To modify or not to modify an Arbitral Award: Supreme Court Constitution Bench to decide - Part I

Arbitration, as a mode of Alternate Dispute Resolution, has now become an integral part of the Indian legal system. The comprehensive statute dealing with arbitrations, that is, the Arbitration and Conciliation Act, 1996 (‘Arbitration Act’), is a complete code in itself and is in tune with the international standards set out in Model Law on International Commercial Arbitration adopted by the United Nations Commission on International Trade Law (‘UNCITRAL’).

Due to the high stakes involved, the Supreme Court has time and again been called upon to clarify and settle the law relating to arbitration in India. Recently, a three-judge Bench of the apex court in the matter of Gayatri Balasamy V. M/s ISG Novasoft Technologies Limited [SLP (C) 15336/2021], decided to refer to the Constitution Bench the contentious issue relating to the scope of interference which the appellate and subordinate courts are permitted to exercise under Sections 34 and 37 of the Arbitration Act and whether these provisions allow the subordinate courts to modify arbitral awards. The said reference order has mentioned both instances, wherein on the one hand, the apex court has held that modification of an award is not permissible under the Arbitration Act, while on the other hand, there are several judgments that have either modified the award or upheld the modification done by subordinate courts.

The Scheme as per the Arbitration Act

Before delving into the topic, it would be beneficial to briefly look into the scheme of Section 34 and 37 of the Arbitration Act. As per Section 34 of the Arbitration Act, recourse to a court (Civil Court or High Court having original jurisdiction) may be made for setting aside an arbitral award only on certain grounds. Keeping in context the power to modify an arbitral award, it is the language used in Section 34 sub-clause (2)(b) that has tempted the courts to go beyond the mandate of ‘setting aside’ an award venture into correcting errors that, at times, include modification of an award to secure the ends of justice. Under what circumstances can a court interfere with an arbitral award has been comprehensively covered in ONGC Ltd. V. Saw Pipes Ltd. [(2003) 5 SCC 705].

Section 37, on the other hand, inter-alia, provides for an appeal against an order passed under Section 34. The jurisdiction of appellate courts under Section 37 of the Arbitration Act has been discussed by the Supreme Court in the case of MMTC Ltd. V. Vedanta Ltd [(2019) 4 SCC 163; ‘MMTC Ltd.’] and in UHL Power Company Ltd. V. State of Himachal Pradesh [(2022) 4 SCC 116], wherein it was held that interference under Section 37 cannot travel beyond the restrictions laid down under Section 34, and that an independent assessment of the merits of the award is not permitted. Thus, a limited scope of interference in arbitral awards has been given to the Courts under Sections 34 and 37 of the Arbitration Act.

The Naysayers

In the case of Project Director, NHAI V. M Hakeem [(2021) 9 SCC 1; ‘M. Hakeem’], the Supreme Court had the occasion to thoroughly discuss the scheme of Section 34 of the Arbitration Act and whether the power to set aside an Arbitral Award did include the power to modify the same. Speaking through Justice RF Nariman, the Court unequivocally held that, the Courts have no power to modify an award under the Arbitration Act. Citing the authorities in the case of MMTC Ltd., Ssangyoung Engg. & Construction Ltd. V. NHAI [(2019) 15 SCC 131] and McDermott International Inc. V. Burn Standard Co. Ltd. [(2006) 11 SCC 181; ‘McDermott’], the Court declared the law that only limited grounds are available to challenge an arbitral award under Section 34 of the Arbitration Act, and as far as the power of the subordinate courts are concerned, the Arbitration Act does not permit them to ‘correct errors of arbitrators,’ but only to quash and set them aside leaving it to the parties to get the dispute resolved again via arbitration or any other means. The Court also referred to the law declared in the case of Dyna Technologies Ltd. V. Crompton Greaves Ltd. [(2019) 20 SCC 1], to clarify that the legislative intent to include sub-clause (4) to Section 34, wherein the arbitral tribunal can be given an opportunity by the Court to cure any defects there may be in the proceedings or the award, was to ensure that the award remains enforceable, and only in rare cases, as mentioned under Section 34, can the Courts exercise its substantive powers and set aside an arbitral award. Another significant reasoning given by the apex court was that the UNCITRAL Model Law on International Commercial Arbitration 1985, on which Section 34 is based, also does not permit a Court to modify an award when an arbitral award has been challenged. The Court further stated that the scheme under the previous Arbitration Act in India (Arbitration Act, 1940), as per Sections 15 and 16, permitted the Courts to modify an award. These provisions were deliberately removed in the Arbitration Act of 1996, which, as per the apex court, made the intention of the legislature abundantly clear as regards the power of courts to modify arbitral awards.

The apex court expressed similar views in the case of Larsen Air Conditioning and Refrigeration Company V. Union of India [2023 SCC OnLine SC 982] wherein, after referring to the law declared in M. Hakeem, it was held that courts are rendered powerless to modify an arbitral award since the advent of the Arbitration Act, 1996, and that an award, at best, can only be partially or wholly set aside by a court if the conditions spelt out under Section 34 have been established.

Then, in the latest case of SV Samudram V. State of Karnataka [2024 INSC 17], the apex court again reiterated that the scope of interference with arbitral awards under the Arbitration Act was very limited and the scheme of Section 34 and Section 37 of the Arbitration Act did not permit courts to modify an award and that any attempt to carry out such a modification would amount to crossing the ‘Laxman Rekha.' The Court further stated that arbitral proceedings are different from judicial proceedings before a Court, and an arbitrator’s view is binding unless set aside on specified grounds mentioned in Section 34 of the Arbitration Act. It was held that once the grounds for interference are made out, it is not open to courts under the Arbitration Act to sit as an appellate court and re-examine the merits of an Arbitral Award when it has been challenged.

About the authors: Abhijit Mittal and Anukalp Jain are Partners, and Divynk Panwar is a Counsel at Legal Scriptures.