Courts Can Modify Arbitral Awards Under Sections 34/37 In Some Cases: Supreme Court

A Constitution Bench of the Supreme Court, in a momentous decision, held in the ratio of 4:1 that courts do have limited powers to modify arbitration awards under Sections 34 and 37 of the Arbitration and Conciliation Act 1996. This judgment now settles an important question which has been pending and has created ambiguity in arbitration law vis-à-vis the question of whether Indian courts can vary the substantive terms of an arbitral award or only set it aside. 

The Majority View

The majority opinion, authored by Chief Justice of India Sanjiv Khanna, clarifies that courts can effectuate a limited qualitative modification in given cases without entertaining a full merits review. The Court explained that power would be exercised under the following classes of cases: 

1. Severability of Award: If a part of the award is legally invalid but that part can be separated from the valid portion, courts may modify the award accordingly. 
2. Clerical or Typographical Errors: Courts may correct obvious mistakes or errors apparent on the face of the award. 
3. Interest Granted After Award: Courts may sometimes vary the interest aspect granted after arbitration. 
4. Cutting across-the-board powers under Article 142 of the Constitution: The Supreme Court may, in appropriate and consignable instances, use its extra-ordinary power under Article 142 to modify awards to secure the ends of justice, restraining itself from doing so in other classes of cases. 

This interpretation constitutes a gradual departure from earlier decisions which took a much serious view in holding that courts could only set aside and not modify awards.

The Constitution Bench was left with Chief Justice Sanjiv Khanna along with Justices BR Gavai, Sanjay Kumar, AG Masih, and KV Viswanathan. The judgment was reserved on February 19th, 2024, after a hearing spanning three days.

The Dissenting View

Justice KV Viswanathan gave an elaborate dissent but disagreed with the rest of the majority on very important issues. According to him, Section 34 does not allow the courts to alter arbitral awards, as it is judicial overreach into essentially what is non-judicial and contractual adjudication.

Justice Viswanathan warned that any interpretation of allowing courts to modify awards would go against the very ethos of arbitration, which includes finality and minimal judicial interference. He further added:

• It should not allow a modification of post-award interest and have the issue referred back to the arbitral tribunal.
• It should not extend Article 142 powers to modify awards as it will create uncertainty and problems in enforcement of foreign awards. 
• The inherent powers under Section 151 of the CPC or the doctrine of implied powers do not serve as a justification for judicial modification. 

His words are: "Modification is not a lesser power than to set aside. Both work in different spheres. Courts have no such authority under Sections 34 and 37 and even the statutory frame ought to be respected."

What the Law Says 

• The arbitral awards are subject to scenario laid down in Section 34 of the Arbitration and Conciliation Act, 1996 which further provides for their being set aside. Section 37 describes situations where appeal may be made in arbitration matters. Until now the majority opinion of the courts was that these sections construed arbitration and were confined to setting aside of awards but that also modified awards.
• This present judgment has now made it clear that at least limited judicial modifications are permissible where an award is severable, has patent errors, or requires an adjustment of post-award interest. 

Why Was This Matter Referred? 

In February 2024, a bench comprising Justices Dipankar Dutta, K.V. Viswanathan, and Sandeep Mehta referred the issue to a Constitution Bench. The referral was made because of deluge discordance from various benches of the Supreme Court. 

Some earlier judgments, for example, Project Director NHAI v. M. Hakeem, Larsen Air Conditioning, and SV Samudram, have held the courts do not have the power to modify awards. However, contrary judgments like Vedanta Ltd., Oriental Structural Engineers, and Tata Hydroelectric had either sanctioned or approved modified awards. 

In a bid to resolve this controversy, the bench had framed five main questions including:

• Is the power to modify covered within the ambit of Sections 34 and 37?
• Could the modification occur only when the award is severable? 
• Does the power to set aside equate to the power to modify?

Presentations of Arguments

Union's Position

The Union of India, represented by Solicitor General Tushar Mehta, contended that the Arbitration Act, particularly Section 34, forbids the courts from altering awards. He asserted that Article 34 of the UNCITRAL Model Law (the provisions form the basis of this Act) also prohibits any modification, allowing only for the possibility of setting aside an award.

The Union submits:

• Section 34(1) talks explicitly about only one remedy: setting aside. 
• Section 34(4) concerns adjournment, allowing the court to give the tribunal the opportunity to remove any ground for setting aside. What it does not give is the power to correct the award. 
• The severability of parts of an award cannot be regarded as a court modification of the award. 

Position of Petitioners

Senior Advocate Arvind Datar, appearing for the lead petitioner, argued that with regard to the domestic drafting of Section 34, it is a quintessential case of misunderstanding Article 34 of the UNCITRAL Model Law. In contrast to India, the UK and Singapore have canonized arbitration laws in consonance with their local frameworks.

Datar said:

• Courts should intervene where awards are grossly erroneous and should have the power to partially set aside or modify those awards. 
• Section 151 CPC gave civil courts the authority to step in and administer justice.
• "Set aside" would have a liberal meaning given that partial modification is also implied thereunder, especially so, when an award is impractical or irrational.

In the case of Gayatri Balasamy v. ISG Novasoft Technologies Ltd, the Supreme Court pronounced an important ruling bringing in clarity to an otherwise murky aspect in arbitration law. While the majority allows minor judicial modifications in arbitral awards under specific and narrowly defined conditions, the dissent cautions against any countermovement against the finality of arbitration.

This judgment finds a balance: allowing courts sufficient discretion to ensure fairness but without compromising the sanctity of the arbitral proceedings. And yet, the Court made it clear that such powers would have to be exercised with utmost restraint.

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