Courts Have Limited Power Under Sections 34 And 37 Of The Arbitration And Conciliation Act, 1996 To Modify Arbitral Awards

INTRODUCTION:

The Supreme Court in its decision in Gayatri Balasamy vs. M/s. ISG Novasoft Technologies Limited.¹ has held that the court has a limited power under Sections 34 and 37 of the Arbitration and Conciliation Act, 1996 ("1996 Act") to modify the arbitral award.

FACTS:

The facts of the matter are set out in ISG Novasoft Technologies Limited v. Gayatri Balaswamy and Another². The Appellant entered into an employment agreement dated 10th March, 2006 ("employment Agreement") with the Respondent whereby she was appointed as the Vice President in the Respondent company with effect from 27th April, 2006.

The Appellant has claimed that within a few months of her joining the Respondent company, she was subjected to sexist and derogatory remarks by one Krishnan Srinivasan ("Srinivasan"). She tendered her resignation on 27th July, 2006. However, after Srinivasan tendered his apology and insisted the Appellant to revoke her resignation, the Appellant accepted the apology and continued her employment.

She further claimed that after rejoining the company, Srinivasan and one Venkatesan, exerted pressure on the Appellant in discharging her duties and attempted to bring disrepute to her – the duo had issued contradictory instructions to her and had humiliated her with unwarranted remarks and further deprived her upward revision in her salary. She was also made to confront numerous difficulties in discharging her duties for turning down their sexual overtures. She further stated that no action was initiated by Respondent in this regard.

After receiving emails containing derogatory and indecent remarks from Srinivasan and Venkatesan, she informed the management of the Respondent company that she was willing to leave the Respondent company provided her termination benefits were settled in terms of the employment agreement – as there was no response, she addressed an email to the management on 14th December, 2007. Thereafter, the Appellant received three termination letters dated 17th October, 2007, 12th December, 2007 and 20th December, 2007. According to her, the management denied her admission to her office on 21st December, 2007 and escorted her out of the office in full view of her co-workers.

In the above circumstances, the Appellant filed a criminal complaint against Srinivasan and Venkatesan. The Respondent management also filed criminal complaints against the Appellant alleging defamation and extortion.

The matters were taken to the Apex Court. The Apex Court while quashing the criminal complaints /criminal proceedings of both sides, directed the parties to approach an arbitrator for adjudication of the dispute. Accordingly, the Arbitrator entered the reference on 29th April, 2011.

The Arbitrator rejected the counter claim of the Respondent and awarded INR. 2 Crore to the Appellant.

Aggrieved by the Award, the Appellant filed a Petition bearing No. O.P. No. 463 of 2012 before the High Court of Madras seeking modification of the Award passed by the Arbitrator under claim No. 12. The High Court of Madras vide its order dated 2nd September, 2014 modified the Award holding that the Appellant is entitled for an additional amount of INR. 1.68 Crores payable by the Respondent herein ("Single Bench Order").

Aggrieved by this order, the Respondent preferred an appeal bearing No. O.S.A. No. 59 of 2015, questioning the correctness of the Single Bench Order enhancing the compensation amount in relation to claim No. 12.

The Appellant also filed an appeal bearing No. O.P. No. 181 of 2015, against the same order seeking further enhancement of the compensation.

Accordingly, both these appeals came to be heard together before the Division Bench of the High Court of Madras which, by its order dated 8th August, 2019, confirmed the Single Bench Order, except for reducing the amount awarded from INR. 1.68 Crores to INR. 50K, which came to be challenged before the Apex Court in Special Leave Petition Nos. 15336-15337 of 2021³ ("SLPs").

The Civil Appeal arises out of SLPs filed by the Appellant wherein a three-Judge Bench of the Apex Court vide its order dated 20th February, 2024 directed the matter to be placed before the Chief Justice of India for an appropriate order.

ISSUE FOR CONSIDERATION:

The main issue before the five-Judge Bench was whether Indian Courts were jurisdictionally empowered to modify an arbitral award and if so, to what extent.

SUBMISSIONS ON BEHALF OF THE APPELLANT:

The Appellant contended that the judgment in Project Director, National Highways No. 45-E and 220, National Highways Authority of India v. M. Hakeem and Another⁴ warrants reconsideration, as it conflicts with several decisions rendered by Benches of two and three Judges of the Apex Court, in which awards were modified and varied. It was further submitted that the Apex Court has also upheld the modification of awards by High Courts or District Courts on other occasions.

The Appellant also submitted that the UNCITRAL Model Law on International Commercial Arbitration, 1985 ("Model Law") permits a broader scope of judicial intervention and that several signatory countries to the Model Law have enacted provisions for domestic awards that permit modification and/or variation.

The Appellant placed reliance upon the decision in Ahmedabad St. Xavier College Society and another vs. State of Gujarat and Another⁵, contending that the power to set aside will include power to modify or partially set aside an award and can be exercised when the award is in conflict with public policy which approach aligns with the jurisprudence of other jurisdictions such as the United Kingdom, Australia, Singapore, and other countries where similar powers are vested in the courts.

The Appellant inter alia submitted that the expression 'recourse' used in Section 34 of the 1996 Act is broad in scope and includes any action to enforce a right which includes within its ambit the recourse to modify an award or vary it.

