Can Appellate Courts Modify Arbitral Awards Under S.34/37 Arbitration Act? Supreme Court Constitution Bench Reserves Judgement

S. 34 provides the outline for applying to set aside an arbitral award. S. 37 of the Act states the instances where an appeal may lie against orders relating to arbitral disputes.

The bench led by CJI Sanjiv Khanna comprises Justices BR Gavai, Sanjay Kumar, AG Masih and KV Viswanathan.

During the hearing, CJI Sanjiv Khanna observed that S.34 and S.33 of the Act were brought in by the legislature to ensure corrective measures are there in a 'one-step adjudication' model like Arbitration. He opined :

“Arbitration is a one-step adjudication, one-step adjudication has its drawbacks and people don't like being put into one-step adjudication. But the legislature's intent is to ensure that even if it's a one-step adjudication, there should be corrective measures available to the parties- whether in the form of S.33 or S.34(4)”

Sr Advocate Saurabh Kirpal argued against the contention that the term setting aside includes modification as a sub-set of the Court's powers under S.34. He argued that the Indian Jurisprudence has a bifurcated understanding of 'modification powers' and 'powers to set aside'. He explained :

“If the power to set aside included modification, there was no need for the 1940 Arbitration Act to separately use the term 'modification', there was no need for our CPC under Order 41 from Rule 24 to 32 to say that pass an order to vary etc. Then the appellate court only has the power to uphold or set aside the judgment…it is always in the view of the Courts and Jurisprudence of our country that the powers of modification/ variation is different from the powers of setting aside or upholding a judgement. These are different and distinct concepts”

Justice Sanjay Kumar inquired that the content of S.15 of the 1940 Act has been 'smuggled into the 1996 Act' where partially setting aside an award has been provided under S.34(2) and proviso to S.33, so should the absence of the word 'modification' in the 1996 Act be given so much significance?

Kirpal answered that modification as a general concept is always seen distinctly from the concept of setting aside an award.

“Even if the power of setting aside has been smuggled in from the 1940 Act….it has been smuggled in (to the 1996 Act) as a legislatively different concept”

He added that partially setting aside an award would very much be part of the powers of setting aside an award, but this power will not allow 'modification' or variation of an award to be consumed as a sub-power within it.

Notably, under the Arbitration Act of 1940, S.15 provided for Powers of the Court to modify awards. In the 1996 Act, S. 34(2) incorporated the contents of S.15 as a ground for the Court to set aside an award. S. 33 of the 1996 Act provides for Correction and interpretation of award; additional award

Kirpal argued that the Arbitration Act of 1996 as it stands today has 'worked fairly well' and it is not as if 'arbitration areas have collapsed and no one is going to arbitration and people are rushing to the Courts for justice saying that because there is no power to modify - that look, there is an absurdity (in law)'

However, CJI interjected to point out that (1) in every 10-20 matters before the Supreme Court the issue of the need for modification in awards is raised; (2) when a court partially sets aside an award, in a way it is modifying the award, which is done in exercise of the Court's wider powers beyond S.34

“When you say partially setting aside the award, that is also modification of the award - it is because you are saying that this part of the award has to be segregated, and that power exists regardless of the power given in the proviso. We have not restrained only to the proviso to S. 34(2)(b) , we have given it a much wider meaning”

“Normally as a principle of interpretation, we don't refer to a section by the interpretation of another section in another Act, that is normally not done”, He added further.

He also highlighted that: “Arbitration is a one-step adjudication, one-step adjudication has its drawbacks and people don't like being put into one-step adjudication. But the legislature's intent is to ensure that even if it's a one-step adjudication, there should be corrective measures available to the parties- whether in the form of S.33 or S.34(4)”

Kirpal stressed that the policy of the Arbitration Act is to uphold an award 'come what may' and is different from the policy of IBC where the company is to be saved from liquidation. He argued that in arbitration the parties have big financial stakes involved. He submitted :

“There is an economic cost involved even in the delay. An expeditious decision even if sometimes unfair, is possibly more acceptable to business than a correct decision which eventually takes 50 years because parties cater to their economic planning in a particular way…if there is always a constant doubt that a particular award will be modified/upheld/set aside- this will create an economic chaos!”

