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This post is authored by Aaryan Dhasmana, 4th year B.A. LL.B. (Hons.) student at NALSAR and Shreya Sethi, 3rd year B.A. LL.B. (Hons.) student at NALSAR.
1.INTRODUCTION
The Arbitration and Conciliation Act, 1996 (Arbitration Act 1996), designed to streamline arbitration proceedings and reduce judicial intervention, delineates specific roles for courts at different stages of the arbitral proceedings. Judicial decisions have further delineated and clarified the scope of judicial involvement. However, this delimitation process has not been smooth vis-à-vis post-award judicial intervention, particularly regarding the Indian courts’ authority to modify arbitral awards.
In interpreting Section 34 of the Arbitration Act 1996, the provision allowing judicial recourse against arbitral awards, Indian constitutional courts have found themselves balancing the need to preserve the efficacy and swiftness of the arbitral process against the consideration of upholding the finality of arbitral awards. In doing this balancing act, the constitutional courts have adopted contradictory stances vis-à-vis the judicial vires to modify arbitral awards. The significance of this issue is clearly highlighted by the recent recognition of the need to clarify the prevailing ambiguity by the Supreme Court in Gayatri Balasamy v. M/S Isg Novasoft Technologies Limited (Gayatri Balasamy) which consequently referred the issue to a five-judge bench. The judgment pronounced by this five-judge bench has presently been reserved.
In this backdrop, this article aims to analyse the arguments put for and against allowing courts to modify arbitral awards in light of judicial holdings. It will first showcase the Supreme Court’s anti-modification stance, followed by a review of the reasons provided in the judgments in which constitutional courts have amended arbitral awards. Finally, it will propose a middle ground that balances considerations factored by the opposing sides.
2. THE TEXT OF SECTION 34 AND SUPREME COURT'S ANTI-MODIFICATION STANCE
Section 34 of the Arbitration Act 1996, a facsimile of Article 34 of UNCITRAL Model Law on International Commercial Arbitration, 1985 (UNCITRAL Model Law), can be clearly distinguished from the corresponding provision of the Arbitration Act, 1940 as the 1996 legislation, unlike its predecessor Act, does not explicitly mentions the power of a court to amend an arbitral award, a fact recognised in Nussli Switzerland Ltd. v. Organizing Committee Commonwealth Games. This legislative shift was noted by the Apex Court in McDermott International Inc v Burnt Standard Co Ltd. (McDermott), which held that in a challenge to an arbitral award under the Arbitration Act 1996, a court’s powers were limited, allowing it to either set aside an award under Section 34(2) or to remit it to the arbitrator under Section 34(4), rendering modification ultra vires qua Section 34. Thus, the removal of modification from the list of available recourses against an award was deemed to be a deliberate legislative manoeuvre to align the Indian arbitration law with Article 34 of the UNCITRAL Model Law, which similarly does not allow award amendment by courts. This line of reasoning, distinguishing the 1996 and the 1940 statutes, in light of the legislative background of the UNCITRAL Model Law became further cemented in the Indian arbitration jurisprudence through cases like Dyna Technologies Ltd. v. Crompton Greaves Ltd, Central Warehousing Corporation vs M/S. A.S.A. Transport, and Project Director, NHAI v. M Hakeem (M. Hakeem).
Another reason often highlighted by the Apex Court while proscribing award modification stems from the fundamental tenets of arbitration. Parties to an arbitration agreement consciously opt to exclude courts’ jurisdiction, seeking expediency and finality. Consequently, as highlighted in the S.V. Samudram v. State of Karnataka the character of arbitral proceedings diverges from judicial proceedings, and an arbitrator’s decision holds sway unless overturned based on specified grounds outlined in Section 34 of the Arbitration Act 1996. Furthermore, even when the grounds for interference are established, courts under the Arbitration Act are precluded from acting as appellate bodies to reassess the merits of an award that has been contested. A similar reasoning was followed in Cybernetics. Ltd. v. Bisquare Technologies Pvt. Ltd., which held that Section 34(4) did not authorize the court to deal with claims that the arbitral tribunal had already dealt with just because it believed that the tribunal was wrong in rejecting these claims, as this amounted to the court acting as an appellate court, negating the finality afforded to the award.
3. CONSTITUTIONAL COURTS ALLOWING MODIFICATIONS
Prior to McDermott, the Supreme Court had modified arbitral awards in cases like Tata Hydro-Electric Power Supply Co Ltd v. Union of India and permitted award amendments by subordinate courts in cases like Hindustan Zinc Ltd v Friends Coal Carbonisation.
