Supreme Court Upholds Contract Terms in Ssangyong vs. NHAI Price Adjustment Dispute: Civil Appeal No. 4779 of 2019 (08 May 2019)

Date of the Judgment: 08 May 2019
Citation: Civil Appeal No. 4779 of 2019
Judges: R.F. Nariman, J., Vineet Saran, J.
Can a government body unilaterally change a contract’s price adjustment formula? The Supreme Court addressed this question in a dispute between Ssangyong Engineering & Construction Co. Ltd. and the National Highways Authority of India (NHAI). The court examined whether NHAI could impose a new price adjustment method via a circular, or if the original contract terms should prevail. This case underscores the importance of adhering to agreed-upon contractual terms and the limits of unilateral changes.

Case Background

In 2005, the National Highways Authority of India (NHAI) awarded Ssangyong Engineering & Construction Co. Ltd. a contract to build a four-lane bypass on National Highway 26 in Madhya Pradesh. The contract, valued at INR 219,01,16,805/-, included a price adjustment clause for various materials like cement, steel, and machinery. This adjustment was to be calculated using a formula based on the Wholesale Price Index (WPI) published by the Ministry of Industrial Development.

Initially, price adjustments were made using the WPI with the base year 1993-94. However, in September 2010, the Ministry of Industrial Development switched to a new WPI series with a base year of 2004-05. Despite the availability of both old and new series indices, NHAI, in February 2013, issued a circular introducing a “linking factor” to connect the old and new series, which required contractors to accept this new method and waive future claims. Ssangyong challenged this circular, leading to a legal battle over the correct price adjustment method.

Timeline

Course of Proceedings

Ssangyong initially challenged the NHAI circular in the High Court of Madhya Pradesh, which directed them to use the dispute resolution mechanism. Subsequently, Ssangyong sought interim protection in the Delhi High Court, which restrained NHAI from retrospectively implementing the circular. The dispute was then referred to a Dispute Adjudicating Board, which, by majority, recommended a linking factor. However, one member dissented, supporting Ssangyong’s position that the circular was inapplicable.

Dissatisfied, Ssangyong initiated arbitration, claiming unpaid price adjustments. The arbitral tribunal, by a 2:1 majority, upheld the circular, applying government guidelines to establish the linking factor. The dissenting arbitrator sided with Ssangyong, stating that the circular and guidelines were outside the contract. Ssangyong’s challenge to the majority award under Section 34 of the Arbitration and Conciliation Act, 1996 was rejected by the Delhi High Court. The Division Bench of the Delhi High Court also upheld the rejection, leading to the appeal before the Supreme Court.

Legal Framework

The case primarily revolves around the interpretation and application of the Arbitration and Conciliation Act, 1996, specifically Section 34, which deals with setting aside arbitral awards. The relevant sections are:

• Section 34(2)(a)(iii) of the Arbitration and Conciliation Act, 1996: This section allows for setting aside an award if a party was unable to present its case.
• Section 34(2)(a)(iv) of the Arbitration and Conciliation Act, 1996: This section allows for setting aside an award if it deals with a dispute not contemplated by or not falling within the terms of the submission to arbitration, or it contains decisions on matters beyond the scope of the submission to arbitration.
• Section 34(2)(b)(ii) of the Arbitration and Conciliation Act, 1996: This section allows for setting aside an award if it is in conflict with the public policy of India.
• Section 18 of the Arbitration and Conciliation Act, 1996: This section states that parties shall be treated with equality and each party shall be given a full opportunity to present his case.
• Section 24(3) of the Arbitration and Conciliation Act, 1996: This section states that all statements, documents or other information supplied to the arbitral tribunal by one party shall be communicated to the other party.
• Section 26 of the Arbitration and Conciliation Act, 1996: This section deals with the appointment of an expert by the arbitral tribunal.

The court also considered the amendments made to the Arbitration and Conciliation Act in 2015, particularly regarding the scope of “public policy of India” as a ground for challenging arbitral awards. The court clarified that the amended Section 34 applies to petitions filed after 23.10.2015.

Arguments

Ssangyong’s Submissions:

• Ssangyong argued that the majority award contained decisions on matters beyond the scope of submission to arbitration, violating Section 34(2)(a)(iv) of the Arbitration and Conciliation Act, 1996. The majority award substituted a new contract, amounting to novation, by applying the linking factor.
• Ssangyong contended that the award conflicted with the public policy of India, violating Section 34(2)(b)(ii) of the Arbitration and Conciliation Act, 1996, as it was contrary to the fundamental policy of Indian law and basic notions of justice because a new contract was unilaterally imposed.
• Ssangyong argued that the principles of natural justice were violated, attracting Section 34(2)(a)(iii) of the Arbitration and Conciliation Act, 1996, because the government guidelines were never produced before the arbitrators, and the arbitrators applied the said guidelines behind the back of the parties.

