India: Appealing Arbitral Awards: Supreme Court's Ruling In Ssangyong

Last Updated: 6 June 2019
Article by RV Anuradha and Meghna Sengupta

In a recent judgement in Ssangyong Engineering & Construction Co. Ltd. v. National Highway Authority of India (NHAI),1 the Supreme Court of India adjudicated on the limited scope of appeal against an arbitral award under Section 34 of the Arbitration and Conciliation Act, 1996 ("A&C Act").

Context of the present case

The National Highways Authority of India ("NHAI") had invited tenders for the construction of certain bypass roads in the state of Madhya Pradesh. Ssangyong Engineering & Construction Co. Ltd., a Korean entity (hereinafter, "the Appellant"), was awarded the tender. Certain components used in the execution of the works were subject to price escalation as per the formula given in the contract between the parties. The price adjustment was being paid to the Appellant every month in terms of the agreed formula using the Wholesale Price Index ("WPI") published by the Ministry of Industrial Development, which followed the years 1993-94 = 100 ("Old Series"). However, with effect from 14.09.2010, the Ministry of Industrial Development stopped publishing the WPI for the Old Series and started publishing indices under the WPI series 2004-05 = 100 ("New Series"). Even under the "New Series" the Ministry of Industrial Development continued to publish WPIs for the previous years and bills were raised by the Appellant accordingly, till February 2013.

On 15.02.2013, the NHAI issued a Policy Circular ("Circular") under which a new formula for determining the indices for the price escalation was laid down by applying a "linking factor" between the Old and New Series. The Circular expressly stated that adopting the process in the Circular was subject to the condition that the contractors furnish an undertaking/affidavit that this price adjustment was acceptable to them. When NHAI stated that the Circular would be applicable to the contract in question, the Appellant did not accept the same and filed a writ petition before the Madhya Pradesh High Court challenging the application of the Circular to the present contract. However, the High Court disposed of the writ petition on the grounds that the contract between the parties had a dispute resolution mechanism as an alternate remedy which had not been exhausted prior to approaching the Madhya Pradesh High Court.

The Appellant subsequently initiated a dispute under the contract's dispute resolution mechanism and simultaneously approached the Delhi High Court under S. 9 of the A&C Act for interim relief, and the Delhi High Court restrained NHAI from implementing the Circular pending the arbitral proceedings.

The arbitration initiated by the Appellant was on the limited question of whether price adjustment would be as per the contract or whether the NHAI Circular would apply. The arbitration was conducted by a 3-member arbitrator tribunal, which delivered a split verdict:

  • Two of the arbitrators held that NHAI's Circular could be applied as it was within contractual stipulations as per certain government guidelines ("Guidelines") that had been issued by the Ministry of Commerce and Industry. It is significant to note that the arbitrators had unilaterally referred to these Guidelines even though that they were not on record before the Tribunal. The majority award referenced these Guidelines as being available on "a certain website".2
  • One of the arbitrators, however, gave a dissenting award which expressly stated that neither the Circular nor the Guidelines could be applied as they were de hors, i.e., outside the scope of the contract between the parties, and accordingly awarded the claim of the Appellant in full.

Section 34 Appeal

Thereafter, an appeal from the arbitral award under Section 34 of the A&C Act was filed by the Appellant before the Delhi High Court, where a single judge and subsequently a Division Bench, upheld the majority award in favour of NHAI. The Appellant therefore took the matter to the Supreme Court.

The legal framework that governs appeals from domestic arbitral awards is Section 34 of the A&C Act. The Appellant's appeal relied on two sub-sections of S.34 of the A&C Act- s.34(2)(a)(iii) and s.34(2)(b)(ii). The text of these provisions is extracted below:

"34. Application for setting aside arbitral award.

...

(2) An arbitral award may be set aside by the Court only if—

(a) the party making the application furnishes proof that— ... (iii) the party making the application was not given proper notice of the appointment of an arbitrator or of the arbitral proceedings or was otherwise unable to present his case;

...

(b) the Court find that – ... (ii) the arbitral award is in conflict with the public policy of India.

Explanation 1—For the avoidance of any doubt, it is clarified that an award is in conflict with the public policy of India, only if,— (i) the making of the award was induced or affected by fraud or corruption or was in violation of section 75 or section 81; or (ii) it is in contravention with the fundamental policy of Indian law; or (iii) it is in conflict with the most basic notions of morality or justice.

