The Supreme Court in a significant development in Gayatri Balasamy V. M/s ISG Novasoft Technologies Limited1 referred the question of whether an arbitral award can be modified by the courts while exercising their powers under sections 34 and 37 of the Arbitration Act to a larger bench.
The dispute arose when an employee of SG Novasoft Technologies Limited (ISG) alleged sexual harassment by the company’s CEO, leading to her resignation, which was followed by termination through three successive letters over a year. She subsequently filed a criminal complaint for harassment and conspiracy, prompting a counter-complaint by the company alleging defamation and extortion. Upon referral to arbitration by the Supreme Court, the Arbitral Tribunal awarded her ₹2 crore as compensation. Dissatisfied, she challenged the quantum under Section 34 of the Arbitration and Conciliation Act, 1996. A Single Judge of the Madras High Court, rejecting arguments that modification was impermissible, enhanced the compensation by ₹1.6 crore. The company appealed under Section 37, and the Division Bench reduced the additional compensation to ₹50,000, leading her to file a Special Leave Petition before the Supreme Court.
As discussed above, in this case, it is evident that the award was modified under Section 34 of the Act, by the Single Judge and subsequently by the Division Bench under Section 37 of the Act. The primary question before the Supreme Court was whether the modification of an arbitral award Sections 34 and 37 of the Act is permissible. The Court was presented with two conflicting streams of judgments. One stream of cases holds that any modification of an arbitral award under Sections 34 and 37 is not permissible. Conversely, the other stream consists of judgments where either the arbitral award was modified or a modified award was upheld in subsequent proceedings.
In this article, we will analyze the conflicting judgments rendered by the Supreme Court on this issue and examine the correct position of law regarding the modification of an arbitral award.
Scheme Of Arbitration
An award passed by the arbitrator can be set aside under Section 34 of the Arbitration Act, and any decision taken under Section 34 can further be challenged under Section 37 of the Act. Therefore, it is important to first determine whether these two provisions permit courts to modify the award. Section 34 of the Arbitration and Conciliation Act, 1996, provides for recourse to a court, including a civil court or a High Court with original jurisdiction, for setting aside an arbitral award on specific statutory grounds. Notably, the phrasing of Section 34(2)(b) has, on occasion, been interpreted by courts to extend beyond the statutory mandate of annulment, allowing for the correction of errors, including the modification of awards, to serve the ends of justice. The judicial circumstances under which such interference may be justified have been extensively analyzed by the Hon’ble Supreme Court in ONGC Ltd. v. Saw Pipes Ltd2.
Conversely, Section 37 of the Act, inter alia, provides for appellate remedies against orders passed under Section 34. The scope of appellate jurisdiction under Section 37 has been clarified by the Hon’ble Supreme Court in MMTC Ltd. v. Vedanta Ltd3. and UHL Power Company Ltd. v. State of Himachal Pradesh4. These judgments affirm that appellate interference under Section 37 is strictly limited by the parameters established under Section 34, thereby precluding an independent assessment of the merits of the arbitral award. Consequently, the statutory framework under Sections 34 and 37 delineates a narrow scope of judicial intervention, thereby reinforcing the principle of minimal interference with arbitral awards.
Modification Of Arbitral Award Is Not Permissible Under Sections 34 And 37- MA Hakeem, Mcdermott International and SV Samudram
The question before the Supreme Court in Project Director, NHAI V. M Hakeem5 was whether a court could modify an arbitral award under Sections 34 and 37 of the Arbitration and Conciliation Act, 1996. The Court answered in the negative, holding that the Arbitration Act is based on the UNCITRAL Model Law on International Commercial Arbitration, 1985. Article 34 of the Model Law, which is similar to Section 34 of the Arbitration Act, provides that recourse to a court against an arbitral award may be made only through an application for setting aside the award in accordance with the provisions of sub-sections (2) and (3).
The court while literally interpreting this provision held that “what is clear from a reading of the said provisions is that, given the limited grounds of challenge under sub-sections (2) and (3), an application can only be made to set aside an award.”
When it came to the Arbitration Act, 1940, the court had power to modify award but such a power of modification is conspicuous by its absence under section 34 of the 1996 Act.
The court held that “under the scheme of the old Act, an award may be remitted, modified or otherwise set aside given the grounds contained in Section 30 of the 1940 Act, which are broader than the grounds contained in Section 34 of the 1996 Act.”
The same position was reiterated by the Supreme Court in McDermott International Inc. v. Burn Standard Co. Ltd6. wherein it was held that “the court cannot correct errors of the arbitrators. It can only quash the award leaving the parties free to begin the arbitration again if it is desired.”
The above observations further fortifies the proposition that an arbitral award cannot be modified.
