Redefining Arbitrations Periphery: Balancing Judicial Intervention Through Gayatri Balasamy Case

Introduction:

The Arbitration and Conciliation Act, 1996 ('A&C Act, 1996') is broadly based on the principles of the United Nations Commission on International Trade Law (UNCITRAL) Model Laws on International Commercial Arbitration¹. These Model Laws are fundamentally based upon the principles of Party Autonomy, Neutrality, and Kompetence-Kompetence. In essence, these principles enhance effectiveness of the arbitration process over other mechanisms of dispute settlement as well as tedious court procedures.

One of such fundamental principles of Arbitration is minimal judicial intervention by the Courts to ascertain that Kompetenz- Kompetenz principle is followed in both letter and spirit. The idea of minimum judicial intervention has been statutorily incorporated under Section 5 of the A&C Act, 1996 according to which the judicial authorities have been restrained from interfering in any arbitration proceeding unless allowed under the Act itself.

At the same time, the Courts do have a responsibility to ensure that the procedure is duly followed, and it does not adversely affect the rights of any party involved. This idea of limited judicial scrutiny is aptly reflected in various provisions of the A&C Act, 1996. One such provision is Section 34 of the A&C Act, 1996 which deals with the power of the Court to set aside the arbitral award on application of such party who is challenging its validity.

The extent to which Courts can interfere at the stage wherein arbitral award has been challenged, has always been a contentious issue. For many years, the Courts in India have adopted standard stance while dealing with applications under Section 34 of the A&C Act, 1996. Conventionally, Courts either set aside or remit the award to the arbitral tribunal for necessary review. However, recently in the case of Gayatri Balasamy v. ISG Novasoft Technologies Ltd.² (hereinafter, referred as "Gayatri Balasamy"), the five judge bench of the Supreme Court of India deviated (partially) from the practice of adhering to the principle of judicial non-intervention and held that the courts have a limited power to modify an arbitral award in clearly defined situations.

Examining the Power to 'Modify' under Section 34 of A&C Act, 1996

The Apex Court in Gayatri Balasamy was dealing with the question, whether the Courts in India are jurisdictionally empowered to modify the arbitral award while adjudicating over the application to set aside such arbitral award under Section 34 of the A&C Act, 1996.

Statutorily, on employing Literal Rule of interpretation, Section 34 of the A&C Act, 1996 only provides for setting aside of the arbitral award on satisfaction of any of the grounds provided therein. The five judge bench of the Supreme Court of India primarily dealt with the interpretation of the power available with the Court to "set aside".

The Supreme Court in its majority decision (of Gayatri Balasamy) also clarified the role of arbitrators in determining claims and counterclaims. At the stage of dealing with the application under Section 34 of A&C Act, 1996, the Court cannot correct the mistakes of arbitrator, whether factual or legal. For appreciating the present position of law, the Court referred to various precedents on the present contentious issues of law.

Conflicting Views: Analysing the Precedents

The award may be set aside or modified, in a situation wherein the arbitrator has failed to draw an inference that ought to have been drawn or reached to an inference which is manifestly untenable in law, as has been held by the three judge bench of the Apex Court in Oil and Natural Gas Corporation Limited v. Western GECO International Limited². It is trite law that the Court should, in ordinary circumstances, refrain from substituting its own interpretation over the findings of the arbitrator³. However, if such findings are patently unjustified, the Court may step in to set the perversity right, if the same is possible.

Furthermore, the Apex Court has, in multiple judgments, consistently held that the arbitrator is the master of evidence and the scope of judicial scrutiny at the stage of dealing with the application under Section 34 of A&C Act, 1996, is very limited.⁴ An arbitral award is the culmination of entire proceedings before the arbitrator and the same cannot be allowed to be interfered in normal course for correcting error of facts, engage in review of merits etc.

On the same lines, the division judge bench of the Supreme Court of India in Ssangyong Engineering and Construction Company Limited v. National Highways Authority of India (NHAI)⁵ laid down that judicial interference based on violation of Public Policy of India under Section 34(2)(b)(ii) of A&C Act, 1996 is limited to the examination of "Fundamental Policy of India" and the Court can not interfere on broad and discretionary grounds such as the arbitrator lacked "judicial approach".

