Supreme Court of India: Challenge To The Domestic Arbitral Award On The Grounds Of Contravention Of Fundamental Policy Of Indian Law, Conflict With Most Basic Notions Of Justice & Patent Illegality As Added By The Arbitration Amendment Act, 2015 Can Only Be Made Prospectively

Supreme-Court-of-India-1_85138_730x419

In Ssangyong Engineering & Construction Co. Ltd. v. National Highways Authority of India (NHAI) 2019 SCC OnLine SC 677, the Supreme Court elucidated and interpreted the grounds for setting aside an award when the party was unable to present its case under Section 34(2)(a)(iii) of the Arbitration & Conciliation Act, 1996 (‘Act’), when arbitral award deals with a dispute not contemplated or falling within the terms of submission under Section 34(2)(a)(iv) of the Act, when the award is in conflict with the public policy of India as provided under Explanation 1 & 2 of Section 34(2)(b)(ii) of the Act and what constitutes patent illegality appearing on the face of the award under Section 34(2A) of the Act. After examining various authorities on UNCITRAL Model Law from around the world, the Court set aside the domestic award in the exceptional circumstances of the case. Detailed case analysis given below:

Factual Matrix

Ssangyong entered into a construction contract with the National Highways Authority of India (‘NHAI’). As per the contract, the price of the material was to be paid by NHAI to Ssangyong as per the formula provided in the contract. Later, NHAI issued a Circular with a new formula for determining the prices and demanded that the Circular should be applied retrospectively.

Ssangyong refrained to accept this and knocked at the doors of the High Court challenging the validity of the Circular. The High Court referred the parties to arbitration since there was an arbitration clause in the construction contract. Meanwhile, Ssangyong approached the High Court seeking protection against the retrospective application of the Circular by NHAI. The High Court granted an injunction in favour of Ssangyong restraining NHAI from implementing the said Circular retrospectively.

The dispute was then referred to arbitration. The majority in the tribunal favoured NHAI and held that the Circular can be applied retrospectively whereas one of the members of the tribunal gave a dissenting award in favour Ssangyong. The majority award applied certain government guidelines as per which it was stated that the charging as per new prices provided through Circular is imperative and therefore, required.

The majority award was challenged before the High Court under Section 34 of the Act. The challenge petition was dismissed by the High Court holding that the scope of interference is limited under Section 34 of the Act. This decision was appealed under Section 37 of the Act before the Division Bench of the High Court but it yielded the same result. This decision of Division Bench is assailed before the Supreme Court in the present case.

Applicable Legal Principles

Section 34(1),(2) & (2A) of the Act as amended by Amendment 2015

Section 34 – Application for setting aside arbitral award

(1) Recourse to a Court against an arbitral award may be made only by an application for setting aside such award in accordance with sub-section (2) and sub-section (3).

(2) An arbitral award may be set aside by the Court only if—

(a) the party making the application furnishes proof that—

(i) a party was under some incapacity, or

(ii) the arbitration agreement is not valid under the law to which the parties have subjected it or, failing any indication thereon, under the law for the time being in force; or

(iii) the party making the application was not given proper notice of the appointment of an arbitrator or of the arbitral proceedings or was otherwise unable to present his case; or

(iv) the arbitral award deals with a dispute not contemplated by or not falling within the terms of the submission to arbitration, or it contains decisions on matter beyond the scope of the submission to arbitration:

Provided that, if the decisions on matters submitted to arbitration can be separated from those not so submitted, only that part of the arbitral award which contains decisions on matters not submitted to arbitration may be set aside; or

(v) the composition of the arbitral tribunal or the arbitral procedure was not in accordance with the agreement of the parties, unless such agreement was in conflict with a provision of this Part from which the parties cannot derogate, or, failing such agreement, was not in accordance with this Past; or

(b) the Court finds that—

(i) the subject-matter of the dispute is not capable of settlement by arbitration under the law for the time being in force, or

(ii) the arbitral award is in conflict with the public policy of India.

Explanation 1.– For the avoidance of any doubt, it is clarified that an award is in conflict with the public policy of India, only if,–

(i) the making of the award was induced or affected by fraud or corruption or was in violation of section 75 or section 81; or

(ii) it is in contravention with the fundamental policy of Indian law; or

(iii) it is in conflict with the most basic notions of morality or justice.

Explanation 2.– For the avoidance of doubt, the test as to whether there is a contravention with the fundamental policy of Indian law shall not entail a review on the merits of the dispute.

(2A) An arbitral award arising out of arbitrations other than international commercial arbitrations, may also be set aside by the Court, if the Court finds that the award is vitiated by patent illegality appearing on the face of the award:

Provided that an award shall not be set aside merely on the ground of an erroneous application of the law or by re-appreciation of evidence.

