization of the awarded amount. For declining payment of compound interest
Page 2 of 15
CIVIL APPEAL NO. 10341 OF 2011
awarded by the learned Sole Arbitrator to UHL, the Division Bench relied on the decision
of this Court in State of Haryana v. S.L. Arora and Co. 4, 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. It was further held that in the absence of
any provision for interest upon interest in the contract, the Arbitral Tribunals do not have
the power to award interest upon interest, or compound interest, either for the pre-award
period or for the post-award period.
4. By now, the aforesaid aspect has been set at rest by a three-Judge Bench of this
Court in Hyder Consulting (UK) Ltd. V. Governor, State of Orissa through Chief
Engineer5, that has overruled the verdict in the case of S.L. Arora (supra). The majority
view is that post-award interest can be granted by an Arbitrator on the interest amount
awarded. Writing for the majority, Justice Bobde (as His Lordship then was) has held
thus:
“21. In the result, I am of the view that S.L. Arora case [State of
Haryana v. S.L. Arora and Co. (2010) 3 SCC] is wrongly decided in that it
holds that a sum directed to be paid by an Arbitral Tribunal and the reference
to the award on the substantive claim does not refer to interest pendente lite
awarded on the “sum directed to be paid upon award” and that in the absence
of any provision of interest upon interest in the contract, the Arbitral Tribunal
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.
Parliament has the undoubted power to legislate on the subject and provide
that the Arbitral Tribunal may award interest on the sum directed to be
paid by the award, meaning a sum inclusive of principal sum adjudged
and the interest, and this has been done by Parliament in plain language.”
[emphasis supplied]
4
(2010) 3 SCC 690
5
(2015) 2 SCC 189
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CIVIL APPEAL NO. 10341 OF 2011
5. While giving a concurring opinion in the aforesaid case, Justice Sapre made the
following pertinent observations:
“31. Coming now to the post-award interest. Section 31(7)(b) of the Act
employs the words, “A sum directed to be paid by an arbitral award … “.
Clause (b) uses the words “arbitral award” and not the “Arbitral Tribunal”.
The arbitral award. as held above, is made in respect of a “sum”
which includes the interest. It is, therefore, obvious that what carries
under Section 31 (7)(b) of the Act is the “sum directed to be paid by an
arbitral award” and not any other amount much less by or under the name
“interest”. In such situation. it cannot be said that what is being
granted under Section 31(7)(b) of the Act is ” interest on interest”.
Interest under clause (b) is granted on the “sum” directed to be paid
by an arbitral award wherein the “sum” is nothing more than what is
arrived at under clause (a).”
[emphasis supplied]
6. As the judgment in the case of S.L. Arora (supra), on which reliance has been
placed by the Division Bench of the High Court of Himachal Pradesh, has since been
overruled by a three-Judge Bench of this Court in the case of Hyder Consulting (UK)
Ltd. (supra), the findings returned by the Appellate Court in the impugned judgment to
the effect that the Arbitral Tribunal is not empowered to grant compound interest or
interest upon interest and only simple interest can be awarded in favour of UHL on the
principal amount claimed, is quashed and set aside. As a result, the findings returned in
para 54(a) of the impugned judgment insofar as it relates to grant of the interest
component, are reversed while restoring the arbitral award on the above aspect in favour
of UHL.
7. Proceeding to the submission made by Mr. Abhinav Mukerji, learned Additional
Advocate General for the State for assailing the impugned judgment, we may note that
two-fold arguments have been put forth. Firstly, that the Division Bench has gravely
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CIVIL APPEAL NO. 10341 OF 2011
erred in upsetting the findings returned by the learned Single Judge vide judgment dated
16th December, 2008 and has failed to appreciate that the Memorandum of Undertaking 6
dated 10th February, 1992, did not merge into the Implementation Agreement dated 22 nd
August, 1997, as both were distinct documents and that the MoU contained a separate
Arbitration clause numbered as Clause 18, whereas the Implementation Agreement
contained Clause 20. Secondly, it has been canvassed that the Appellate Court as also
the Arbitral Tribunal have committed a grave error in arriving at the conclusion that the
Implementation Agreement was prematurely terminated by the State much before the
expiry of the prescribed period.
