Sec.34 Arbitration Act- Unilateral Addition To Contract By Arbitral Tribunal Violates Most Basic Notions Of Justice : SC [Read Judgment]

Holding that "a unilateral addition or alteration of a contract can never be foisted upon an unwilling party", the Supreme Court has set aside an arbitral award on the grounds of it being in conflict with "most basic notions of justice" and thereby conflicting with "public policy of India" as per Section 34(2)(b)(ii)(iii) of the Arbitration and Conciliation Act 1996.

In addition to that, the Court held that the award was also liable to be set aside under Section 34(2)(a)(iii) on the finding that the party was rendered "unable to present his case".

Background

The matter arose out of a 2005 work contract between the National Highway Authority of India(NHAI) and Ssangyong Engineering and Construction Company, a Korean company. The contract had a price adjustment formula, which applied the Wholesale Price Index published by Union Government based on the year 1993-94. From 2010 onwards, the Union Ministry started publishing WPI based on 2004-05. The contractor raised the bills accordingly. In 2013, the NHAI issued a circular adopting a new formula applying a "linking factor" based on 2009-10 to the old formula.

The contractor opposed the application of 2013 circular as a unilateral modification of the formula . The dispute was referred to arbitration.

The arbitral tribunal by a 2:1 majority upheld the application of 2013 circular. While doing so, the majority award applied certain government guidelines of the Ministry of Commerce and Industry, which stated that the establishment of a linking factor to connect the Old Series with the New Series is necessary. The majority award further made it clear that these guidelines are available on the official website, though they were not on record in the proceedings.

The dissenting arbitrator expressly stated that neither the Circular nor the guidelines could be applied as they were de hors the contract between the parties.

The challenge made to the award under Section 34 before the Delhi High Court was not successful and the matter reached the Supreme Court at the instance of the Korean contractor.

2015 amendment applicable in this case

At the outset, the bench of Justices R F Nariman and Naveen Sinha considered the applicability of 2015 amendments to Section 34 in the instant case.

Referring to BCCI v Kochi Cricket Club, the bench said "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 date".

When arbitral tribunal could be said to have gone beyond the agreement

The appellant in SC had argued that Section 34(2)(a)(iv) of the 1996 Act was attracted to the facts of the case as the majority award contained decisions on matters beyond the scope of the submission to arbitration.

However, the bench did not accept this argument.

Referring to State of Goa v. Praveen Enterprises, the bench observed 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"

The bench further added the Section 34(2)(a)(iv) has to be construed narrowly and that it was not possible to say that the misinterpretation of contract by the tribunal would mean that it had gone 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"(See para 43).

Applying this to the facts, the bench observed the the applicability of 2013 circular came within the ambit of disputes referred to the tribunal:

"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 attracted."(para 47)

Party unable to present case

The bench however held that the award was hit by Section 34(2)(a)(iii).

It noted 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 relied upon the said guidelines by itself and stated that they are to be found on a certain website. The respondent also agreed that these guidelines were never, in fact, disclosed in the arbitration proceedings.

In this backdrop, the Court observed :

"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)"(para 46)

Most basic notions of justice violated

The Court observed that the 2013 circular, which was unilaterally issued by the NHAI, could not bind the contractor without its consent. In fact the Circular itself expressly stipulated that it cannot apply unless the contractors furnish an undertaking/affidavit that the price adjustment under the Circular is acceptable to them. 

"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"(para 48), observed the Court.

This amounted to breaching the most basic notions of justice.

In the words of the Court :

"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"(para 48).

However,the Court cautioned that  this ground is available only in very exceptional circumstances.

"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".

"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", clarified the Court. 

Though the award was set aside, the Court did not relegate the parties to fresh round of arbitration. Instead, the minority award was upheld, invoking Article 142 of the Constitution, to do complete justice.

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