The Hon’ble Supreme Court of India (“Supreme Court”) vide its judgment dated May 7, 2024 in the case titled National Highway Authority of India v. Meissners Hindustan Construction Company Limited (Civil Appeal No. 4702 of 2023) has held that the Court under Section 34 of the Arbitration & Conciliation Act, 1996 (“Act”) cannot interfere with the Arbitral Tribunal’s interpretation of a contract.

Brief Facts

The Appellant in the present case, National Highways Authority of India Limited ("NHAI") on June 2, 2004 awarded a contract to the Respondent i.e., Meissners Hindustan Construction Company Limited for the work of Allahabad Bypass Project which involved the construction of a road from km 158 (one hundred and fifty eight) to km 198 (one hundred and ninety eight). The total cost of the project was Rs. 4,46,99,12,839/- (Rupees four hundred forty-six crores ninety-nine lakhs twelve thousand eight hundred thirty-nine). Thereafter, certain disputes arose between the parties and the matter was ultimately referred to the Arbitral Tribunal. The three claims before the Arbitral Tribunal were as follows:

1. Reimbursement of additional expenditure incurred due to an increase in the rates of royalty and associated sales tax on soil, sand and crushed stone aggregates;
2. Non-payment for executed work of embankment with soil/pond ash for the initial 150 mm (One hundred and fifty) depth stripped in accordance with the requirements of the contract; and
3. Reimbursement of additional costs incurred due to an increase in the forest transit fee rates.

The award passed by the Ld. Arbitral Tribunal

The Arbitral Tribunal passed its award on March 30, 2010, on three distinct claims that were presented during the arbitration:

1. The Arbitral Tribunal granted an amount of Rs.2,69,91,248/- (Rupees two crore sixty-nine lakh ninety-one thousand two hundred forty-eight) as an additional cost to the Respondent till December 31, 2008, along with interest and future interest of 12% (twelve percent) per annum.
2. The Respondent was held entitled to Rs.3,47,35,522/- (Rupees three crore forty-seven lakh thirty-five thousand five hundred twenty-two) towards the formation of the embankment for an initial 150 mm (one hundred and fifty), along with a price adjustment on the said amount in accordance with clause 70.3 of the contract, with interest and future interest at 12% (twelve percent) per annum.
3. The Respondent was granted Rs.3,77,74,427.39/- (Rupees three crore seventy-seven lakh seventy-four thousand four hundred twenty-seven rupees and thirty-nine paise) along with interest and future interest at 12% (twelve percent) per annum.

Challenge to the arbitral award under Section 34 of the Act

The Appellant, being aggrieved by the award, filed a petition under Section 34 of the Act before the Ld. Single Judge of the Hon’ble High Court of Delhi. The Ld. Single Judge vide Judgment/ Order dated November 30, 2011, confirmed the award with respect to the Claim No. 1 and Claim No. 3, relying upon the decision in the case of National Highways Authority of India v. Meissners ITD Cementation India Limited, 2008 (100) DRJ 431. However, with respect to the Claim No. 2, the Ld. Single Judge held that the award was a majority decision of the Arbitral Tribunal based on an analysis of the material placed before the Arbitral Tribunal. Therefore, the award for Claim No. 2 was upheld.

Appeal under Section 37 of the Act

The Appellant, once again being aggrieved, preferred an appeal under Section 37 of the Act before a Division Bench of the Hon’ble High Court of Delhi. By the impugned judgment, the appeal preferred by the appellant was dismissed. Therefore, being aggrieved by the Arbitral Tribunal’s award and the judgments of the High Court, the appellant preferred the present appeal before the Hon’ble Supreme Court.

Submissions of the Parties

The Appellant’s Submissions

1. The appellant pointed out that an increase in the rates of royalty on soil, sand and crushed stones which aggregates through a notification, would be adjusted as per sub-clause 70.3 (vii) of the contract, which provides for a price adjustment for all local material based on Wholesale Price Index ("WPI"). It was further submitted that the Ld. Division Bench has erroneously interpreted the Clause 70.8 of the Agreement.
2. The Appellant further submitted that though the contract provided for partly fixed and partly adjustable prices, the adjustment in costs for inputs would be covered only to the extent to which they are covered by a formula in clause no. 70.3 of the agreement.
3. It was further submitted that the learned Single Judge and Division Bench of the High Court have failed to notice that clause 70.8 starts with a non-obstante clause. It provides that such additional or reduced costs shall not be separately paid or credited if the same has already been taken into consideration in the indexing of any inputs to the price adjustment formulae in accordance with clauses 70.1 to 70.7. It was further submitted that such additional costs have been dealt with in Clause 70.3 (vii)
4. The Appellant further submitted that claim for the construction of embankment forms part of the activity of clearing and grubbing and was not payable as embankment work.
5. It was further submitted that the Courts and the Arbitral Tribunal have to strictly interpret the contract and just because the respondent has incurred some expenditure, it would not amount to a liability on the Appellant which is covered by Clause 70.8 of the agreement.

