Arbitral Awards Cannot Be Modified Under Sections 34 & 37 Of Arbitration & Conciliation Act : Supreme Court

While deciding on a plea whether there is a scope of interference with arbitral awards under Section 34 and 37 of the Arbitration and Conciliation Act, 1996, the Supreme Court has reiterated the settled position of law that any attempt to “modify an award” while adjudicating Sections 34 and 37 petitions is not permissible under the Arbitration and Conciliation Act, 1996.

The Division Bench of Supreme Court comprising Justices Abhay S. Oka and Sanjay Karol while deciding a Civil Appeal filed by the Appellant against the judgment and order passed by the High Court of Karnataka under Section 37 (1) of the Arbitration and Conciliation Act, 1996, framed a question of law that:

“whether the High Court was justified in confirming the order dated 22nd April, 2010 under Section 34 of the Arbitration & Conciliation Act, 1996 passed by the Senior Civil Judge, Sirsi, in Civil Misc. No. 08/2003, whereby the award passed by the learned Arbitrator was modified and the amount awarded was reduced.”

Factual Background

One Mr. S.V. Samudram (Appellant) has entered into a contract from the Karnataka State Public Works Department (Respondent) on 29^th January, 1990 to construct the office and residence of the Chief Conservator of Forests at Sirsi for an amount of Rs. 14.86 Lakhs with a stipulation that that the possession of the construction site would be handed over to the Claimant-Appellant on 8th March, 1990 and the work allotted was to be completed on or before 6th May 1992 i.e., 18 months from the date of the agreement excluding the monsoon season. However, it was claimed by the Claimant-Appellant that the work allotted could not be completed on time by the him, because the PWD department responsible did not clear his bills, repeatedly at every stage and also due to delays caused by change of site and in delivery of material for such construction.

Proceedings before the Arbitral Tribunal

In order to settle the claims, the parties resorted to the arbitration proceedings, and the claimant-appellant filed his claim before the learned Arbitrator totalling to Rs.18,06,439/- along with an interest payable thereupon @ 18% per annum. Among the 11 claims filed by the claimant-appellant, only 9 claims were awarded by the learned arbitral tribunal totalling to Rs.14,68,239/- with interest payable @ 18%.

Proceedings under Sections 34 and 37 of the Act

Assailing the order of the arbitrator, the respondent preferred a petition under Section 34 of the Act. The Ld. Civil Judge while deciding the Section 34 petition modified the award passes by the tribunal and reduced the amount of claim to Rs. 3,71, 564 with interest @ 9% interest, and also provided the reasoning to that effect. Thereafter, against the Section 34 Petition order, the claimant-appellant preferred a Section 37 (1) petition before the High Court of Karnataka, which has confirmed the modification of the arbitral award as has been done by the learned Civil Judge, dismissing the application on part of the Claimant-Appellant.

Observations by the Court

While adjudicating the dispute, the Supreme Court has held as follows: -

1. Modification of Arbitral Award not allowed under Section 34: The Court has observed that the position as to whether an arbitral award can be modified in the proceedings initiated under Sections 34/37 of the A&C Act is no longer res integra. The court in para 14 reiterated the findings of it passed in National Highways Authority of India v. M. Hakeem and Another, categorically held that any court under Section 34 would have no jurisdiction to modify the arbitral award, which at best, given the same to be in conflict with the grounds specified under Section 34 would be wholly unsustainable in law. Moreover, the court in para 17 also observed that “the Arbitrator's view, generally is considered to be binding upon the parties unless it is set aside on certain specified grounds.” The Court also noted the importance of primacy granted to arbitral tribunal to adjudicate the disputes agreed to be resolved by the parties through arbitration. While placing reliance on three judge Bench Judgment of the Supreme Court in Dyna Technologies Private Limited v. Crompton Greaves Limited, the court reiterated the need for the Court to look at the substance of the findings, rather than its form, stood reiterated and the need for adopting an approach of reading the award in a fair and just manner, and not in what is termed as “an unduly literal way”. Thus, no interference by way of modifying the award can be made while adjudicating Section 34 petition.

2. No violation of Public Policy: In the instant case, the only provision under which the award could have been assailed was for it to have been in conflict with the public policy of India. The Court took reference to its own judgment Indian Oil Corporation. Ltd. v. Shree Ganesh Petroleum to summarize that an award could be said to be against the public policy of India in, inter alia, the following circumstances:

1. When an award is, on its face, in patent violation of a statutory provision
2. When the arbitrator/Arbitral Tribunal has failed to adopt a judicial approach in deciding the dispute.
3. When an award is in violation of the principles of natural justice.
4. When an award is unreasonable or perverse.
5. When an award is patently illegal, which would include an award in patent contravention of any substantive law of India or in patent breach of the 1996 Act.
6. When an award is contrary to the interest of India, or against justice or morality, in the sense that it shocks the conscience of the Court.

However, the court in para 29 declined to accept that there's a violation of public policy of India by observing that:

“the reasons recorded by the learned Civil Judge for modifying the arbitral award, as reflected from a perusal thereof, have been recorded in an earlier section of the judgment. None of those reasons even so much as allude to the award being contrary to the public policy of India, which would enable the court to look into the merits of the award.”

3. Modification of Award under Section 37 Petition: The Court while considering the order of the High Court upholding such modification, under the jurisdiction of Section 37 of the A&C Act, took a reference to one of its own Judgment in MMTC Ltd. v. Vedanta Ltd., where the observation conveyed in para 14 is meaningful i.e.,

“14. As far as interference with an order made under Section 34, as per Section 37, is concerned, it cannot be disputed that such interference under Section 37 cannot travel beyond the restrictions laid down under Section 34. In other words, the court cannot undertake an independent assessment of the merits of the award and must only ascertain that the exercise of power by the court under Section 34 has not exceeded the scope of the provision. Thus, it is evident that in case an arbitral award has been confirmed by the court under Section 34 and by the court in an appeal under Section 37, this Court must be extremely cautious and slow to disturb such concurrent findings.”

Moreover, the court in para 38 took reference of a Judgment delivered in Larsen Air Conditioning and Refrigration Company v. Union of India and Others by holding that “the circumscribed nature of the exercise of power under Sections 34 and 37 i.e., interference with an arbitral award, is clearly demonstrated by legislative intent. The Arbitration Act of 1940 had a provision (Section 15) which allowed for a court to interfere in awards, however, under the current legislation, that provision has been omitted.”

Thus, the court in para 39 held that “the learned Single Judge, similar to the learned Civil Judge under Section 34, appears to have not concerned themselves with the contours of Section 37 of the A&C Act.”

Conclusion

The Court has ultimately allowed the appeal of the claimant-appellant by setting aside the impugned judgment passed by the Ld. Single Judge of High Court and Ld. Civil Judge, and consequently restored the award dated 18^th Feb. 2003 passed by the Ld. Arbitrator, with a direction to the State of Karnataka to expeditiously pay the amount to the claimant-appellant.

Case Title: S.V. Samudram v. State of Karnataka

Citation : 2024 LiveLaw (SC) 14

Click Here To Read/Download Judgment