The much-awaited judgment, reserved in the matter of Gayatri Balasamy vs M/S ISG Novasoft Technologies Limited ( "Gayatri Balasamy") by the 5-Judge Constitution Bench of the Hon'ble Supreme Court on February 19, 2025, is heralded as the torch-bearer for contouring and setting straight the path to be followed by courts under Section 34 or Section 37 of the Arbitration and Conciliation Act, 1996 (for short "the 1996 Act") – whether to modify an award or separate portions thereof as recourse when an award is challenged.
Background
Although the 1996 Act imposes greater restrictions on judicial interference in the arbitral process as opposed to its precursor - the Arbitration and Conciliation Act, 1940 (for short "the 1940 Act") - modification of arbitral awards is rather a commonplace trend. What is rather bemusing or in the dark is the extent or power that is contemplated under or sanctioned by the 1996 Act – whether the 1996 Act, which treads on borders of 'minimum judicial interference', empowers the courts to modify an award that is a result of careful and detailed deliberation of evidence or the power lies restricted to separating portions from the award based on 'prima facie' case made out?
In the UNICITRAL Model Law on Arbitration, the counter article is Article 34 which does not confer specific power to modify an award. The Article is captioned or titled in a manner that implies that the setting aside of an arbitral award, upon application, is to be the "exclusive recourse against arbitral award." The same may be in view of arbitration being conceived as an alternate dispute mechanism, independent and autonomous with an aim to have a finality while having minimum interference from courts.
This is in stark contrast to Sections 15 and 16 of the 1940 Act which provided explicit power upon a court to modify an award and to thereafter remit the award back to the Arbitral Tribunal upon satisfaction of certain eventualities. Thus, the shift to the 1996 Act was a step towards reduced judicial interference which provides that an application 'to set aside an award' is the only recourse that can be made available to a party approaching the court under Section 34 of the 1996 Act. No specific Section or sub-section of Section 34 of the 1996 Act either mentions or deals with the modification or the reversal or revision of an arbitral award and as such, what may have been contemplated is only an authority to either dismiss the objections to the award and uphold the award, or set aside the award if the criteria mentioned in subsections (2) and (2-A) of Section 34 of the 1996 Act are satisfied.
As per settled law, the jurisdiction of Appellate Courts under Section 37 of the 1996 Act also continues to be guided by Section 34 principles and therefore, no independent assessment of merits is permissible [MMTC Ltd. vs. Vedanta Ltd [(2019) 4 SCC 163 & UHL Power Company Ltd. vs. State of Himachal Pradesh (2022) 4 SCC 116].
Judicial Trend: The divide leading to Gayatri Balasamy
The 1996 Act armed with judicial interpretations like McDermott International vs. Burn Standard[(2006) 11 SCC 181] had sought to carve out a supervisory role for the courts with minimal interference - while courts can review awards within the contours or limited purposes as propounded in Section 34 of the 1996 Act, they cannot correct errors committed by the arbitrators and thereby modify the award. As such, a court could only set aside the award, leaving the parties with a choice to initiate arbitration afresh.
As this view is re-enforced by numerous authorities - like Project Director, NHAI v. M Hakeem (AIR 2021 SC 3471), National Highways Authority of India vs Arbitrator and Divisional Commissioner, Jalpaiguri & Ors (2022 SCC OnLine Cal 1693), National Highways Authority of India vs P. Nagaraju alias Cheluvaiah and Anr., (2022 SCC OnLine SC 864), Union of India and Others vs Pawan Construction Co. Engineers & Civil Contractors (2023 SCC OnLine Cal 1141), Larsen Air Conditioning And Refrigeration Company vs Union of India & Ors (2023) 15 SCC 472 and S.V. Samudram vs. State of Karnataka & Anr. (2024) 3 SCC 623, toname a few - such a position stands firmly entrenched making the modification of an award uncontemplated under the 1996 Act and therefore, impermissible. Courts are rendered powerless to modify an award and, at best, can only partially or wholly set aside the award if the conditions spelt out under Section 34 of the 1996 Act have been established prima facie from a reading of the award.