On contrary, there are multiple precedents allowing the modification of award at the stage of adjudication of the application under Section 34 of A&C Act, 1996. For instance, in Oriental Structural Engineers Pvt. Ltd. vs. State of Kerala⁶, the Court upheld the award on its merit but still stepped in to modify the applicable interest rates in accordance with Section 31(7)(a) of the A&C Act, 1996.

It is evident from the analysis till now that there are conflicting opinions regarding the permissible extent of interference by the Courts. The Apex Court in McDermot International Inc. v. Burn Standard Co. Ltd. and Others⁷ and Project Director, NHAI v. M Hakeem⁸ has held that the Courts have limited scope of judicial intervention under Section 34 of the A&C Act, 1996 and can set aside the award only on limited grounds as provided therein. The Court has expressly barred interference in guise of correction of error, reconsideration of cost or interest and review of merit at the stage of Section 34.

Notably, Section 34 is based upon the principles enshrined in UNCITRAL Model Law on International Commercial Arbitration, 1985 which does not allow the courts to modify the awards. Also, it is equally true that any expansion of power to set aside the award to include its power to modify will amount to legislative amendment.

Conversely, in Vedanta Limited v. Shenzhen Shandong Nuclear Power Construction Company Ltd.⁹ and Oil and Natural Gas Corporation Ltd v. Western GECO International Ltd.¹⁰, the Court has allowed setting aside or modification of award if the invalid part of the award can be severed from the valid part.

Majority Opinion: Gayatri Balasamy

The Apex Court acknowledged the need to adopt a balancing approach. The Constitutional Bench, while deciding Gayatri Balasamy in the ratio of 4:1, held that the Courts do have limited power under Section 34 and Section 37 of the A&C Act, 1996 to modify the award but only in exceptional cases on satisfaction of enlisted grounds. The limited power to modify, as per the majority decision, may be exercised in the following circumstances:

1. If the invalid or incorrect part of the award can be severed from the valid or correct part of the award.
2. For the correction of any clerical, computational and typographical mistakes which are evident prima facie in award.
3. Post award interest can be modified but only in limited circumstances.
4. While exercising the power under Article 142 of the Constitution of India, 1950, the Supreme Court may modify the award, but such power must be exercised cautiously and not in routinely manner.

To come up with the aforesaid grounds, in its majority decision, the Court has relied upon various settled principles of law. The Proviso to Section 34(2)(a)(iv) of the A&C Act, 1996 contains the Doctrine of Severability as its underlying principle. The Courts are jurisdictionally empowered to severe the invalid portions of the arbitral award and uphold the valid portion. Furthermore, the Court relied upon the doctrine of omne majus continent in se minus to infer that the greater power of setting aside of the award under Section 32(2)(a)(iv) of A&C Act, 1996 will include, the lesser power to partially modify the same.

Dissenting Opinion: Gayatri Balasamy

It is equally interesting to study the dissenting opinion by Hon'ble Justice K.V. Viswanathan in Gayatri Balasamy who held that the power to modify is not a subservient power to the power of set aside the arbitral award, as provided under Section 34 of the A&C Act, 1996. He opined that the legal maxim, maxim omne majus continet in se minus does not apply to Section 34 of A&C Act, 1996 because the jurisdiction of the appellate Court under the Code of Civil Procedure, 1908 is fundamentally different from the jurisdiction of the Court presiding over application to set aside the award under Section 34 of A&C Act, 1996. If modification of award is allowed, the same will widen the scope for the Court, empowering them to adjudicate on merits when the parties agreed to get their dispute resolved vide arbitration.

Conclusion:

The Apex Court, speaking through its majority as well as dissenting opinion, reasserted in Gayatri Balasamy that the underlying intention being A&C Act, 1996 is to facilitate the processes of disputes resolution as a quicker and cost-effective alternative to the tedious litigation. It is true that the power to modify the award at the stage of Section 34 will empower the Court to uphold the valid part of award rather than setting aside in entirety. It is a matter of fact that any award is culmination of entire arbitral proceedings and thus, the same should not be allowed to be set aside in totality, only on the grounds which can be cured by the Court.

On contrary, it is equally important for the Court to exercise self-restraint while exercising such power to modify. The Courts are still not empowered to delve into the merits of the case which has already been determined by the Arbitral Tribunal (or Arbitrator) at the stage of dealing with application under Section 34 of A&C Act, 1996. To strengthen the position of India as a favourable destination for arbitration, it is indispensable that the Court exercise minimal interference only of necessary grounds before, during and after the conclusion of the arbitration proceedings.