Modification of Awards – Is Section 34(4) the answer?

The Supreme Court in Hakeem rightly posits that it is only for Parliament to amend Section 34(4), and bring it in line with other legislations the world over.
Payal Chawla and Hina Shaheen
Payal Chawla and Hina Shaheen

In NHAI v. M. Hakeem [(2021) 9 SCC 1] the Supreme Court held that courts had no power to modify an arbitral award. The Court rightly observed that the Arbitration and Conciliation Act, 1996 (“ACA”) does not confer courts with the power to modify arbitral awards, and doing so will be crossing “the Lakshman Rekha”.

A similar issue arose more recently in the matter of NHAI v. P. Nagaraju alias Cheluvaiah, where a coordinate bench of the Supreme Court set aside an arbitral award.  The Court held that the award suffered from “patent illegality” and that the “only course open” was to set aside the award. The Court, however, simultaneously remanded the matter to the same arbitral tribunal “to reconsider” certain aspects under Section 34(4) of the ACA.

Under the scheme of the ACA, an order cannot be set aside under Section 34 while simultaneously remanded to the tribunal under Section 34(4). A bare perusal of the latter will indicate that an exercise of power under Section 34(4) is to uphold an award, and not set it aside – this is clearly discernable from the expression “eliminate the grounds for setting aside the award” appearing in Section 34(4). This position also stands settled by a three-judge bench in the matter of Kinnari Mullick v. Ghanshyam Das Damani.

Kinnari Mullick v. Ghanshyam Das Damani

In Kinnari Mullick, the award was set aside by the Single Judge. No “formal written application” was filed by the party in question, either before the Single Judge or the Division Bench, under Section 34(4) of the ACA. The Supreme Court held that under Section 34(4) the court’s discretion was “ limited” and could be “exercised only upon a written application made in that behalf by a party to the arbitration proceedings”, and that the court “cannot exercise this limited power of deferring the proceedings before it suo moto”. Failure by a party to seek deferral of the court proceedings to set aside the award would disqualify the party from moving an application under Section 34(4).  The Court further held that upon the disposal of the main proceedings under Section 34, the arbitral tribunal becomes functus officio, and further observed, “…the limited remedy available under Section 34(4) is required to be invoked by the party to the arbitral proceedings before the award is set aside by the Court”.

In the peculiar facts of P Nagaraju as well, no application under Section 34(4) of the ACA was filed before the Court. It is therefore unclear how the Supreme Court relied on Section 34(4) while simultaneously setting aside the award.  

The problem of per incuriam

Importantly, P. Nagaraju fails to consider the binding precedent of a three-judge bench in Kinnari Mullick, making the f0rmer judgement per incuriam. The Court instead relies on Dyna Technologies Pvt. Ltd. v. Crompton Greaves Ltd. [2019 SCC OnLine SC 1656].

The judgement of Dyna Technologies is also by a three-judge bench. While the judgement makes no reference to Kinnari Mullick, the Court’s observations on Section 34(4) are more or less in line with the former judgement. In fact, the Court in Dyna Technologies observed that   “… when the High Court concluded that there was no reasoned award, then the award ceased to exist and the Court was functus officio under Section 34 of the Arbitration Act ….”. Evidently, the same is diametric to what the Supreme Court held in the P. Nagaraju matter.  That said, it would also be important to point out that in the same paragraph the Court also adds - “In such case, the High Court ought to have considered remanding the matter to the Tribunal in the usual course”. There is a distinct possibility that this observation of the Supreme Court in Dyna Technologies may have weighed with the Supreme Court in P Nagaraju while remanding the matter. If that was indeed the case, it is our respectful submission that it would be a misreading of the judgement in Dyna Technologies, since the observations are clearly in the context of the underlying Division Bench decision. On the contrary, if the Supreme Court in Dyna Technologies did intend for its observations to be the ratio on Section 34(4), Dyna Technologies too would be per incuriam, insofar as it fails to rely on Kinnari Mullick, which undoubtedly is the authority on Section 34(4) of the ACA.

Article 142

The Supreme Court in Hakeem recognises that there are judgements of the Supreme Court where the courts have modified awards, but explains these decisions as taken by the Supreme Court under its extraordinary jurisdiction under Article 142 of the Constitution of India, even whilst some of the judgements do not explicitly refer to Article 142. 

In the matter of Vedanta Limited v. Shenzhen Shandong Nuclear Power too, the Supreme Court modified the interest granted by the arbitral tribunal. The Supreme Court made no mention of Article 142. More importantly, the Court in Vedanta appears to have granted sanction to other courts to modify award qua interest, and in this regard observed - “Courts may reduce the interest rate awarded by an Arbitral Tribunal where such interest rate does not reflect the prevailing economic conditions or where it is not found reasonable, or promotes the interests of justice”. Such an observation by the Supreme Court is not only in conflict with the ACA, but also in contra-distinction to the position later taken by the coordinate bench in Hakeem. It may be noted that the Hakeem judgement makes no reference to Vedanta.

