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Maitrii Dani

  1. CITATION : AIR 2019 SC 5041

  2. BENCH: R.F. Nariman and Vineet Saran

  3. RATIO: Setting aside of the majority arbitral award by a court under a S.34 application does not give effect to the minority arbitral award. Fresh arbitral proceedings need to be conducted in such a case.

  4. RELEVANT FACTS: A contract was awarded by NHAI (“Respondent”), to Ssangyong Engineering & Construction Co. Ltd. (“Appellant”), for the construction of a four-lane bypass in Madhya Pradesh. The contract provided for a monthly compensation to the Appellant for inflation in prices of construction materials as per the Wholesale Price Index (WPI) method following 1993-94 as the base year. The Respondent later issued a Policy Circular (“Circular”) which reduced the price adjustment available to the Appellant under the Contract. Disputes arose when the Respondent applied the Circular to the Contract despite a condition in the Circular that it would only apply if the contractor in question consents. The Appellant filed a writ petition challenging the validity of the Circular before the High Court of Madhya Pradesh, which was dismissed. The dispute was then referred to the Dispute Adjudication Board (DAB) as per the Contract, and at the same time the Delhi High Court restrained the Respondent from implementing the Circular pending the arbitral proceedings. The majority of the DAB upheld the revision as being within the Contract. Aggrieved, the Appellant referred the dispute to a 3-member Arbitral Tribunal. The majority of the Tribunal applying guidelines of the Ministry of Commerce and Industry (“Guidelines”), permitted payments to be made with reference to the Circular. The minority, however, held the revision to be de hors the Contract. The Appellant challenged the award u/S.34 of the Act before the Delhi High Court as being against public policy. The judge held that though he agreed with the minority arbitral award, the majority award was also plausible and hence could not be interfered with. The matter was then appealed before the Supreme Court of India.

  5. ISSUE: Whether majority award had created new contract for parties by applying unilateral circular and was liable to be set aside

  6. RULES: Arbitration and Conciliation Act, 1996 – Section 34

  7. CASE(S) RELIED ON: Board of Control for Cricket in India v. Kochi Cricket (P.) Ltd. and Ors. (2018) 6 SCC 287

  8. ANALYSIS: The Court noted that the interpretation of the term ‘public policy of India’ had been narrowed down by the Arbitration and Conciliation (Amendment) Act 2015 (“2015 amendment”); and found that amendments to S.34 of the Act, especially the doing away of the wide interpretation of the term ‘public policy of India’, were substantive in nature. The Court thus affirmed its findings in Board of Control for Cricket in India v. Kochi Cricket (P.) Ltd. and Ors. ((2018) 6 SCC 287), where it held that the 2015 amendments shall only apply prospectively to applications filed on or after the commencement of the Act on 23.10.2015, irrespective of the date of commencement of the arbitral proceedings. The arbitration under question commenced before the coming into force of the 2015 amendments, but since the S.34 application in the present case was filed on 30.07.2016, the amended provision was held to be applicable to this case. The Court then went on to clarify the interpretation that should be given to ‘public policy’ u/S.34 of the Act. The 246th Report of the Law Commission of India (“Report”) stated that introduction of ‘patent illegality’ u/S.34 of the Act by the 2015 amendment widened the scope of inquiry under this provision than that available u/S.48 of the Act. The Court thus relying on this Report held that the scope of ‘public policy’ under S.34 and S.48 of the Act is not the same. Further relying on the Supplementary to the 246th Report of the Law Commission of India which was released in February 2015, the Court noted that wide interpretation given to terms ‘fundamental policy of Indian Law’ and ‘most basic notions of morality or justice’ u/S.34 of the Act would be against the intent and purposes of the Act. The Court further noted that the Guidelines which formed the basis of the majority arbitral award were not in evidence before the Tribunal, which itself stated that the said Guidelines were to be found on a “certain website”. Hence the Appellant, who was directly affected by their application, was denied the opportunity to comment on their interpretation or application to the Contract, and therefore to fully present its case, thus violating S.34(2)(a)(iii) of the Act. The Court further observed that such unilateral alteration of the Contract amounted to the Tribunal rewriting the Contract. This, the Court held breached the ‘most basic notions of justice’ under the ground of public policy and shocked the conscience of the Court. The Court however cautioned that S.34(2)(b)(ii) should only be used in very exceptional circumstances. Thus, applying S.34(2)(a)(iii) and S.34(2)(b)(ii) of the Act Court observed that the Circular could not unilaterally bind the Appellant without consent, and set aside the arbitral award. The Court further observed that in such cases the matter needs to be remanded back to the arbitral tribunal for fresh consideration. However, requiring the Parties to start fresh arbitral proceedings would delay the resolution of disputes to an extent that would be contrary to the objective of the Act. Thus, setting aside the judgment of the Delhi High Court, the Court exercised its plenary power u/Art.142 of the Constitution of India (“Constitution”) and gave effect to the minority arbitral award which held the Circular to be de hors the Contract.