Kirpal submitted 3 key contentions (1) Words cannot be added to the Statute by a Court, especially under S.34 (for allowing awards' modification) because the law does not permit; (2) the Arbitration Act presently is workable and does not cause any severe injustices or unfairness; (3) the general principle of adding words to a statute is only done when a provision is in violation of fundamental rights- here no provision of the Act has been constitutionally challenged.

Senior Advocate Gourab Banerjee argued that, as per the policy of the Arbitration Act, Tribunals are the first forum for rendering justice between the parties, and within the Act, a Tribunal is given multiple opportunities to rectify its errors by way of S. 33 and S.34.

Banerjee also stressed that if Courts were allowed to modify awards, it would make the enforceability of an ICA Award vulnerable in foreign jurisdictions as the modification would be done by way of a domestic court's judgement which may not accepted in a foreign jurisdiction.

“No one will be bothered to come to arbitrate ICA disputes in Delhi or in Bombay because they will not be comfortable knowing that it cannot be enforced.” He stressed.

He added that foreign jurisdictions like the United Kingdom and New Zealand have expressly provided for the provisions of modification of the awards by the Court.  

Sr Advocate Gaurav Pachnanda appearing for one of the intervenors mainly submitted that the Scope of S.34 to set aside an award is not to be understood the same as the normal appellate jurisdiction of the Court.

He argued that the doctrine of merger would not be applicable to orders passed under S. 34. Notably the Doctrine of Merger states that the order of a superior court would be final and binding on the lower court, the lower court's decision would be considered as merged into the superior court's ruling. Pachnanda reasoned that the doctrine would not apply to the Courts under S.34, as the nature of powers is different from the powers of the Tribunal (lower forum in this scenario)

SG Tushar Mehta in his rejoinder arguments mainly submitted that (1) the Arbitration Act has to be seen as a code in itself providing for the challenges in built and its solution; (2) the legislature consciously omitted the modification powers in the 1996 Act to limit judicial intervention in arbitration; (3) if the present bench delivers a judgement allowing courts to modify the award, it may lead to the subjective approach of all the Courts in the country in cases where modification is sought. He said :

“If it is a statutory provision, it will have its contours defined by the Statute”

CJI objecting to the above, pointed out that it is not the case that Courts are completely ousted from filling into a vacuum which may be created in the legislation.

“Just like we don't have a law on sentence policy given to the Court when legislation is passed, there is an element of discretion which is always there with the Court and when we are exercising our discretion, we are not over-stepping ourselves. We know when to step into the legislation, like the Constitution has left it to us to interpret the words of the legislation.”

 The SG clarified that for the Court to interpret, the contours of the modification powers have to be well defined, which is done by foreign countries in their legislation itself.

To which the CJI reverted, “We are conscious of that, we cannot have an open-ended thing. Forget about open-ended, it has to be in consonance with the objective behind S.34, limited interference- if we accept the argument of the other side.”

The counsels supporting the modification of the award gave their sur-rejoinders in brief. Sr Advocate Darius Khambatta stated that the doctrine of merger is a flexible doctrine which is to be applied in a case-to-case basis. He pointed out that previously when the Supreme Court modified the awards under its powers under S.142 in cases where one of the parties was international, it wasn't that the awards became unenforceable in the foreign domains. He suggested that modification powers can be contoured at least to cater to the issue of 'patent illegality' in domestic cases under S.34(2)(a).

What Led To The Reference?

In January, the bench of CJI Sanjiv Khanna and Justices Sanjay Kumar and KV Viswanathan directed that while considering the scope of powers of the Court to modify arbitral awards, an examination of the scope and contours of S. 34 and 37 will also be needed. The Court would also need to see the extent to which modification powers can be given if such modification is allowed.

