SC ruling in NHAI vs Ssangyong case streamlines arbitration awards process

Contractual disputes with government entities, whether public sector units (PSUs) or government bodies like the National Highways Authority of India (NHAI), often drag on because arbitration awards are challenged in the law courts. A principal reason for this is that not only do all losing parties to an arbitration file appeal in courts, but with PSUs, the option of not filing an appeal is generally not open for fear of corruption allegations and vigilance enquiries. With a large number of PSU contracts providing for arbitration as the mode of dispute resolution, there has been a steady increase in arbitration-related court proceedings, clogging the courts and slowing project implementation.

Last month, the Supreme Court sought to reduce this appeals overkill by setting out six grounds on which courts can appeal in arbitration cases. These criteria were based on past jurisprudence and in accordance with a 2015 amendment to the Arbitration and Conciliation Act, 1996, which had aimed to limit the number of arbitration awards that go in appeal. 

The apex court’s May ruling came in a case involving Ssangyong Engineering and NHAI. The court observed that NHAI had unilaterally altered the contract and foisted the new terms of the contract upon Ssangyong without its consent. The arbitration award passed by a 2:1 majority had upheld the conduct of NHAI and allowed for the alteration to the contract, but the Supreme Court rejected this approach and observed that the majority award has in fact created a new contract for the parties. 

“The court concluded that the majority award was contrary to the most basic and fundamental principles of justice and, therefore, liable to be set aside. It also found that the award ought to be set aside under section 34 (2) (a) (iii) as Ssangyong was not unable to present its case,” explained Naresh Thacker, partner, Economic Laws Practice. 

This decision was significant because, in effect, the apex court had clarified that court intervention could be done only when: (a) an award was contrary to the fundamental policy of Indian law; (b) violated basic notions of justice or morality; (c) involved a patent illegality of facts on record; (d) lack of evidence; (e) militated against fair mind or reasonableness; (d) involved error of jurisdiction, or (f) if it warrants a review of the merits of dispute.

“Although the Supreme Court has addressed the grounds to set aside an arbitral award under section 34 of the Arbitration and Conciliation Act, 1996 on several occasions, this decision exhaustively reflects on the jurisprudence pre- and post the 2015 amendment,” Thacker said.

Section 34 of the Act deals with filing of application in courts for setting aside an arbitration award. The 2015 amendment added an explanation to section 34, which stated that an award is in conflict with the public policy of India, only “if the making of the award was induced or affected by fraud or corruption” or in contravention with the fundamental policy of Indian law or in conflict with the most basic notions of morality or justice. 

The amendment also said an arbitral award arising out of arbitrations other than international commercial arbitrations would be set aside by the court, if the court finds that the award is vitiated by patent illegality, provided that an award will not be set aside merely on the ground of an erroneous application of the law or by re-appreciation of evidence.

In Thacker’s view, the Supreme Court consciously clarified that the Ssangyong award shook the conscience of the court, and the ground that an award contravenes public policy of India as it violates the “most basic notions of justice” can only be applied in “exceptional circumstances”. 

“The Supreme Court has forewarned that “under no circumstances can any court interfere with an arbitral award on the ground that justice has not been done” as such interference would be an entry into the merits of the dispute which is against the tenets of section 34,” Thacker added. 

Usually in line with the pro-arbitration spirit, courts are careful while applying grounds to set aside an award. The NHAI case is a welcome exception as it sets precedent that PSUs cannot act unilaterally and to the disadvantage of parties with lower bargaining power. 

At the same time, since court interventions delay remedies through arbitration, Thacker says courts are wary of frivolous applications under section 34 of the Act and have even imposed costs on parties filing such applications. “When applicants have failed to make a case under section 34 of the Act, courts have dismissed applications. The intent of the courts to further speedy resolution of disputes has come through in Ssangyong as well — it upheld the minority award instead of referring the matter for fresh arbitration.”

Ramesh K Vaidyanathan, managing partner, Advaya Legal pointed out that the judgement does not in any way set out a new interpretation of the grounds on which judicial review of arbitration awards can takes places. It deals more with the applicability of the 2015 amendments to cases where the arbitration began before the amendment came into effect but court proceedings started later. 

The 2015 amendments had, in fact, minimised the grounds of challenge of arbitral awards. Under the new law, there is no scope to re-appreciate merits unless the award attracts one of the grounds mentioned in the amended section 34. “In other words, unless special circumstances exist, the courts would ordinarily uphold the arbitral award,” said Vaidyanathan.