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20 June 2019
Appellant Ssangyong's bid for the respondent National Highways Authority of India's four-lane bypass project was accepted in 2005.
The contract drawn up between the parties specified a price adjustment, which was applicable to labour, plant and machinery, petroleum, oil and lubricant, cement, steel, bitumen and other local materials used. The contract also specified how the price adjustment was to be calculated.
The price adjustment was paid to the appellant by the respondent following an agreed formula which was calculated using the wholesale price index (WPI) published by the Ministry of Industrial Development, which followed the years 1993-1994 (the old series). However, with effect from 14 September 2010, the ministry stopped publishing the WPI for the old series and started publishing indices under the WPI series 2004-2005 (the new series). Hence, the appellant raised its bills accordingly.
The parties had used the price adjustment formula until 2013. On 15 February 2013 the respondent issued a policy circular in which a new formula for calculating the indices was used by applying a 'linking factor' based on the year 2009-2010. The circular required the contractors to provide an affidavit accepting the price adjustment and stating that they would not make any claim after the payment.
The respondent stated that the circular would be applied to the contract and, as a result, a linking factor would have to be provided, thereby connecting the old series WPI to the new series. The appellant was asked to provide its consent to the use of this circular. However, the appellant provided only a conditional undertaking reserving its right to challenge the circular.
On 31 May 2013 the Delhi High Court issued an interim injunction against the respondent in a Section 9 petition under the Arbitration and Conciliation Act 1996, restraining it from applying the circular retrospectively. Since the contract's dispute resolution clause stated the need to consult the Dispute Adjudication Board before the dispute could be referred to an arbitral tribunal, the appellant approached the board. In a two-to-one judgment, the board ruled in favour of the respondent, with the majority recommending a certain linking factor. Only one member disagreed and stated that – in view of the express terms of the contract – the circular could not be applied for price adjustment.
Aggrieved with the decision, the appellant approached an arbitral tribunal consisting of three members. The reference to arbitration was whether the price adjustment would continue under the terms of the contract, or whether the circular, applying the linking factor, would have to be applied.
Again, in a two-to-one judgment, the arbitral tribunal agreed with the respondent's contentions and held that the circular could be applied as it was within contractual stipulations. The majority award also applied certain guidelines released by the Ministry of Commerce and Industry, which required a linking factor connecting the old series with the new series to be established. The appellant's arguments that the circular was outside of the contract and that the guidelines were not on record and could not have been referred to by the arbitral tribunal were rejected. The arbitral tribunal held that the guidelines were published on the website, brushing aside the contention that they were not on record.
The dissenting arbitrator held that neither the circular nor the guidelines could be applied as they were outside of the contract between the parties. Accordingly, the dissenting award awarded the claim of the appellant in full.
The appellant's petition for setting aside the majority award under Section 34 of the act was dismissed by a single judge of the Delhi High Court, who held that the majority's view was reasonable and did not warrant interference. The appeal under Section 37 to the Division Bench yielded the same result.
Hence, the appellant approached the Supreme Court.
In the Supreme Court, the appellant contended that:
The respondent argued that:
The court first examined whether the Arbitration and Conciliation (Amendment) Act 2015 would be applicable to the present Section 34 petition since it was filed in 2016. The court ruled that the amended Section 34 would apply only to petitions filed after 23 October 2015 and that it would therefore be applicable to the present case.
The court affirmed that principles of natural justice enshrined in Sections 18 and 34(2)(a)(iii) would continue to be grounds of challenge for setting aside.(1)
The court referred to its decision in Renusagar Power Co Ltd Vs General Electric Co(2) to determine the contours of judicial review of foreign awards and awards in international commercial arbitrations held in India. The court also cited references by foreign authors and jurists on courts not being permitted to refuse enforcement on the ground that the arbitrator's mistake was one of law or fact.(3)
Section 34(2)(a)(iii) would include situations where materials are taken on record by the tribunal, without the knowledge of the parties, on which the parties have had no opportunity to comment.
With regard to Section 34(2)(a)(iv), the court ruled that it must be narrowly construed(4) and clarified that an arbitrator wandering outside of the contract and dealing with matters not allotted to them would be a jurisdictional error under patent illegality in Section 34(2A), which would not apply to international commercial arbitrations.
Specifically with regard to the present case, the court held that the fact that the majority award had itself made a new contract for the parties by applying the extra-contractual circular was not subject to Section 34(2)(a)(iv) – that is, the majority award could not be held to be dealing with issues outside of the contract since this could have been covered by the parties' dispute as to whether the linking factor applied.(5)
The court ruled that the expression "most basic notions of morality or justice" as found in Explanation 1 to Section 34(2)(b) refers to a breach of fundamental justice – whether substantive or procedural – which shocks the conscience of the court.(6)
The court held that the majority award applying the guidelines which had never been filed by the parties was in violation of Section 34(2)(a)(iii) since the appellant had not been given the opportunity to present arguments on the matter.(7)
The court ruled that the ground that the majority award created a new contract instead fell within the ambit of India's public policy based on the "most basic notions of justice". The court held that by substituting a workable formula under the agreement by another formula outside of the agreement, the majority award had created a new contract between the parties. This was held to be contrary to India's fundamental principles of justice and shocked the conscience of the court. However, the court made it clear that this ground was available only in exceptional circumstances and that the court could not interfere with an award on the ground that justice has not been done in the opinion of the court.(8)
On these grounds, the court set aside the majority award. Under Section 34, the disputes decided by the majority award would have to be referred afresh to another arbitration. This would result in significant delay and contradict the aim of the act – that is, the speedy resolution of the disputes. Therefore, the court invoked Article 142 of the Constitution and upheld the minority award which had awarded the entire claim to the appellant.(9)
The court's ruling is a welcome exposition on the contours of Section 34, especially in relation to challenges on grounds of violations of principles of natural justice.
For further information on this topic please contact Ajay Bhargava, Arvind Kumar Ray or Sharngan Aravindakshan at Khaitan & Co by telephone (+91 11 4151 5454) or email (firstname.lastname@example.org, email@example.com or firstname.lastname@example.org). The Khaitan & Co website can be accessed at www.khaitanco.com.
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