Notably, in February 2024, a bench of Justices Dipankar Dutta, K.V. Viswanathan, and Sandeep Mehta referred to the larger bench the question of whether the courts have the power to modify the arbitral award under Sections 34 or 37 of the Arbitration and Conciliation Act, 1996.

The bench led by Justice Datta also noted that while one line of decisions of this Court has answered the aforesaid question in the negative, there are decisions which have either modified the awards of the arbitral tribunals or upheld orders under challenge modifying the awards. The 5 main questions that the other bench had framed were :

“1. Whether the powers of the Court under Section 34 and 37 of the Arbitration and Conciliation Act, 1996, will include the power to modify an arbitral award?

2. 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?

3. Whether the power to set aside an award under section 34 of the Act, being a larger power, will include the power to modify an arbitral award and if so, to what extent?

4. Whether the power to modify an award can be read into the power to set aside an award under section 34 of the Act?

5. Whether the judgment of this Court in Project Director NHAI vs. M. Hakeem, followed in Larsen Air Conditioning and Refrigeration Company vs. Union of India and SV Samudram vs. State of Karnataka lay down the correct law, as other benches of two Judges (in Vedanta Limited vs. Shenzden Shandong Nuclear Power Construction Company Limited, Oriental Structural Engineers Pvt. Ltd. vs. State of Kerala and M.P. Power Generation Co. Ltd. vs. Ansaldo Energia Spa) and three Judges (in J.C. Budhraja vs. Chairman, Orissa Mining Corporation Ltd., Tata Hydroelectric Power Supply Co. Ltd. vs. Union of India and Shakti Nath vs. Alpha Tiger Cyprus Investment No.3 Ltd.) of this Court have either modified or accepted the modification of the arbitral awards under consideration?”

In M. Hakeem, Larsen Air Conditioning, and SV Samudram, the Apex Court has held that the courts are not empowered to modify the arbitral award under Sections 34 or 37 of the Arbitration Act whereas in other aforementioned cases, the Supreme Court had modified or accepted the modified arbitral award.

Case Details : GAYATRI BALASAMY Versus M/S ISG NOVASOFT TECHNOLOGIES LIMITED| SLP(C) No. 15336-15337/2021

Appearance Of The Parties -

Petitioners : Mr. Arvind Datar, Sr. Advocate along with Nishanth Patil, Advocate appeared for the Petitioner in the lead matter i.e. Gayatri Balawamy v. ISG Novasoft (SLP (C) No. 15336-15337 of 2021)

Respondents : Mr. Saurabh Kirpal, Sr. Advocate along with Ms. Manmeet Kaur, Partner, Mr. Debmalya Banerjee, Partner, Rohan Sharma, Principal Associate, Gurtejpal Singh, Senior Associate, Jai Dogra, Liza Vohra, Advocates, from M/s Karanjawala & Co appeared on behalf of the Respondent in the lead matter i.e. Gayatri Balawamy v. ISG Novasoft (SLP (C) No. 15336-15337 of 2021).

Mr. Tushar Mehta, Solicitor General of India, Archana Pathak Dave, ASG along with Nikilesh Ramachandran, Aastha Singh, Kaustubh Prakash and Surjendu Sankar Das, Advocates, appeared on behalf of Union of India.

Intervenors : Mr. Gourab Banerji, Sr. Advocate appeared along with Arunava Mukharjee, Advocate on behalf of UNCITRAL; Mr. Shekhar Naphade, Sr. Advocate appeared along with Shashibhushan P. Adgaonkar, Advocate on record; Mr. Prashanto Chandra Sen, Sr. Advocate; Mr. Sumeet Pushkarna, Sr. Advocate appeared along with Mr. Gaurav Varma on behalf of Telecommunications Consultants India Ltd; Ritin Rai, Sr. Adv, Sr. Advocate appeared along with Prakash Ranjan Nayak, Advocate; Darius Khambata, Sr. Advocate appeared along with E.C. Agarwala, Advocate.