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AWARD REVERSED AGAINST UNILATERAL CHANGE OF TERMS OF CONTRACT – CASE ANALYSIS – SSANGYONG ENGINEERING V. NATIONAL HIGHWAYS AUTHORITY OF INDIA 2019(3)ARBLR152(SC); 2019(2)KLT679

By July 10, 2019 November 22nd, 2019 No Comments

A.   
Brief Facts
NHAI
and Ssangyong Engineering (“Appellant”) entered into an agreement
pursuant to a tender process for construction of a four-lane bypass. In the
present case, the Appellant was a company registered under the laws of the Republic
of Korea, whereas NHAI was a Government of India undertaking.
Pursuant
to the agreement executed between NHAI and the Appellant, NHAI was liable to
pay price adjustments for the components used by the Appellant. One such
component, as agreed between the NHAI and the Appellant was cement. The
agreement provided for a formula for calculation of the adjustment for cement
which included the following components:
(a)   the all
India average wholesale price index (“WPI”) for cement on the day 28
(twenty eight) days prior to the closing date of submission of bids, as
published by Ministry of Industrial Development, Government of India, New Delhi
(“MID”); and
(b)   the all
India average WPI for cement on the day 28 (twenty eight) days prior to the
last day of the period to which a particular interim payment certificate is
related, as published by the MID.
The
price adjustment was being paid by NHAI to the Appellant every month in terms
of the agreed formula by using the WPI published by the MID, which followed
years 1993-94 (“Old Series”). However, from September 14, 2010,  the MID stopped publishing the WPI for the
Old Series and started publishing indices under the WPI series 2004-05 (“New
Series
”).
Payments
of 90% monthly bills were made on the basis of the Old Series for the period
September 2010 to February 2013 i.e. after the publication of the New Series. Disputes
arose between the NHAI and Appellant due to a circular dated February 15, 2013
(“Circular”), issued by NHAI in which a new formula for determining
indices was used by applying a “linking factor” between the Old Series and the New
Series. The Appellant did not accept the applicability of the Circular and challenged
the aforesaid Circular before the High Court of Madhya Pradesh. The High Court
of Madhya Pradesh disposed of the writ petition on the grounds that a dispute
resolution mechanism in the form of a Dispute Adjudicating Board and arbitration
existed in the document executed between NHAI and the Appellant as a result of
which the Appellant had an efficacious alternative remedy. Hence the matter was
relegated to the Dispute Adjudicating Board.
The
Appellant approached the Delhi High Court vide an application under Section 9
of the Act, for interim protection against deductions and recoveries sought to
be made by NHAI by application of the Circular. Hence, the Delhi High Court
vide its order dated May 31, 2013, restrained NHAI from implementing the said
Circular retrospectively.
In the
meantime, the matter was presented before the Dispute Adjudicating Board,
wherein, the Dispute Adjudicating Board decided in favour of NHAI.  Subsequently, the Appellant issued a notice of
dissatisfaction against the order of Dispute Adjudicating Board. The Appellant
referred the dispute to an arbitral tribunal consisting of 3 (three) members.
The issue
presented between the arbitral tribunal was whether the price adjustment, as
contemplated by the agreement, executed between NHAI and AAI may be revised
subsequently, without the consent of the Appellant. The arbitral tribunal relied
on certain government guidelines of the Ministry of Commerce and Industry,
which provided for establishing a linking factor between the Old Series and the
New Series. The majority view taken by the arbitral tribunal was in favour of
NHAI and therefore, the arbitral tribunal upheld the decision of the Dispute
Adjudicating Board.
A petition
under Section 34 of the Arbitration and Conciliation Act, 1996, (“Act”)
was filed by the Appellant before the learned Single Judge of the Delhi High
Court. The learned Single Judge held that given the parameters of the challenge
to arbitral awards, he cannot interfere in the view taken by majority
arbitrators. Therefore, the aforesaid petition was dismissed by the learned
Single Judge.
Subsequently,
a petition under Section 37 was filed by the Appellant to the Division Bench of
the Delhi High Court, however, the petition was dismissed on the same grounds as
the Single Judge of Delhi High Court. The Appellant subsequently approached the
Hon’ble Supreme Court of India with respect to the aforesaid issue.
B.   
Issues
While
the Hon’ble Supreme Court of India dealt with various minor issues based on the
applicability of the Act, the major issues before the consideration of the
Hon’ble Supreme Court were as follows:
(a)   Whether
the decision by the arbitral tribunal on a matter that was not referred to it
by the parties can be considered as a ground to set aside the arbitral award?
(b)   Whether
a new contract has been made by the majority award of the arbitral tribunal,
without the consent of the Appellant, by applying a formula outside the agreement,
as per the Circular and whether this act amount to violation of public policy?
C.   
Authorities Cited
The
Hon’ble Supreme Court has relied on various case and authorities in this case,
which has been summarized on the basis of the issues dealt by the Hon’ble
Supreme Court.
Applicability
of the Amendment Act
The
Hon’ble Supreme Court relied on its decision in Sedco Forex International
Drill Incorporation and Others v. Commissioner of Income Tax, Dehradun and
Another[i]