8. Coming first to the argument urged on behalf of the State that the MoU dated 10 th
February, 1992 did not merge with the Implementation Agreement dated 22 nd August,
1997, a perusal of the recitals and the clauses contained in the Implementation
Agreement dated 22nd August, 1997, belies such a submission. One of the recitals on the
second page of the Implementation Agreement is as follows:
“WHEREAS the Government in accordance with the policy guidelines of
Government of India (hereinafter referred to as “GOI” had entered into
Memorandum of Understanding (MOU) (APPENDIX ‘A’) on February 10,
1992 with the Company to carry out detailed investigations of the UHL-III
Hydro – electric Project of 100 MW capacity and located in District Mandi,
Himachal Pradesh (hereinafter referred to a “Project”) and has submitted,
within the stipulated period from the date of signing of the MOU, a Detailed
project Report (DPR).”
6
For short ‘MoU’
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CIVIL APPEAL NO. 10341 OF 2011
9. Further, the definition of different words used in the Implementation Agreement
form a part of Clause (2). The term “Agreement” has been defined in Clause 2.2 as
follows:
“CLAUSE 2 DEFINITIONS
For all purposes of this Agreement, the. various terms shall have the
following meanings, except where the context otherwise requires,
definitions and other terms expressed in the singular shall, include the
plural and vice versa.
2.1 xxx xxx xxx
2.2 “Agreement” shall mean this Agreement together with all its
appendices and annexures and any amendments thereto made
in accordance with the provisions herein contained.”
10. The very fact that the State admits to having executed the MoU with UHL on 10 th
February, 1992 and the said MoU has been mentioned as “Appendix A” in the second
recital of the Implementation Agreement, as reproduced above, itself demolishes the
plea taken by the State that the Arbitral Tribunal and the Appellate Court have erred in
returning a finding that the MoU dated 10 th February, 1992 did not merge into the
Implementation Agreement dated 22nd August, 1997. The aforesaid view is reinforced on
a reading of the definition of the word “Agreement” as used in Clause 2.2 of the
Implementation Agreement which clearly states that the word “Agreement” wherever
used in the Implementation Agreement, shall include all its appendices and annexures.
The MoU having been described by the parties as Appendix A to the Implementation
Agreement, would have to be treated as having merged with the Implementation
Agreement for all effects and purposes. In the light of the aforesaid recitals and clauses
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CIVIL APPEAL NO. 10341 OF 2011
of the Implementation Agreement, this Court endorses the findings returned in para 47 of
the impugned judgment, wherein it has been held that a plain reading of the second
recital read with Clause 2.2 of the Implementation Agreement suggested that the MoU
has merged with the Implementation Agreement and, therefore, the disputes that were
referable to arbitration under the Implementation Agreement in terms of Clause 20, were
to include disputes arising under the MoU, even though the latter document did contain a
separate arbitration clause.
11. No exception can be taken to the observations made by the Appellate Court that
the learned Single Judge erred in singularly relying on the contents of Clause 1 of the
Implementation Agreement, which states as follows:
“CLAUSE 1 STATEMENT OF IMPLEMENTATION OF PROJECT :
Both the parties i.e. the Government and the company agree that the Project
shall be implemented, subject to the terms mentioned in the Agreement, as
per the provisions of the DPR as approved by· the Government/ GOI. The
parties also agree that the MOU signed on 10.2.1992 shall stand lapsed as on
today the twenty second August, 1997.”
This Court is in agreement with the Appellate Court that Clause 1 of the Implementation
Agreement could not have been read in isolation and when read in conjunction with the
second recital and Clause 2.2 of the Implementation Agreement, it is apparent that the
MoU was made a part and parcel of the Implementation Agreement. In view of the
above, the view taken by the learned Sole Arbitrator that the MoU forms a part of the
Implementation Agreement, as has been upheld by the Appellate Court, does not
deserve any interference. All the points of dispute between the parties regarding
performance of the contractual obligations including claims for damages and expenses
Page 7 of 15
CIVIL APPEAL NO. 10341 OF 2011
incurred by UHL either arising from the MoU dated 10 th February, 1992, or under the
Implementation Agreement dated 22nd August, 1997, were referable to arbitration in
accordance with Clause 20 forming a part of the Implementation Agreement.
