One of the key objectives behind enactment of the Arbitration and Conciliation Act, 1996 (“1996 Act”) was to create a fair and efficient framework for arbitration process and to reduce the supervisory role of courts in the arbitration process. To achieve this, the 1996 Act includes provisions that ensure awards passed by the arbitrators are reasoned and required arbitrators to operate within their jurisdiction, promoting fair and just outcomes with requirement of minimal court intervention. Consequently, instead of providing a mechanism for appealing against an arbitral award, the 1996 Act permits preferring an application to set aside an award albeit only on a limited set of grounds.
Section 34 of the 1996 Act states that an arbitral award may be set aside by the court if the award meets any of the grounds mentioned in Section 34 (2). In contrast to the Indian Arbitration Act 1940 (“1940 Act”) which allowed rather broad grounds for setting aside of an arbitral award1, Section 34 (2) of the 1996 Act outlines limited grounds for challenging an arbitral award aiming to prevent excessive judicial interference.
The jurisprudence regarding the scope of examination by courts of arbitral awards is well established. There are multiple restraints on a court while exercising its jurisdiction under Section 34 of the 1996 Act. For instance, a court cannot re-evaluate the evidence that has already been considered by the arbitrator nor can a court examine the merits of an award if the arbitral award is well reasoned2. Additionally, a court cannot examine the reasonableness of the reasons provided by the arbitrator nor can it interfere with an arbitral award unless the principles of natural justice or fundamental rules of evidence have been disregarded by the arbitrator3.
Notably, while the language in Section 34 of 1996 Act provides for “Application for setting aside arbitral award” and “An arbitral award may be set aside by the Courts only if”, the courts have also been modifying or affirming modifications of an award when exercising their jurisdiction under Section 34, in addition to setting aside or upholding the award.
In Tata Hydroelectric Power Supply Co. Ltd. vs. Union of India4, a three-judge bench of the Supreme Court was adjudicating an appeal against the High Court's decision to set aside an arbitral award. While upholding the arbitral award, the Supreme Court also partly modified it. The arbitrator had originally awarded interest at a rate of 12% p.a. from August, 1993 till the passing of the court decree. However, the Supreme Court modified the award directing that interest be awarded from the date of the award i.e. 30th March, 1998 instead of August, 1993.
Similarly, in J.C. Budhraja vs. Chairman, Orissa Mining Corporation Ltd.5, the claimant in the Statement of Claim had stated that the value of work completed was Rs. 2,45,85,183.89, with total payments received from the defendant amounting to Rs. 1,49,88,566.90. Consequently, the Claimant had claimed the remaining balance amount of Rs. 95,96,616. However, during the arbitration proceedings, the claimant increased the claim by a sum of Rs. 29,86,871/- while the original claim statement remained unaltered. The arbitrator awarded the claim taking into consideration the increased claim amount. The District Court upheld the award, but the High Court later allowed an appeal and set it aside. In the subsequent appeal to Supreme Court, the three-judge Bench noted that the arbitrator had considered the averments which were not made in or supported by the claimant's statement of claim of the Claimant, thus exceeding his jurisdiction. Accordingly, the Supreme Court reduced the awarded amount and directed a decree for a sum of Rs. 13,93,373.50 in terms of the award.
In M.P. Power Generation Co. Ltd. vs. Ansaldo Energia Spa6, the arbitrator in the arbitral award had inter-alia observed that the bank guarantee invocation by the defendant was improper and ultimately awarded Rs.11,14,55,042/- with interest to the claimant. The Division Bench of Supreme Court modified the arbitral award to the extent that the claimant was not entitled to the amounts involved in the Bank Guarantees.
There are many other cases, where the Supreme Court had either modified or upheld the modification of arbitral awards7.
