SSANGYONG ENGINEERING & CONSTRUCTION CO. LTD. VS. RESPONDENT NATIONAL HIGHWAYS AUTHORITY OF INDIA (NHAI) 2019/INSC/647:

DATE: 08.05.2019

COURT: Supreme Court of India

BENCH: Justice Rohinton Fali Nariman and Justice Vineet Saran

FACTS:

NHAI invited bids for the construction of a four-lane bypass on National Highway 26 in Madhya Pradesh, and Ssangyong Engineering & Construction Co. Ltd., a Korean company, was awarded the contract on 30 December 2005 for a total value of ₹219,01,16,805. The contract contained a price-adjustment mechanism under Clause 70.3, under which adjustments for cement, steel, plant and machinery, and other local materials were to be calculated using the Wholesale Price Index (WPI). After the Government introduced a new WPI series in 2010, NHAI continued making payments using the contractual formula until February 2013. Thereafter, on 15 February 2013, NHAI issued a policy circular introducing a new formula involving a “linking factor” between the old and new WPI series.

Ssangyong disputed the applicability of the new formula and claimed that the contractual formula under Clause 70.3 should continue to govern the price adjustment. The dispute was referred to a three-member arbitral tribunal. By a majority, the tribunal accepted NHAI’s position and applied the new formula, while the dissenting arbitrator found in favour of Ssangyong and awarded its claim. Ssangyong consequently challenged the majority arbitral award under Section 34 of the Arbitration and Conciliation Act, 1996 before the Delhi High Court. The Single Judge dismissed the challenge on 9 August 2016, holding that the majority view was a possible view, and the Division Bench dismissed Ssangyong’s appeal on 3 April 2017. Aggrieved by these decisions, Ssangyong approached the Supreme Court by way of a civil appeal arising from SLP (C) No. 19033 of 2017.

ISSUES:

The principal issues before the Supreme Court were whether the 2015 Amendment to the Arbitration and Conciliation Act, 1996 applied to the Section 34 proceedings; whether the majority arbitral award could be set aside under Section 34(2)(a)(iii) on the ground that Ssangyong had been denied a fair opportunity to present its case; whether the arbitral tribunal had exceeded the scope of its jurisdiction by applying NHAI’s unilateral circular and linking factor; and whether the award was contrary to the public policy of India under the amended Section 34(2)(b)(ii). The Court also considered the permissible scope of judicial interference with arbitral awards after the 2015 Amendment.

JUDGEMENT WITH REASONING:

The Supreme Court allowed the appeal, set aside the judgments of the Delhi High Court as well as the majority arbitral award, and upheld the minority award in favour of Ssangyong. The Court held that the majority award was vitiated principally because it relied upon government guidelines and material that had not been disclosed to the parties, thereby violating principles of natural justice, and because the contractual price-adjustment mechanism had effectively been replaced by a unilateral formula introduced by NHAI. Exercising its power under Article 142 of the Constitution, the Court directed that the minority award be enforced rather than sending the matter for a fresh arbitration.

The Court first examined the effect of the Arbitration and Conciliation (Amendment) Act, 2015 and held that the amended provisions of Section 34 applied because Ssangyong's Section 34 petition had been filed after the commencement of the Amendment Act. The Court explained that the 2015 Amendment had significantly narrowed the meaning of “public policy of India” and had done away with the expansive approach previously adopted in ONGC v. Western Geco International Ltd. In particular, the Court held that the earlier concept of “fundamental policy of Indian law” could no longer be used as a broad basis for reviewing the merits of an arbitral award. At the same time, principles such as natural justice, judicial approach, and the requirement that an adjudicatory authority act fairly and objectively remained fundamental to Indian law. The Court therefore emphasised that an arbitral tribunal cannot base its decision on material that was never disclosed to the parties or on which they were never given an opportunity to comment.

Applying these principles, the Court found that the majority arbitrators had relied upon undisclosed Government guidelines in determining the linking factor used to connect the old and new WPI series. Ssangyong had consequently been deprived of a meaningful opportunity to challenge the material that directly affected the determination of its contractual claim. The Court further held that NHAI's circular could not unilaterally alter the contractually agreed price-adjustment formula, as doing so effectively imposed a new contractual formula upon Ssangyong without its consent. This amounted to a violation of the basic principles of natural justice and the fundamental principle that an arbitral tribunal must decide the dispute in accordance with the contract between the parties. Although the Court recognised that errors in interpreting a contract ordinarily do not justify interference under Section 34, it found that the present case went beyond a mere erroneous interpretation because the majority award had effectively rewritten the contract and relied upon material that had not been disclosed to the appellant.

ANALYSIS:

The Supreme Court’s decision in Ssangyong Engineering & Construction Co. Ltd. v. National Highways Authority of India is significant for reaffirming the restricted scope of judicial intervention in arbitral awards following the 2015 amendment to the Arbitration and Conciliation Act, 1996. The Court clarified that the amended concept of “public policy of India” cannot be used as a means for courts to undertake a merits-based review of an arbitral award. However, arbitral autonomy is subject to basic procedural and substantive safeguards, including natural justice, a fair opportunity to present one’s case, and adherence to the terms of the contract. The Court distinguished between a mere erroneous interpretation of a contractual provision, which ordinarily does not justify interference under Section 34, and an award that fundamentally departs from the contractual framework agreed between the parties. Thus, the judgment strikes a balance between respecting the finality and autonomy of arbitration and ensuring that arbitral proceedings remain fair and legally sustainable.

The case further demonstrates that an arbitral tribunal cannot effectively rewrite or modify the contract under the guise of interpreting it. The majority tribunal’s reliance upon undisclosed Government guidelines and NHAI’s unilateral linking formula deprived Ssangyong of a proper opportunity to address material that substantially influenced the determination of its claim. The Supreme Court therefore found that the award suffered from a serious violation of natural justice and was contrary to the contractual bargain between the parties. Particularly significant was the Court’s decision to invoke Article 142 of the Constitution and enforce the minority award rather than remitting the matter for a fresh arbitration, thereby bringing the prolonged dispute to an effective conclusion. The judgment consequently serves as an important authority on the limits of arbitral jurisdiction, the application of the amended Section 34, and the principle that while courts must exercise restraint in reviewing arbitral awards, such restraint cannot extend to upholding an award founded upon procedural unfairness or a departure from the parties’ agreed contractual terms.