There is no quarrel with the proposition that the “… Supreme Court in the exercise of its jurisdiction may pass such decree or make such order as is necessary for doing complete justice in any cause or matter pending before it…..”, however, the Constitution Bench of the Supreme Court in the matter of Premchand Garg v. Excise Commission has held that such an order cannot be “inconsistent with the substantive provisions of the relevant statutory laws”.

Furthermore, in 2007, the Supreme Court in the matter of Bharat Sewa Sansthan v. U.P. Electricity Corporation Limited, held, that the Supreme Court will not “ordinarily” bypass the provisions of the Arbitration and Conciliation Act, 1996 while exercising power under Article 142. In this particular matter, the Court declined to exercise its powers under Article 142 for “payment of arrears towards water and sewerage tax and payment of interest at the rate of 12% p.a. on the arrears of rent in terms of the agreement”, and held that while undoubtedly Article 142 is meant to do complete justice between the litigating parties, the” power is conceived to meet the situations which cannot be effectively and appropriately tackled by the existing provisions of law”

Seen in this context, it would be important to consider that the Supreme Court in Vedanta reduced the interest, even though the Court found no infirmity with the award, on the ground that interest was in the nature of “compensation” and hence “excessive”. 

Should Courts have the power to modify arbitral awards?

It is oft-debated whether the courts should have the power to modify and vary awards. The Supreme Court in Hakeem rightly posits that “it is only for Parliament to amend the aforesaid provision in the light of the experience of the courts in the working of the Arbitration Act, 1996, and bring it in line with other legislations the world over”. The Court cites the example of arbitration legislation in England, the United States, Canada, Australia and Singapore, where there are express provisions which permit the varying of an award. In this context, it may be apropos to mention that even in countries like the United Kingdom where the courts have the power to modify and vary the award, those powers are backed with adequate guardrails to limit judicial intervention, and courts themselves maintain “a close control to discourage speculative applications” (Review of the (UK) Arbitration Act, Summary of Consultation Paper, para 1.85). 

We would therefore caution against bringing a hasty amendment to the ACA to expand the power of courts to modify or vary awards. Given the differing positions taken in various judgements of the Supreme Court, it may be desirous for a larger bench to consider the conflicting decisions and decisively settle the law. The courts may also in their wisdom reconsider the frequent reliance on its Article 142 powers for purposes of modification of awards, particularly given the under-utilized provision of Section 34(4) of the ACA. Instead, it is advisable for litigants and courts alike to test the waters by taking more frequent recourse to Section 34(4) of the ACA.

Power to modify an award and Section 34(4)

The Supreme Court, in the context of Section 34(4), appears to limit the powers of the Court to remand matters, only to awards with “curable defects” [Kinnari Mullick & Dyna Technologies]. However, the plain language of Section 34(4), unlike Section 33, appears to impose no such fetters. Per contra, a bare perusal of the language of Section 34(4) appears to grant wide powers to the Court - to adjourn proceedings “for a time period determined” by the court, to direct the arbitral tribunal “to resume the arbitral proceedings” or “to take such other action as in the opinion of (the) arbitral tribunal will eliminate the grounds for setting aside the arbitral award”.

Apart from a few judgements [Kinnari Mullick, Dyna Technologies and I-Pay Cleaning Services Pvt. Ltd. v. ICICI Bank Ltd., which provide some insight into the scope of Section 34(4), there is no clear guideline as to which awards will fall within the mischief of Section 34(4). Even so, it might be worth considering whether there is an actual difference between “curing defects” and “modification”, or whether it is merely a matter of semantics. Certainly, it is no one’s case that the courts should have the power to modify arbitral awards in their entirety. 

Seen in that context, would it not be correct to say that the ACA does indeed make a provision for modification/variation of an award (by whatever name called)?

But where such relief of modification/variation is not sought, and only an application to set aside is filed, the court is only vested with the power to set aside the award. Thereafter, the only option for the parties is “to begin the arbitration again if it is desired” [McDermott International Inc. v. Burn Standard Co. Ltd.  For any detractors that believe the parties would have to undertake a cumbersome second arbitration, do consider that such an instance would be no different if parties had filed a suit, and were before a court in a “first appeal”. Besides, the “second” arbitration would only be a re-hearing on arguments, since parties would be bound by their pleadings and evidence.

In the current context, parties have been diffident to file applications under Section 34(4). Petitioners are typically keen to challenge the entire award, in the hope of the award being set aside, to avoid any liability. The Respondents, on the other hand, are generally reluctant to file a Section 34(4) application for the fear of admitting even a partial error with the award. So, while the prayer is to seek setting aside, the hope is modification.  But then, as they say, be careful what you pray for, for the courts may just grant it!

Payal Chawla and Hina Shaheen are Advocates at JusContractus, a New Delhi based law firm, with primary focus on arbitrations.

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