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

J U D G M E N T

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, 1996

2

. UHL has filed Civil Appeal No. 10342 of 2011 and the State of

Himachal Pradesh

3

has filed Civil Appeal No. 10342 of 2011, as both the parties are

aggrieved by the impugned judgment.

1

For short ‘UHL’

2

For short ‘the Arbitration Act’

3

For short ‘the State’

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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

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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

Engineer

5

, 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

16

th

December, 2008 and has failed to appreciate that the Memorandum of Undertaking

6

dated 10

th

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 22

nd

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.

2.1xxxxxxxxx

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 22

nd

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

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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 22

nd

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

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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

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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

Limited

10

, 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 Saran

12

, 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

Engg. & Constructions Ltd.[SEAMAC Limited] V. Oil India Ltd.

13

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

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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.

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