27 May 2019

UNILATERAL ADDITION TO CONTRACT VIOLATES BASIC NOTIONS OF JUSTICE

INTRODUCTION

The Hon’ble Supreme Court passed a landmark judgement in the matter of Ssangyong Engineering and Construction Company Limited vs National Highways Authority of India (NHAI) where it ruled that a unilateral addition or alteration to a contract cannot be foisted upon an unwilling party and such an act would be contrary to the fundamental principles of justice. This judgement also deals with the implication of amendments to the Arbitration and Conciliation Act, 1996 (Arbitration Act).

FACTS OF THE CASE:

• Ssangyong Engineering and Construction Company Limited (Ssangyong) entered into a works contractwith the National Highway Authority of India (NHAI).
  
  
• The works contract entered into between the parties had a price adjustment formula, which applied the Wholesale Price Index (WPI)published by Union Government based on the year 1993-94 (Old Series). The Union Ministry, from year 2010 onwards, started publishing WPI based on year 2004-2005 (New Series) and Ssangyong raised bills in accordance with the New Series. Thereafter in 2013, NHAI issued a circular adopting a new formula applying a linking factor based on 2009-10 to the old formula.
  
  
• Ssangyong opposed application of the aforesaid 2013 circular and raised dispute for unilateral modification of contract. The said dispute was referred to arbitration. The Arbitral Tribunal while adjudicating the dispute and passing the award, referred to the guidelines available on website of the Ministry of Commerce and Industry, which stated that establishment of a linking factor to connect the Old Series with New Series is necessary. The Arbitral Tribunal by a 2:1 majority upheld the implementation of NHAI’s 2013 circular. The dissenting Arbitrator expressed that 2013 circular and guideline cannot be applied as they were de hors the contract.
  
  
• The said award was challenged before the Hon’ble Delhi High Court by Ssangyong but the Hon’ble Delhi High Court upheld the award passed by the Arbitral Tribunal rejecting Ssangyong’s claim. The matter was appealed to the Hon’ble Supreme Court.

ISSUES

• Whether the award can be set aside under section 34(2)(a)(iii) of the Arbitration Act on the ground that the parties did not have a chance to argue on the guidelines relied by the Arbitral Tribunal while passing the award?
  
  
• Whether the award can be set aside under section 34(2)(a)(iv) of the Arbitration Act on the ground that new contract was made by applying the circular and applying a formula which did not form part of the original contract?
  
  
• Whether 2015 amendment to the Arbitration Act is applicable in the present case? The arbitration in this case was invoked prior to 2015 amendment and arbitration petition under section 34 of the Arbitration Act was filed after the 2015 amendments came into force. In the 2015 amendment, explanation was given to the term “public policy of India” under section 34 of the Arbitration Act. The said Amendment sought to do away with the expansive interpretation of the term ``public policy of India``.
  
  
• Whether unilateral addition or alteration in the contract is contrary to fundamental principles of justice?

SUPREME COURT HELD

• The Supreme Court held that the award needs to be set aside under section 34(2)(a)(iii) of the Arbitration Act, as the Arbitral Tribunal had relied on the guidelines which were not presented to the parties. Accordingly, the appellant never had a chance to argue on the said guidelines and present its case;
  
  
• The argument that a new contract was made by virtue of the circular and the award needs to be set aside under section 34(2)(a)(iv) of the Arbitration Act was rejected by the Supreme Court. The Supreme Court was of the view that arguments regarding applicability of the circular and other related issues were already argued before the Arbitral Tribunal. Therefore, the same would fall within the arbitration clause or the reference to arbitration governing parties;
  
  
• The Supreme Court also ruled that amendment to Section 34 of the Arbitration Act will be applicable in the present case; as petition under Section 34 of the Arbitration Act was filed after the Amendment, even though the arbitration proceeding commenced before amendment was enforced;
  
  
• The Supreme Court also ruled that any unilateral addition or alteration to the contract cannot be foisted upon an unwilling party and are in breach of fundamental principles of justice;
  
  
• Further, the Supreme Court invoked its powers under Article 142 of the Constitution of India and did not relegate the matter to Arbitral Tribunal for a fresh hearing, but upheld the minority award to ensure a speedy resolution of the dispute.

MHCO Comment: The aforesaid judgment passed by the Supreme Court gives clarity over number of issues, most important of them being applicability of amendment to the arbitration proceedings and unilateral alteration or additions being in breach of fundamental principles of justice. It is often seen in contracts entered by Governmental authorities that Government tries to unilaterally modify the contract without taking consent of other parties to a contract. This judgement would ensure that such additions and alterations do not take place without consent of all parties. The other important aspect of the judgement is that the Supreme Court invoked Article 142 of the Constitution of India for speedy resolution of the disputes which is very encouraging.

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