Introduction

The recent judgement of the Supreme Court in Ssangyong Engineering & Construction Limited v National Highway Authorities of India1 is of seminal importance in understanding the approach and proper scope of judicial review of arbitral awards.

The Supreme Court's pronouncement is a tour de force as it reviews the practice and approach in different jurisdictions to challenges to arbitral awards. The ruling explains the interaction between local courts and awards and the philosophy of the Model Law in restricting challenges to awards. The Court has authoritatively clarified and delineated the boundaries of judicial review when faced with awards that are vitiated by procedural errors warranting curial intervention.

Brief Facts

Ssangyong Engineering & Construction Limited ("Ssangyong") entered into a contract with ("NHAI") for the construction of a four-lane bypass in India. Parties agreed to a price adjustment mechanism for components such as cement, steel, plant and machinery by reference to the Wholesale Price Index ("WPI") of the 1993-1994= 100 ("Old Series"). Thereafter on 14 September, 2010, the Old Series was replaced by WPI series 2004-05= 100 ("New Series"). NHAI issued a circular ("Circular") in which a new formula was used to determine indices by applying a linking factor between the Old Series and New Series. The Circular expressly provided that it would be applicable only if the contractor affirmed an affidavit accepting the New Series. Ssangyong did not agree to the applicability of the New Series to its contract.

Disputes arose as to whether the New Circular would govern price adjustments payable by NHAI to Ssangyong, which was referred to a three-member arbitral tribunal. The controversy was limited to whether the price adjustment was to be determined by the terms of the original contract or by the New Circular.

Two out of 3 members of the arbitral tribunal found that the price adjustment was to be determined by reference to the Circular. This conclusion was arrived at by applying certain government guidelines of the Ministry of Commerce and Industry, which according to the tribunal was publicly available on the web and was required to link the Old Series to the New Series, but which were not on record. Ssangyong's argument that the linking factor was outside the scope of its contract was rejected by the majority award. The dissenting arbitrator found that the Circular and the government guidelines relied on by the majority were both beyond the scope of the contract. The dissenting arbitrator accordingly awarded Ssangyong its full claim value together with interest and costs.

Ssangyong's challenge to the award before a Single judge of the Delhi High Court under Section 34 of the Arbitration and Conciliation Act, 1996 ("Act"), failed, as the court held that despite the dissenting opinion being more appealing, the majority view taken by the tribunal was a possible view and could not be interfered with given its restricted power of review of awards. Ssangyong's appeal to a Division Bench of the Delhi High Court also yielded the same result.

Supreme Court's Reasoning

The Supreme Court whilst allowing Ssangyong's appeal, set aside the award. Its judgement is a valuable guide on several aspects of the role of the court in reviewing awards.
Ssangyong challenged the award mainly on the ground that the award, by rewriting the contract by making the Circular applicable to price adjustments: i) travelled beyond the scope of the submission to arbitration ii) was contrary to public policy and iii) offended principles of natural justice by introducing guidelines behind the back of the parties.

Before dealing with each of these challenges, the Court ruled that the restricted scope of review of arbitral awards found in the 2015 Amendment Act would be applicable to the present case, even though the arbitration was commenced before the coming into force of the Amendment Act.

Beyond the scope of submission

Ssangyong's challenge to the award on the ground of it wandering beyond the scope of the arbitration agreement and rewriting the Contract, was rejected by the Court. According to the Court, the controversy about the computation of the price adjustment formula was very much an issue before the tribunal, as it had been pleaded and argued and did not render it beyond the scope of the arbitration agreement.

Public Policy

Interestingly, the 'public policy', challenge to the award found favour with the Court. The Court agreed with Ssangyong that the application of the Circular to the contract (which had been opposed by Ssangyong) amounted to foisting a new contract on it. Such an approach by the tribunal, according to the Court, breached a fundamental principle of justice that shocked its conscience and vitiated the award. The Supreme Court however emphasized that this was an exceptional case and its observations should not be interpreted as endorsing judicial interference of an arbitral award simply because the Court is of the opinion that justice has not been done. Such an approach would be impermissible as it would entail the Court reviewing the merits of the award, which must be eschewed.

Natural Justice

The Supreme Court also agreed that Ssangyong's grievance of the award offending natural justice was well founded, as the tribunal made adverse findings on the basis of government guidelines not forming part of the record, which the parties had no opportunity to address the tribunal on.

Conclusion

The Supreme Court accordingly set aside the award. However, given the considerable delay that this would entail, the Court invoked its inherent powers to do complete justice and adopted the dissenting opinion issued by the third arbitrator, which allowed Ssangyong's claim with interest and costs.

The ruling is a neat illustration of the tension between the principles of finality and justice underlying arbitration. The judgement in the facts of the present case has struck the right balance between these two competing principles.

Footnote

1 Civil Appeal No. 4779 of 2019

Originally published May 27, 2019.

The above is a generic analysis and should not be regarded as a substitute for specific advice based on the facts of a client's objectives and specific commercial agreements reached. Please do reach out to us at mail@zba.co.in for any queries.