Ssangyong Engineering & Construction Co. Ltd.

Versus

National Highways Authority of India (NHAI)

CIVIL APPEAL NO. 4779 OF 2019

(Arising out of Special Leave Petition (Civil) No.19033 of 2017)

Applicability of the Arbitration and Conciliation (Amendment) Act, 2015

The question which arises is whether the amendments made in Section 34 are applicable to

applications filed under Section 34 to set aside arbitral awards made after 23.10.2015.

Board of Control for Cricket in India v. Kochi Cricket (P.) Ltd. and Ors., (2018) 6 SCC

287

[T]he Amendment Act, 2015 would apply to Section 34 petitions that are made after this

date.

[W]e declare that Section 34, as amended, will apply only to Section 34 applications that

have been made to the Court on or after 23.10.2015, irrespective of the fact that the

arbitration proceedings may have commenced prior to that date. [para 12]

 By 2015 Amendment fundamental changes have been made in the law. The expansion

of “public policy of India” in Saw Pipes (2003) 5 SCC 705 and Western Geco (2014)
 9 SCC 263 has been done away with, and a new ground of “patent illegality”, with

inbuilt exceptions, has been introduced. [para 12]

Changes made by the Amendment Act, 2015

In Renusagar 1994 Supp (1) SCC 644 following three grounds were recognised by the SC

on which an Award may be set aside being against the Public Policy i.e.

(i) The fundamental policy of Indian law,

(ii) The interest of India,

(iii) Justice or morality,

It was clarified that the binding effect of the judgment of a superior court being disregarded

would be equally violative of the fundamental policy of Indian Law.

(iv) “patent illegality” was further added by SC in Saw Pipes (2003) 5 SCC 705

[I]n DDA v. R.S. Sharma and Co., (2008) 13 SCC 80, summarised the law as it stood at that

point of time, as follows:

“21. From the above decisions, the following principles emerge:

(a) An award, which is

(i) contrary to substantive provisions of law; or

(ii) the provisions of the Arbitration and Conciliation Act, 1996; or

(iii) against the terms of the respective contract; or

(iv) patently illegal; or

(v) prejudicial to the rights of the parties;

is open to interference by the court under Section 34(2) of the Act.

(b) The award could be set aside if it is contrary

to:

(a) fundamental policy of Indian law; or

(b) the interest of India; or

(c) justice or morality.

(c) The award could also be set aside if it is so unfair and unreasonable that it shocks the

conscience of the court.

(d) It is open to the court to consider whether the award is against the specific terms of

contract and if so, interfere with it on the ground that it is patently illegal and opposed to the

public policy of India. ……”

(e) Judicial Approach i.e. in judicial and quasi-judicial determination court, tribunal or

the authority exercising powers cannot act in an arbitrary, capricious or whimsical manner.

Judicial approach ensures that the authority acts bona fide and deals with the subject in a fair,

reasonable and objective manner and that its decision is not actuated by any extraneous

consideration. [Western Geco (2014) 9 SCC 263 para 35]

(f) Natural Justice - court and so also a quasi-judicial authority must, while determining

the rights and obligations of parties before it, do so in accordance with the principles of

natural justice. one of the facets of the principles of natural justice is that the court/authority

deciding the matter must apply its mind to the attendant facts and circumstances while taking

a view one way or the other. Non-application of mind is a defect that is fatal to any

adjudication. Application of mind is best demonstrated by disclosure of the mind and

disclosure of mind is best done by recording reasons in support of the decision which the

court or authority is taking. [Para 38]

(g) Perversity – i.e. a decision which is perverse or so irrational that no reasonable person

would have arrived at the same will not be sustained in a court of law. [Para 39]

A. [J]uristic principle of a “judicial approach” demands that a decision be fair,

reasonable and objective. On the obverse side, anything arbitrary and whimsical would

obviously not be a determination which would either be fair, reasonable or objective. [Para 29

of the Judgment in Associate Builders (2015) 3 SCC 49]

B. The audi alteram partem principle which undoubtedly is a fundamental juristic

principle in Indian law is also contained in Sections 18 and 34(2)(a)(iii) of the Arbitration

and Conciliation Act. [Para 30 of the Judgment in Associate Builders (2015) 3 SCC 49]

(C) The third juristic principle is that a decision which is perverse or so irrational that no

reasonable person would have arrived at the same is important and requires some degree of

explanation. It is settled law that where:

(i) a finding is based on no evidence, or

(ii) an Arbitral Tribunal takes into account something irrelevant to the decision which

it arrives at; or

(iii) ignores vital evidence in arriving at its decision,

such decision would necessarily be perverse. [Para 31 of the Judgment in Associate Builders

(2015) 3 SCC 49]

Changes made –
 (a) the making of the award was induced or affected by fraud or corruption or was in

violation of section 75 or section 81;

(b) it is in contravention with the fundamental policy of Indian law; and

(c) it is in conflict with the most basic notions of morality or justice.

