Will courts’ power to modify awards address lingering issues in arbitration?

…Vikram pondered upon the two-level dilemma that Betaal presented him with. Betaal had narrated a story and then posed a fairly complicated question. He could, of course, answer the question—the first level of the dilemma. The meta-dilemma was that if Vikram answered the question, Betaal would fly back to the tree and if he didn’t answer or answered wrongly, it would result in a terrible outcome…

A court considering the question of setting aside an arbitral award is faced with a similar two-level dilemma: If the award is set aside, the parties are relegated back to the arbitral tribunal to relitigate. If the award is not set aside, even an erroneous finding could remain standing and perhaps even be enforced. 

Is there a way of correcting the errors of an award, instead of nullifying it and sending it back to the starting point?

The Supreme Court, in its recent Judgement in Gayatri Balasamy v M/s ISG Novasoft Technologies Ltd, has brought new clarity to the law on modification of arbitral awards. The context of the Judgement, the two opinions that form part of the judgment, and the opinions on the opinions, all deserve our attention. 

The lead-up to the case

Arbitration is intended to bring speed to a system plagued by delays. In practice, however, the process is long and tedious and could include multiple rounds of litigation. Though the Arbitration and Conciliation Act, 1996 prescribes a timeline for completion of domestic arbitration proceedings and limits the scope of judicial interference, it has not delivered expected results for a variety of reasons. One of these is that judicial challenges to awards take a long time to reach a meaningful conclusion. 

Gayatri Balasamy came up before a Bench of three judges of the Supreme Court last year. The judges observed that there were conflicting decisions from the Court on whether awards can be modified. The Bench referred the matter to a larger Bench and framed issues around a central quandary: Does a court that has the power to set aside an award also have the power to modify the award? 

Legal framework

The Court in Gayatri Balasamy referred to the provisions that set out the scheme of the Act. Judicial interference in all matters covered under the Act is discouraged under Section 5, except for some limited aspects. 

Section 34 empowers the court to set aside an award in certain circumstances. These are typically when the error can be spotted without digging too deep into the merits. The circumstances cover jurisdictional issues, such as arbitrability of the dispute; validity of the arbitration agreement; whether the agreement was tainted by fraud or coercion; basic notions of justice;  “contravention with fundamental policy of Indian law.” 

Conflicting precedents 

The Supreme Court in McDermott International Inc. v Burn Standard Co. Ltd (2006) had held that it cannot correct mistakes made by an arbitrator but can only set aside the award. However, relying on two precedents, the Court modified the rate of interest awarded. Similarly, in Vedanta Limited v Shenzhen Shandong Nuclear Power Construction Company Ltd (2018), the Court modified an award to align the rates of interest because the parties operated in different currencies. 

Slightly differently, in Ssangyong Engineering and Construction Company Ltd v National Highway Authority of India (2019), the Supreme Court set aside a majority award that had made unilateral additions to the contract without the affected party’s consent. To ensure complete justice, the Court, using its power under Article 142 of the Constitution, upheld the minority award and the interest it prescribed. 

Then, in National Highways Authority of India v M. Hakeem (2021), the Court held that under the scheme of the Act, an award can either be remanded to the arbitrator or set aside by the court. In this case, the Court saw it fit not to interfere in the modification of the award by the district court. This Judgement became the basis for the Court refusing to uphold modification in subsequent cases. 

In Larsen Air Conditioning v Union of India (2023) and S.V. Samudram v State of Karnataka (2024), the Court set aside Judgements where the High Court and the Court of Civil Judge, respectively, had made modifications to the award while referring to Hakeem. 

Justice K.V. Viswanathan, in his dissenting opinion, considered whether Hakeem was per incuriam for not having considered the judgment of a larger bench in Oil and Natural Gas Corporation Ltd. v Western GECO International Ltd. (2014). He noted that Hakeem was not considering a scenario involving severability as in ONGC and therefore it could not be per incuriam. However, neither the majority nor the minority seem to have examined whether the observations on modification in Hakeem were consequential to the result or merely obiter dicta. 

Issues and arguments 

The parties supporting modification argued that there were several judgements where modifications had been made or upheld. They submitted that the decision in Hakeem “warrants reconsideration” in this context. They also pointed out that the UN Model Law on which the Indian Act is based “permits a broader scope of judicial intervention.” Several countries have enacted statutory provisions that enable courts to modify awards.

Further, they relied on the legal maxim Omne majus continent in se minus: a greater power includes a lesser power. In their view, the greater power of setting aside an award included the lesser power of modification. 

On the other hand, those arguing against modification insisted that unless expressly provided in the Act, the power to modify cannot be inferred from a greater power of setting aside. They also pointed out that the Act only permits modification by a tribunal. But the role of the tribunal ends after the award is passed. 

