Supreme Court dismisses challenge mounted on the ground that the tribunal’s interpretation of the contract was off-key

In National Highways Authority of India v. M/s Hindustan Construction Company Limited[1], the Hon’ble Supreme Court of India fine-tuned the limits of judicial intervention in challenge proceedings initiated against an arbitral award. The Petitioner’s core contention was that the tribunal had missed a beat while interpreting the contract and erred in allowing a claim for expenses, that according to the Petitioner did not arise from a change in legislation.

In 2004, the National Highways Authority of India (“NHAI”) awarded a contract to Hindustan Construction Company Limited (“HCC”) for the Allahabad Bypass Project (“Contract”). Subsequently, the disputes which arose between NHAI and HCC were referred to arbitration. The tribunal awarded three monetary claims in favour of HCC under the Award (“Award”).

Subsequently, NHAI was unsuccessful in its challenge against the Award under Section 34 of the Arbitration and Conciliation Act, 1996 (“the Act”) and also under Section 37, before the Delhi High Court (“High Court”). Consequently, NHAI approached the Supreme Court.

The Supreme Court focussed on two claims in the Award:

• Reimbursement for increased expenditure due to royalty and sales tax hikes on materials.

As per NHAI, the claim was factored into the contractually agreed ‘price adjustment formula’ for adjustments in the cost of inputs and could not be claimed separately under the clause for ‘change in legislation’. Contrastingly, HCC contended that this issue had been dealt with in M/s ITD Cementation^[2] and in any event, the scope of interference under Section 37 of the Act was restricted.

• Reimbursement for additional embankment work.

As per NHAI, this was included in the scope of work and thus could not be claimed. As per HCC, the embankment was additional as only backfilling was included in the lumpsum scope of work.

Resonating with the Award and the Impugned Order

The Supreme Court held that:

• The Impugned Order correctly held that upward revision of an existing tax through subsequent legislation is akin to an additional levy. This was confirmed in M/s ITD Cementation^[3] by the Supreme Court.
• The cost escalation based on agreed price adjustment formulas gave rise to one set of claims (as per sub-clauses 70.1 to 70.7), compensation for additional costs resulting from subsequent legislation (as referred to in clause 70.8) constituted another^[4]. Sub-clause 70.8 of the contract squarely covered any additional cost arising from a change in legislation. Since there was an evident increase in sales tax from 22% to 25%, the view taken in the Award was plausible.
• With respect to the second claim, the Supreme Court held that the majority award had considered all the evidence including the fact that NHAI had initially agreed to pay for the embankment. Thus, the Award did not warrant any interference regarding this claim.

Scope of interference under Sections 34 and 37

In view of the above, the Supreme Court upheld the Award and concurred that:

• It is not open to a court of appeal to (i) set aside an award if the construction of the contractual terms by the arbitrator was reasonable, as the arbitrator is the ultimate master of the quantity and quality of evidence; and (ii) correct factual errors while applying the ‘public policy’ test^[5].
• The court may interfere on merits only on the limited grounds mentioned in Section 34(2)(b)(ii) of the Act^[6]. Patent illegality itself has been held to mean contravention of the substantive law of India, the Act, and the terms of the contract^[7].
• If two plausible interpretations of the terms of the contract emerge, fault cannot be found merely because one interpretation is adopted rather than the other.

Analysis:

While the findings in ITD Cementation weighed in considerably, the Supreme Court has made it clear that the interpretation of the contract is within the domain of the arbitrator. Moreover, the realm of judicial interference under Section 37 of the Act is even more circumscribed than under Section 34 of the Act. This decision aligns well with the ongoing efforts to elevate arbitration as the preferred method for resolving commercial disputes – by minimizing interference during the challenge stage and mandating award-debtors to deposit the award amount before pursuing challenge proceedings, there is a sense of optimism that “The Times, They Are A-Changin’”[8].

On the flipside, this decision has arrived 14 years after the Award was passed and serves as a reminder of the lengthy process. Incidentally, written in 1963, Marley’s song-track became a clarion call for a generation yearning to progress. While courts are taking a pro-arbitration stance, it has also become necessary to tighten the time limits for disposing challenge proceedings and consequently, safeguard the interests of award holders.

We hope you have found this information useful. For any queries/clarifications please write to us at insights@elp-in.com  or write to our authors:

Ria Dalwani, Principal Associate – Email – riadalwani@@elp-in.com

Atharva Diwe, Associate – Email – atharvadiwe@elp-in.com

[1] Civil Appeal No. 4702 of 2023
[2] National Highways Authority of India v M/s ITD Cementation India Limited., (2015) 14 SCC 21.
[3] Supra Note 2.
[4] Supra Note 2.
[5] Parsa Kente Collieries Limited v Rajasthan Rajya Vidyut Utpadan Nigam Limited, (2019) 7 SCC 236
[6] MMTC v Vedanta Ltd., (2019) 4 SCC 163
[7] MMTC v Vedanta Ltd., (2019) 4 SCC 163
[8] “The Times They Are a-Changin'”, Bob Marley, 1964.