and  Board of Control for Cricket in
India v. Kochi Cricket Private Limited and Others[ii]

to ascertain that amended provision of Section 34 applies shall apply to
petition filed under Section 34 from the effective date of the Amendment Act
i.e. October 23, 2015, and therefore, shall not have a retrospective effect.
The
Hon’ble Supreme Court of India analyzed the public policy as a ground to file
an application under Section 34 of the Act through the case ONGC Limited v.
Western Geco International Limited[iii]
.  It was held by the Hon’ble Supreme Court that
while passing an arbitral award, the arbitrator must have a judicial approach
and he/she must not act perversely.
Public
Policy of India
The
Hon’ble Supreme Court of India relied on ONGC Limited v. Saw Pipes Limited[iv]
in relation to the addition of ‘patent illegality’ as a ground to challenge
the arbitration award. The Supreme Court of India further analyzed Associate
Builders v.  Delhi Development Authority[v]

wherein the scope of the phrase public policy of india was expanded.
Renusagar
Principle
The
case of Renusagar Power Company Limited v. General Electric Company[vi]
 was analyzed by the Hon’ble Supreme
Court to understand the parameters of judicial review and the grounds for
challenge/refusal of enforcement under Section 34 and 48 of the Act.
Equal
treatment of Parties
The
Hon’ble Supreme Court observed that Section 18[vii],
24(3)[viii]
and 26[ix]
are important pointers to what is contained in the ground of challenge
mentioned in Section 34(2)(a)(iii). The Hon’ble Supreme Court relied on New
York Convention on the Recognition and Enforcement of Foreign Arbitral Awards ‑
Commentary[x]

to ascertain that where materials are taken behind the back of parties by the
arbitral tribunal, on which the parties have had no opportunity to comment, the
ground under Section 34(2)(a)(ii) would be made out. The Hon’ble Supreme Court
also referred to International Commercial Arbitration[xi]
and Internal Arbitration[xii]
 to ascertain the aforesaid issue.
The Supreme Court of India then relied on Minmetals Germany GmbH v. Ferco
Steel Limited[xiii]
wherein the Queen’s Bench Division decided that the New York Convention
protects the requirement of natural justice reflected in the audi alteram
partem
rule.
Submission
to arbitration
The
Hon’ble Supreme Court of India analyzed that the expression “submission to
arbitration” either refers to the arbitration agreement itself, or to disputes
submitted to arbitration. The Hon’ble Supreme Court relied on various books
such as International Commercial Arbitration and International
Arbitration
to ascertain the consequence of the arbitral tribunal deciding
on a matter which has not been “submitted to arbitration”.
The
Supreme Court of India referred to CRW Joint Operation v. P.T. Perusahaan
Gas Negara (Persero) TBK[xiv],
a case before the Court of Appeal of Singapore,  where the relevant grounds for challenging
the arbitral awards were categorized into three categories namely
jurisdictional grounds, procedural grounds and substantive grounds. The Court
of Appeal in the aforesaid case urged to ask a crucial question i.e. whether
there has been real or actual prejudice to either (or both) of the parties to
the dispute.
The
Supreme Court of India also relied on the UNCITRAL Guide on the New York
Convention which provided the following:
Courts
and commentators agree that an arbitration agreement constitutes a “submission
to arbitration” within the meaning of Article V (1) (c). Consequently, where an
arbitral tribunal has rendered an award which decides the matters beyond the
scope of the arbitration agreement, there is a ground for refusing to enforce
an award under Article V(1) (c).
The
Supreme Court of India referred to various foreign judgements such as the U.S
Judgement in Parsons & Whittemore Overseas Company Incorporation v.
Societe General De L’industrie Du Papier (RAKTA)[xv],
Lesotho Highlands Development Authority v. Impregilo SpA and Others[xvi]
and Patrick Ryan & Ann Ryan and Kevin o’Leary (Clonmel) Limited
& General Motors[xvii]
with respect to construction of the term “submission to arbitration”.
The
Supreme Court of India further relied upon State of Goa v. Praveen
Enterprises[xviii]

