M/S. Ssangyong Engin... v. National Highways Au..., Delhi High Court, Judgment, Law, casemine.com

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Case Number

O.M.P (COMM) 375/2016

Attorney(S)

Mr. Arvind K. Nigam, Senior Advocate with Mr. Navin Kumar, Ms. Rashmeet Kaur and Ms. Manalisha Chaudhary, Advocates.
Mr. Yaman Kumar, Advocate.

Judges

Vibhu Bakhru, J.

Acts

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Smart Summary

Factual and Procedural Background

The petitioner filed a petition under Section 34 of the Arbitration and Conciliation Act, 1996 challenging an arbitral award dated 02.05.2016. The dispute arose from a contract between the petitioner and the respondent, National Highways Authority of India (NHAI), for construction of a four-lane highway section in Madhya Pradesh. The petitioner submitted a bid in 2005, which was accepted, and the contract was executed in 2006. The dispute concerns the calculation of price adjustments under Sub-clause 70.3(ii) of the contract's Conditions of Particular Application (COPA), specifically relating to the use of Wholesale Price Index (WPI) data for cement price adjustments. A change in the WPI series by the Government of India during the contract period led to differing interpretations of the applicable WPI series and the use of a linking factor. This disagreement was referred to an Arbitral Tribunal, which issued a majority award upheld by the present petition.

Legal Issues Presented

Whether the Arbitral Tribunal correctly interpreted the price adjustment formula under Sub-clause 70.3(ii) of the contract given the change in the Wholesale Price Index series during the contract period.
Whether the use of a linking factor between the old and new WPI series by the majority of arbitrators was appropriate.
Whether the dissenting arbitrator’s view that only the new WPI series should apply from September 2010 was legally valid.
Whether the arbitral award is in conflict with the public policy of India under Section 34(2)(b)(ii) of the Arbitration and Conciliation Act, 1996.

Arguments of the Parties

The opinion does not contain a detailed account of the parties' legal arguments.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Steel Authority of India Ltd. v. Gupta Brother Steel Tubes Ltd., (2009) 10 SCC 63	An error in contract interpretation by an arbitrator is within jurisdiction and not correctable by courts; courts should not interfere if the arbitrator’s conclusion is a possible view.	The court relied on this precedent to affirm that the arbitral tribunal’s interpretation of the contract, even if debatable, was a plausible view and not subject to judicial interference.
Sumitomo Heavy Industries Limited v. Oil and Natural Gas Commission of India, (2010) 11 SCC 296	The arbitrator’s construction of contract clauses, if not perverse, must be accepted as final and binding; courts should not substitute their own views.	The court cited this case to emphasize that it cannot act as an appellate body over the arbitrator’s findings and must accept the arbitrator’s view if it is a legitimate one.
Rashtriya Ispat Nigam Ltd. v. Dewan Chand Ram Saran, (2012) 5 SCC 306	If a contract clause admits two interpretations, the arbitrator’s choice of a plausible view cannot be interfered with by courts.	The court used this precedent to reinforce that the arbitrator’s interpretation, even if not the only possible one, is binding and not subject to judicial substitution.

Court's Reasoning and Analysis

The court analyzed the dispute as one of contract interpretation regarding the application of the price adjustment formula in the context of a change in the Wholesale Price Index series. The formula specified the use of WPI indices from the same series for both the base and current periods. The majority of arbitrators applied a linking factor to reconcile the old and new WPI series, while a dissenting arbitrator advocated exclusively using the new series post-September 2010. The court recognized both views as plausible interpretations within the arbitrators' jurisdiction. It emphasized the settled legal principle that courts should not substitute their own interpretation for that of the arbitral tribunal if the tribunal’s view is a possible one. The court relied on binding Supreme Court precedents to affirm that errors in contract interpretation by arbitrators do not constitute grounds for setting aside an award unless the award conflicts with public policy. The petitioner’s challenge under Section 34(2)(b)(ii) was found unmeritorious as the award did not violate public policy.

Holding and Implications

The petition challenging the arbitral award is dismissed.

The decision affirms the binding nature of the arbitral tribunal’s interpretation of contractual clauses when such interpretation is plausible, reinforcing the limited scope of judicial review under the Arbitration and Conciliation Act, 1996. The ruling directly resolves the dispute between the parties without setting new legal precedent beyond affirming established principles on arbitral awards and contract interpretation.