12. The second plea taken by the learned Additional Advocate General the State is
that 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 on the part of the State well before expiry of the
prescribed period. For examining this point, Clause 4 of the Implementation Agreement
gains significance. The said clause prescribes the starting date of the project and states
as follows:
“CLAUSE 4 STARTING DATE OF PROJECT.
4.1 Within one year from the Effective Date, the Company shall start the
construction of the Project after meeting the major requirements, e.g.:-
a) Obtain techno economic clearance from CEA.
b) Obtain environmental clearance from GO!, Ministry of Environment
and Forests (MOEF).
c) Identify the purchaser of power and finalise Power Schedules
Agreement(s).
d) Commence· detailed designs of Project components/ structures.
e) Finalise selection of Engineering, Procurement and construction
(EPC) contractor/ executing agencies, if required.
f) Establish site office and take over the site from Government including
the Government land or private land already acquired by Government
on lease etc., for the purpose of carrying out preparatory works.
g) Achieve Financial Closure.
Both parties acknowledge that fulfillment of activities enumerated at 4.1(a),
4.l(b) of this clause and clause 16.8 of this Agreement are not totally under the control
of the Company, therefore, if the fulfillment of these activities is delayed beyond three
3 months from effective Date, the stipulated period of one year, shall be extended by
one month for each month of delay in fulfillment of any of the activities enumerated at
4.1(a), 4.1 (b) and 16.8 provided that the total of the monthly extensions shall not
exceed twelve (12).”
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CIVIL APPEAL NO. 10341 OF 2011
13. A plain reading of Clauses 4.1(a) and (b) leaves no manner of doubt that UHL
was required to commence construction of the project within a period of one year from
the effective date only after obtaining a techno-economic clearance from CEA and an
environmental clearance from the Government of India, Ministry of Environment and
Forests. However, it was agreed by the parties that since obtaining of the relevant
clearances referred to above and under Clause 16.8 of the Agreement whereunder the
State was required to discharge certain obligations, were 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, but not beyond the additional period of twelve months. In
the light of the aforesaid clauses of the Implementation Agreement, the submission
made by learned Additional Advocate General for the State that, under all circumstances,
the Implementation Agreement had to be executed within a period of one year and since
the provision for extension beyond one year was applicable only to the conditions
contemplated in Clause 4.1(a) and (b) and not to those stipulated in Clause 4.1(c) to (g),
is found to be unmerited and is turned down. 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 when the requisite clearances were to be obtained by the State Government
Page 9 of 15
CIVIL APPEAL NO. 10341 OF 2011
from the Central Government and Centralized Authorities, is devoid of merits, besides
being completely unreasonable and illogical.
14. This Court also accepts as correct, the view expressed by the Appellate Court
that the learned Single Judge committed a gross error in re-appreciating the findings
returned by the Arbitral Tribunal and taking an entirely different view in respect of the
interpretation of the relevant clauses of the Implementation Agreement governing the
parties inasmuch as it was not open to the said Court to do so in proceedings under
Section 34 of the Arbitration Act, by virtually acting as a Court of Appeal.
15. As it is, the jurisdiction conferred on Courts under Section 34 of the Arbitration Act
is fairly narrow, when it comes to the scope of an appeal under Section 37 of the
Arbitration 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. In MMTC Limited v.
Vedanta Limited 7, the reasons for vesting such a limited jurisdiction on the High Court
in exercise of powers under Section 34 of the Arbitration Act has been explained in the
following words:
“11. As far as Section 34 is concerned, the position is well- settled by now
that the Court does not sit in appeal over the arbitral award and may
interfere on merits on the limited ground provided under Section 34(2)(b)
(ii) i.e. if the award is against the public policy of India. As per the legal
position clarified through decisions of this Court prior to the amendments
to the 1996 Act in 2015, a violation of Indian public policy, in turn, includes
a violation of the fundamental policy of Indian law, a violation of the
interest of India, conflict with justice or morality, and the existence of
patent illegality in the arbitral award. Additionally, the concept of the
7
(2019) 4 SCC 163
Page 10 of 15
CIVIL APPEAL NO. 10341 OF 2011
“fundamental policy of Indian law” would cover compliance with statutes
and judicial precedents, adopting a judicial approach, compliance with the
principles of natural justice, and Wednesbury [Associated Provincial
Picture Houses v. Wednesbury Corpn., (1948) 1 KB 223 (CA)]