Explanation 2—For the avoidance of doubt, the test as to whether there is a contravention with the fundamental policy of Indian law shall not entail a review on the merits of the dispute."

It is to be noted that Explanations 1 and 2 in Section 34(2)(b)(ii) above were added by the 2015 amendments to the A&C Act.

While assessing the appeal, the key observations and holding of the Supreme Court was as follows:

  1. Applicability of the A&C Act amendment of 2015: The Supreme Court acknowledged the substantial changes and narrowing of the scope of appeals from arbitral awards that had resulted from the 2015 amendments to the A&C Act. The Supreme Court upheld the precedent3 that the amendments to s.34 of the A&C Act would apply to appeals made after the date of the 2015 amendments even though the arbitral proceedings had commenced prior to the date of such amendments. Since the present appeal was filed after the amendment came into force, it held that the amended s.34 would be applicable in the present instance.4
  2. Appeal under Section 34(2)(a)(iii) of the A&C Act (Inability of a Party to Present its Case): With regard to the ground under s.34(2)(a)(iii), the Supreme Court observed that under the facts of the case, there was no doubt that the Guidelines that were referred to and relied upon by the majority award, were never in evidence before the tribunal. In fact, the tribunal itself relied upon the said Guidelines by stating that they were to be found on a "certain website". The Appellant thus would not have had a chance to present its case as it was not allowed to comment on the applicability or interpretation of those Guidelines, and hence this was an instance where a party was unable to present its case. This, in view of the Supreme Court, constituted sufficient reason for setting aside the majority award under S.34(2)(a)(iii) of the A&C Act.5
  3. Appeal under Section 34(2)(b)(ii) of the A&C Act (Arbitral Award in Conflict with Public Policy): On the second ground of appeal under s.34(2)(b)(ii), the Supreme Court noted that the parameters of challenge under this section is that "substantively or procedurally, some fundamental principle of justice which has been breached, and which shocks the conscience of the Court".6

    In the facts of the case, it noted that the NHAI Circular was a unilaterally imposed change to the price escalation as determined by the parties under their agreement. By applying the unilateral NHAI Circular and by substituting a workable formula under the agreement between the parties with another formula, the Supreme Court held that the majority award had effectively created a new contract between the parties. Thus, the majority award was de hors the agreement between the parties. The Court went on to say that "This being the case, a fundamental principle of justice has been breached, namely, that a unilateral addition or alteration of a contract can never be foisted upon an unwilling party, nor can a party to the agreement be liable to perform a bargain not entered into with the other party. Clearly, such a course of conduct would be contrary to fundamental principles of justice as followed in this country, and shocks the conscience of this Court."7

The Supreme Court added a note of caution that the ground under Section 34(2)(b)(ii) is available only in very exceptional circumstances, and that, "Under no circumstance can any Court interfere with an arbitral award on the ground that justice has not been done in the opinion of the Court. That would be an entry into the merits of the dispute which... is contrary to the ethos of Section 34 of the 1996 Act..."8

The Supreme Court thus allowed the appeal and set aside the majority arbitral award (and the High Court orders that had upheld the majority award). It also noted that when an appeal against an arbitral award is allowed, the scheme of s.34 of the A&C requires that the disputes decided by such award would need to be referred afresh to another arbitration. At the same time, it acknowledged that any new proceedings would run counter to a key objective of the A&C Act, i.e., speedy resolution of disputes. In the specific facts before it, however, there was also a minority arbitral award which was based upon the formula mentioned in the agreement between the parties. The Supreme Court exercised its inherent powers under Article 142 of the Constitution of India9 to uphold the minority arbitral award, and directed that the award, together with interest, be executed between the parties.

Footnotes

1. Judgment of the Supreme Court of India in Civil Appeal No. 4779 of 2019  ("SC Judgment")

2. Paragraph 6, SC Judgment.

3. As laid out in Board of Control for Cricket in India v. Kochi Cricket (P.) Ltd. and Ors., (2018) 6 SCC 287

4. Paragraph 10, SC Judgment

5. Paragraph 46, SC Judgment

6. Paragraph 44, SC Judgment

7. Paragraph 48, SC Judgment

8. Id.

9. Article 142 of the Constitution of India states that "The Supreme Court in the exercise of its jurisdiction may pass such decree or make such order as is necessary for doing complete justice in any cause or matter pending before it, and any decree so passed or orders so made shall be enforceable throughout the territory of India in such manner as may be prescribed by or under any law..."

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