Arbitrators Can Award Interest on Interest: Supreme Court Restores Interest in UHL Power's Award Against Himachal

Himachal Pradesh signed an MoU with UHL on 10.02.1992 to investigate the UHL-III hydro-electric project (100 MW) in Mandi district, followed by an Implementation Agreement on 22.08.1997, which the State terminated (paras 7-8, 22). The sole arbitrator's award of 05.06.2005 granted UHL ₹26,08,89,107.35 towards expenses with pre-claim interest capitalised annually, plus compound and future interest (para 2). A Single Judge set aside the whole claim under Section 34 on 16.12.2008; on UHL's appeal under Section 37 the Division Bench, on 24.05.2011, awarded ₹9,10,26,558.74 with simple interest at 6%, relying on S.L. Arora (paras 1, 3). Both sides appealed (para 1).

S.L. Arora, which held that arbitral tribunals cannot award compound interest or interest on interest without a contract or statute, had been overruled by a three-Judge Bench in Hyder Consulting, under which post-award interest runs on a sum that includes interest (paras 3-5). The High Court's finding that only simple interest could be awarded was therefore set aside and the award restored on the interest component (para 6). On the State's appeal, the MoU, annexed as Appendix A and covered by the definition of 'Agreement' in Clause 2.2, merged into the Implementation Agreement, so disputes under it were arbitrable under Clause 20 despite Clause 1 saying the MoU lapsed (paras 8-11). Clause 4 let the one-year period to start construction be extended by up to twelve months; the State terminated five months early on a distorted reading (paras 12-13, 22). The Single Judge had wrongly re-appreciated the award like an appellate court; under Sections 34 and 37 courts must defer to the arbitrator's plausible interpretation (paras 14-21).