NHAI’s Submissions:

• NHAI argued that applying the new formula with the base index of 2004-05 would make the contract unworkable, necessitating a linking factor.
• NHAI stated that Ssangyong itself applied a linking factor when asked by the Tribunal, and that this was a matter of interpretation of the agreement, which the arbitrators’ view was final.

Innovativeness of the Argument: Ssangyong’s argument that the majority award effectively created a new contract by unilaterally imposing the linking factor was particularly innovative. They argued that this violated fundamental principles of contract law and natural justice, highlighting the importance of consent in contractual agreements.

Submissions Table

Issues Framed by the Supreme Court

The Supreme Court framed the following issues:

1. Whether the majority award contained decisions on matters beyond the scope of the submission to arbitration, thus attracting Section 34(2)(a)(iv) of the Arbitration and Conciliation Act, 1996?
2. Whether the majority award was in conflict with the public policy of India, thus attracting Section 34(2)(b)(ii) of the Arbitration and Conciliation Act, 1996?
3. Whether the principles of natural justice were violated, thus attracting Section 34(2)(a)(iii) of the Arbitration and Conciliation Act, 1996?

Treatment of the Issue by the Court

Authorities

The Supreme Court considered the following authorities:

Cases:

• Board of Control for Cricket in India v. Kochi Cricket (P.) Ltd. and Ors. , (2018) 6 SCC 287: Regarding the applicability of the 2015 Amendment Act.
• Sedco Forex International Drill, Inc. and Ors. v. Commissioner of Income Tax, Dehradun and Anr. , (2005) 12 SCC 717: On the retrospective nature of amendments.
• Associate Builders v. Delhi Development Authority , (2015) 3 SCC 49: On the interpretation of “public policy of India.”
• Renusagar Power Co. Ltd. v. General Electric Co. , 1994 Supp (1) SCC 644: On the scope of “public policy” in foreign awards.
• ONGC Ltd. v. Saw Pipes Ltd., (2003) 5 SCC 705: On the ground of “patent illegality” in setting aside awards.
• ONGC Ltd. v. Western Geco International Ltd ., (2014) 9 SCC 263: On the expansion of “public policy of India.”
• DDA v. R.S. Sharma and Co. , (2008) 13 SCC 80: Summarizing the grounds for setting aside an award.
• Shri Lal Mahal v Progetto Grano Spa , (2014) 2 SCC 433: On the application of “public policy” in international commercial arbitrations.
• Excise and Taxation Officer-cum-Assessing Authority v. Gopi Nath & Sons [1992 Supp (2) SCC 312]: On the concept of perversity.
• Kuldeep Singh v. Commr. of Police [(1999) 2 SCC 10]: On the concept of perversity.
• P.R. Shah, Shares & Stock Brokers (P) Ltd. v. B.H.H. Securities (P) Ltd. [(2012) 1 SCC 594]: On the limited scope of court interference with arbitral awards.
• Parsons & Whittemore Overseas Co., Inc., v. Societe Generale De L’industrie Du Papier (RAKTA), 508 F.2d 969 (United States Court of Appeals, Second Circuit, 1974): On the narrow interpretation of the public policy defense.
• State of Goa v. Praveen Enterprises , (2012) 12 SCC 581: On the meaning of “reference to arbitration.”
• Minmetals Germany GmbH v. Ferco Steel Ltd. , [1999] CLC 647: On the inability to present a case.
• Lesotho Highlands Development Authority v. Impregilo SpA and Ors., [2005] 3 All ER 789 [HL]: On the interpretation of the contract.
• CRW Joint Operation v. PT Perusahaan Gas Negara (Persero) TBK , [2011] SGCA 33: On the court’s power to set aside an award.
• Patrick Ryan & Ann Ryan and Kevin O’Leary (Clonmel) Ltd. & General Motors , [2018] IEHC 660 (High Court of Ireland, 2018): On the narrow interpretation of the grounds for setting aside an award.
• Dongwoo Mann+hummel Co. Ltd. v. Mann+hummel Gmbh , [2008] SGHC 67: On the scope of “public policy”.
• BAZ v. BBA and Ors. , [2018] SGHC 275: On the narrow scope of public policy.

Books:

• Redfern and Hunter on International Arbitration by Nigel Blackaby, Constantine Partasides, Alan Redfern, and Martin Hunter (Oxford University Press, Fifth Ed., 2009): On the principles of international arbitration.
• International Commercial Arbitration by Gary B. Born (Wolters Kluwer, Second Ed., 2014): On the judicial review of awards.
• New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards – Commentary, edited by Dr. Reinmar Wolff (C.H. Beck, Hart, Nomos Publishing, 2012): On the right to comment in arbitration.
• Fouchard, Gaillard, Goldman on International Commercial Arbitration (Kluwer Law International, 1999): On the scope of arbitration agreements.
• UNCITRAL Secretariat Guide on the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York, 1958) (2016 Ed.): On the grounds for refusal under the New York Convention.