  9. CONCLUSION: The majority award unilaterally applied the Circular which substituted the formula under the Contract with another formula which was de hors the Contract, thus creating a new contract between the Parties.

  10. REMARK: Art.142 of the Constitution gives the Supreme Court the power to make such orders as may be necessary for doing “complete justice” in a case. In Delhi Development Authority v. Skipper Construction Co. (1996 AIR 2005), this power was deliberately left undefined, so that it could be adapted according to a given situation. However, later in Supreme Court Bar Association v. Union of India (1998 INSC 225), this power was restricted to the extent that the Supreme Court could not neglect express statutory provisions in its exercise of this plenary power. A court is not allowed to modify an award when dealing with an application u/S.34 of the Act. To reduce judicial interference and reinforce party autonomy, the award must be set aside and fresh arbitral proceedings should be conducted. This position was recently reiterated by the Delhi High Court in Delhi Metro Rail Corporation Ltd. v. Delhi Airport Metro Express (FAO (OS) (COMM) 58/2018 & CM Nos. 13434/2018, 17581/2018 & 31531/2018). Though this was accepted by the Court in the present case, it further observed that fresh arbitral proceedings would lead to substantial delay, defeating the objective of the Act to promote speedy dispute resolution. Thus, drawing a balance between party autonomy and efficiency, the Court exercised its plenary power u/Art.142 of the Constitution by declaring the minority decision as the enforceable award between the Parties. However, such declaration begs the question as to whether the upholding of minority awards in the past has been improper; since in the past, in cases like Modi Entertainment v. Prasar Bharati (OMP 39 of 2008), and ONGC v. Interocean Shipping (Arbitration Petition 549/2013), the courts have upheld the minority awards without the use of the plenary power u/Art.142 of the Constitution. The use of the plenary power also raises the possibilities of parties appealing disputes up to the Supreme Court in the hope of getting favourable judgments u/Art.142 of the Constitution. Thus, in the interest of certainty, suitable amendments should be made in the Act. Despite these issues raised by this judgment, its impact may not be much since the Supreme Court in State of Punjab v. Rafiq Masih (Special Leave Petition (C) No.11684 of 2012) held that orders u/Art.142 of the Constitution do not constitute a binding legal precedent.  astly, some commentators[1] have found the Court’s characterisation of the 2015 amendments as prospective as wholly misleading. In my view, these commentators fail to make a distinction between commencement of arbitral proceedings and commencement of court proceedings. They thus conclude that by applying the 2015 amendments to S.34 applications for arbitral proceedings that initiated before 23.10.2015, the Court has given a retrospective application to the 2015 amendments. However, this is not the case. Court proceedings commence once an application is filed u/S.34 of the Act after the termination of arbitral proceedings in front of an arbitral tribunal. Keeping this distinction in mind, the criticism is unfounded, and the Court’s applicability of S.34 to applications made after 23.10.2015 is a clear prospective application of the 2015 amendments.

[1] Vikas Mahendra, ‘Section 34 of the Arbitration Act: Prospective but Retrospective’ (Bar & Bench, May 9, 2019) < https://www.barandbench.com/columns/section-34-arbitration-act-prospective-but-retrospective> accessed 13th March 2020; ‘An analysis of S.34 of the Arbitration and Conciliation Act, 1996 by Rhea Tewary’ (MappingADR, March 9, 2019) < http://mappingadr.in/an-analysis-of-s-34-of-the-arbitration-conciliation-act-1996-by-rhea-tewary/> accessed 13th March 2020.

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