Case: SSANGYONG ENGINEERING AND CONSTRUCTION CO. LTD Vs. NATIONAL HIGHWAYS AUTHORITY OF INDIA(NHAI)

The respondent, National Highways Authority of India [ NHAI], invited bids for construction of a four-lane bypass on National Highway 26 in the State of Madhya Pradesh. The appellants bid was accepted vide its letter of acceptance dated 30.12.2005, for a total contract value of INR 219,01,16,805/-. The appellant before us is a company registered under the laws of the Republic of Korea, whereas the respondent is a Government of India undertaking, responsible for construction of National Highways throughout the territory of India. The components used in execution of work for which price adjustment was payable to the appellant are labour, plant and machinery, petroleum, oil and lubricant (POL), cement, steel, bitumen, and other local materials. Price adjustment for four of these components, i.e., cement, steel, plant and machinery, and other local materials was agreed to be calculated as per a formula given in sub-clause 70.3 of the contract. The relevant portion of sub-clause 70.3 states as under:ii. Adjustment for Cement ComponentPrice adjustment for increase or decrease in the cost of cement procured by the contractor shall be paid in accordance with the following formula:Vc = increase or decrease in the cost of work during the month under consideration due to change in rates of componentC0 = the all India average wholesale price index for cement on the day 28 days prior to the closing date of submission of bids, as published by Ministry of Industrial Development, Government of India, New DelhiC1 = the all India average wholesale price index for cement on the day 28 days prior to the last day of the period to which a particular interim payment certificate is related, as published by Ministry of Industrial Development, Government of India, New DelhiPc = percentage of Cement componentInsofar as the component C 0 is concerned, the date which is 28 days prior to the last submission of bids is 29.09.2005, which is the base date for calculation of price adjustment, since it is common ground that the date of submission of the bid is 27.10.20053. The price adjustment was being paid to the appellant every month in terms of the agreed formula under sub-clause 70.3 by using the Wholesale Price Index [ WPI] published by the Ministry of Industrial Development, which followed the years 1993-94 = 100 [ Old Series]. However, with effect from 14.09.2010, the Ministry of Industrial Development stopped publishing the WPI for the Old Series and started publishing indices under the WPI series 2004-05 = 100 [ New Series]. It is important to note that even under this New Series, the WPIs for the previous years beginning from April, 2005 were also being published by the Ministry. This being so, as both the indices C 1 and C o were available to the appellant under the New Series for calculating price adjustment, the appellant raised its bills accordingly. It is undisputed that payments of 90% of the monthly bills on this basis were made for the period September, 2010 to February, 2013. On 15.02.2013, the respondent issued a Policy Circular [ Circular], in which a new formula for determining indices was used by applying a linking factor based on the year 2009-10. However, this Circular expressly stated:Thus, payment on account of price adjustment may be made by adopting the above process subject to the condition that the contractors furnish undertaking / affidavit that this price adjustment is acceptable to them and they will not make any claim, whatsoever, on this account in future after this payment4. After this Circular, the respondent stated that the Circular would have to be applied to the contract in question, as a result of which, a linking factor would have to be provided by which the Old Series was connected to the New Series. The appellant never accepted this and knocked at the doors of the High Court of Madhya Pradesh through a writ petition in which it challenged the validity of the Circular. However, the High Court vide its order dated 03.04.2013 disposed of the writ petition with the observation that there exists a dispute resolution mechanism through the Dispute Adjudication Board, after which arbitration is also provided, and as the appellant had an efficacious alternative remedy, it was relegated to the same. The respondent then asked the appellant to give its consent to receive monthly payment under the Circular. The appellant submitted a conditional undertaking dated 17.05.2013, in which it was clearly stated:The above undertaking is without prejudice to the Contractors right to challenge the said Circular dated 15.02.2013 as per provisions of contract and other legal remedies available to the Contractor before the appropriate forum5. The appellant then approached the Delhi High Court vide an application under Section 9 of the Arbitration and Conciliation Act, 1996 [ 1996 Act], for interim protection against deduction and recoveries sought to be made by the respondent by applying the said Circular. The Delhi High Court, by its order dated 31.05.2013, restrained the respondent