Lastly, they cautioned that a complication would arise in terms of enforcing awards under the New York Convention since any modifications made by a court in India do not automatically merge with the award. 

Analysis of the Court

The majority specified some situations in which modification of awards could be considered and carefully enumerated the type of modification that was permissible. 

First, the Court considered the case where an arbitral award has issues which aren’t necessarily inseparable from each other. The majority applied the principle of Omne majus continent in se minus only to the extent of the severability of awards. Thus, the greater power to set aside an arbitral award includes the lesser power to set aside part of the award. The minority opinion on this point was that severing or separating the issues was not the same as modifying.

Even as it clarified that Section 34 does not envisage an appeal over the award, the majority opinion reasoned that the provision still contained within it a limited power to modify. This power is not taken away by the fact that a court also has the option to remand the award to the tribunal under Section 34(4) for reconsideration on one or more issues.

The Court then looked at the issue of whether the interest awarded could be modified. One of the few aspects where the Act contemplates a role for the court is on the issue of post-award interest. Section 31(7) of the Act permits a court to scrutinise the interest awarded against the standard prescribed by the Act. Recognising this, the majority held that it has the power to modify the interest.

Further, the majority held that the Supreme Court could use its power under Article 142 to modify awards. The minority opinion held that this power could not override the provisions of the Act. It is worth remembering here that to invoke this power, a party must contest their dispute all the way to the Supreme Court.

The approach of the court may have been coloured by the history of the arbitration law. Section 15 of the 1940 Act expressly provided for modification of awards by courts. However, this provision was omitted in the 1996 Act. In Hakeem, the Court took this to read a deliberate intent of Parliament to exclude a power to modify. 

Some of the issues also came up because proceedings often take years to conclude. For instance, a small difference in the interest rate would not be a contentious issue if the duration is a short one. Typically, however, the amount awarded is paid years later, after all post-award proceedings are completed. The interest adds up to a substantial sum by that time. 

So what does the Judgment finally say?

The court has a limited power under Sections 34 and 37 of the Act to modify an award under the following circumstances:

1. When the invalid parts of the award can be separated from the valid parts 
2. Correcting clerical, computational or typographical errors
3. When post-award interest prescribed by the tribunal doesn’t go by the standards prescribed under the Act

The Court also affirmed its power “to do complete justice” under Article 142, though advising caution while doing so. 

And what does it not say?

A key issue that was raised during arguments was whether the modification of awards under statutory arbitrations (for example, in the case of compensation for land acquisition under the National Highways Act) had a different threshold. 

Arbitrations usually arise out of contracts where, at least in theory, the parties have agreed to sign up for the low-interference scheme of the Arbitration Act. On the other hand, in statutory arbitrations, at least one of the parties has been thrust into an arbitration without having had an opportunity to opt out. Should the low-interference regime be read into arbitrations that arise from other statutes? 

The Court did not make any distinction between statutory and non-statutory arbitration with respect to setting aside powers under Section 34. The Court also declined to comment on provisions of the National Highways Act, as the validity of those provisions is under challenge in a different petition. 

Impact on statutory arbitrations 

Arbitration policy and discourse are driven by high-value arbitrations, which operate in a scenario where parties have a reasonably advanced understanding of the arbitration clauses of the agreement. The tribunal often comprises individuals who are legal experts and the parties have excellent representation. In these arbitrations, the interference of the courts comes across as unnecessary. Commentators who have criticised this Judgment (here, here and here) may have these arbitrations in mind. 

However, most arbitrations take place in a very different environment. Some of the challenges around these arbitrations have been examined and addressed by another Constitution Bench in Central Organization for Railway Electrification v ECI (2024). In these scenarios, parties may have entered into agreements by signing standard form contracts containing an arbitration clause. 

In statutory arbitrations, the parties would not even have consented to arbitration or wouldn’t have actively opted out of the court system. In such cases, the principle of non-interference may be a restriction on the remedies available. To further say that modification is not possible would doom the parties to multiple rounds of litigation. This may not be feasible for parties, both from a financial and a timeline point of view. 

This Judgement in Gayatri Balasamy offers hope to parties who are thrust into arbitrations without fully understanding the concept or without actively having agreed to it. 

Yet, the true solution to the problem may be a legislative one. One option that can be considered is codifying an approach that gives courts more control over lower-value and statutory arbitrations while retaining the high threshold of Section 34 for claims above a certain amount. 

Vikram Hegde is an Advocate on Record at the Supreme Court of India. Chitwan Sharma is an Advocate at the Supreme Court of India.