Ssangyong Engineering & Construction Co. Ltd. v. NHAI

Ssangyong Engineering & Construction Co. Ltd.     ….Appellant


            National Highways Authority of India (NHAI)      …..Respondent

  1. Citation: AIR 2019 SC 5041
  • Relevant Facts:
  • A contract was awarded by NHAI(Respondent) in favour of Ssangyong Engineering & construction Co. Ltd.(Appellant) a company registered under the laws of the Republic of Korea, for the construction of a four lane bypass on National Highway 26 in the state of Madhya Pradesh.
  • The terms of the contract provided for Price Adjustment to be paid to the appellant every month using the agreed formula as per the Wholesale Price Index(WPI) method following the years 1993-1994 as the base year.
  • However, the respondent later issued a policy circular in which a new formula for determining indices was used by applying a “linking factor” based on the year 2009-10.  This reduced the price adjustment available to the appellant via the Wholesale Price Index under the contract.
  • The appellant never accepted this and knocked at the doors of the High Court of Madhya Pradesh, the High Court granted an injunction in favour of Ssangyong restraining NHAI from implementing the said Circular retrospectively. However, it disposed of the writ petition with the observation that there exists a dispute resolution mechanism through the Dispute Adjudication Board.
  • After the arbitration proceedings, two out of the three members which amounted to the majority of the arbitral tribunal, by their award dated 02.05.2016 made at New Delhi, after noting the arguments of both sides, held that this Circular could be applied as it was within the contractual stipulations. The minority, however, held the revision to be de hors the contract.
  • Hence, the appellant challenged challenged the award dated 02.05.2016 under section 34 of the Arbitration and Conciliation Act 1996 before the Delhi High court under it being against the public policy of India and in violation of the terms of the contract.
  • The judge adjudicating upon the matter held by a judgment and order dated 09.08.2016 that a possible view was taken by the majority arbitrators which, therefore, could not be interfered with, given the parameters of challenge to arbitral awards. This decision was then appealed under Section 37 of the Arbitration and conciliation Act 1996 before the Division Bench of the High Court, however, it yielded the same result. After which the matter was assailed before the supreme court via a special leave petition.
  • Issues:
  • Whether the majority award had created a new contract by applying a unilateral circular?
  • Is the 2015 amendment made to section 34 of the Arbitration and conciliation Act 1996 prospective in nature?
  • Could the majority award passed by an arbitral tribunal be challenged under section 34?
  • What are the parameters of review of arbitral awards?
  • Contentions:

Ssangyong contended as under:

  • Firstly, section 34 (2)(a)(iv) of the Arbitration and conciliation act was attracted to the facts of the present case as the majority award passed by the arbitral tribunal contains decisions on matters beyond the scope of the submission to arbitration. Furthermore, it was argued that the award passed substituted the old contract with a new contract between the parties, amounting to a novation of the old contract and the old formula contained in the contract. It was argued that the aforementioned was a jurisdictional error and it was a decision on a matter beyond the scope of the submission to the arbitration.
  • Secondly, it was argued that the award was in conflict with the public policy of India, being contrary to the fundamental policy of Indian law as well as the basic notions of justice and hence violative of section 34(2)(b)(ii). This argument was made on the contention that rewriting the terms of the contract ought to shock the conscience of the court. Furthermore, the contention under Section 34 (2)(A) regarding the award being patently illegal was set aside when it was pointed out that the defence of patent illegality doesn’t apply in International commercial arbitration.
  • That under section 34(2)(a)(iii) the principles of natural justice were violated as the government guidelines were never produced before the arbitrators, and the arbitrators applied the said guidelines behind the back of the parties.