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M/S. Ssangyong Engineering & Construction Co. Ltd. Petitioner v. National Highways Authority Of India (Nhai)

Vibhu Bakhru, J.:—

IA No. 9572/2016

1. Allowed, subject to all just exceptions.

O.M.P (COMM) 375/2016

2. The petitioner has filed the present petition under Section 34 of the Arbitration and Conciliation Act, 1996 (hereinafter the ‘Act’) impugning the Arbitral Award (by majority) dated 02.05.2016 (hereinafter referred to as the ‘impugned award’).

3. The respondent (NHAI) invited tenders for construction of Highway Contract being Four-Lane of Jhansi-Lakhanadon Section between km. 297 to km. 351 of NH-26 in the state of Madhya Pradesh. The petitioner submitted its bid in response to the invitation to tender on 27.10.2005 This was accepted on 30.12.2005 and the contract between the parties was signed on 12.04.2006 NHAI issued the notice to commence work on 28.04.2006 and the petitioner commenced work on 28.05.2006

4. The dispute involves between the parties relate to the calculation of the price adjustment as per Sub-clause 70.3 of the Agreement between the parties - Conditions of Particular Application (hereinafter the ‘COPA’).

5. Sub-clause 70.3 of COPA is a price adjustment clause and specifies a formula for adjustment of the contract price for increase or decrease in rates and price of labour, materials, fuels and lubricants. In terms of item (ii) of the aforesaid Sub-clause the price adjustment for increase or decrease in the cost of cement procured is to be computed as per the formula specified therein. Clause 70.3(ii) of COPA reads as under:-

“ii Adjustment for Cement Component

Price adjustment for increase or decrease in the cost of cement procured by the contractor shall be paid in accordance with the following formula:

Vc = increase or decrease in the cost of work during the month under consideration due to changes in the rates for cement.

Co = the all India average wholesale price index for cement on the day 28 days prior to the closing date of submission of Bids as published by Ministry of Industrial Development, Government of India, New Delhi.”

C1 = the all India average wholesale price index for cement on the day 28 days prior to the last day of the period to which a particular interim payment certificate is related, as published by Ministry of Industrial Development, Government of India, New Delhi.

Pc = Percentage of Cement component of the work.”

6. The controversy arose between the parties in connection with calculation of the base Wholesale Price Index (hereinafter the ‘WPI’)- referred to as Co and Current WPI, referred to C1, the formula as quoted above. This was consequent to the change in WPI series published by the Ministry of Industrial Development, Government of India.

7. Admittedly, the purposes of computing the price variation in terms of Sub-clause 70.3(ii) of COPA the base date is as 29.05.2005, which is 28 days prior to the last date submission of the bid. Admittedly as on the base date the Wholesale Price Index published by the Ministry of Industrial Development, Government of India was a WPI Series with 1993-94 as its commencement base year; in other words, the WPI was 100 in the base year 1993-94 and the WPI was adjusted on the said base periodically. For the convenience in reference the WPI series with 1993-94 as base and which were published on the base date are referred to as “Old Series”.

8. The Government of India launched a new WPI series on 14.09.2009 which came into effect on 14.09.2010; apparently, this was done to capture the structural changes in the economy. For convenience, the WPI series launched on 14.09.2009 is referred to as “New Series”. The basket of commodities as well as the weightage accorded to different commodities on which the Old Series and New Series are based, are materially different. Although, the New Series came into effect from August, 2010, the base year for the new series is 2004-05 (WPI of the New Series is 100 in 2004-2005). The Government of India has also provided the data of the New Series from 2004-05.

9. From December, 2005 to August, 2010, the petitioner raised bills on the basis of the price adjustment clause and for the purposes of calculation, used the Old Series WPI. After September, 2010 till February, 2013, the petitioner raised bills based on the New Series.

10. NHAI was of the view that an anomaly had crept in due to change in the WPI Series during the tenure of the contract. Accordingly, on 15.02.2013, NHAI issued a circular to provide a linking factor. The purpose of the linking factor was to link the Old Series to the New Series. Further, NHAI also sought to apply the linking factor from September, 2010 and recover certain payments already made. This led to disputes between the parties, which were subsequently referred to the Arbitral Tribunal.

11. It is apparent from the plain reading of the formulae provided in Sub-clause 70.3 of COPA (as quoted above) that the base index for working the formulae, that is Co, is WPI as on 28 days prior to the closing date of submission of bids, that is on 29.09.2005 Clearly, the current WPI index to be used for making the price adjustment, that is, C1 in the formula would for purposes of integrity have to be from the same WPI Series. It is difficult to accept that the said formulae would use the base index from another WPI Series and the current WPI index (that is, as on 28 days prior to the last day of the period to which the Interim Payment Certificate relates) from a different series.