[formulation further tightens the Renusagar test and ensures that “morality or justice”

– terms used in Renusagar – cannot be used to widen the test.]

(d) (2A) An arbitral award arising out of arbitrations other than international commercial

arbitrations, may also be set aside by the Court if the Court finds that the award is

vitiated by patent illegality appearing on the face of the award.

[patent illegality standard was set out by the Supreme Court in Saw Pipes (2003) 5 SCC

705]

Hon’ble Supreme Court vide para 23 of the Judgment under consideration, made it clear that

the expression “public policy of India”, whether contained in Section 34 or in Section 48,

would now mean the “fundamental policy of Indian law” as explained in paragraphs 18 and

27 of Associate Builders (2015) 3 SCC 49), i.e., the fundamental policy of Indian law would

be relegated to the “Renusagar” [1994 Supp (1) SCC 644 ] understanding of this

expression.

However, principles of natural justice as contained in Sections 18 and 34(2)(a)(iii) of the

1996 Act, continue to be grounds of challenge of an award, as is contained in paragraph 30 of

Associate Builders (2015) 3 SCC 49).

(i) the ground for interference insofar as it concerns “interest of India” has since been

deleted;
 (ii) the ground for interference on the basis that the award is in conflict with justice or

morality is now to be understood as a conflict with the “most basic notions of

morality or justice”. …This … [is] in line with paragraphs 36 to 39 of Associate

Builders [(2015) 3 SCC 49], as it is only such arbitral awards that shock the

conscience of the court that can be set aside on this ground.

25. Thus, it is clear that public policy of India is now constricted to mean firstly, that a

domestic award is contrary to the fundamental policy of Indian law, as understood in

paragraphs 18 and 27 of Associate Builders (supra), or secondly, that such award is against

basic notions of justice or morality as understood in paragraphs 36 to 39 of Associate

Builders (supra). Explanation 2 to Section 34(2)(b)(ii) and Explanation 2 to Section 48(2)(b)

(ii) was added by the Amendment Act only so that Western Geco (supra), as understood in

Associate Builders (supra), and paragraphs 28 and 29 in particular, is now done away with.

26. Insofar as domestic awards made in India are concerned, an additional ground is now

available under sub-section (2A), added by the Amendment Act, 2015, to Section 34. Here,

there must be patent illegality appearing on the face of the award, which refers to such

illegality as goes to the root of the matter but which does not amount to mere erroneous

application of the law. In short, what is not subsumed within “the fundamental policy of

Indian law”, namely, the contravention of a statute not linked to public policy or public

interest, cannot be brought in by the backdoor when it comes to setting aside an award on the

ground of patent illegality.

27. Secondly, it is also made clear that re-appreciation of evidence, which is what an

appellate court is permitted to do, cannot be permitted under the ground of patent illegality

appearing on the face of the award.

28. To elucidate, paragraph 42.1 of Associate Builders (supra), namely, a mere

contravention of the substantive law of India, by itself, is no longer a ground available to set

aside an arbitral award. Paragraph 42.2 of Associate Builders (supra), however, would

remain, for if an arbitrator gives no reasons for an award and contravenes Section 31(3) of the

1996 Act, that would certainly amount to a patent illegality on the face of the award.

29. The change made in Section 28(3) by the Amendment Act really follows what is stated in

paragraphs 42.3 to 45 in Associate Builders (supra), namely, that the construction of the

terms of a contract is primarily for an arbitrator to decide, unless the arbitrator construes the

contract in a manner that no fair-minded or reasonable person would; in short, that the

arbitrator’s view is not even a possible view to take. Also, if the arbitrator wanders outside

the contract and deals with matters not allotted to him, he commits an error of jurisdiction.

This ground of challenge will now fall within the new ground added under Section 34(2A).

