COURTS CAN MODIFY ARBITRAL AWARD U/S 34 OF A & C ACT: SUPREME COURT

 

Courts can modify Arbitral Award u/s 34 of A & C Act: Supreme Court

 

The parameter of objections to arbitral award and the prescription of setting aside of arbitral award is stipulated under Section 34 of Arbitration & Conciliation Act 1996 ( As amended and up to date). The limited grounds of objection is to arbitral award is there in the aforesaid provisions. The award on the above premise therefore could have been upheld or set aside. However, on issue that have raised concern now as regards the fact that whether the award can be modified by the court or not? The above aspect stands adjudicated now by a Five (5) Judge Constitution bench in a matter captioned as GAYATRI BALASAMY Vs M/S. ISG NOVASOFT TECHNOLOGIES LIMITED  (Arising out of S.L.P.(C) Nos.15336-15337 of 2021) and decided by Supreme Court on 30.04.2025..The judgment is rendered by majority of 4:1 and hon’ble CJI.(SANJIV KHANNA), , hon’ble Justice (B.R. GAVAI), hon’ble Justice (SANJAY KUMAR and hon’ble justice (AUGUSTINE GEORGE MASIH) are the majority judges.

 

To put it in perspective, a three-Judge Bench of the Supreme Court vide order dated 20th February 2024, had  directed that the Special Leave Petitions in Gayatri Balasamy v. ISG Novasoft Technologies Limited 2024 SCC OnLine SC 1681  be placed before the Chief Justice of India for an appropriate order. The matter was to be examined to determine the need to refer the following questions of law to a larger Bench:

“1. Whether the powers of the Court under Sections 34 and 37 of the Arbitration and Conciliation Act 1996 will include the power to modify an arbitral award?

2. If the power to modify the award is available, whether such power can be exercised only where the award is severable, and a part thereof can be modified?

3. Whether the power to set aside an award under Section 34 of the Act, being a larger power, will include the power to modify an arbitral award and if so, to what extent?

4. Whether the power to modify an award can be read into the power to set aside an award under Section 34 of the Act?

5. Whether the judgment of the Supreme Court in Project Director NHAI vs. M. Hakeem, (2021) 9 SCC 1.  followed in Larsen Air Conditioning and Refrigeration Company vs. Union of India (2023) 15 SCC 472  and SV Samudram vs. State of Karnataka, (2024) 3 SCC 623 laid down the correct law, as other benches of two Judges (in Vedanta Limited vs. Shenzden Shandong Nuclear Power Construction Company Limited, (2019) 11 SSC 465,  Oriental Structural Engineers Pvt. Ltd. vs. State of Kerala, (2021) 6 SCC 150  and M.P. Power Generation Co. Ltd. vs. Ansaldo Energia Spa) (2018) 16 SCC 661  and three Judges (in J.C. Budhraja vs. Chairman, Orissa Mining Corporation Ltd. (2008) 2 SCC 444 , Tata Hydroelectric Power Supply Co. Ltd. vs. Union of( India (2003) 4 SCC 172 and Shakti Nath vs. Alpha Tiger Cyprus Investment Ltd (2020) 11 SCC 685..

 

As in above cases Supreme Court had either modified or accepted the modification in the award, hence, the final adjudication by the Constitution Bench on it was felt necessary.

 

According to the Supreme Court, The fulcrum of the legal controversy rested on the following question(s)::

 

Are Indian courts jurisdictionally empowered to modify an arbitral award? If so, to what extent?

 

The situation arose owing to the fact that as per the Arbitration and Conciliation Act, 1996, the Courts are not expressly empowered to modify or vary an arbitral award. Section 34 of the 1996 Act only confers upon courts the power to set aside an award. Though, the Supreme Court , earlier have, still, on several instances had to modify arbitral awards, with a view to  seeking to minimize protracted litigation and foster the ends of justice. Conve5rsely, since, some judgments have reflected that Indian courts cannot modify awards, due to the narrowly defined scope of Section 34. As such, due to, divergent and contrasting judicial opinions existing, this was incumbent upon the Constitution bench to adjudicate on the issue.

The Supreme Court had also noted that Section 34 is modelled on the UNCITRAL Model Law on International Commercial Arbitration, 1985,27 which does not allow courts to modify awards. Unlike the broader powers available under the 1940 Act, the court’s powers under the 1996 Act are narrower. Thus, it was generally felt that  allowing modification under Section 34 would go against the legal framework, as only the legislature has the power to change the law and any expansion of Section 34’s powers to include modification would require a legislative amendment.

The opposition to the power of courts to modify the award hinged on the Model Law as it was the result of a collective effort by several countries to establish a uniform and cohesive legal framework. If courts had such power, it could result in a situation where a court order or decree replaces the arbitral award, which in arbitration jurisprudence is unacceptable. It may carry international repercussions when awards are sought to be enforced under foreign conventions.

Further, the above school of thought also believed that doctrine of merger does not apply to court modifications of an arbitral award. The nature and scope of the power of a court, being distinct from an arbitral tribunal. It was thus canvassed that  the modifications will not merge with the arbitral award. In simpler words, any modification or variation made by the court to the arbitral award would not be subsumed into the arbitral award.

The Constitution bench (majority) has held in Para 33 and Para 34 as under:

33.We hold that the power conferred under the proviso to Section 34(2)(a)(iv) is clarificatory in nature. The authority to sever the “invalid” portion of an arbitral award from the “valid” portion, while remaining within the narrow confines of Section 34, is inherent in the court’s jurisdiction when setting aside an award.

 

34. To this extent, the doctrine of omne majus continet in se minus—the greater power includes the lesser—applies squarely. The authority to set aside an arbitral award necessarily encompasses the power to set it aside in part, rather than in its entirety. This interpretation is practical and pragmatic. 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. A contrary interpretation would not only be inconsistent with the statutory framework but may also result in valid determinations being unnecessarily nullified.”

 

The Constitution Bench of the Supreme Court while emphasizing on the power of courts for modifying the award has held in para 42 as under:

42.    Given this background, if we were to decide that courts can only set aside and not modify awards, then the parties would be compelled to undergo an extra round of arbitration, adding to the previous four stages: the initial arbitration, Section 34 (setting aside proceedings), Section 37 (appeal proceedings), and Article 136 (SLP proceedings). In effect, this interpretation would force the parties into a new arbitration process merely to affirm a decision that could easily be arrived at by the court. This would render the arbitration process more cumbersome than even traditional litigation.”

 

The Supreme Court has noted in para 44 of the judgment as under:

 

“44.We are of the opinion that modification represents a more limited, nuanced power in comparison to the annulment of an award, as the latter entails a more severe consequence of the award being voided in toto. Read in this manner, the limited and restricted power of severing an award implies a power of the court to vary or modify the award. It will be wrong to argue that silence in the 1996 Act, as projected, should be read as a complete prohibition”.

 

The Constitution Bench of the Supreme Court, on the basis of the detailed discussion and as narrated above in nutshell has thus answered the reference in its conclusion in the following manner:

 

It is held that: the Court has a limited power under Sections 34 and 37 of the 1996 Act to modify the arbitral award. 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 and/or

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.

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                                            Anil K Khaware

Founder & Senior Associate

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