            NHAI contended as follows:

  • Firstly, it was imperative to have a linking factor as applying the new formula with the base index of 2004-2005 would make the contract unworkable.
  • Secondly, the arbitrators view is final and the court can’t get into the merits of the case, an arbitration award can only be set aside under the ‘public policy of India’ under Section 34 & 48 if there is a violation of basic notions of justice prima facie and the judiciary can’t get into the merits of an arbitral award.
  • Lastly, that the merits of challenging an arbitral awards have been narrowed to a great extent, making it clear that the construction of the terms of the contract is primarily for the arbitrator to decide unless it is found that such a construction is not a possible one. As increased interference of courts in arbitration matters would tend to defeat the object of the Arbitration and conciliation Act 1996.
  • Holdings:
  • The court held that the government guidelines that were referred to were never presented before the arbitral tribunal. Hence, the appellant was affected directly as they weren’t allowed to present their case properly. For this reason, the majority was set aside under Section 34 (2)(a)(iii)
  • That there was no violation of section 34 (2)(a)(iv) as the dispute as to application of the circular is certainly something which would fall within the arbitration clause or the reference to arbitration that governs the parties.
  • That the majority award passed has created a new contract, without the consent of the appellant. Due to which a fundamental principle of justice has been breached. Which is in violation of Section 34 (2)(b)(ii) of the act and is a ground to set aside the award.
  • Hence, the majority award was set aside
  • Rule of law:
  • Amendments made in section 34 of the Arbitration and conciliation (Amendment) Act 2015, were prospective in nature i.e. applicable to applications filed under Section 34 of the act to set aside arbitral awards made after 23.10.2015. In this matter the court held that the Amendment act 2015, apply to section 34 petitions that are made after 23.10.15(relying on Board of Control for Cricket in India v. Kochi Cricket (P.) Ltd. and Ors., (2018) 6 SCC 287)
  • Secondly, the meaning of ‘public policy of Indian law’ is now constricted to
  • Firstly, that a domestic award is contrary to the fundamental policy of Indian law
  • or secondly, that such award is against basic notions of justice
  • The defence under Section 34 (2)(A) of patent illegality doesn’t apply in international commercial arbitration and can only be used in a purely domestic arbitration.
  • the construction of the terms of a contract is primarily for an arbitrator to decide, unless the arbitrator construes the contract in a manner that no fair-minded or reasonable person would. In short, that the arbitrator’s view is not even a possible view to take.
  • when matters that are not strictly in issue are brought up due to being connected with other matters in issue, they would not readily be held to be matters outside the scope of submission to arbitration for the purposes of Section 34 (2)(b)(ii).
  • Conclusion  
  • Firstly, I believe when it comes to the Amendment made to Section 34 of the Arbitration and conciliation Act being prospective or retrospective in nature the court has misunderstood some facts when it held the act was prospective, I believe the amendments made to the act should apply to ongoing cases retrospectively too as the explanations 1&2 were supplanted in the Amendment act to clarify some doubts, the judgement by the court defeats that purpose.
  • However, I believe the court’s decision to limit the scope of challenging an arbitral award under Section 34 & 48 of the Arbitration and Conciliation Act by not allowing a judicial body to get into the merits of an arbitration decision was a correct one. The court adequately justified its reasoning in this matter. An Arbitral tribunals view when it comes to International Arbitration should be final and the ground of challenging the award should be very limited, as constant interference by the judiciary would defeat the purpose of Arbitration and prevent it from being an efficacious and speedy method for alternative dispute resolution. However, when it comes to purely domestic arbitrations, I believe, the court should be given wider powers to review an arbitral award so as to uphold the substantive law in India and limit erroneous application of law and perverse proceedings by smaller and unexperienced arbitral tribunals. Hence,  this law will cause a major reform when it comes to arbitration and give it more power and in turn reduce the burden on the judiciary when it comes to adjudication while providing a speedy and efficacious remedy for dispute resolution. This judgement could also restore faith in foreign investors as it would compel the government and state bodies to uphold arbitral awards. However, the judiciary should introduce certain checks and balances to make sure some arbitral tribunals don’t act in a perverse way.

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