30. What is important to note is that a decision which is perverse, as understood in paragraphs

31 and 32 of Associate Builders (supra), while no longer being a ground for challenge under

“public policy of India”, would certainly amount to a patent illegality appearing on the face

of the award. Thus, a finding based on no evidence at all or an award which ignores vital

evidence in arriving at its decision would be perverse and liable to be set aside on the ground

of patent illegality.

Additionally, a finding based on documents taken behind the back of the parties by the

arbitrator would also qualify as a decision based on no evidence inasmuch as such decision is

not based on evidence led by the parties, and therefore, would also have to be characterised as

perverse.
The Ground of Challenge under Section 34(2)(a)(iii)

Under Section 34(2)(a)(iii), one of the grounds of challenge of an arbitral award is that a

party is unable to present its case. In order to understand the import of Section 34(2)(a)(iii),

Section 18 of the 1996 Act should also be seen. [Equal treatment and equal opportunity to

present ones case]

36. Sections 18, 24(3), and 26 are important pointers to what is contained in the ground of

challenge mentioned in Section 34(2)(a)(iii). Under Section 18, each party is to be given a

full opportunity to present its case. Under Section 24(3), all statements, documents, or other

information supplied by one party to the arbitral tribunal shall be communicated to the other

party, and any expert report or document on which the arbitral tribunal relies in making its

decision shall be communicated to the parties. Section 26 is an important pointer to the fact

that when an expert’s report is relied upon by an arbitral tribunal, the said report, and all

documents, goods, or other property in the possession of the expert, with which he was

provided in order to prepare his report, must first be made available to any party who requests

for these things. Secondly, once the report is arrived at, if requested, parties have to be given

an opportunity to put questions to him and to present their own expert witnesses in order to

testify on the points at issue.

37. Under the rubric of a party being otherwise unable to present its case, the standard

textbooks on the subject have stated that where materials are taken behind the back of the

parties by the Tribunal, on which the parties have had no opportunity to comment, the ground

under Section 34(2)(a)(iii) would be made out.

The Ground of Challenge under Section 34(2)(a)(iv)

39. So far as this defence is concerned, standard textbooks on the subject have held that the

expression “submission to arbitration” either refers to the arbitration agreement itself, or to

disputes submitted to arbitration, and that so long as disputes raised are within the ken of the

arbitration agreement or the disputes submitted to arbitration, they cannot be said to be

disputes which are either not contemplated by or which fall outside the arbitration agreement.

The expression “submission to arbitration” occurs in various provisions of the 1996 Act.

Thus, under Section 28(1)(a), an arbitral tribunal “… shall decide the dispute submitted to

arbitration …”. Section 43(3) of the 1996 Act refers to “… an arbitration agreement to submit

future disputes to arbitration ….”. Also, it has been stated that where matters, though not

strictly in issue, are connected with matters in issue, they would not readily be held to be

matters that could be considered to be outside or beyond the scope of submission to

arbitration.

42. [It emerges] that where an arbitral tribunal has rendered an award which decides matters

either beyond the scope of the arbitration agreement or beyond the disputes referred to the

arbitral tribunal the arbitral award could be said to have dealt with decisions on matters

beyond the scope of submission to arbitration.

43. We therefore hold, following the aforesaid authorities, that in the guise of

misinterpretation of the contract, and consequent “errors of jurisdiction”, it is not possible to

state that the arbitral award would be beyond the scope of submission to arbitration if

otherwise the aforesaid misinterpretation (which would include going beyond the terms of the
contract), could be said to have been fairly comprehended as “disputes” within the arbitration

agreement, or which were referred to the decision of the arbitrators as understood by the

authorities above. If an arbitrator is alleged to have wandered outside the contract and dealt

with matters not allotted to him, this would be a jurisdictional error which could be corrected

on the ground of “patent illegality”, which, as we have seen, would not apply to international

commercial arbitrations that are decided under Part II of the 1996 Act. To bring in by the

backdoor grounds relatable to Section 28(3) of the 1996 Act to be matters beyond the scope

of submission to arbitration under Section 34(2)(a)(iv) would not be permissible as this

ground must be construed narrowly and so construed, must refer only to matters which are

beyond the arbitration agreement or beyond the reference to the arbitral tribunal.

Most Basic Notions of Justice

44. The expression “most basic notions of … justice” finds mention in Explanation 1 to sub-

clause (iii) to Section 34(2)(b). Here again, what is referred to is, substantively or

procedurally, some fundamental principle of justice which has been breached, and which

shocks the conscience of the Court.