12. The above controversy was considered by the Arbitral Tribunal and the majority of the arbitrators were of the view that it was necessary to use a linking factor for working the formula as provided under Sub-clause 70.3 of COPA. The Arbitral Tribunal also determined the linking factor to be used. However, one of the arbitrators, Mr. Dilip Namdeo Potdukhe, recorded a dissenting note. In his view, the New Series was applicable with effect from September, 2010 and, thereafter, only the New Series was to be applied for working the formulae as provided under Sub-clause 70.3 of COPA. According to him, even though the New Series came into effect from September, 2010, the base index of the New Series (which was the base year 2004-05) could be used for determination of price variation after September, 2010.

13. This would mean that the base index i.e the index WPI (Co) in the formula would have to be a WPI index as on 29.09.2005 from the New Series which admittedly was not in force as on that date. It is also relevant to note that although the New Series could be applied in the case of the petitioner - as the base index as on 2004-05 under the New Series was available - the same would not work for contracts that were bid for prior to 2004.

14. It is apparent from the above that both the views - that of the majority Arbitrators as well as the view expressed by Mr. Potdukhe in his dissenting note - are plausible views; each method throws up separate issues. However it is apparent that the controversy relates to interpreting the manner in which the formula specified in the Contract has to be worked, given the change in the WPI Series. This is purely a question in the realm of interpretation of the Contract and is within the jurisdiction of the Arbitral Tribunal. Even though the view expressed in the dissenting note may seem more appealing and I prefer that view but that does not mean that the view expressed by the majority arbitrators is not a plausible one. It is now well settled that this court while considering a challenge to an arbitral award does not substitute its view over that of the arbitrators. It is not permissible for a court to examine the correctness of the findings of the Arbitral Tribunal as if it were sitting in appeal over its findings.

15. In Steel Authority of India Ltd. v. Gupta Brother Steel Tubes Ltd.: (2009) 10 SCC 63, the Supreme Court had expressly stated that “an error relatable to interpretation of the contract by an arbitrator is an error within his jurisdiction and such error is not amenable to correction by Courts as such error is not an error on the face of the award”. The Court further held that “If the conclusion of the arbitrator is based on a possible view of the matter, the court should not interfere with the award”.

16. In Sumitomo Heavy Industries Limited v. Oil and Natural Gas Commission of India: (2010) 11 SCC 296, the Supreme Court held as under:-

“…..The umpire has considered the fact situation and placed a construction on the clauses of the agreement which according to him was the correct one. One may at the highest say that one would have preferred another construction of Clause 17.3 but that cannot make the award in any way perverse. Nor can one substitute one's own view in such a situation, in place of the one taken by the umpire, which would amount to sitting in appeal. As held by this Court in Kwality Mfg. Corpn. v. Central Warehousing Corpn. the Court while considering challenge to arbitral award does not sit in appeal over the findings and decision of the arbitrator, which is what the High Court has practically done in this matter. The umpire is legitimately entitled to take the view which he holds to be the correct one after considering the material before him and after interpreting the provisions of the agreement. If he does so, the decision of the umpire has to be accepted as final and binding.”

17. The aforesaid view was reiterated by the Supreme Court in Rashtriya Ispat Nigam Ltd. v. Dewan Chand Ram Saran: (2012) 5 SCC 306. In that case the Supreme Court held as under:-

“43. In any case, assuming that Clause 9.3 was capable of two interpretations, the view taken by the arbitrator was clearly a possible if not a plausible one. It is not possible to say that the arbitrator had travelled outside his jurisdiction, or that the view taken by him was against the terms of contract. That being the position, the High Court had no reason to interfere with the award and substitute its view in place of the interpretation accepted by the arbitrator.”

18. Although the decisions in Steel Authority of India Ltd. (supra) and Sumitomo Heavy Industries Limited (supra) have been delivered in the context of the Arbitration Act, 1940, the view expressed therein is still good law and the scope of interference under the Act has not been widened but considerably narrowed.

19. The parties have agreed to accept the opinion of the Arbitral Tribunal as binding and once the Arbitral Tribunal has decided the dispute, the matter must rest there; unless of course the award is required to be set aside on any of the grounds as spelt out under Section 34 of the Act.

20. In the present case, the petitioner has endeavoured to place its challenge within the scope of section 34(2)(b)(ii) of the Act. However, in the given circumstances, I am unable to accept that the impugned Award is in conflict with the public policy of India.

21. The petition is, accordingly, dismissed.

M/S. Ssangyong Engin... v. National Highways Au...