Even post-McDermott, different High Courts have continued the practice of modifying arbitral awards despite the clear jurisprudence arising from the rulings mentioned in the previous section proscribing them. The justification behind such judgments usually stems from an unconventional interpretation of the separability doctrine, which permits courts to set aside particular parts of arbitral awards. Typically, this doctrine enables courts to isolate portions of the award that remain unaffected by any defects and uphold those parts accordingly, as held in J.C Budhraja v. Chairman, Orissa Mining Corporation Ltd.. However, the interpretation of this doctrine so as to allow modification is rooted in the objectives of the Arbitration Act 1996. If an arbitral award is set aside in its entirety, the parties are forced to go through another round of arbitration or to litigate before courts, undermining the speedy resolution process envisaged under the Arbitration Act 1996.[i] This reasoning was utilized in Union of India v. M/S Modern Laminators, where the court had allowed modification of an award on the basis of the need to ensure speedy disposal of the suit and to not force the parties to go through a second round of arbitration when the lis could be perfectly settled through the modification. This judgment was subsequently utilised in Canara Bank v. Bharat Sanchar Nigam Ltd. by the Delhi High Court to allow a similar judicial amendment of an arbitral award.
While the Apex Court has also modified awards, with McDermott being one of the judgments in which, despite the aforementioned advocation of the anti-modification stance, the Court ended up amending parts of the award, the same has mostly been done using the plenary powers bestowed onto it under Article 142 of the Constitution rather than Section 34 of the Arbitration Act 1996. A similar amendment was made by the Supreme Court in Ssangyong Engineering & Construction Co. Ltd. v. NHAI where Article 142 was used to effectively convert the separate opinion of the minority arbitrator into the final award. However, there still exist judgments like Vedanta Ltd. v. Shenzhen Shandong Nuclear Power Construction Co. Ltd. (Vedanta Ltd.) and Oriental Structural Engineers Private Ltd. v. State of Kerala (Oriental Structural Engineers) where the Apex Court has amended the interest rates that were decided by the tribunal, effectively amending parts of the award instead of merely setting them aside, without the use of Article 142.
4. THE WAY FORWARD: PARTIAL SET ASIDE AS THE MIDDLE GROUND
Thus, it becomes apparent that the rationale used by both sides of the legal debate is rooted in the ideas at the core of arbitration. While parties certainly must not be relegated to another round of relitigating over already decided issues to maintain the swiftness of the arbitration process, the same must not give way to allowing courts to effectively hear appeals against arbitral awards in ignorance of the minimalistic role envisaged for the judiciary under the 1996 Act.
This conflict can be resolved using the doctrine of separability, which allows courts, as previously mentioned, to distinguish between distinct and identifiable parts of an award that do not suffer from legal flaws under the grounds specified in Section 34(2) of the Arbitration Act 1996. This would at least ensure that in cases where different issues are not intertwined, the finality of the award qua the issues not suffering from infirmity is upheld and the subsequent proceedings pursued by any of the parties only deal with the issues that have been set aside. The legitimacy of the courts’ power to partially set aside awards is further cemented by the legislative history of the Model Law, which shows that the doctrine of separability was very much within the scheme of Article 34, as the text containing the doctrine was adopted in the 5th and 6th sessions of the Working Group on International Contract Practices.
However, the partial set aside of an award must be explicitly distinguished from the power to modify awards, which lacks statutory basis and questions the arbitral process’ sanctity, as the 1996 Act does not provide for appellate bodies reviewing awards and correcting errors of the tribunal. In this regard, cases like Saptarishi Hotels Pvt. Ltd. and Anr. v. National Institute of Tourism & Hospitality Management and M/S J.G. Engineers Pvt. Ltd. v. Union of India, clearly distinguishing partial set aside from modification, of an award, are welcome. These judgments clearly highlighted that the text of Section 34, which uses the expression “set aside by the Court”, could only be stretched to the extent of allowing the setting aside of illegal parts of an award that were sufficiently severable from the parts of an award not suffering from illegality in the absence of the mention of expressions such as “modify”, “revise”, “reverse” or “vary” in the provision.
Furthermore, while modifying an award is certainly within the vires of the Apex Court’s powers to do complete justice using Article 142, the same must be used sparingly, and judgments modifying awards using this plenary power must not be used as precedents as they are rendered in light of the injustice that would be caused by the strict adherence to law in light of the peculiar circumstances of a case. This would be in tandem with the M. Hakeem judgment which observed that such modification “orders that are passed under Article 142 of the Constitution do not constitute the ratio decidendi of a judgment passed.” Finally, in its hope that the Gayatri Balasamy judgment would correct the stance that the Apex Court has adopted in the Vedanta Ltd. and Oriental Structural Engineers judgments, where the Supreme Court has implicitly modified awards without the explicit use of its plenary powers in order to prevent their usage by subordinate courts to justify modification of awards in the future.
[i] N. MARKANDA & P.C. MARKANDA, LAW RELATING TO ARBITRATION AND CONCILIATION, 133 (LexisNexis 2016).
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