SSANGYONG ENGINEERING & CONSTRUCTION CO. LTD. VS NATIONAL HIGHWAYS AUTHORITY OF INDIA (NHAI)
Ms. Khushboo Garg
(University Institute of Laws, Regional Centre, Ludhiana)
CITATION: Civil Appeal No. 4779 of 2019, decided on May 8, 2019
BENCH (DB): Rohinton Fali Nariman and Vineet Saran
The Honorable Supreme Court upheld that the appeal must be allowed to restore the minority decisions vide Article 142 of the Constitution of India, 1950 and suggested bringing suitable amendments to the Arbitration and Conciliation Act, 1996 to remove ambiguity and uncertainty.
An appeal was filed by Ssangyong Engineering Company challenging the majority decision laid under Section 34 of the Arbitration and Conciliation Act, 1996. The appellants allege that the ‘most basic notions of justice’ were breached due to the majority award decided by the Arbitral Tribunal whereas, the respondents contended that the arbitral award was within the terms of the contract.
FACTS OF THE CASE:
The National Highways Authority of India (hereafter referred to as NHAI) invited a bid for the construction of a four-lane bypass on NH-26 (Madhya Pradesh). The appellant, a company registered under the Republic of Korea was approved for the construction contract, total value being INR 2,19,01,16,805. The bid was accepted vide the letter of acceptance communicated on 30 December 2015. Clause 70.3 of the contract to provide for Price Adjustment for four components viz. cement, steel, plant, and machinery that were used for the construction of the highway. Accordingly, the appellant was entitled to receive compensation as per the terms of the contract for the inflation of the above four components. The agreed method/formula for calculation of the inflation was the Wholesale Price Index [hereafter referred to as WPI] that followed 1993-1994 as the base year. However, with effect from 14 September 2010, the NHAI issued a circular revising the calculation of WPI, which used 2004-2005 as the base year and the appellant issued the bills accordingly. NHAI further issued a policy circular on 15 February 2013 that indicated a new formula to determine indices through ‘linking factor’ and referred to 2009-2010 as the base year. The appellant raised the claim for INR 2,01,42,827 due to the non-payment of price adjustment for September 2010-May 2014 and the interest on non-payment thereof.
WRIT PETITION: BEFORE THE MADHYA PRADESH HIGH COURT
The appellant challenged the circular dated 15 February 2013 issued by NHAI through a writ petition before the Honorable High Court of Madhya Pradesh. The court opined that the contract between the appellant and NHAI provides for an alternate dispute redressal mechanism that is Arbitration, therefore, the writ was disposed of.
DISPUTE REFERRED TO ARBITRATION:
The appellant disputed the revision of WPI (the base year 2004-2005) as it inflated their costs, therefore to resolve the dispute the matter was referred to a three-member arbitral tribunal. The dispute in question was whether the price adjustment should be calculated as per the terms of the contract or whether the circular w.e.f. 15 February 2013 should be referred for applying the linking factor.
The Arbitral Tribunal on the award dated 2nd May 2016 were of the view that the circular dated 15 February 2013 were within the terms of the contract and hence must be referred. Moreover, the appellant’s contention that the circular de hors the contract were denied and the subsequent claims was rejected.
APPEAL: BEFORE THE DELHI HIGH COURT:
Unsatisfied from the majority decision of the arbitral tribunal, the appellant filed an appeal under Section 34 before the Single Judge of the High Court. The court rejected the appeal stating that the new series were duly published by the Ministry of Commerce and Industry and the base indices should be calculated as per the circular dated 15.02.2013.
The appellant filed a subsequent appeal before the High Court (Division Bench) under Section 37 of the Act, which was also rejected.
APPEAL: BEFORE THE SUPREME COURT OF INDIA
The appellant filed an appeal before the honorable Supreme Court. The appeal involved the following issues:
Whether amendments under section 34 will be applicable to set aside the arbitral awards?
Whether the provisions of Section 34(2)(a)(iv) is applicable?
Whether the arbitral award decided by the majority is in conflict with the public policy?
The above contentions were duly elaborated by the honorable Supreme Court to decide the matter.
The applicability of the Amendment Act 2015:
The 246th Law Commission Report provided for the application of the Amendment Act 2015 to the court proceedings that would commence on or after 23.10.2015. In Board of Control for Cricket in India v. Kochi Cricket (P.) Ltd. and Ors., it was observed that the amendments of Section 34 of the Act would apply to the appeals made for the arbitral proceedings that started before the date of any such amendments. Further, the court found that the appeal filed in the present case was after the enforcement of the amendment, therefore, the provisions under Section 34 should be applied.
The applicability of Section 34(2)(a)(iv) in the present case:
The respondents duly agreed to the fact that the guidelines were not discussed in the arbitral proceedings. The appellant, therefore, either would be directly affected by the same else would be unable to present the case as he would not be allowed to comment on the interpretation of the guidelines. Thus, the Supreme Court suffice the reasons to set aside the majority orders under Section 34(2)(a)(iv).
The arbitral award under Section 34(2)(b)(ii) and the public policy:
Section 34(2)(b)(ii) holds mention of the term ‘most basic notions of justice.’ It was challenged under the said provisions based on a substantive or a procedural breach of the fundamental principle of justice that shocks the conscience of the court. The Supreme Court further stated that the majority award that substituted a workable formula as per the NHAI Circular has created a new contract. Therefore, the appellants alleging the decision of the arbitral tribunal as de hors the agreement between the said parties was held justified. The court was of the view that the broad interpretation of fundamental policy given under ONGC Ltd. v. Western Geco International Ltd. and Associate Builders v. DDA was not applicable on Section 34.
The court elaborated the fundamental principle of justice by clarifying that any material addition or alteration of the contract, where one of the parties clearly states its unwillingness, cannot be made liable to perform a bargain under such contract.
It was further clarified by the honorable Supreme Court that under no circumstance, the court can interfere with the arbitral award on the ground that justice has not been done. It is only through the provisions of Section 34 of the Act that a court can interfere in the decision of the arbitral tribunal.
The additional ground of domestic awards was available under Section 34(A2) of the Amendment Act. The concept of ‘patent illegality was also enumerated by the Supreme Court. For the application of the provisions under Section 34(2A), patent illegality must be visible on the face of the award where the illegality is at the roots of the matter of dispute and not due to an erroneous application of the law. The grounds invoking the same could be:
Where the award was granted without giving due reasons;
Where the arbitrator believes that it is impossible to interpret a contract;
Where the decision of the arbitrator is beyond the terms of the contract;
Where the decision overlooks a piece of evidence or the necessary documents are taken as evidence without the notice/knowledge to the parties to contract.
DECISION OF THE SUPREME COURT:
The Supreme Court allowed the appeal filed by the appellant. The court believed that referring the matter to a fresh Arbitral Tribunal would be contrary to the main objective of the Arbitration and Conciliation Act that is to provide speedy resolution when any dispute arises. Therefore, the court through Article 142 upholds the minority decision and grants relief of claim of INR 2,01,42,827 and interest of 10 percent to the appellants.
The above-discussed judgment highlights three main aspects in light of the Arbitration and Conciliation Act, 1996 viz.
The applicability of the Arbitration and Conciliation (Amendment) Act, 2015;
Setting aside an arbitral award on the grounds of ‘public policy,’ further elaborating the scope of public policy under Section 34 (after the Amendment Act, 2015);
Recognition towards the Minority Decisions in the Arbitral Awards.