However, in 2021, the Division Bench of Supreme Court in the case of Project Director NHAI vs. M. Hakeem8 addressed the issue of whether under Section 34 of the 1996 Act the courts have power to modify an arbitral award and ruled that courts do not have power to modify an arbitral award. It emphasised that Section 34 is far from being in the nature of an appellate provision and it provides only for setting aside awards on very limited grounds outlined in the section. The Court noted that the 1996 Act is based on UNICITRAL Model Law on International Commercial Arbitration, 1985, which also does not provide power to courts to modify the award in a challenge against it. Further, while Section 15 of the 1940 Act explicitly allowed courts to modify or correct an award (apart from the power to set aside) under certain circumstances, the 1996 Act does not confer such power to courts. Having considered the above, the Court cautioned that allowing modifications under Section 34 would amount to crossing the laxman rekha (sacrosanct boundary) as the Parliament very clearly intended that no power of modification of an award exists in Section 34 of the 1996 Act.
The ratio of M. Hakeem (supra) was followed by the Divion Bench of Supreme Court in Larsen Air Conditioning and Refrigration Company vs. Union of India and Others9 and S.V. Samudram v. State of Karnataka10 wherein the Court observed that the question of whether an arbitral award could be modified under Section 34 of the 1996 Act is no longer res integra given the findings in M. Hakeem (supra).
However, considering that coordinate benches of the Supreme Court have given divergent views on the power of courts to modify an award and further recognising that three-judge benches of the Supreme Court have in past modified the arbitral award, the Court in Gayatri Balasamy vs. ISG Novasoft Technologies Limited11 noted the need for an authoritative ruling to clarify this issue. Accordingly, the Court referred, to a larger bench, the question of whether the power of the courts under Section 34 or Section 37 of 1996 Act includes the power to modify an arbitral award and if yes, whether such power can be exercised severally i.e., whether only a part of the award can be modified. Thus, the issue is presently pending for consideration by a larger bench.
Unlike the 1940 Act, which explicitly granted courts the power to modify awards, the 1996 Act does not grant such power to courts in Section 34 or elsewhere. A plain reading of Section 34 indicates that the power of the court is limited solely to setting aside of an arbitral award. However, it is also important to consider the difficulties which the parties face pursuant to setting aside of an arbitral award. When an award is set aside, the parties must initiate a fresh arbitration, effectively bringing them back to square one. This undermines the very objective of the 1996 Act of providing an efficient arbitral procedure, as it not only causes delays but also results in additional costs for the parties involved in the fresh arbitration.
To mitigate these issues, courts could be granted the discretion to modify an arbitral award when it is evident that the matter does not require re-evaluation of facts or evidence. For example, if an arbitrator fails to award interest or awards interest at a lower rate without providing any reasons in the arbitral award, the court should have the discretion to modify the award in such cases. Thus, the Parliament may consider bringing an appropriate amendment in Section 34 of the 1996 Act to provide such discretion to courts to modify an arbitral award when reappraisal of facts and evidence is not necessary.
Footnotes
1. Section 30 of Indian Arbitration Act, 1940
2. MMTC Ltd. vs. Vedanta Ltd., (2019) 4 SCC 163; Ssangyong Engg. & Construction Co. Ltd. v. NHAI, (2019) 15 SCC 131
3. Hindustan Tea vs. Sashikant & Co., AIR 1987 SC 81
4. (2003) 4 SCC 172
5. (2008) 2 SCC 444
6. (2018) 16 SCC 661
7. Vedanta Limited vs. Shenzden Shandong Nuclear Power Construction Company Limited, (2019) 11 SCC 465; Shakti Nath vs. Alpha Tiger Cyprus Investment No.3 Ltd., (2020) 11 SCC 685 and Oriental Structural Engineers Pvt. Ltd. vs. State of Kerala, (2021) 6 SCC 150. In these cases, the court modified or upheld the modification of the interest awarded in the arbitral award.
8. (2021) 9 SCC 1
9. 2023 SCC OnLine SC 982
10. (2024) 3 SCC 623
11. 2024 SCC OnLine SC 1681
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