from implementing the said Circular retrospectively6. Meanwhile, the aforesaid dispute was referred to the Dispute Adjudicating Board as envisaged under sub-clause 67 of the contract. The Dispute Adjudicating Board, by its majority recommendation dated 31.10.2013, recommended a certain linking factor and then arrived at the figures of price adjustment in the aforesaid four materials by applying such linking factor. However, one of the members of the Dispute Adjudicating Board gave a dissenting note in favour of the appellant, recommending that in view of the express terms of the contract, the provisions contained in the impugned Circular cannot be applied for calculation of price adjustment. Aggrieved by the recommendations of the Dispute Adjudicating Board, the appellant issued a notice of dissatisfaction dated 19.11.2013, and referred the dispute to an arbitral tribunal consisting of three members. The appellant raised a claim of INR 2,01,42,827/- towards unpaid price adjustment for the period September 2010 up to May 2014, plus INR 1,00,86,417/- for interest on the aforesaid unpaid amount. The dispute that was thus referred to arbitration was a narrow one, namely, as to whether price adjustment would continue under the terms of the contract, or whether the Circular dated 15.02.2013, applying the linking factor, would have to be applied. Two out of three members of the arbitral tribunal, by their award dated 02.05.2016 made at New Delhi, after noting the arguments of both sides, held that the Circular could be applied as it was within contractual stipulations, as has been held by the Dispute Adjudicating Board, and hence, rejected the appellants claim. While doing so, the majority award applied certain government guidelines of the Ministry of Commerce and Industry, as per which it was stated that the establishment of a linking factor to connect the Old Series with the New Series is imperative, and therefore, required. The appellants argument that the linking factor is de hors the contract and not at all required was, therefore, rejected. The majority award further made it clear that these guidelines are available on a certain website, as they were not on record. Paragraph 13 of the guidelines was then referred to, and applying the arithmetic conversion method, which is one of the three methods referred to in the said paragraph, a linking factor was applied in accordance with the formula prescribed in the said method which is as follows:y = cx or c = y/xWhere y is average value of indices of 12 months for the Old Series and x for the New Series; c being conversion factor. Meaning thereby that relation between y and x is linear. Average of 12 months for x is taken 100Thus, the final majority award, based on the aforesaid linking factor, was as follows:9.1. Based on the findings above, we hold that introducing linkage factor is imperative and required for conversion of indices from the base 2004-05 series to the earlier series base 1993-94 as basis for determination of price adjustment. Linking factors for four items of work/materials involved in price adjustment, shall be as under:9.2. The final amount of price adjustment shall be worked out on the basis of above-mentioned linkage factors. After deducting the amount already paid to the Claimant, the amount payable to them against their claim shall be determined and the same shall be paid by the Respondent to the Claimant9.3. This amount shall also attract interest @ 10% per annum compounded monthly from due date of payment to the date of award, viz. 02.05.20169.4. Further interest @ 12% per annum, simple interest, shall be payable to the Claimant from 02.05.2016 onwards till the date of payments. No future interest however shall be payable in case the amounts are paid within 90 days of the date of the award, that is by 02.08.2016A dissenting award was given by Shri Dilip Namdeo Potdukhe, in which the learned dissenting arbitrator expressly stated that neither the Circular nor the guidelines could be applied as they were de hors the contract between the parties. Accordingly, the dissenting award awarded the claim of the claimant-appellant in full7. A Section 34 petition which was filed by the appellant was rejected by the learned Single Judge of the Delhi High Court, by a judgment and order dated 09.08.2016, in which it was held that a possible view was taken by the majority arbitrators which, therefore, could not be interfered with, given the parameters of challenge to arbitral awards. The learned Single Judge also went on to hold that the New Series published by the Ministry could be applied in the case of the appellant as the base indices for 2004-05 under the New Series were available. Having so held, the learned Single Judge stated that even though the view expressed in the dissenting award is more appealing, and that he preferred that view, yet he found that since the majority award is a possible view, the scope of interference being limited, the Section 34 petition was dismissed. A Section 37 appeal to the Division Bench of the Delhi High Court yielded the same result, by the impugned judgment dated 03.04.2017.