reasonableness. Furthermore, “patent illegality” itself has been held to
mean contravention of the substantive law of India, contravention of the
1996 Act, and contravention of the terms of the contract.”
16. A similar view, as stated above, has been taken by this Court in K. Sugumar v.
Hindustan Petroleum Corporation Ltd.8, where it has been observed as follows:
“2. The contours of the power of the Court under Section 34 of the
Act are too well established to require any reiteration. Even a bare reading
of Section 34 of the Act indicates the highly constricted power of the civil
court to interfere with an arbitral award. The reason for this is obvious.
When parties have chosen to avail an alternate mechanism for dispute
resolution, they must be left to reconcile themselves to the wisdom of the
decision of the arbitrator and the role of the court should be restricted to
the bare minimum. Interference will be justified only in cases of
commission of misconduct by the arbitrator which can find manifestation in
different forms including exercise of legal perversity by the arbitrator.”
17. It has also been held time and again by this Court that if there are two plausible
interpretations of the terms and conditions of the contract, then no fault can be found, if
the learned Arbitrator proceeds to accept one interpretation as against the other. In
Dyna Technologies (P) Ltd. V. Crompton Greaves Ltd. 9, the limitations on the Court
while exercising powers under Section 34 of the Arbitration Act has been highlighted
thus:
“24. There is no dispute that Section 34 of the Arbitration Act limits a
challenge to an award only on the grounds provided therein or as
interpreted by various Courts. We need to be cognizant of the fact that
arbitral awards should not be interfered with in a casual and cavalier
manner, unless the Court comes to a conclusion that the perversity of the
award goes to the root of the matter without there being a possibility of
8
(2020) 12 SCC 539
9
(2019) 20 SCC 1
Page 11 of 15
CIVIL APPEAL NO. 10341 OF 2011
alternative interpretation which may sustain the arbitral award. Section
34 is different in its approach and cannot be equated with a normal
appellate jurisdiction. The mandate under Section 34 is to respect the
finality of the arbitral award and the party autonomy to get their dispute
adjudicated by an alternative forum as provided under the law. If the
Courts were to interfere with the arbitral award in the usual course on
factual aspects, then the commercial wisdom behind opting for alternate
dispute resolution would stand frustrated.”
18. In Parsa Kente Collieries Limited v. Rajasthan Rajya Vidyut Utpadan Nigam
Limited10, adverting to the previous decisions of this Court in McDermott International
Inc. v. Burn Standard Co. Ltd. And Others 11 and Rashtriya Ispat Nigam Ltd. V.
Dewan Chand Ram Saran12, wherein it has been observed that an Arbitral Tribunal must
decide in accordance with the terms of the contract, but if a term of the contract has been
construed in a reasonable manner, then the award ought not to be set aside on this
ground, it has been held thus:
“9.1 ………..It is further observed and held that construction of
the terms of a contract is primarily for an Arbitrator to decide unless
the Arbitrator construes the contract in such a way that it could be
said to be something that no fair-minded or reasonable person could
do. It is further observed by this Court in the aforesaid decision in
paragraph 33 that when a court is applying the “public policy” test to an
arbitration award, it does not act as a court of appeal and consequently
errors of fact cannot be corrected. A possible view by the Arbitrator on
facts has necessarily to pass muster as the Arbitrator is the ultimate
master of the quantity and quality of evidence to be relied upon when
he delivers his arbitral award. It is further observed that thus an award
based on little evidence or on evidence which does not measure up in
quality to a trained legal mind would not be held to be invalid on this score.
9.2 Similar is the view taken by this Court in NHAI v. ITD
Cementation (India) Ltd. (2015) 14 SCC 21, para 25 and SAIL v. Gupta
Brother Steel Tubes Ltd. (2009) 10 SCC 63, para 29.”
[emphasis supplied]
10
(2019) 7 SCC 236
11
(2006) 11 SCC 181
12
(2012) 5 SCC 306
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CIVIL APPEAL NO. 10341 OF 2011
19. In Dyna Technologies (P) Ltd. (supra), the view taken above has been
reiterated in the following words:
“25. Moreover, umpteen number of judgments of this Court have
categorically held that the courts should not interfere with an award merely
because an alternative view on facts and interpretation of contract exists. The
courts need to be cautious and should defer to the view taken by the Arbitral
Tribunal even if the reasoning provided in the award is implied unless such award
portrays perversity unpardonable under Section 34 of the Arbitration Act.”