Parties Contentions

Ssangyong contended as under:

  • that Section 34(2)(a)(iv) of the Act was attracted to the facts of the present case as the majority award contained decisions on matters beyond the scope of the submission to arbitration. It was argued that vide majority award, a new contract was substituted by the actual contract between the parties amounting to a novation of the old agreement and the old formula contained in the contract, which would be a decision on a matter beyond the scope of the submission to arbitration;
  • that the award was in conflict with the public policy of India, being contrary to the fundamental policy of Indian law as well as the most basic notions of justice and thus hit by Section 34(2)(b)(ii) of the Act. This argument was premised on the contention that rewriting of the terms of the contract ought to shock the conscience of the Court, as a new contract was foisted on one of the parties unilaterally;
  • that the principles of natural justice were violated and, therefore, Section 34(2)(a)(iii) of the Act would also be attracted as the government guidelines were never produced before the arbitrators, and the arbitrators applied the said guidelines behind the back of the parties.

NHAI argued that the issue of applying the new formula as per the Circular is a matter of interpretation of the agreement in which the arbitrators’ view is final.

Court’s Analysis and Observations

Since the Section 34 petition in the present case is dated 30.07.2016, the first question decided by the Court was whether the amendments made in Section 34 of the Act by the Arbitration & Conciliation (Amendment) Act, 2015 (Amendment Act, 2015) are applicable to applications filed under Section 34 to set aside  arbitral awards made after 23.10.2015. The Court held as that the Amendment Act, 2015 would apply to Section 34 petitions that are made after 23.10.2015 (relying on Board of Control for Cricket in India v. Kochi Cricket (P.) Ltd. and Ors., (2018) 6 SCC 287).

Further, the Court has made following observations:

  • that the clarification provided by the Amendment Act, 2015 in Section 34(b)(ii)(Explanation 1 & 2) of the Act which had clarified the ambit of “public policy of India” cannot be applied retrospectively since the law as it was post amendment 2015 regarding “public policy of India” has been changed substantively;
  • that “public policy of India” is now constricted to mean
  • firstly, that a domestic award is contrary to the fundamental policy of Indian law, or
  • secondly, that such award is against basic notions of justice
  • Insofar as the domestic awards made in India are concerned, an additional ground is now available under sub-section (2A) added by the Amendment Act, 2015 to Section 34. Here, there must be patent illegality appearing on the face of the award, which refers to such illegality as goes to the root of the matter but which does not amount to mere erroneous application of the law. Therefore, what is not subsumed within “the fundamental policy of Indian law”, namely, the contravention of a statute not linked to public policy or public interest, cannot be brought in by the backdoor when it comes to setting aside an award on the ground of patent illegality;
  • that re-appreciation of evidence, which is what an appellate court is permitted to do, cannot be permitted under the ground of patent illegality appearing on the face of the award;
  • that a mere contravention of the substantive law of India, by itself, is no longer a ground available to set aside an arbitral award. However, it would remain, for if an arbitrator gives no reasons for an award and contravenes Section 31(3) of the Act, that would certainly amount to a patent illegality on the face of the award;
  • that the construction of the terms of a contract is primarily for an arbitrator to decide, unless the arbitrator construes the contract in a manner that no fair-minded or reasonable person would. In short, that the arbitrator’s view is not even a possible view to take;
  • that if the arbitrator wanders outside the contract and deals with matters not allotted to him, he commits an error of jurisdiction. This ground of challenge will now fall within the new ground added under Section 34(2A);
  • that a decision which is perverse, as while no longer being a ground for challenge under “public policy of India”, would certainly amount to a patent illegality appearing on the face of the award. Thus, a finding based on no evidence at all or an award which ignores vital evidence in arriving at its decision would be perverse and liable to be set aside on the ground of patent illegality;
  • that a finding based on documents taken behind the back of the parties by the arbitrator would also qualify as a decision based on no evidence inasmuch as such decision is not based on evidence led by the parties, and therefore, would also have to be characterised as perverse;
  • that where matters, though not strictly in issue, are connected with matters in issue, they would not readily be held to be matters that could be considered to be outside or beyond the scope of submission to arbitration for the purposes of Section 34(2)(a)(iv) of the Act;
  • that where an arbitral tribunal has rendered an award which decides matters either beyond the scope of the arbitration agreement or beyond the disputes referred to the arbitral tribunal, the arbitral award could be said to have dealt with decisions on matters “beyond the scope of submission to arbitration”. Thus, in the guise of misinterpretation of the contract, and consequent “errors of jurisdiction”, it is not possible to state that the arbitral award would be beyond the scope of submission to arbitration if otherwise the aforesaid misinterpretation (which would include going beyond the terms of the contract), could be said to have been fairly comprehended as “disputes” within the arbitration agreement, or which were referred to the decision of the arbitrators;
  • that if an arbitrator is alleged to have wandered outside the contract and dealt with matters not allotted to him, this would be a jurisdictional error which could be corrected on the ground of “patent illegality”, which would not apply to international commercial arbitrations that are decided under Part II of the Act.