Legal Provisions:

• Arbitration and Conciliation Act, 1996: Sections 18, 24(3), 26, 28, 34, and 48.
• UNCITRAL Model Law on International Commercial Arbitration: Articles 24(3) and 26.
• Foreign Awards (Recognition and Enforcement) Act, 1961: Section 7.

Authorities Table

Judgment

The Supreme Court allowed Ssangyong’s appeal, setting aside the majority award and upholding the minority award. The court’s reasoning was as follows:

How each submission made by the Parties was treated by the Court?

How each authority was viewed by the Court?

• The Court relied on Associate Builders v. Delhi Development Authority to define the scope of “public policy of India,” emphasizing that the fundamental policy of Indian law should be understood as per Renusagar Power Co. Ltd. v. General Electric Co.
• The Court clarified that the expansion of “public policy” in ONGC Ltd. v. Western Geco International Ltd. had been done away with by the 2015 Amendment Act.
• The Court used Parsons & Whittemore Overseas Co., Inc., v. Societe Generale De L’industrie Du Papier (RAKTA) to emphasize the narrow interpretation of the public policy defense.
• The Court used State of Goa v. Praveen Enterprises to define “reference to arbitration” and to determine that the dispute was within the ambit of the arbitration clause.
• The Court used Minmetals Germany GmbH v. Ferco Steel Ltd. and other authorities to show that the principle of audi alteram partem is important in arbitration proceedings.
• The Court relied on Lesotho Highlands Development Authority v. Impregilo SpA and Ors. to emphasize that an error of law is not an excess of power.
• The Court used CRW Joint Operation v. PT Perusahaan Gas Negara (Persero) TBK to explain the limited power of the court to set aside an arbitral award.
• The Court used Patrick Ryan & Ann Ryan and Kevin O’Leary (Clonmel) Ltd. & General Motors to emphasize the narrow interpretation of the grounds for setting aside an award.
• The Court used Dongwoo Mann+hummel Co. Ltd. v. Mann+hummel Gmbh and BAZ v. BBA and Ors. to explain the narrow scope of “public policy”.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the following factors:

• Adherence to Contractual Terms: The court emphasized the importance of adhering to the agreed-upon terms of the contract. It found that the majority award’s application of a linking factor, which was not part of the original contract, was a breach of fundamental principles of justice.
• Unilateral Alteration of Contract: The court was critical of NHAI’s attempt to unilaterally impose a new formula through a circular, which required contractors to waive future claims. The court found that such a unilateral alteration of the contract was not permissible.
• Violation of Natural Justice: The court noted that the arbitral tribunal had relied on government guidelines that were not disclosed to Ssangyong, thereby violating the principles of natural justice. This denial of opportunity to comment on the guidelines was a significant factor in setting aside the majority award.
• Limited Scope of Interference: The court also acknowledged that while the scope of interference with arbitral awards is limited, it is necessary to intervene when an award violates fundamental principles of justice or is in conflict with the public policy of India.

Ratio Decidendi

The ratio decidendi of this case can be summarized as follows:

An arbitral award that unilaterally alters the terms of a contract by applying a new formula not agreed upon by the parties, and that relies on undisclosed government guidelines, is in conflict with the public policy of India and violates principles of natural justice, and therefore, can be set aside under Section 34 of the Arbitration and Conciliation Act, 1996. Parties are bound by the terms of their original contract, and unilateral changes are not permitted.

Obiter Dicta

The Supreme Court made the following obiter dicta:

• The Court clarified that the 2015 Amendment to the Arbitration Act has narrowed the scope of “public policy of India” as a ground for challenging arbitral awards. The court emphasized that the expansive interpretation of “public policy” in cases like ONGC Ltd. v. Western Geco International Ltd. is no longer applicable.
• The Court reiterated that the power to set aside arbitral awards is limited. Courts should not re-appreciate evidence or substitute their interpretation of the contract for that of the arbitrators. However, when the award is contrary to fundamental principles of justice, intervention is necessary.
• The Court highlighted the importance of upholding the sanctity of contracts. It emphasized that parties are bound by the terms of their agreements and that unilateral alterations are not permissible.

Conclusion

The Supreme Court’s judgment in the Ssangyong vs. NHAI case is a significant ruling that reinforces the importance of adhering to contractual terms and the limits of unilateral changes. The court’s decision emphasizes that while arbitration is a preferred method of dispute resolution, it is essential that arbitral awards do not violate fundamental principles of justice or the public policy of India. This case serves as a reminder that contracts should be interpreted according to their plain terms and that unilateral alterations are not permissible. The judgment has implications for both contract law and arbitration, highlighting the need for fairness, transparency, and adherence to agreed-upon terms.

Flowchart of the Case