The case of Ssangyong Engineering & Construction Co. Ltd. v. National Highways Authority of India (NHAI) (2019) is a landmark judgment by the Supreme Court of India that significantly shaped the jurisprudence on arbitral awards under the Arbitration and Conciliation Act, 1996 (as amended in 2015). This case is particularly relevant for arbitration in infrastructure projects, such as road and highway developments, as it clarifies the scope of judicial intervention in arbitral awards under Section 34 (setting aside an award) and the grounds of public policy and patent illegality. Below is a detailed analysis of the case, covering its background, facts, legal issues, court’s reasoning, judgment, and its implications, tailored to the context of arbitration in road projects like those under the HAM or EPC frameworks.

Case Citation

  • Case: Ssangyong Engineering & Construction Co. Ltd. v. National Highways Authority of India (NHAI)
  • Citation: (2019) 15 SCC 131
  • Court: Supreme Court of India
  • Bench: Justices R.F. Nariman, Aniruddha Bose, and V. Ramasubramanian
  • Date of Judgment: May 8, 2019

Background

  • Context: The case arose from a dispute between Ssangyong Engineering & Construction Co. Ltd. (a South Korean company) and the National Highways Authority of India (NHAI) over a road construction contract. The contract involved the four-laning of a section of National Highway 26 in Odisha, India, under an agreement dated May 31, 2006.
  • Contractual Framework: The agreement was based on a standard form contract, likely similar to FIDIC or NHAI’s model agreements, involving construction obligations, payment terms, and dispute resolution through arbitration.
  • Dispute Trigger: The primary dispute centered on the type of bitumen to be used for the road construction. The contract specified Bitumen 60/70 as per Indian Standards (IS:73:1992). However, the Ministry of Road Transport and Highways (MoRTH) issued a circular in 2010 mandating the use of Crumb Rubber Modified Bitumen (CRMB) or Polymer Modified Bitumen (PMB) for enhanced durability, which was costlier. Ssangyong claimed additional costs for using CRMB/PMB, while NHAI argued that the contract’s fixed price covered such changes.

Facts of the Case

  1. Contractual Obligation:
    • The contract required Ssangyong to construct a section of NH-26 using Bitumen 60/70, with a fixed contract price.
    • Clause 28.2 of the agreement allowed price adjustments for changes in raw material costs (e.g., bitumen) based on a formula tied to the Wholesale Price Index (WPI).
  2. MoRTH Circular:
    • In 2010, MoRTH issued a circular mandating CRMB/PMB for national highways to improve road longevity, post-dating the contract.
    • Ssangyong incurred higher costs for CRMB/PMB, which were not accounted for in the original contract price or WPI-based adjustments.
  3. Dispute:
    • Ssangyong sought additional payment for the increased costs, arguing that the MoRTH circular constituted a change in law or a variation under the contract.
    • NHAI rejected the claim, asserting that the contract’s fixed price included all bitumen types, and the circular was not binding as it was issued after the contract.
  4. Arbitration:
    • The dispute was referred to a three-member arbitral tribunal under the Arbitration and Conciliation Act, 1996.
    • Majority Award: The tribunal (by a 2:1 majority) ruled in favor of NHAI, holding that:
      • The MoRTH circular was not a “change in law” under the contract, as it was a guideline, not a statutory mandate.
      • The contract’s fixed price and WPI adjustment clause covered the cost increase.
      • Ssangyong was not entitled to additional payment.
    • Dissenting Opinion: The dissenting arbitrator argued that the circular effectively mandated CRMB/PMB, constituting a change in law or variation, entitling Ssangyong to additional costs.
  5. Section 34 Challenge:
    • Ssangyong challenged the majority award under Section 34 before the Delhi High Court, arguing that it was perverse, against public policy, and patently illegal.
    • Delhi High Court (Single Judge): Upheld the majority award, finding no grounds for interference under Section 34.
    • Delhi High Court (Division Bench): Reversed the Single Judge’s order, setting aside the majority award on grounds of patent illegality and public policy, citing the tribunal’s failure to consider the MoRTH circular’s impact and the dissenting opinion’s reasoning.
  6. Appeal to Supreme Court:
    • NHAI appealed to the Supreme Court, challenging the Division Bench’s decision to set aside the award.
    • Ssangyong cross-appealed, seeking enforcement of the dissenting opinion or a fresh arbitration.

