'Need To Be Practical' : Supreme Court On Whether Appellate Courts Can Modify Arbitral Awards [Day 2 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 CJI explained that the 1996 Act was framed when the Country opened its doors for liberalisation and the legislation came for tackling cross-border disputes which may arise. However, S.34 being adopted from the UNICITRAL Model law without modifications would not mean that the provision has to be given an outdated meaning. He said :

“What was material at that time, when we implemented the 1996 Act- let's not forget that was the occasion in 1990 when liberalisation had started, we were expecting foreign investment to take place and normally arbitration is a method resorted to for dispute resolutions in cross border disputes.”

“So what happened was we adopted the UNICITRAL Model which is basically also the framework of the New York Convention- more or less on that….but if one goes on that - normally we say we have to interpret the intent of the legislation but while doing so we also have to be practical, because the legislation never meant that it would be impacting the law- something which is so obvious, it will be overlooked by it”

Previously, SG Tushar Mehta argued 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 limited power of the court to set aside or partially set aside the arbitral award.

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

Senior Advocate Arvind Datar appearing for the lead petitioner submitted that the term 'set-aside' has to be interpreted to mean the power of the Court to either fully or partially set aside an arbitral award. He added that (1) 'recourse to a court' would mean recourse to a civil court in light of S.9 read with S.151 CPC; (2) the inherent powers of the Court to do justice are always there and thus setting aside would entail partially setting aside the award.

“The word set-aside cannot be given such a rigid meaning as to make it inflexible and put it into bigamy into black-white.”

Datar argued that the Courts under S.34(2) would have the power to rectify an award instead of sending it back to the Tribunal under S. 34(4) as that would lead to years of delay in reaching a conclusion on the award.

The CJI interjected to point out that in the presence of an express remedy to remit the award back to the tribunal, allowing the Court to modify may not be possible. He explained:

“If we accept that "curable defects" referred to in your arguments- which the court can rectify, are relatable to S.34(4)- then it will lead to difficulty because 34(4) provides for a specific remedy. It can be argued from the other side that when a specific remedy and method of providing for that remedy is given, then we cannot by pass it.”

Dattar clarified that his argument is that 34(4) is merely an indicia for the Court to save the award from being completely set aside.

“I'm only trying to say- setting aside the award is the last resort. Wherever you can save it, try to save it.”

He concluded by asserting that in instances where out of supposing 7 issues considered in the award, 2 issues 'infect the whole award' and are not severable from the core of the award, then the Court should examine such a 'patent illegality' which is not on merits of the case, or on the correction of application of law, then the Court should rectify the patent illegality.

“Like a post-correction, the award is off-track, bring it on track and save it.”

To illustrate instances where the court modified a 'patent illegality' in the award, Datar cited the decision of Indian Oil Corporation v. Ganesh Petroleum, in which the Court modified the award. In that case, the tribunal changed the rate of the original rent fixed as per the lease agreement. Here, the Court modified the award by correcting the rent period back to 20 years, as per the original lease agreement between the parties.

Similarly, in Ssangyong Engineering v. NHA, the Supreme Court went ahead with the dissenting award where the tribunal's decision was split in majority-minority opinion.

Senior Advocate Darius Khambata appearing for one of the intervenors submitted that as long as there is no express bar under the provision of law, it cannot be said that courts are restricted from modifying an award.

He referred to the example cited by SG Tushar Mehta in his written submissions regarding Singapore's Arbitral Law where “there is express prohibition to vary the award except as provided under this Act.”

He stressed that under the Act of 1996, there is no such express prohibition on powers of the Court and S.5 of the Act cannot be read as a limitation to the Court's power to modify an award.

Khambata argued that by virtue of the Doctrine of Implied Powers and Doctrine of Moulding the Relief, the Courts do have powers under S.34 to modify an award. He stressed that modification by way of severability was done in the general sense and not restrictively as under S.34. He submitted:

“Yet lordships have repeatedly applied the general doctrine of severability to save awards”

“Why have they read that power in? It is because they are cognizant that S. 34 is a recourse provision and that the aim and object of the Act is finality and speed of dispute resolution”

He added that giving a rigid interpretation to S. 34 would practically go against the main intent of the whole Act, which is effective dispute resolution.

Advocate Vaibhav Dane appearing for one of the intervenors pointed out that the provision of remitting back an award to the Tribunal overlooks the excess expenditure that parties incur in such a process. The power of the Courts to modify would help in avoiding such an expense.

Sr Advocate Ritin Rai also supporting the argument on the Court's powers to modify an award, emphasized that the modification powers sought by the petitioners are different from the implied modification power under S. 34(4).

While the Union has argued that S.34(4) restricts the Court's powers to modify an award by allowing the Courts only to the extent of remittance, Rai submitted that S.34(4) is misconstrued and only means the scope of the Tribunal to cure its defects of reasoning and not change the conclusion of the award.

Rai added that S.34(4) cannot be read to mean that the Tribunal can change the defective part of the award.

Statutory Arbitration Under NHAI Act Distinct From Arbitration Act of 1996

Sr Advocate Shekhar Naphade appearing for an intervenor whose land had been acquired submitted that there is a 'fundamental difference between the Statutory arbitration under the NHAI Act and arbitration under the Arbitration Act”

He stressed that the former involved limitations under the public law, including factors to consider while determining compensation, while commercial arbitration entails limitations of the private law.

Secondly, under commercial arbitration, the arbitration and choice of arbitrator is as per the mutual consent of the parties. While statutory arbitration is prescribed by the legislation, and arbitrators are appointed from a government panel.

He highlighted that awards passed under the NHAI Act's arbitration are very meagre for the private party and often the Supreme Court has enhanced the compensation by invoking its powers under Article 142.

Naphade explained that giving a strict interpretation of S.34(4) in cases relating to awards under the NHAI Act would complicate things for a private party whose land is acquired. He exemplified that in cases where the land of two different persons is acquired under the same notification, but they are awarded compensation at different rates (as opposed to the Act), then the person challenging the award under 34 would be compelled to go back and forth between courts and tribunals.

“Look at the kind of injustice! It will defeat the very objective of expeditious resolution of disputes.”

He concluded by submitting that the powers of the Court under S.34 cannot be applied from the same yardstick when dealing with Statutory arbitrations which are conceptually different from commercial ones, doing so would lead to an infraction of Article 14.

Senior Advocare Prashanto Chandra Sen also appearing for an intervenor briefly submitted that (1) S.34, there is both inherent powers and discretionary powers of the Court; it is from the discretionary power that power to modification arises; (2) Within the discretionary power, the power of severability is also found- if severability is accepted as a form of modification, then there should not be a bar on other types of modifications of the award; (3) it would be incorrect to limit inherent powers of the Court to modify an award by giving a limited interpretation to 'modification' itself.

The Court will continue the hearing tomorrow.

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