Courtesy: Meenakshi Shukla
Recently, the Supreme Court of India delivered a landmark judgment of Gayatri Balasamy v. M/s ISG Novasoft Technologies Ltd. It settled the long-debated question of whether the Courts can modify an arbitral award under Section 34 or 37 of the Arbitration Act, 1996.
The Apex Court granted the power to modify the arbitral award and held that:
“To deny courts the authority to modify an award—particularly when such a denial would impose significant hardships, escalate costs, and lead to unnecessary delays—would defeat the raison d’être of arbitration.”
In this article, we break down the judgment of the Hon’ble Apex Court and its repercussions.
Background of the objective of the Act
The objective of the Arbitration and Conciliation Act 1996 is to, inter alia, facilitate minimal judicial intervention. The jurisprudence behind the legislation is to uphold ‘party autonomy’. The act speaks of ‘party autonomy’ from the ‘arbitration clause’ to the ‘arbitral award’. Hence, the Courts were prone to disagreements vis-à-vis party autonomy and the limitations thereof.
As a result, a Constitutional Bench of the Hon’ble Apex Court settled the principle of alteration in arbitral awards, and as a result, the rigidity of the arbitral awards can be relaxed to some extent.
Interpretation of sections 34 and 37 in the Arbitration and Conciliation Act 1996
1. “Section 34 – Application for setting aside arbitral award.
(1) Recourse to a Court against an arbitral award may be made only by an application for setting aside such award in accordance with sub-section (2) and sub-section (3)….”
Hence, Courts have an express power to set aside a challenged arbitral award on certain grounds. They are incapacity of the party, non-arbitrability of the subject matter, or an impugned award hindering public policy. Section 37 of the Act provides a right of appeal against a court order either setting aside or refusing to set aside an arbitral award under Section 34.
Therefore, the Court can annul an award. However, no implicit explanation suggests that Courts can alter or modify the final arbitral award.
What was the legal position before the Gayatra Balaswammy Judgment?
Courts have expressed varied views in a catena of judgments on the modification of the arbitral award.
· Against Modification
In McDermott International Inc. v. Burn Standard Co. Ltd. and Others, theSupreme Court reiterated that the Act lends a supervisory role to the Courts without the power to correct the error of the arbitrator. Further, in Project Director, National Highways No. 45E and 220 National Highways Authority of India v. M. Hakeem (2021), Sections 15 and 16 of the 1940 Act, which permitted such variations, were deliberately removed in the 1996 Act to reduce judicial interference.
This stance has been further solidified in more recent judgments, including Ssangyong Engineering [1], Larsen AC & Refrigeration Co. [2], and S.V. Samudram[3]. These decisions emphasise that allowing a full review of an award’s merits under Section 34, especially when appealed under Section 37, would lead to an undesirable “domino effect,” making any modification impermissible.
· Pro- Modification
The Courts have inadvertently modified arbitral awards in a plethora of precedents and by virtue of Article 142 of the Constitution of India, the Courts have amended details of arbitral awards to deliver “complete justice.”
For instance, in Pure Helium India (P) Limited[4] and Vedanta Limited[5],the courts modified the rate of interest.
In Oil and Natural Gas Corporation Limited v. Western GECO International Limited[6], it was held that :
“30. …. if on facts proved before them the arbitrators fail to draw an inference which ought to have been drawn or if they have drawn an inference which is on the face of it, untenable resulting in miscarriage of justice, the adjudication even when made by an arbitral tribunal that enjoys considerable latitude and play at the joints in making awards will be open to challenge and may be cast away or modified depending upon whether the offending part is or is not severable from the rest.”
What is the scope of the Allahabad High Court to modify an arbitral award under sections 34 and 37?
The Allahabad High Court shall have a limited scope of modification, while remaining in the contours of Section 34. The Court shall adhere to the following:1) Courts cannot reassess the merits and facts of the case, and 2) Modification can be made only when the error is on the face of the record and not debatable3) Varying an award is not equivalent to an appellate process. Converging with this point the Court held that-
“46. …modification order would only be appropriate where the modification, including any adjustment of costs, follows inevitably from the tribunal’s determination of a question of law.This approach would be beneficial, as it would reduce costs and delays. The courts need not engage in any fact-finding exercise”
What are the grounds of modification of an arbitral award?