20. An identical line of reasoning has been adopted in South East Asia Marine
13
Engg. & Constructions Ltd.[SEAMAC Limited] V. Oil India Ltd. and it has been
held as follows:
“12. It is a settled position that a court can set aside the award only on the
grounds as provided in the Arbitration Act as interpreted by the courts.
Recently, this Court in Dyna Technologies (P) Ltd. v. Crompton Greaves
Ltd. [Dyna Technologies (P) Ltd. v. Crompton Greaves Ltd., (2019) 20
SCC 1 : 2019 SCC OnLine SC 1656] laid down the scope of such
interference. This Court observed as follows : (SCC pp. 11-12, para 24)
“24. There is no dispute that Section 34 of the Arbitration
Act limits a challenge to an award only on the grounds
provided therein or as interpreted by various Courts. We
need to be cognizant of the fact that arbitral awards
should not be interfered with in a casual and cavalier
manner, unless the Court comes to a conclusion that the
perversity of the award goes to the root of the matter
without there being a possibility of alternative
interpretation which may sustain the arbitral
award. Section 34 is different in its approach and cannot
be equated with a normal appellate jurisdiction. The
mandate under Section 34 is to respect the finality of the
arbitral award and the party autonomy to get their dispute
adjudicated by an alternative forum as provided under the
law. If the Courts were to interfere with the arbitral award
in the usual course on factual aspects, then the
commercial wisdom behind opting for alternate dispute
resolution would stand frustrated.”
13. It is also settled law that where two views are possible, the Court
cannot interfere in the plausible view taken by the arbitrator
supported by reasoning. This Court in Dyna Technologies [Dyna
13
(2020) 5 SCC 164
Page 13 of 15
CIVIL APPEAL NO. 10341 OF 2011
Technologies (P) Ltd. V. Crompton Greaves Ltd., (2019) 20 SCC 1 : 2019
SCC OnLine SC 1656] observed as under : (SCC p.12, para 25)
25. Moreover, umpteen number of judgments of this Court have
categorically held that the Court should not interfere with an
award merely because an alternative view on facts and
interpretation of contract exists. The Courts need to be cautious
and should defer to the view taken by the Arbitral Tribunal even if
the reasoning provided in the award is implied unless such award
portrays perversity unpardonable under Section 34 of the
Arbitration Act.”
[emphasis supplied]
21. In the instant case, we are of the view that the interpretation of the relevant
clauses of the Implementation Agreement, as arrived at by the learned Sole Arbitrator,
are both, possible and plausible. Merely because another view could have been taken,
can hardly be a ground for the learned Single Judge to have interfered with the arbitral
award. In the given facts and circumstances of the case, the Appellate Court has rightly
held that the learned Single Judge exceeded his jurisdiction in interfering with the award
by questioning the interpretation given to the relevant clauses of the Implementation
Agreement, as the reasons given are backed by logic.
22. We, therefore, uphold the decision of the Appellate Court that has restored the
findings returned in the arbitral award dated 05 th June, 2005 to the effect that the State of
Himachal Pradesh had proceeded to terminate the Implementation Agreement before
expiry of the prescribed period which could have been extended up to 24 months,
reckoned from the “effective date”. In the instant case, the State of H.P. had terminated
the Implementation Agreement five months prior to the stipulated period by adopting a
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CIVIL APPEAL NO. 10341 OF 2011
distorted interpretation of Clause 4 of the Implementation Agreement, which was
impermissible.
23. In view of the above discussion, Civil Appeal No. 10341 of 2011 preferred by UHL
is partly allowed to the extent mentioned in para 6 above, while Civil Appeal No. 10342
of 2011 filed by the State of Himachal Pradesh is rejected in toto. Parties are left to bear
their own costs.
………………………….CJI
[N.V. RAMANA]
….….……………………..J.
[A.S. BOPANNA]
.….………………………..J.
[HIMA KOHLI]
New Delhi,
January 07, 2022.
Page 15 of 15
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