The Respondent’s Submissions

1. The Respondent in the appeals pointed out that the scope of interference in a petition under Section 34 of the Act is narrow, and the jurisdiction of the Appellate Court under Section 37 is still narrower.
2. The Respondent further pointed out that the impugned judgments relied upon of the Hon’ble Delhi High Court in the case of the National Highways Authority of India v. Meissners ITD Cementation India Limited had been upheld by the Supreme Court by judgment and order dated April 24, 2015 in Civil Appeal no. 9799 of 2010 and other connected cases.
3. It was further submitted that the decision of the Supreme Court completely covers the Respondent's claims nos. 1 and 3. The Respondent submitted that the view taken by the majority is the view of the experts, which does not call for any interference.

Consideration of submissions by the Supreme Court

The Hon’ble Supreme Court noted that the Court is dealing with concurrent findings arrived at by the Arbitral Tribunal, the learned Single Judge in a petition under Section 34 of the Act, and the Division Bench in appeal under Section 37 of the Act and is concerned with the construction of the terms of a contract between the parties in terms of the Appeal under Section 37 of the Act. 

The Hon’ble Supreme Court noted the various precedents on the scope of interference with an Arbitral Award and referred to the case of Parsa Kente Collieries Ltd. v. Rajasthan Rajya Vidyut Utpadan Nigam Limited, (2019) 7 SCC 236 and MMTC v. Vedanta Limited, (2019) 4 SCC 163 to note that the Court does not sit in appeal over the Arbitral aware and may interfere on merits on the limited ground provided under Section 34 (2)(b)(ii) of the Act i.e., if the award is against the public policy of India. 

Further, the Hon’ble Supreme Court referred to the case of UHL Power Company Ltd. v. State of Himachal Pradesh, (2022) 4 SCC 116 wherein it was held that the jurisdiction of the Court under Section 34 is relatively narrow and the jurisdiction of the Appellate Court under Section 37 of the Arbitration Act is all the more circumscribed. Therefore, the Hon’ble Supreme Court in the present case observed that the Court will deal with the submissions in light of the limited scope for interference.

Decision of the Supreme Court

The Supreme Court noted that the Division Bench held that the imposition of a tax or upward revision of an already existing tax or levy through subsequent legislation is admittedly akin to the levy of additional royalty. Further, the Supreme Court noted that the decision of the High Court in the case of National Highways Authority of India v. Meissners ITD Cementation India Limited has been confirmed by the Supreme Court vide order dated April 24, 2015 with a partial modification. The issue in the said judgment was also regarding a claim based on an upward revision of royalty. Further, it was noted that the Clauses 70 to 70.8 of the agreements are identical and the arguments led are also the same.

The Supreme Court further on the issue of whether the claim for the construction of embankment forms part of the activity of clearing and grubbing and was not payable as embankment work, observed that two expert members of the Arbitral Tribunal held in favor of the respondent, whereas the third member dissented.

The Supreme Court therefore noted that dispute that as far as the construction of the terms of a contract is concerned, it is for the Arbitral Tribunal to adjudicate upon. If, after considering the material on record, the Arbitral Tribunal takes a particular view on the interpretation of the contract, the Court under Section 34 does not sit in appeal over the findings of the arbitrator.

The Supreme Court also observed that the Division Bench was right in holding that the majority opinion of technical persons need not be subjected to a relook, especially when the learned Single Judge had also agreed with the view taken by the Arbitral Tribunal. Therefore, in light of the aforesaid, the Supreme Court found nothing perverse or illegal about the award and consequently, the appeal was dismissed.

Conclusion and analysis

The above judgment emphasizes the Hon’ble Supreme Court's adherence to the principle of limited judicial interference in arbitral awards under the Act. The Court in the judgment has reiterated that the grounds for challenging an arbitral award are restricted to instances of contravention of substantive Indian law, violations of the Act, or breaches of contract terms, emphasizing the concept of "patent illegality". The Court further has emphasized the narrow scope of the Court's jurisdiction under Section 34 of the Act, highlighting that the appellate court's powers under Section 37 are even more constrained. This case highlights the importance of upholding arbitral awards unless they violate public policy or exhibit clear legal errors, as established by previous judicial precedents such as UHL Power Company Ltd. v. State of Himachal Pradesh and NHAI v. ITD Cementation (India) Ltd. The judgment upholds the principle of limited judicial interference in arbitral awards, respecting the autonomy of arbitrators in interpreting contractual terms and the limited role of courts in reviewing arbitral decisions.

Please find attached a copy of the judgement here.

This update has been contributed by Namitha Mathews (Partner) and Pragalbh Bhardwaj (Senior Associate).

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