Power Of Court To Modify An Arbitral Award – A Legal Quagmire

The aforementioned constitutional bench would hear the parties on the following issues-

i) Whether the ratio expressed in Project Director, NHAI v. M Hakeem i.e. the Court does not have power to modify an award under Sec. 34 and 37 of ACA requires reconsideration?

ii) What are the contours and scope of power of the Court under Sec. 34 and 37 of ACA and whether they extend to modification of awards and if so to what extent can the same be exercised?

iii) If the power to modify the award is available, whether such power can be exercised only where the award is severable and a part thereof can be modified?

An authoritative pronouncement was necessitated to provide clarity on this issue due to the presence of conflicting opinions rendered by the Supreme Court and various High Courts.

It is to be noted that Sec. 34, ACA lays down the process for setting aside an arbitral award, while Sec. 37 lays down the circumstances in which an appeal may lie against orders relating to arbitral disputes.

One line of judgements which includes the landmark judgment of Project Director, NHAI v. M Hakeem^[2] (hereinafter 'Hakeem') followed in Larsen Air Conditioning and Refrigeration Company v. Union of India^[3] and SV Samudram v. State of Karnataka^[4] have held that courts are not empowered to modify the arbitral award under Sec. 34 or 37 of ACA.

In Hakeem^[5], the court had to consider whether it could exercise its power under Sec. 34, ACA to modify the arbitral award in order to enhance the compensation awarded by the arbitrator. The division bench comprising Justices RF Nariman and BR Gavai, observed that Sec. 34 is not in the nature of an appellate provision, it merely provides limited grounds for setting aside an arbitral award.^[6] The court also observed that Sec. 34 is modelled on the UNCITRAL Model Law on International Commercial Arbitration, 1985 under which no power to modify an award is given to the court hearing a challenge to an award.^[7] The court also had regard to the legislative policy behind ACA which was one of minimal judicial interference in arbitral awards.^[8] Lastly the court compared ACA to the Arbitration Act, 1940. While the latter specifically contained provisions allowing the Court to modify the award, no such provisions are found in ACA. In view of the above, the court concluded that Sec. 34, ACA does not empower the court to modify an arbitral award passed by the arbitral tribunal.^[9]

The other line of judgments consisting of Vedanata Limited v. Shenzden Shandong Nuclear Power Construction Company Limited,^[10] J.C. Budharaja v. Chairman Orissa Mining Corporation Ltd.,^[11] Tata Hydroelectric Power Supply Co. Ltd. v. Union of India^[12] amongst others, have either modified or accepted the modification of arbitral awards under consideration.

It is worth noting that recently a division bench consisting of Justices PS Narasimha and Manoj Mishra in S Jayalakshmi v. The Special District Revenue Officer & Ors.^[13] has reiterated the position of law laid down in Hakeem. The case dealt with land acquisition compensation under the National Highways Act, 1956. The Appellant, being dissatisfied with the compensation awarded by the arbitral tribunal preferred an application under Sec. 34 of the ACA before the District Court, Vellore which modified the award and enhanced the compensation. In view of the judgment in Hakeem, the Madras High Court set aside the judgment passed by the District Court. In the present appeal, the Supreme Court upheld the position taken by the High Court. However, exercising its extraordinary powers under Art. 142 of the Constitution of India, in the interest of parity, the court directed that the Appellant would be paid the enhanced compensation as granted by the District Court.

It is interesting to note that this issue finds mention in the Report of the Expert Committee to Examine the Working of Arbitration Law and Recommend Reforms in Arbitration and Conciliation Act, 1996 (hereinafter 'Report') which was submitted to the Law Ministry on February 07, 2024.^[14] The Report has recommended that the courts should be permitted to modify or vary an award, while setting aside such an award in exercise of their power under Sec. 34.^[15] However, such orders must be made only in exceptional circumstances to meet ends of justice. This shall be achieved by “amendment to sub-sections (2) and (2A) of section 34 to substitute the words “set aside by the Court”, with the words “set aside in whole or in part by the Court” and to add the following proviso, namely “Provided that in cases where the Court sets aside the arbitral award in whole or in part, the Court may make consequential orders varying the award only in exceptional circumstances to meet the ends of justice.””^[16]

Thus, while the legislature contemplates whether to extend the powers of the court under the ACA to include modification of an arbitral award, the ball is now in the constitution bench's court to settle this issue with far reaching consequences, once and for all. It will be interesting to see as to how the constitution bench navigates the direct conflict between cursory overview of the award permissible under Sec. 34 of the ACA and detailed review required for modification of the award to offer complete (purported) justice.