Can Courts Modify Arbitral Award Under S.34/ 37 Of Arbitration Act? Supreme Court Constitution Bench Begins Hearing

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.

At the outset, the CJI clarified that the court would not go into the Draft Arbitration and Conciliation (Amendment) Bill, 2024, which is pending parliamentary assent.

The two main aspects that the Court would focus on examining are (1) What is meant by 'modification' of an arbitral award; (2) to what extent, if the court accepts partial modification, without changing the core of the award- what will be the permissible parameters and (3) the scope and extent of severability of an award

Solicitor General of India (SG) Tushar Mehta, appearing for the Union, cited the first draft of Article 34 (then Article 40) of the UNICITRAL Model Law On International Commercial Arbitration. He read :

“No recourse against an arbitral award made under this law, whether or not rendered under the territory of this State may be made to a court except for an action for setting aside in accordance with the provisions of Article 41”

He pointed out that S.5 of the Arbitration Act today, mirrors the same provision where judicial intervention into arbitration is limited only to wherever the Act specifies.

S.5 states “ —Notwithstanding anything contained in any other law for the time being in force, in matters governed by this Part, no judicial authority shall intervene except where so provided in this Part.”

He added that Article 34 of UNICITRAL was adopted within the Indian framework and is reflected in S.34 of the Arbitration Act. The SG noted that the commonality here was the power of the court to set aside or partially set aside the arbitral award.

The SG mainly argued that under S.34, the Courts do not have the power to make modifications to an arbitral award. The Court can only set aside an award as per the literal reading of the provision.

Referring to S.34(1), SG stressed that S.34 only provides for one option to the Court expressly which is to set aside an award.

“The only prayer permissible is to set aside the award. There is no other prayer permissible either we go by the literal interpretation or any other interpretation,"he stressed.

Underlining S. 34(4), he argued that the Court may allow the arbitral tribunal to eliminate the grounds on which an award may be set aside, but if the tribunal doesn't follow, the only option left with the court is to set aside the award.

S.34(4) reads : On receipt of an application under sub-section (1), the Court may, where it is appropriate and it is so requested by a party, adjourn the proceedings for a period of time determined by it in order to give the arbitral tribunal an opportunity to resume the arbitral proceedings or to take such other action as in the opinion of arbitral tribunal will eliminate the grounds for setting aside the arbitral award.

At this juncture, CJI remarked, “The language used is very careful- 'eliminate the grounds' - it doesn't talk about the grounds which affect the award. So final adjudication at that stage may not be required- that the grounds for setting aside the arbitral award are embedded.”

He explained that there are two ways of understanding the sub-clause: (1) where the Tribunal is asked to eliminate the grounds which are raised by the parties raising objections after the Court examines the issue prima facie or (2) Where the Court doesn't examine prima facie on merits and comes to the conclusion that the grounds have actual substantial merit and the award is liable to be set aside- but allows the Tribunal to rectify it.

The SG asserted that the provision to set aside cannot be interpreted to also mean as modifying the award:

“ I don't think Jurisprudentially, setting aside an award can include modifying. Setting aside may include setting in part.”

CJI however pondered: “But when you modify (an award) aren't you setting aside that part?”

SG replied that assuming so would go against the literal understanding of the term 'to set-aside'.

“ Mylords I think that would be doing violence to the linguistic meaning of the word (setting aside)”

CJI then asked, “Why restrict the power of the Court?”

SG explain that the holistic purpose of the Arbitration Act is to give minimal Court intervention in arbitral proceedings.

To which the CJI replied, “ That's one way of looking at it. The other way to look at it is that the object of every law is to ensure that the litigation must come to an end”

SG opined that allowing courts to interfere may in turn flare up further litigation as each court or judge presiding may have a different view on the award challenged.

Severability Comes Within The Fold Of 'Setting Aside'; Different From Modifying The Award: SG Explains

On the issue of whether severability would mean as modifying an award, the SG expressed: “Mylords, severability- from the ultimate guillotine of being set aside will have to be distinguished from modifying powers.”

SG referred to S.37 of the Act, he explained that when the Court finds a certain part of the award severable from the whole award, it could be set aside- but such severing would not amount to a modification of the award.

S.37(1)(c) states : [Notwithstanding anything contained in any other law for the time being in force, an appeal] shall lie from the following orders (and from no others) to the Court authorised by law to hear appeals from original decrees of the Court passing the order, namely:—

(c) setting aside or refusing to set aside an arbitral award under section 34.