Reasoning: 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.12. There is no doubt that in the present case, fundamental changes have been made in the law. The expansion of public policy of India in ONGC Ltd. v. Saw Pipes Ltd., (2003) 5 SCC 705  [ Saw Pipes] and ONGC Ltd. v. Western Geco International Ltd., (2014) 9 SCC 263  [ Western Geco] has been done away with, and a new ground of patent illegality, with inbuilt exceptions, has been introduced. Given this, we declare that Section 34, as amended, will apply only to Section 34 applications that have been made to the Court on or after 23.10.2015, irrespective of the fact that the arbitration proceedings may have commenced prior to that date23. What is clear, therefore, is that the expression public policy of India, whether contained in Section 34 or in Section 48, would now mean the fundamental policy of Indian law as explained in paragraphs 18 and 27 of Associate Builders (supra), i.e., the fundamental policy of Indian law would be relegated to the Renusagar understanding of this expression. This would necessarily mean that the Western Geco (supra) expansion has been done away with. In short, Western Geco (supra), as explained in paragraphs 28 and 29 of Associate Builders (supra), would no longer obtain, as under the guise of interfering with an award on the ground that the arbitrator has not adopted a judicial approach, the Courts intervention would be on the merits of the award, which cannot be permitted post amendment. However, insofar as principles of natural justice are concerned, as contained in Sections 18 and 34(2)(a)(iii) of the 1996 Act, these continue to be grounds of challenge of an award, as is contained in paragraph 30 of Associate Builders (supra)24. It is important to notice that the ground for interference insofar as it concerns interest of India has since been deleted, and therefore, no longer obtains. Equally, the ground for interference on the basis that the award is in conflict with justice or morality is now to be understood as a conflict with the most basic notions of morality or justice. This again would be in line with paragraphs 36 to 39 of Associate Builders (supra), as it is only such arbitral awards that shock the conscience of the court that can be set aside on this ground25. Thus, it is clear that public policy of India is now constricted to mean firstly, that a domestic award is contrary to the fundamental policy of Indian law, as understood in paragraphs 18 and 27 of Associate Builders (supra), or secondly, that such award is against basic notions of justice or morality as understood in paragraphs 36 to 39 of Associate Builders (supra). Explanation 2 to Section 34(2)(b)(ii) and Explanation 2 to Section 48(2)(b)(ii) was added by the Amendment Act only so that Western Geco (supra), as understood in Associate Builders (supra), and paragraphs 28 and 29 in particular, is now done away with26. Insofar as 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. In short, 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 illegality27. Secondly, it is also made clear 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 award29. The change made in Section 28(3) by the Amendment Act really follows what is stated in paragraphs 42.3 to 45 in Associate Builders (supra), namely, 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 arbitrators view is not even a possible view to take. Also, 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)30. What is important to note is that a decision which is perverse, as understood in paragraphs 31 and 32 of Associate Builders (supra), 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. Additionally, 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 perverse31. Given the fact that the amended Act will now apply, and that the patent illegality ground for setting aside arbitral awards in international commercial arbitrations will not apply, it is necessary to advert to the grounds contained in Section 34(2)(a)(iii) and (iv) as applicable to the facts of the present case36. Sections 18, 24(3), and 26 are important pointers to what is contained in the ground of challenge mentioned in Section 34(2)(a)(iii). Under Section 18, each party is to be given a full opportunity to present its case. Under Section 24(3), all statements, documents, or other information supplied by one party to the arbitral tribunal shall be communicated to the other party, and any expert report or document on which the arbitral tribunal relies in making its decision shall be communicated to the parties. Section 26 is an important pointer to the fact that when an experts report is relied upon by an arbitral tribunal, the said report, and all documents, goods, or other property in the possession of the expert, with which he was provided in order to prepare his report, must first be made available to any party who requests for these things. Secondly, once the report is arrived at, if requested, parties have to be given an opportunity to put questions to him and to present their own expert witnesses in order to testify on the points at issue37. Under the rubric of a party being otherwise unable to present its case, the standard textbooks on the subject have stated that where materials are taken behind the back of the parties by the Tribunal, on which the parties have had no opportunity to comment, the ground under Section 34(2)(a)(iii) would be made out.39. So far as this defence is concerned, standard textbooks on the subject have held that the expression submission to arbitration either refers to the arbitration agreement itself, or to disputes submitted to arbitration, and that so long as disputes raised are within the ken of the arbitration agreement or the disputes submitted to arbitration, they cannot be said to be disputes which are either not contemplated by or which fall outside the arbitration agreement. The expression submission to arbitration occurs in various provisions of the 1996 Act.42. A conspectus of the above authorities would show 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, as understood in Praveen Enterprises (supra), the arbitral award could be said to have dealt with decisions on matters beyond the scope of submission to arbitration43. We therefore hold, following the aforesaid authorities, that 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 as understood by the authorities above. 