Worldwide: Award Reversed Against Unilateral Change Of Terms Of Contract

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

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:

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:

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[1] and Board of Control for Cricket in India v. Kochi Cricket Private Limited and Others[2] 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[3]. 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[4] 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[5] 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[6] 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[7], 24(3)[8] and 26[9] 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[10] 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[11] and Internal Arbitration[12] to ascertain the aforesaid issue. The Supreme Court of India then relied on Minmetals Germany GmbH v. Ferco Steel Limited[13] 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[14], 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:

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)[15], Lesotho Highlands Development Authority v. Impregilo SpA and Others[16] and Patrick Ryan & Ann Ryan and Kevin o'Leary (Clonmel) Limited & General Motors[17] with respect to construction of the term "submission to arbitration".

The Supreme Court of India further relied upon State of Goa v. Praveen Enterprises[18] 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)[19] 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[20] 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[21] 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:

Footnotes

1. (2005) 12 SCC 717

2. (2018) 6 SCC 287

3. (2014) 9 SCC 263

4. (2003) 5 SCC 705

5. (2015) 3 SCC 49

6. 1994 Supp (1) SCC 644

7. Section 18 of the Act – Equal treatment of parties

8. Section 24 of the Act – Hearing and written proceedings

9. Section 26 of the Act – Expert appointed by arbitral tribunal

10. Dr. Reinmar Wolff, New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards ‑ Commentary, C.H. Beck, Nomos Publishing 2012

11. Gary B. Born, International Commercial Arbitration, Wolters Kluwer, Second Edition, 2014.

12. Nigel Blackaby, Constantine Partasides, Alan Redfern and Martin Hunter, International Arbitration, Oxford University Press, Fifth Edition, 2009

13. [1999] CLC 647

14. [2007] 3 SLR (R) 86

15. (1974) 508 F. 2d 969 (United States Court of Appeals, Second Circuit, 1974)

16. [2005] 3 All ER 789 HL.

17. [2018] IEHC 660 (High Court of Ireland, 2018)

18. (2012) 12 SCC 581

19. (1974) 508 F. 2d 969 (United States Court of Appeals, Second Circuit, 1974)

20. [2008] SGHC 67

21. [2001] 1 Lloyd's Rep 715

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