However, over the years, various High Courts and the Supreme Court have also had divergent views on the issue of whether setting aside arbitral awards under Section 34 of the 1996 Act could also include in its scope the power to modify the award. The Supreme Court has, under Article 142 of the Constitution of India, modified awards to ensure "complete justice" like in Tata Hydro-Electric Power Supply Company vs. Union of India, (2003) 4 SCC 172, where the effective date of the award was changed or JC Budhraja vs. Chairman, Orissa Mining Corporation Ltd. & Anr., AIR 2008 SC 1363. where award amount was reduced or Madhya Pradesh Power Generation Company Limited & Anr. vs. Ansaldo Energia Spa and Anr. (2018) 16 SCC 661, where a party was restrained from encashing certain bank guarantees though the arbitral tribunal had directed the same, or Royal Education Society v. LIS (India) Construction Company Private Limited (2009) 2 SCC 261, Oriental Structural Engineers Private Limited vs. State of Kerala 2021 SCC OnLine SC 337, Vedanta Limited v. Shenzhen Shandong Nuclear Power Construction Company Limited (2019) 11 SCC 465 and Shakti Nath & Ors vs. Alpha Tiger Cyprus Investment No. 3 Limited & Ors (2020) 11 SCC 685, where exorbitant interest rates were adjusted. These are contrasting examples which pause the domino effect of the settled law which says that no modification of an award is possible. While Article 142 of the Constitution of India sanctions the Supreme Court to exercise extraordinary jurisdiction when "necessary for doing complete justice", the same has somewhat incongruously been invoked to revise arbitral awards.
This leads us to the question – what made the Supreme Court circumvent its own set legal position to allow judicial revision or modification of arbitral awards and whether such an act is statutorily permissible? Accordingly, and rightly so, on February 20, 2024, this important question was referred to a larger Bench wherein arguments stand complete and the matter is now reserved for judgment.
Conclusion
While we await the final guiding light from the Supreme Court on the unresolved judicial equivocation, the legislative front seems to have tabled a suggestion in paragraph 3.25 of the 'Report of the Expert Committee to Examine the Working of the Arbitration Law and Recommend Reforms in the Arbitration and Conciliation Act, 1996 to make it alternative in the letter and spirit' to substitute the words "set aside by the Court" with the words "set aside in whole or in part by the Court" and to add a proviso for partly varying the award in exceptional circumstances.
Such a suggestion was forwarded days before the Gayatri Balasamy judgment was referred to the Constitution Bench of the Supreme Court of India. However, any action on the same is yet to see the light of day, leaving the entire onus on the Constitution Bench to finally quell the confusion. Apart from balancing the power to do "complete justice" under Article 142 with the restrictive construct of Section 34 of the 1996 Act, the Court would also have to cater to other pressing ambiguities - whether a court can consider the issue of modification only after prima facie forming an opinion without re-appreciating evidence?
An affirmative ruling by the Constitutional Bench may not serve the purpose unless complemented by overhauling the 1996 Act. The act of setting aside an arbitral and modifying an award are interlinked and cannot be viewed in isolation. Courts generally enter into the exercise of modification only after deciding on whether to set aside an award and, while doing so, it may find it is not proper to set aside but that it is more appropriate to modify the arbitral award.
However, modification of an arbitral award may involve a burden greater than simply arriving at a prima facie view of the award. This is because a modification of the award, in essence, will amount to rewriting an arbitral award. This could make the jurisprudence of Section 34 of the 1996 Act - that courts should not re-appreciate evidence or that the courts are to have a prima facie view of the award being unsustainable under Section 34 principles - questionable, apart from the idea of finality of arbitration proceedings going for a toss.
Originally published by Bar & Bench, 19 Mar 2025.
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