Conclusions

Applying the above findings on the facts of the case, the Court held as under

  • that the government guidelines that were referred to and strongly relied upon by the majority award were never in evidence before the arbitral tribunal. Thus, Ssangyong would be directly affected as it would otherwise be unable to present its case, not being allowed to comment on the applicability or interpretation of those guidelines. For this reason, the majority award was set aside under Section 34(2)(a)(iii) (‘party was otherwise unable to present his case’);
  • that the parties were at issue on the dispute as to application of the Circular is clearly something raised and argued by the parties and is certainly something which would fall within the arbitration clause or the reference to arbitration that governs the parties. This being the case, this argument would not obtain and Section 34(2)(a)(iv) (‘matters beyond the scope of submission to arbitration’), as a result, would not be attracted;
  • that the majority award has created a new contract for the parties by applying the unilateral Circular and by substituting a workable formula under the contract by another formula de hors the parties’ contract. This being the case, a fundamental principle of justice has been breached, namely, that a unilateral addition or alteration of a contract can never be foisted upon an unwilling party, nor can a party to the agreement be liable to perform a bargain not entered into with the other party. Clearly, such a course of conduct would be contrary to fundamental principles of justice as followed in this country and shocks the conscience of this Court which is a ground to set aside the award under Explanation 1 (ii)&(iii) of Section 34(2)(b)(ii) of the Act.
  • Thus, the majority award was set aside.

My Comments

On various aspects dealt in this case, my views are as under:

On the issue of application of amendments made in Section 34 by Amendment Act, 2015, should be applied retrospectively or prospectively, I see a clear misunderstanding of the dictum of this case in a post I recently read. The Amendment Act, 2015 has clarified the term “Public Policy of India” by providing two Explanations i.e. 1 & 2 under Section 34(2)(b)(ii) and adding another ground of “patent illegality” under Section 34(2A) of the Act. Let’s understand this by means of algebra.

Let us assume that Section 34(2)(b)(ii) is ‘A’ and 34(2A) is ‘B’. Now before Amendment, 2015, A was there but after the amendment, 2015, A was further supplanted by Explanation 1 & 2 and has now become say ‘A+1+2’. Then, according to this judgement, Section 34 petition filed before the effective date of Amendment, 2015 i.e. 23.10.2015 should not be decided by A+1+2 since they were filed when the position was only limited to A and not A+1+2.

Further such petition, in no way, can be decided on B since it was only introduced later and therefore, B was not a ground available to the party challenging the award before the Amendment, 2015. The relevant observations of Hon’ble Mr Justice R.F. Nariman covering this aspect is reproduced below:

“11. There is no doubt that the amendments made in Explanations 1 and 2 to Section 34(2)(b)(ii) have been made for the avoidance of any doubt, which language, however, is not found in Section 34(2A). Apart from the anomalous position which would arise if the Section were to be applied piecemeal, namely, that Explanations 1 and 2 were to have retrospective effect, being only to remove doubts, whereas sub-section (2A) would have to apply prospectively as a new ground, with inbuilt exceptions, having been introduced for the first time, it is clear that even on principle, it is the substance of the amendment that is to be looked at rather than the form. Therefore, even in cases where, for avoidance of doubt, something is clarified by way of an amendment, such clarification cannot be retrospective if the earlier law has been changed substantively

Further, this position of law was already settled by the Lordships in Board of Control for Cricket in India v. Kochi Cricket (P.) Ltd. and Ors., (2018) 6 SCC 287 wherein it was held that the Amendment Act, 2015 as a whole, is prospective in nature.

With regard to ‘dispute not falling within the terms of submission’ or ‘matter beyond the scope of submission’ as a ground to set aside the award, the Court has followed that although categorical rules are impossible to formulate in this regard, the decisive issue is whether the relief granted by the arbitrators was subsumed within or reasonably related to what has been requested by the parties. This ground applies where the arbitral tribunal has improperly decided the matters that had not been submitted to it or failed to decide matters that had been submitted to it. Further, this ground ought to be construed narrowly and should never lead to a re-examination of the merits of the award.

With regard to countervailing public policy, in determining whether the award is countervailing public policy, it is important to consider both the subject nature of the public policy, the degree of violation of that public policy and the consequences of the violation.

And last but not the least, the celebrated doctrine of audi alteram partem rule is a ground for challenging an award and it triggers if the award creditor has not been given any reasonable opportunity to present its case while reaching out to the conclusions drawn by the arbitral tribunal in its award.

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