Modification of Arbitral Awards

Ensuring minimal judicial intervention in arbitral proceedings has been the cornerstone of the success of arbitration as an alternate dispute resolution mechanism in India.^[1] While the parameters for challenge of an award under the Arbitration and Conciliation Act, 1996 (Act)^[2] has been restricted over time, there have been divergent judicial opinions on whether a court is empowered to modify an arbitral award. While Section 34 of the Act sets out the stringent grounds under which an arbitral award may be set aside by a court, whether such power can be extended to ‘modifying’ an award instead of simply setting it aside and/or upholding it has not seen a consensus across courts in India. While the Supreme Court in McDermott International Inc. v. Burn Standard Co. Ltd^[3] and NHAI v. M. Hakeem and Anr^.[4] had opined that modification is not contemplated under Section 34 of the Act, several other decisions^[5] have interpreted “Recourse to a Court against an arbitral award…” as appearing in Section 34 of the Act to include modification as well. 

Considering the varying opinions taken by different courts, recently in Gayatri Balasamy v. M/s. ISG Novasoft Technologies Limited,^[6]a 3-judge bench of the Supreme Court has referred the question of whether arbitral awards can be modified by courts under Section 34 of the Act to a larger bench. 

Meaning of modification of awards 

In the legal sense, modification means a change or alteration which introduces new elements into the details or cancels some of them but leaves the general purpose and effect of the subject matter intact.^[7] This would mean that modifying an award would extend beyond what is contemplated under Section 33 of the Act, i.e., above and beyond rectification and correction of computational or clerical errors. While an award can be set aside without considering the merits of the case, the court while modifying an award would certainly have to review the case based on its merits.^[8] Thus, modifying or varying an award seems to be distinct from the simpliciter setting aside of an award.

International perspective 

Before delving into the interpretation of Section 34 of the Act, it would be prudent to consider global standards. Significant arbitration centers around the world such as United Kingdom,^[9] United States,^[10] Australia,^[11] and Singapore^[12] set out express provisions in their domestic legislations which permit the varying or modification of an arbitral award, unlike the Act. Such power is distinct from the court’s power to set aside an award. Singapore in specific has two separate legislations governing arbitration, for domestic and international arbitration respectively. The Singapore Arbitration Act, 2001 governing domestic arbitration carves out a provision allowing modification of awards, i.e., Section 49(8), which is based on Section 69 of the English Arbitration Act, 1996. On the other hand, the International Arbitration Act, 2002 contemplates no such modification to an arbitral award. 

Some jurisdictions had already provided for modification of awards since its inception while others adopted and empowered its courts to modify awards by way of subsequent amendments to keep up with the evolution of arbitration law globally. 

Legislative history of Section 34 of the Act

The Act, which replaced the Indian Arbitration Act, 1940 (1940 Act), draws guidance from the UNCITRAL Model Law on International Commercial Arbitration, 1985 (Model Law). While Sections 15 and 16 of the erstwhile 1940 Act bestowed courts with the power to modify, correct or remit an award to the arbitral tribunal, the power under Section 34 of the Act is limited to only setting aside an arbitral award. Section 34 of the Act is modelled around Article 34 of the Model Law which clearly provides for the application for setting aside of an arbitral award as an “exclusive recourse” against any arbitral award. Article 34 of the Model Law never envisaged varying or modifications to the findings of an arbitral tribunal by the court.^[13] Therefore, the Parliament did not intend to include the power to modify or vary awards under Section 34 of the Act. However, courts in India have over time delivered conflicting opinions and have crossed the line demarcated by the legislature by allowing or upholding modification of awards under Section 34 of the Act.    

Analysis of judicial trends

Though the Supreme Court in NHAI clarified that arbitral awards cannot be modified under Section 34 of the Act by varying the findings of the arbitral tribunal; certain High Courts have allowed modification of awards in furtherance of doing “complete justice” under Article 142 of the Constitution of India (Constitution). 