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, as we have seen, would not apply to international commercial arbitrations that are decided under Part II of the 1996 Act. To bring in by the backdoor grounds relatable to Section 28(3) of the 1996 Act to be matters beyond the scope of submission to arbitration under Section 34(2)(a)(iv) would not be permissible as this ground must be construed narrowly and so construed, must refer only to matters which are beyond the arbitration agreement or beyond the reference to the arbitral tribunal45. Given these parameters of challenge, let us now examine the arguments of learned counsel on behalf of the appellant. There can be no doubt that the government guidelines that were referred to and strongly relied upon by the majority award to arrive at the linking factor were never in evidence before the Tribunal. In fact, the Tribunal relies upon the said guidelines by itself and states that they are to be found on a certain website. The ground that is expressly taken in the Section 34 petition by the appellant is as follows:It is pertinent to mention here that no such guidelines of the Ministry of Industrial Development had been filed on record by either of the parties and therefore, the Tribunal had no jurisdiction to rely upon the same while deciding the issue before it. Accordingly, the impugned Award is liable to be set aside46. Learned counsel for the respondent also agreed that these guidelines were never, in fact, disclosed in the arbitration proceedings. This being the case, and given the authorities cited hereinabove, it is clear that the appellant 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 example, the appellant could have argued, without prejudice to the argument that linking is de hors the contract, that of the three methods for linking the New Series with the Old Series, either the second or the third method would be preferable to the first method, which the majority award has applied on its own. For this reason, the majority award needs to be set aside under Section 34(2)(a)(iii)47. Insofar as the argument that a new contract had been made by the majority award for the parties, without the consent of the appellant, by applying a formula outside the agreement, as per the Circular dated 15.02.2013, which itself could not be applied without the appellants consent, we are of the view that this ground under Section 34(2)(a)(iv) would not be available, given the authorities discussed in detail by us. It is enough to state that the appellant argued before the arbitral tribunal that a new contract was being made by applying the formula outside what was prescribed, which was answered by the respondent, stating that it would not be possible to apply the old formula without a linking factor which would have to be introduced. Considering that the parties were at issue on this, the dispute as to whether the linking factor applied, thanks to the Circular dated 15.02.2013, 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), as a result, would not be attracted48. However, when it comes to the public policy of India argument based upon most basic notions of justice, it is clear that this ground can be attracted only in very exceptional circumstances when the conscience of the Court is shocked by infraction of fundamental notions or principles of justice. It can be seen that the formula that was applied by the agreement continued to be applied till February, 2013 – in short, it is not correct to say that the formula under the agreement could not be applied in view of the Ministrys change in the base indices from 1993-94 to 2004-05. Further, in order to apply a linking factor, a Circular, unilaterally issued by one party, cannot possibly bind the other party to the agreement without that other partys consent. Indeed, the Circular itself expressly stipulates that it cannot apply unless the contractors furnish an undertaking/affidavit that the price adjustment under the Circular is acceptable to them. We have seen how the appellant gave such undertaking only conditionally and without prejudice to its argument that the Circular does not and cannot apply. This being the case, it is clear that the majority award has created a new contract for the parties by applying the said unilateral Circular and by substituting a workable formula under the agreement by another formula de hors the agreement. 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. However, we repeat that this ground is available only in very exceptional circumstances, such as the fact situation in the present case. Under no circumstance can any Court interfere with an arbitral award on the ground that justice has not been done in the opinion of the Court. That would be an entry into the merits of the dispute which, as we have seen, is contrary to the ethos of Section 34 of the 1996 Act, as has been noted earlier in this judgment.