Legal Issues

The Supreme Court addressed the following key issues:

  1. Scope of Judicial Interference under Section 34:
    • What constitutes valid grounds for setting aside an arbitral award under Section 34(2)(b)(ii) (public policy) and Section 34(2A) (patent illegality)?
  2. Public Policy and Patent Illegality:
    • Did the majority award violate India’s public policy or exhibit patent illegality by ignoring the MoRTH circular’s impact?
  3. Interpretation of Contract Terms:
    • Was the tribunal’s interpretation of the contract (fixed price and WPI clause) so perverse as to warrant interference?
  4. Role of Dissenting Opinion:
    • Can a dissenting opinion influence the court’s decision under Section 34?
  5. Remedy for Set-Aside Award:
    • If the award is set aside, should the court remit the matter to the tribunal or substitute the majority award with the dissenting opinion?

Court’s Reasoning

The Supreme Court, led by Justice R.F. Nariman, provided a detailed analysis, building on precedents like Associate Builders v. DDA (2015) and ONGC v. Western Geco International Ltd. (2014), and clarified the post-2015 amendment scope of Section 34. The key points of reasoning are:

  1. Scope of Section 34 Post-2015 Amendment:
    • The 2015 amendment to the Arbitration and Conciliation Act narrowed the grounds for setting aside awards, emphasizing minimal judicial interference.
    • Public Policy (Section 34(2)(b)(ii)) includes:
      • Awards induced by fraud or corruption.
      • Violation of fundamental policy of Indian law.
      • Conflict with basic notions of morality or justice.
    • Patent Illegality (Section 34(2A), added in 2015) applies only to domestic arbitrations and requires illegality that goes to the root of the matter, not mere erroneous application of law or evidence.
    • The Court held that courts cannot re-evaluate evidence or merits, per McDermott International Inc. v. Burn Standard Co. Ltd. (2006).
  2. Analysis of the Majority Award:
    • The tribunal’s finding that the MoRTH circular was not a “change in law” was based on the contract’s definition, which required a statutory or legal change, not a guideline.
    • However, the Court found the tribunal’s interpretation perverse because:
      • The circular, issued by MoRTH, was effectively binding on NHAI, a government entity, as it reflected a policy shift for national highways.
      • Ignoring the circular’s mandatory nature and its cost impact on Ssangyong was a patent illegality, as it contradicted the contract’s variation and change-in-law clauses.
      • The tribunal failed to consider the practical necessity of CRMB/PMB, rendering the award unjust, per Section 28(3) (Arbitration Act, regard to contract terms).
    • The Court noted that the award violated the fundamental policy of Indian law by ignoring a government directive, impacting public infrastructure quality.
  3. Public Policy and Patent Illegality:
    • The Court clarified that patent illegality includes:
      • Failure to consider vital evidence (e.g., the MoRTH circular).
      • Perverse contract interpretation that shocks the conscience.
      • Disregard of mandatory legal provisions.
    • The majority award’s dismissal of the circular’s impact was a “grave miscarriage of justice,” warranting interference under Section 34(2A).
  4. Role of Dissenting Opinion:
    • The dissenting opinion was not binding but served as a “guide” to assess the majority’s reasoning.
    • The Court found the dissent’s view—that the circular constituted a change in law or variation—more aligned with the contract and evidence, supporting the Division Bench’s decision.
  5. Remedy for Set-Aside Award:
    • The Court rejected Ssangyong’s plea to enforce the dissenting opinion, as Section 34 does not allow substituting one award for another.
    • Instead, the Court set aside the majority award and remitted the matter to a new arbitral tribunal to reconsider the dispute, per Section 34(4), to cure the defect.

Judgment

  • Decision: The Supreme Court upheld the Delhi High Court Division Bench’s order, setting aside the majority arbitral award under Section 34(2)(b)(ii) (public policy) and Section 34(2A) (patent illegality).
  • Reasons:
    • The tribunal’s failure to recognize the MoRTH circular’s mandatory nature was a patent illegality.
    • The award violated public policy by undermining the quality of public infrastructure.
  • Remedy: The matter was remitted to a fresh arbitral tribunal for adjudication, with directions to consider the circular’s impact and contract terms.
  • Costs: No costs were awarded, given the complexity of the issue.

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