The Apex Court laid down four grounds or circumstances under which the Court may modify an arbitral award. These include severing an invalid portion of the award, correcting clerical, computational, or typographical errors, modifying post-award interest in certain cases, and exercising its powers under Article 142 with due care. Court held that:
“85. This limited power may be exercised under the following circumstances:
I. When the award is severable, by severing the “invalid” portion from the “valid” portion of the award…
II. by correcting any clerical, computational or typographical errors which appear erroneous on the face of the record..
III. post award interest may be modified in some circumstances..
IV. Article 142 of the Constitution applies, albeit, the power must be exercised with great care and caution and within the limits of the constitutional power…”
Can the doctrine of severability apply to the modification of an award?
Yes, it has been expressly held that the Court can sever or remove invalid portions of an arbitral award that do not align with Section 34 of the Arbitration and Conciliation Act 1996.
· Proviso toSection 34(2)(a)(iv) which says:
“Provided that, if the decisions on matters submitted to arbitration can be separated from those not so submitted, only that part of the arbitral award which contains decisions on matters not submitted to arbitration may be set aside”
Power to sever and modify both serve the objective of preserving valid portions. Therefore, arbitrable portions are severable from non-arbitrable portions.
· Courts may partially set aside or modify an award only if the “valid” and “invalid” parts are separable, both legally and practically.If the parts are interdependent or intrinsically linked, then it does not allow partial modification of the arbitral award.The Court invoked the maxim “omne majus continent in se minus”i.e. the greater includes the lesser, stating“It would be incongruous to hold that power to set aside would only mean power to set aside the award in its entirety and not in part.”
Are Courts empowered to modify the rate of interest granted in an arbitral award?
Courts cannot modify pendente lite interest; the award may only be set aside or remitted. Courts may modify post-award interest under Section 31(7)(b) if the rate awarded is found to be excessive or unjustified. It can both increase and decrease a post-award interest.
Can the Court modify to rectify the arbitral award despite Sections 33 and 34(4)?
The Hon’ble Apex Court ruled that it Courts have an inherent power to rectify clerical, typographical, or calculation errors even if this power isn’t explicitly mentioned in the legislation. However, the error must be on the face of the record and obvious in nature.
54. The key distinction between Section 33 and Section 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 hands bound by the uncertainty. In such instances, it would be more appropriate for the party to seek recourse under Section 33 before the tribunal or under Section 34(4).
Can Article 142 of the Constitution be invoked to modify an arbitral award?
Yes, the Courts can invoke Article 142 of the Constitution in order to impart “ complete justice”. The Apex Court implied that the exercise of this must be with utmost diligence and care. In Shilpa Sailesh v. Varun Sreenivasan[7] a Constitution Bench underscored the scope of Article 142 as follows:
“19. …Article 142(1) of the Constitution of India, seemingly unhindered, is tempered or bounded by restraint, which must be exercised based on fundamental considerations of general and specific public policy. Fundamental general conditions of public policy refer tothe fundamental rights, secularism, federalism, and other basic features of the Constitution of India. Specific public policy should be understood as some express pre-eminent prohibition in any substantive law, and not stipulations and requirements to a particular statutory scheme. It should not contravene a fundamental and non-derogable principle at the core of the statute. Even in the strictest sense, it was never doubted or debated that this Court is empowered under Article 142(1) of the Constitution of India to do “complete justice” without being bound by the relevant provisions of procedure, if it is satisfied that the departure from the said procedure is necessary to do “complete justice” between the parties.”
Is the Allahabad High Court empowered to remit an award instead of modifying it?
The power of Courts to remit the award under section 34(4) stands untouched. The Court may remit when “a fog of uncertainty obscures the exercise of modification 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). In the case of Kinnari Mullick and Another v. Ghanshyam Das Damani,[8] it was held that the court cannot exercise the power of remand suo motu in the absence of a written request by one of the parties.
[1](2019) 15 SCC 131
[2](2023) 15 SCC 472
[3](2024) 3 SCC 623.
[4](2003) 8 SCC 593
[5] 2019 (11) SCC 465
[6] 2014(9) SCC 263
[7](2023) 14 SCC 231
[8](2018) 11 SCC 328