He added that as per the dictionary meaning of 'Set-aside', modification didn't find any cover.

Notably, the Oxford Dictionary defines 'To set aside' as to reverse, vacate, cancel, annul, or revoke a judgment, order etc.

The Black's Law Dictionary defines it as “ to put on one side, to discontinue the performance or use or practise of, to dismiss from one's mind, to abandon the consideration of, to reject or throw over as being of no value”

The term modification under Black's Law Dictionary, the SG highlighted was to mean “ To remit, restrain, assuage, to make less severe, rigourous, to tone down, to give an object its particular form…”

SG argued that both 'set aside' and 'modification' had different essences altogether. He added that modification powers may be needed but cannot be culled through the Court's interpretation of what extent modification of award can be done . It should be left to the legislature to prescribe such modification.

While the SG acknowledged that there is a legislative gap when it comes to the question of modification of an award, the present situation cannot be equated to the Vishakha v. State of Rajasthan case, where the Court laid down guidelines for the prevention of sexual harassment at workplace.

The SG stressed that in Vishakha, the Court was compelled to do so because of the lack of any legislation on the issue, here an intact arbitration statute already exists.

He also submitted that the report of Dr TK Viswanathan Committee has suggested amending Section 34 to give powers of modification in exceptional circumstances.

High Court's Exclusive Jurisdiction & Possibility Of Modification Powers

During the hearing, Justice Viswanathan inquired that while the law is silent on award modification powers of the Court , the High Court could still modify an award under its writ jurisdiction

, “ If a party only wants a modification and if you say that it is not covered by the Statute, will it not be a matter exclusively within the jurisdiction of the High Court? Because the Act doesn't contemplate that at all”

To which the SG said that while there is no definite answer, but under Articles 226 and 227, at present, the High Court may have jurisdiction to review the award.

“ I cannot say Yes or No, but it is not possible right now to say that the High Court has no jurisdiction, the High Court would retain the jurisdiction”, he answered.

Domestic Law Overlooks That Art.34 Of UNICITRAL Meant For International Arbitration : Sr Adv Arvind Datar Argues

Sr Advocate Arvind Datar appearing for the lead petitioner in the present matter, emphasized that Article 34 was not understood correctly when making the domestic law on arbitration. He stressed that UNICITRAL was intended to cater to arbitration between two nations.

“The difficulty which we are facing for the last 20 years, and the continuous confusion on arbitral law and resorting to Article 142 and so on, is because Article 34 is UNICITRAL Model Law, is necessarily for pure international arbitration where two parties are from two different countries. Article 34 was meant for two nations' arbitration”

He explained that other countries like the UK, Singapore, and Canada did not exactly lift Article 34 in the UNICITRAL and chose to draft separate laws suiting their domestic arbitration landscape. This was however not considered while drafting S.34 of the 1996 Act. Thus, he rooted for the present bench's input on the interpretation of S.34.

He said “If there is a complete inconsistency and the law is crying and begging for change, we cannot wait till the legislation changes it”

Datar further stressed that in cases where the award is completely erroneous, then the Courts under S.34 should be given the power to step in and modify it.

The CJI then inquired if simple corrections in the award could be called as modification and under what conditions one may say that Court has not modified the award.

“ When will the interference by the Court not be treated as modification? Interference into interests not be treated as modification? Clerical or arithmetic arrears should not be treated as a modification.”

He further analysed that the possible reason why modification was not included under the Act was because it may invite judicial examination on the merits of the award as opposed to making the proceedings only summary in nature under S.34

“ There is a reason why modification is not incorporated. Because without defining modification, it will virtually mean that the Court gets into the judgement and after having set it aside, can examine it. The very fact that the Court should not do that as S.34 is a summary proceeding”

The bench was also informed that foreign jurisdictions in their laws have expressly stated where modification is permissible and under what conditions can the arbitral award be modified, which was missing in the Act of 1996.

CJI however reiterated the issue of judicial overreach in allowing modification of awards by the Courts

“The difficulty is- in case we give the power of amendment of modification to the Courts, it may be that we virtually step into the shoes of the arbitral tribunal.”

To which Datar pointed out that if such modification powers aren't granted then the parties will keep going back and forth between tribunal and court without concluding.

The bench will continue hearing the matter on Tuesday, February 18.

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