Supreme Court Upholds Minority Arbitral Award in Ssangyong vs. NHAI, Clarifies Limits on Court’s Interference in Arbitration

SC narrows scope of “public policy” in arbitration challenges post-2015 Amendment, emphasizes fair hearing rights and rejects unilateral contract modification via Circular.

In a landmark judgment dated May 8, 2019, the Supreme Court of India in the case of Ssangyong Engineering & Construction Co. Ltd. v. National Highways Authority of India (NHAI) has set important precedents on the judicial review of arbitral awards under the Arbitration and Conciliation Act, 1996, especially concerning the applicability of the 2015 Amendment Act and the interpretation of “public policy” as a ground for setting aside awards.

Background:

The dispute arose from a contract between Ssangyong Engineering (a Korean company) and the Indian government’s National Highways Authority of India for the construction of a four-lane bypass in Madhya Pradesh. The contract included a price adjustment clause for certain materials, calculated based on Wholesale Price Indices (WPI). The Ministry of Industrial Development transitioned its WPI base from 1993-94 to 2004-05 in 2010, issuing a Circular in 2013 prescribing a “linking factor” to connect the old and new WPI series. Ssangyong contested the retrospective application of this Circular, arguing it altered the contract unilaterally and without its consent.

Arbitration and Court Proceedings:

The dispute was initially referred to a Dispute Adjudicating Board and later to a three-member arbitral tribunal. The majority of arbitrators accepted the Circular and applied the linking factor, rejecting Ssangyong’s claims for unpaid price adjustments. However, the dissenting arbitrator upheld Ssangyong’s position, awarding the claim in full.

Ssangyong challenged the majority award under Section 34 of the Arbitration Act in the Delhi High Court, which upheld the majority award, relying on the principle that courts should not interfere unless there is no possible basis for the arbitral decision. Ssangyong then appealed to the Supreme Court.

Supreme Court’s Analysis and Findings:

1. Applicability of the Arbitration and Conciliation (Amendment) Act, 2015:

The Court clarified that the 2015 Amendment, which significantly narrowed the grounds to challenge arbitral awards on “public policy” and introduced the concept of “patent illegality,” applies only prospectively to Section 34 applications filed on or after October 23, 2015. It affirmed that substantive changes in law cannot be applied retrospectively merely because the amendment states it is “for avoidance of doubt.”

2. Narrowing the Scope of “Public Policy”:

The Court rejected the expansive interpretation of “public policy” from earlier cases (Saw Pipes and Western Geco) and confined it to the “fundamental policy of Indian law” or conflict with “most basic notions of morality or justice” that shock the conscience of the court. The ground of “interest of India” was discarded as vague and removed.

3. Judicial Approach and Natural Justice:

The Court reiterated that arbitrators must adopt a judicial approach, act bona fide, and respect principles of natural justice, especially the right of each party to present its case. The arbitral tribunal’s failure to disclose or rely upon government guidelines not on record or supplied to the contractor violated Ssangyong’s right to a fair hearing under Sections 18, 24(3), and 26 of the Act, constituting a breach of natural justice.

4. Challenge under Section 34(2)(a)(iii) – Inability to Present Case:

Relying on international arbitration jurisprudence and principles, the Court held that the majority award was vitiated because the arbitrators relied on undisclosed government guidelines and a Circular that were never part of the contract or arbitration record, depriving Ssangyong of a fair opportunity to comment or challenge them.

5. Challenge under Section 34(2)(a)(iv) – Matters Beyond Scope of Arbitration:

The Court held that the dispute over the applicability of the Circular and linking factor was within the scope of arbitration. Ssangyong’s claim that a new contract was imposed unilaterally did not attract this ground, as the parties contested this issue before the tribunal.

6. Unilateral Modification of Contract and Public Policy:

The Court observed that the majority award effectively created a new contract by imposing the Circular and linking factor without Ssangyong’s consent, breaching fundamental principles of justice and fairness. However, such interference with the merits of the dispute is exceptional and must meet the high threshold of shocking the court’s conscience.

7. Setting Aside Majority Award and Upholding Minority Award:

The Supreme Court set aside the majority arbitral award for lack of fair hearing and breach of fundamental justice and, invoking its constitutional powers under Article 142, upheld the minority award in favor of Ssangyong. The minority award was directed to be executed, entitling Ssangyong to the claimed price adjustments along with interest.

Significance and Implications:

This judgment is significant for several reasons:

- It clarifies the retrospective applicability of the Arbitration and Conciliation (Amendment) Act, 2015, reinforcing that fundamental changes in arbitration law apply prospectively.

- It restricts the ambit of “public policy” as a ground to challenge arbitral awards, aligning Indian law with international arbitration standards.

- It underlines the necessity of adherence to principles of natural justice in arbitration, especially the disclosure and opportunity to comment on evidence or guidelines on which the tribunal relies.

- It rejects the notion that courts can interfere with arbitral awards merely because they disagree with the merits, emphasizing judicial restraint.

- It cautions arbitral tribunals against unilaterally modifying contractual terms or applying extraneous guidelines not agreed upon by parties.

This ruling thus balances the need for minimal judicial interference with the imperative of ensuring fairness and justice in arbitration proceedings, strengthening India’s arbitration framework and its attractiveness as an arbitration-friendly jurisdiction.

Statutory provisions

Arbitration and Conciliation Act, 1996 Sections 9, 18, 24(3), 26, 28(3), 31(3), 34(1), 34(2)(a)(iii), 34(2)(a)(iv), 34(2)(b)(ii), 34(2A), 37, 48(2)(b); Arbitration and Conciliation (Amendment) Act, 2015 (applicability and amendments to Sections 28, 34, 48); Constitution of India Article 142.

Ssangyong Engineering & Construction Co. Ltd. v. National Highways Authority of India (NHAI) (SC) : Law Finder Doc Id # 1454596