In NHAI, it was emphasized that the power to modify cannot be read into Section 34 of the Act since it was based on Article 34 of the Model Law which prohibits modification and that it was deliberate of the legislature to exclude the power to modify, as contained in the erstwhile 1940 Act, from Section 34 of the Act. Further, while citing certain decisions^[14] wherein the court had changed the date from which interest would be applicable, the Supreme Court agreed that this would amount to modification of the award. However, it held that such modification was not made in setting aside proceedings under Section 34 of the Act, but instead pursuant to the discretionary power of the Supreme Court under Article 142 of the Constitution. Thus, this effectively meant that only the Supreme Court is empowered to modify awards in the interest of justice and High Courts are restricted to only setting aside awards and remanding the matter back to the arbitral tribunal. The rationale in NHAI has been relied on in subsequent decisions^[15] to hold that the power to modify cannot be afforded to High Courts under Section 34 of the Act and it is not open to courts to sit as an appellate court under the Act and re-assess the merits of the case. 

Prior to the NHAI judgment, the Supreme Court had either allowed modification of an award itself or upheld modification by subordinate courts. In such instances, courts have exercised their jurisdiction under Article 142 of the Constitution and have relied on the doctrine of severability to modify and partially set aside awards wherein the offending part of an award was severable and distinct from the rest of the award. For instance, in Vedanta Ltd. v. Shenzhen Shandong Nuclear Power Construction Co. Ltd.,^[16] the impugned award was modified to the extent of the rate of interest awarded being “excessive”. The ratio was that the court is empowered to modify the payable interest rate if it is not in consonance with prevailing economic conditions or where it is found to be unreasonable or where it does not promote the interests of justice. Similar reasoning was employed in certain other decisions to modify awards to the extent of the payable rate of interest and the date from which the interest should be applicable.^[17] Apart from modifying the payable rate of interest, the Supreme Court has also modified awards under Article 142 of the Constitution by citing reasons of “complete justice” to ensure speedy resolution of disputes rather than institution of fresh proceedings.^[18]  

Evidently, modification has largely been made to the interest rates, the sum of the amount awarded and the date on which the award is to come into effect. On the other hand, from a perusal of precedents which have prohibited modification under the Act, it is certain that these precedents, specifically NHAI, does not settle the position on modification of awards under the Act and replaces one source of discretion afforded to High Courts under Section 34 of the Act with another source of discretion available with the Supreme Court, with the latter arguably being less attainable than the former.

To comment on the need for clarity on the modification of an award, it is relevant to discuss the power to partially set aside arbitral awards which was recognized earlier by the Bombay High Court^[19] and has been recently crystallized by the Delhi High Court in National Highways Authority of India v. Trichy Thanjavur Expressway Limited.^[20] It is a settled position that if an arbitral award can be segregated into components, with each being severable from the other, the doctrine of severability may be applied to partially set aside the offending component of the award while retaining the rest. Such partial setting aside would also fall under “setting aside” of awards under Section 34 of the Act. 

There is a noteworthy distinction between such partial setting aside and modification of an award. Trichy Thanjavur establishes that modifying an award would mean to vary the ultimate relief that could be accorded by an arbitral tribunal whereas the power exercised by courts under Section 34 of the Act to partially set aside awards does not amount to modification since partial setting aside is confined to the offending component of an award and does not deal with the ultimate relief. 

Comments

The question to be settled by the larger bench of the Supreme Court is whether courts should be allowed to modify or vary awards while partially or wholly setting aside an award in exercise of its power under Section 34. Irrespective of judicial pronouncement, legislative amendments to give statutory recognition to partially setting aside awards and modification of awards must be considered to settle this position. The insertion of an express provision in Section 34 of the Act allowing partial setting aside of awards along with the insertion of a proviso for partially modifying an award in exceptional circumstances are a priority.[21] Such statutory recognition will come as a relief to parties in instances where it is possible to vary the findings of an arbitral tribunal solely based on the record of the tribunal. Moreover, such an amendment would align the Act with international standards and help in positioning India as a pro-arbitration jurisdiction globally.

Considering that the power conferred under Section 34 of the Act is limited by strict parameters for setting aside awards, allowing courts to modify awards under limitations will strike a balance between preserving the finality of arbitration and ensuring “complete justice” and fairness, without the tedious and time-consuming task of aggrieved parties having to approach the Supreme Court under Article 142 of the Constitution. This would also avoid further litigation while upholding the construct of arbitration and tenets of the Act i.e., minimal judicial interference. 

Disclaimer: The views expressed in this article are those of the author and do not necessarily reflect the views of the publication.