Similarly, the Delhi High Court in Puri Construction P. Ltd. v. Larsen and Toubro Ltd7. after analysing the conflicting judgments on the same point held that “in light of the dictum in McDermott International Inc. and the difference in provisions of the 1940 Act and the present Act, this Court holds that the power to modify, vary or remit the award does not exist under Section 34 of the Act.”
Several Judgments (some of them will be discussed in the latter part of this article) were presented before the court in Hakeem (supra) in which the award was either modified or a modified award was upheld. The court while distinguishing them observed that they were passed while exercising the Court’s power to do complete justice under Article 142 of the Indian Constitution. Therefore, it cannot be said that the law regarding whether the court under Sections 34 and 37 is empowered to modify or vary the award was specifically addressed.
It was pertinently held that “each of these judgments also does not carry the matter further in that, orders that are passed under Article 142 of the Constitution do not constitute the ratio decidendi of a judgment. Admittedly, there was no discussion on whether, as a matter of law, a power to vary an award can be found in Section 34 of the Arbitration, 1996.”
In the latest judgment in SV Samudram V. State of Karnataka8 the Supreme Court held that modifying or varying award under sections 34 and 37 of the Arbitration Act would amount to crossing the “Lakshman Rekha”. The court further said that the award can either be set aside or upheld but cannot be modified.
Modification Of Award Is Permissible- Vedanta Limited ,M/S Oriental Structural Engineers Pvt And J.C. Budhraja
On the other hand, there are various judgments in which the Supreme Court has taken a contrary view and allowed the modification of the arbitral award or itself modified the award.
The Supreme Court in Vedanta Limited vs Shenzhen Shandong Nuclear Power9 had modified the award without setting aside the same. The court held that “the Interest awarded by the arbitral tribunal is modified only to the extent mentioned hereinbelow :The Interest rate of 15% post 120 days granted on the entire sum awarded stands deleted. A uniform rate of Interest @ 9% will be applicable for the INR component in entirety till the date of realization.”
This judgment lends credence to the proposition that the arbitral award can be modified. It is pertinent to observe that the court in this judgment has not gone into the question whether the courts under sections 34 and 37 are empowered to modify the award. However, the fact remains that the award was modified.
Further, the Supreme Court again in M/S Oriental Structural Engineers Pvt. vs State Of Kerala10 changed rate of interest awarded by the arbitrator and held that “the award of the Tribunal shall stand sustained so far as direction to pay interest on delayed payment of the local currency component of the agreement is concerned, but the rate of interest on the sum shall be computed in the manner prescribed in paragraphs 1.6, 1.7 and 1.8 and shall be at 8% simple interest per annum.”
This judgment did not directly address the question at hand. However, there is no doubt about the fact that the award was modified as rate of interest was changed.
In J.C. Budhraja v. Chairman, Orissa Mining Corporation Ltd11., the Supreme Court, while following the same line, overturned the decision of the High Court, which had set aside the award and reduced the sum awarded by the arbitrator, while upholding the award passed by the arbitrator.
It is evident from the above discussion that the court, while identifying flaws in the arbitrator’s reasoning regarding the awarding of interest and the excess sum, refrained from setting them aside and instead merely modified the award with respect to the rate of interest and the sum awarded, which is inconsistent with its own judgment in Hakeem (supra).
Conclusion
Although the law appears to be settled on this point, as the Court in Hakeem (supra) extensively analyzed Section 34 to determine whether an award can be modified, there are instances where the Supreme Court, as discussed above, has allowed the modification of awards without addressing the question of whether such modification is permissible. This creates an impression that awards can, in some cases, be modified. As the Constitution Bench is seized of the matter, it will be interesting to see how the Court interprets its powers under Article 142 of the Constitution. The law is well-established as to when extraordinary powers contained under this Article can be exercised as the Supreme Court in Supreme Court Bar Association vs Union Of India & Anr has held that the powers under this article cannot be exercised in disregard of statutory provisions. When an arbitral award cannot be modified under Sections 34 and 37, it raises the question of whether such a modification is justified using extraordinary powers.
Given the conflicting judgments on the issue, the Court deemed it appropriate to refer the matter to a larger bench for an authoritative pronouncement. It is expected that the Supreme Court will resolve the prevailing confusion and provide clarity on this critical matter.
Note: Section 34(4) of the Act can be useful for this purpose also as it provides an opportunity to the arbitral tribunal to correct errors in the award on which it can be set aside. The Supreme Court while delineating the scope of this provision in Kinnari Mullick vs Ghanshyam Das Damani held that this application for correcting error can be filed before the court hearing section 34 petition by either of the parties to the arbitration.
1SLP (C) 15336/2021
2(2003) 5 SCC 705
3(2019) 4 SCC 163
4(2022) 4 SCC 116
5(2021) 9 SCC 1
6(2006) 11 SCC 181
72015 SCC OnLine Del 9126
82024 INSC 17
92019 (11) SCC 465
10CIVIL APPEAL NO. 3454 OF 2011
11(2008) 2 SCC 444]