Wrongful interpretation of contract by Arbitral Tribunal - A violation of the Principles of Natural Justice

On April 8, 2024, the Delhi High Court, in the case of National Highway Authority of India V/s M/s Ssangyong Engineering And Construction Co. Limited, [O.M.P. (COMM) 340/2021 & I.A. 14705/2021] discussed at length what constitutes a violation of the public policy and natural justice for the purpose of setting aside an International Arbitration Award, as is elaborated hereunder in this article with brief facts and findings.  

The legislative intent while enacting the Arbitration and Conciliation Act, 1996, (hereinafter referred to as ‘the Act’) was that there should be limited intervention of the courts in arbitral proceedings, especially after the conclusion of the arbitration. It is a well-settled law that Section 34 of the Act, has a limited scope and the courts can only intervene if the conditions mentioned in the said provision are fully met.

The statutory provision and established judicial dictum that establish the criteria upon which an Arbitral Award may be set aside by the Courts, encompass three essential ingredients:

1. when the award contravenes the public policy;

2. when the award exhibits patent illegality; and

3. when the Arbitrator fails to adhere to the fundamental principle of natural justice.

The role of the courts is to determine whether the impugned award is riddled with any of the three conditions set out above.

The Hon’ble Supreme Court, in numerous judgements, have clarified that the grounds to challenge an international arbitral award would be even more restricted and can be interfered with only if it contravenes the public policy of the country.

In the context of a foreign award, any award which is contrary to (i) the fundamental policy of Indian law; (ii)  the interest of India; or (iii) Justice or morality, can be construed as contrary to the public policy of India and would be liable to be set aside.

The petitioner in the present case, an undertaking of the Government of India, invited bids for the construction of highways by private contractors.  

The respondent submitted its bid for the said contract and was awarded the same. An independent engineer firm [hereinafter referred to as 'engineer'] was appointed by the parties to supervise the contract performance.  The engineer was, inter alia, empowered to give decisions, opinions or consent, express his satisfaction or approval, or take action which may affect the rights and obligations of the employer or the contractor in terms of the contract.  

The agreement also contemplated resolving the disputes of the parties pertaining to decisions, opinions, determination, certification etc. through arbitration.

After the completion of the work by the respondent, the engineer issued a Defect Liability Certificate and recommended a certain sum accrued against the statement of completion submitted by the respondent company. Thereafter, the petitioner released 90 per cent of the amount against the statement issued by the engineer.

As per the agreement, the respondent company submitted the alleged final draft statement showing value of all the work done in accordance with the contract along with the outstanding amount as per the respondent.

Thereafter, disputes arose between the parties regarding the completion of work and due payments, and the same were referred for arbitration.

In the meanwhile, the engineer issued a Payment Certificate, subsequent to which the petitioner raised various grievances regarding completion of work and sought reply from the respondent and the engineer.

In response to the questions raised by the petitioner, the respondent wrote several letters assuring the compliance of the observations made by the petitioner.

During the pendency of the said disputes/ issues, the respondent company invoked arbitration and accordingly, an Arbitral Tribunal was constituted for the adjudication of the disputes wherein, the petitioner preferred a counterclaim for the recovery of excess payments made to the respondent company.  

The learned Tribunal passed an award (‘impugned award’ hereinafter), and held  the Payment Certificate to be the Final Statement and directed the petitioner to make payment to the respondent company.

Aggrieved by the same, the petitioner preferred a petition before the Delhi High Court.

The petitioners challenged the impugned award, inter alia, on the grounds that the findings of the Tribunal are contradictory, vague, devoid of any logic and violative of the fundamental policy of the Indian law. The petitioners were aggrieved that the Arbitral Tribunal had ignored the disputes raised by the petitioners.  

The petitioners contended that the contract was not completed and, therefore, the issuance of the Final Payment Certificate could not have been done by the engineer and that the same is against the terms of the contract.

The petitioners pointed out to the Court that the Tribunal has taken contradictory views in two different awards based on the same contract which makes it evident that the impugned award warrants interference of the Court.