wherein the Supreme Court of India interpreted ‘reference to arbitration’.
Therefore, in light of the aforesaid authorities the Hon’ble Supreme Court held
that under Section 34(2)(a)(iv), submission or referred to arbitration, being a
ground of challenging the arbitral award, must be constructed narrowly and so
constructed must refer only to matters which are beyond the arbitration
agreement or beyond the reference to the arbitral tribunal.
Most
basic notions of justice
To
ascertain the most basic notion of justice, the Supreme Court referred to Parsons
& Whittemore Overseas Company Incorporation v. Societe General De
L’industrie Du Papier (RAKTA)[xix]
wherein it was held that most basic notions of justice are said to be
breached when substantially or procedurally, some fundamental principle has
been breach and such breach shocks the conscience of the court.
The
Hon’ble Supreme Court then relied upon Dongwoo Mann+hummel Company Limited
v. Mann+hummel Gmbh[xx]
wherein the High Court of Singapore held that public policy of the State
encompasses a narrow scope and therefore, it should operate in instances where
the arbitral award shock the conscience or is clearly injurious to the public
good. The Hon’ble Supreme Court further relied on Profilati Italia SRL v.
Paine Webber Inc[xxi]
in relation to the argument that non-disclosure of material documents
constituted a breach of public policy in the context of Section 68 of the
English Arbitration Act, 1966.
Therefore,
based on the aforesaid authorities, the Hon’ble Supreme Court of India came to
the decision discussed hereinbelow.
D.   
Decision
The
Hon’ble Supreme Court decided that the government guidelines that were referred
to and strongly relied upon the majority were never in evidence before the
arbitral tribunal. The arbitral tribunal relied upon the guidelines by itself.
Therefore, the Appellant was held to be directly affected as it was unable to
present its case by not being allowed to comment upon the applicability or
interpretation of the aforesaid government guidelines. The majority award was
set aside under Section 34(2)(a)(ii) based on the aforesaid reason.
The
Hon’ble Supreme Court was of the view that Section 34(2)(a)(iv) may not be
attracted to the issue with respect to the applicability of the linking factor
as it was discussed during the arbitration proceedings. However, the Hon’ble
Supreme Court opined that a new contract made by the majority award, without
the consent of the Appellant, by applying a formula outside the agreement, is
violation of the most basic notion of justice and therefore, may be considered
as a violation of the public policy of India.
The
Hon’ble Supreme Court analyzed various case laws and law commission report, to
summarize the following with respect to the public policy of India:
(a)   The public
policy of India now means the fundamental policy of Indian law;
(b)   Violation
of principles of natural justice continues to be a ground of challenge of an
award;
(c)   The
ground for interference in the basis that the arbitral award is in conflict
with justice or morality is to be understood as a conflict with the most basic
notions of morality or justice;
(d)   Violation
of public policy of India is now constricted to mean that a domestic award is
contrary to the fundamental policy of Indian law and that such award is against
the basic notion of justice or morality.

[i]           (2005) 12 SCC 717
[ii]           (2018) 6 SCC 287
[iii]         (2014) 9 SCC 263
[iv]         (2003) 5 SCC 705
[v]          (2015) 3 SCC 49
[vi]         1994 Supp (1) SCC 644
[vii]        Section 18 of the Act – Equal treatment
of parties
[viii]       Section 24 of the Act – Hearing and
written proceedings
[ix]         Section 26 of the Act – Expert appointed
by arbitral tribunal
[x]          Dr. Reinmar Wolff, New York Convention
on the Recognition and Enforcement of Foreign Arbitral Awards ‑ Commentary,
C.H. Beck, Nomos Publishing 2012
[xi]         Gary B. Born, International Commercial
Arbitration, Wolters Kluwer, Second Edition, 2014. 
[xii]        Nigel Blackaby, Constantine Partasides,
Alan Redfern and Martin Hunter, International Arbitration, Oxford University
Press, Fifth Edition, 2009
[xiii]       [1999] CLC 647
[xiv]       [2007] 3 SLR (R) 86
[xv]        (1974) 508 F. 2d 969 (United States Court
of Appeals, Second Circuit, 1974)
[xvi]       [2005] 3 All ER 789 [HL]
[xvii]      [2018] IEHC 660 (High Court of Ireland,
2018)
[xviii]     (2012) 12 SCC 581
[xix]       (1974) 508 F. 2d 969 (United States Court
of Appeals, Second Circuit, 1974)
[xx]        [2008] SGHC 67
[xxi]       [2001] 1 Lloyd’s Rep 715

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