SUBMISSIONS ON BEHALF OF THE RESPONDENT:

The Respondent submitted that the Model Law was the result of a collective effort by several countries to establish a uniform and cohesive legal framework wherein it was decided that courts should not have the power to modify awards for this could result in a situation where a court order replaces the arbitral award, which in arbitration jurisprudence is unacceptable.

It was further submitted that the power to set aside an award is a sui generis power, which is different from the modification power – further, when an award is set aside, it results in annulment of the award which means it cannot be modified or altered.

It was also submitted that the arbitral tribunal after rendering an award, becomes functus officio. Thus, the exercise of any modification, would lead to the courts adopting appellate powers which the courts do not possess and therefore, an award cannot be modified.

Lastly, it was submitted that the doctrine of merger does not apply to court modifications of an arbitral award as the power of a court is distinct from that of an arbitral tribunal.

JUDGMENT:

The Apex Court, placing reliance upon a catena of judgments observed that, the arbitral tribunal is the master of evidence – the scope of judicial intervention under Section 34 is confined to the limited grounds expressly provided therein and that the Courts do not possess the powers to correct the errors of fact, reconsider costs, or engage in a review of the merits of the arbitral award.

The Apex Court also noted that Section 34 of the 1996 Act is modelled on the Model Law which does not allow courts to modify awards, unlike the broader powers available under the Arbitration Act, 1940 – modification would go against the legal framework, as only the legislature has the power to change the law – any expansion of the ambit of Section 34 to include modification would require a legislative amendment.

On the aspect of contours of Section 34 of the 1996 Act:

The Apex Court observed that Section 5 of the 1996 Act limits judicial intervention in an arbitral award – recourse under Section 34 (1) to a court against an arbitral award may be made only by an application for setting aside the award.

On severability of Awards:

The Apex Court observed that the proviso to Section 34(2)(a)(iv) of the 1996 Act states that if the decisions on matters submitted to arbitration can be separated from those not submitted, only that part of the arbitral award which contains decisions on matters not submitted may be set aside. The Court observed that the power conferred under the said proviso is clarificatory in nature. The Court also caveated that not all awards can be severed or segregated into separate silos – partial setting aside may not be feasible when the valid and invalid portions are legally and practically inseparable.

On the difference between setting aside and modification of Awards:

While agreeing to a limited extent with the argument advanced by the Respondent that modification and setting aside have different consequences, the Court observed that recognizing any modification power will not inevitably lead to an examination of the merits of the dispute – it will depend on the extent of the modification powers recognized by the Apex Court.

On the aspect of limited power of modification in Section 34:

The Court opined that modification represents a more limited, nuanced power in comparison to the annulment of an award – the latter entails a more severe consequences of the award being voided in toto. The limited and restricted power of severing an award implies a power of the court to vary or modify the award – the silence in the 1996 Act should not be read as a complete prohibition.

Observing further that, Section 34 of the 1996 Act can apply the doctrine of severability and modify a portion of the award while retaining the rest, which is subject to parts of awards being legally and practically separable.

On the question of whether courts can modify the award despite Section 33 and 34(4) of the 1996 Act:

The Apex Court affirmed that, notwithstanding Section 33 of the 1996 Act, a court reviewing an award under Section 34 of 1996 Act possesses the authority to rectify computational, clerical or typographical errors, as well as other manifest errors, provided that such modification does not necessitate a merits-based evaluation. The key distinction between Section 33 and 34 lies in the fact that, under Section 34, the court must have no uncertainty or doubt when modifying an award – if the modification is debatable or a doubt arises regarding its appropriateness i.e., if the error is not apparent on the face of the record, the court will be left unable to proceed, its hand bound by the uncertainty; in such instances, it would be appropriate for the party to seek recourse under Section 33 of the 1996 Act before the Tribunal or under Section 34 (4) of the 1996 Act.

The Court also opined that if a fog of uncertainty obscures the exercise of modification of powers, the courts must not modify the award. Instead, they should avail their remedial power and remand the award to the tribunal under Section 34(4). The Apex Court also observed that Section 34(4) derived from Model Law, is discretionary in nature which is evident from the use of the word "may".

On the Apex Court's power to do complete justice:

The Court held that as far as the applicability of Article 142 of the Indian Constitution is concerned, the power is to be exercised by the Apex Court with great care and caution. Article 142 enables the court to do complete justice in any cause or matter pending before it. This exercise of power has to be in consonance with the fundamental principles and objectives behind the 1996 Act and not in derogation or in suppression thereof.

In conclusion, the Apex Court held that the court had a limited power under Sections 34 and 37 of the 1996 Act to modify the arbitral award – the limited power may be exercised in the following circumstances:

1. When the award is severable, by severing the "invalid" portion from the "valid" portion of the award;
2. By correcting any clerical, computational or typographical errors which appear erroneous on the face of the record;
3. Post award interests may be modified in some circumstances; and/or
4. Article 142 of the Constitution applies, albeit, the power must be exercised with great care and caution and within the limits of the constitutional powers.

Footnotes

1. 2025 INSC 605

2. 2019(6)CTC601

3. 2024 SCC OnLine SC 1681

4. (2021) 9 SCC 1

5. (1974) 1 SCC 717

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