The Tribunal erred while holding that the counterclaim of the petitioner was barred by limitation, it was contended. The Final Statement was revised by the engineer by issuing subsequent certificates and the limitation period would be counted from the date of the subsequent certificates, it was stated.

The respondents countered by submitting that the learned Tribunal has rightly interpreted and has appreciated the evidence on record. The respondents submitted that the engineer had issued the Final payment certificate pursuant to the issuance of the Taking Over Certificate as well as the completion of the defect liability period which was not challenged by any of the parties and therefore, the same has attained finality.  

The respondent submitted that Section 34 of the Act provided limited interference to an arbitral award as the findings arrived at by an arbitral tribunal are based on appreciation of facts and evidence before it and on the plausible interpretation of the agreement executed between the parties. The present Court was precluded from acting as a Court of appeal and from re-opening or reviewing the merits of the case, the respondent contended.

The Court perused the contract and the impugned award and observed as follows.

When no opportunity is given to deal with an argument that goes to the root of the case or findings based on evidence which goes behind the back of the party, it is a denial of justice to the prejudice of the party and the same amounts to a violation of the principle of natural justice.

In the present case, the petitioner had raised objections to the Final Payment Certificate by filing various documents showing discrepancies in the certificate. Therefore, the finding of the Tribunal that no challenge has been made to the certificate depicted a contrary situation.

And even though the learned Tribunal appreciated the submissions advanced by the petitioner with regard to discrepancies and fallacies in the certificate, the Tribunal failed to adjudicate upon the same. This conduct of the Tribunal is in violation of the rights of the petitioner, and therefore, the said situation is a clear violation of the principle of natural justice.

The term ‘public policy’ has been given a broader meaning by the Hon’ble Supreme Court in a catena of judgments and non-adherence to the principles of natural justice is a violation of the public policy.

The Court held that the operative part of the impugned award suffers from illegality which goes to the root of the matter.

The Court also touched upon the contention of the petitioner that the same Tribunal has not been consistent with its findings based on the same agreement and has taken a different view in another dispute which is exactly contrary to the one taken in the impugned award, especially in the following instances:

A. The learned Tribunal held that the claim of the petitioner is time-barred and dismissed the same on the issue of limitation in the impugned award, a finding exactly opposite to the one given in a different award; and

B. In the different arbitration, the same Tribunal held the same certificate was held to be not a Final Payment Certificate but rather an interim one, and therefore held that the petitioner was not to be liable to make any payment on the basis of a certificate that has not attained finality.

The Court did not rely upon the findings of the learned Tribunal in the award passed in the different Arbitration. However, it opined that the application of principles in the impugned award makes it evident that the learned Tribunal has committed serious errors and wrongly interpreted the contract, thereby, committing a clear violation of the fundamental policy of this country.

The Court held that the findings arrived at by the learned Tribunal in the impugned award are incorrect and in complete violation of the principles of natural justice.  

The Court held that the petitioner has made out a case to prove that the impugned award suffers from illegality as the same is against the public policy of this country, inter alia on the following grounds:

a.  the Tribunal erroneously directed the payment of the due amount on the basis of a payment certificate despite holding that the same was not a final payment certificate in a different arbitration, a conclusion contrary to its own findings;

b. the non-adjudication of the contentions raised by the petitioner is a clear violation of the principles of natural justice; and

c.  the contrary opinions given by the same Tribunal in similar factual scenarios create a bizarre situation and the same cannot be permitted under the law.

The Court set aside the award, calling it a contravention of the settled position of law and, therefore, against the public policy of the country and remanded the dispute back to the Arbitral Tribunal for fresh adjudication.

In the present case, the Delhi High Court has given a detailed and reasoned order as to on what grounds can an International Arbitration Award be set aside. The order has discussed each ground in depth and relied upon the orders passed by the Hon’ble Supreme Court in a catena of matters. The order has set a very clear precedent for the future challenges to international arbitrations.

It will be interesting to see if the same is challenged.

About the authors: Mahua Roy Chowdhury is the Managing Partner of Royzz & Co. Akshay Kapadia is an Associate Partner at the Firm.