Whether courts possess the power to modify Arbitral Awards under section 34

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Abstract

Arbitration gained traction as an Alternate Dispute Redressal (ADR) over the years for being a faster and effective means of dispute resolution between parties. The preference of arbitration over its other ADR counterparts can be attributed to the binding nature of an arbitral Award and its enforceability by the local judicial system.

However, even inspite of its binding nature, there are still remedies available to challenge an Arbitral Award on certain grounds which the aggrieved party can avail under Section 34 of the Arbitration and Conciliation Act, 1996 which might unnecessarily delay the implementation of the award thereby frustrating the primary reason for which arbitration is sought over litigation. But this possesses another problem. This is an important issue since the extent to which courts can interfere with the arbitration process must be kept in check since excessive intervention of the Court must be avoided in case of entertaining applications against arbitral awards as it would cause unnecessary delay in arbitral proceedings thus defeating the objective of the Act.

Under the Arbitration Act, there is a provision to set aside an Arbitral Award on certain limited grounds by an application under section 34 of the Arbitration and Conciliation Act 1996 in the local courts. The judicial trend in such matters has been somewhat mixed, few courts holding that the courts don’t possess power to modify an award but to only ‘set aside’ on certain grounds which the aggrieved party can avail under Section 34 of the Arbitration and Conciliation Act, 1996. However quite a few have held that the courts possess to modify the award to the degree it feels fit. This Paper makes an evaluation of Section 34 of the 1996 Act and the scope of judicial intervention.

Introduction

Arbitration gained traction as an Alternate Dispute Redressal (ADR) over the years for being a faster and effective means of dispute resolution between parties. The preference of arbitration over its other ADR counterparts can be attributed to the binding nature of an arbitral Award and its enforceability by the local judicial system. Arbitration’s success can be largely attributed to its relatively quicker pace, procedural flexibility, and technical expertise of the arbitrator in the subject matter of dispute.

Though there are other methods for settlement of commercial disputes such as mediation and conciliation in which parties come to settlement according to mutual agreements however, one of the reasons why Arbitration is preferred is because of the binding nature of the award.

However, even inspite of its binding nature, there are still remedies available to challenge an Arbitral Award on certain grounds which the aggrieved party can avail under Section 34 of the Arbitration and Conciliation Act, 1996 which might unnecessarily delay the implementation of the award thereby frustrating the primary reason for which arbitration is sought over litigation. But this possesses another problem. The extent to which courts can interfere with the arbitration process should be kept at a check otherwise the benefits of arbitration such as speedy proceedings, confidentiality etc are not impeded since “the parties to the agreement make a conscious decision to exclude the court’s jurisdiction by opting for arbitration as they prefer the expediency and finality offered by it.”[1]

However, Section 30 of the Indian Arbitration Act 1940, prior to the 1996 Act’s implementation, contained relatively broad grounds for setting aside or modifying an arbitral Award. Section 34(2) of the 1996 Act attempted to limit the grounds for contesting an award.

Arbitrations in India were governed by The Arbitration Act, 1940 which was later repealed by the Arbitration and Conciliation Act, 1996 and further amended in 2015. In an attempt to make arbitration a preferred mode of settlement of commercial disputes and making India a hub of international commercial arbitration some major amendments were introduced in the year to 2015 and 2019. The current law is a composition of several such amendments with the latest amendments being introduced in 2019.

Under the Arbitration Act, there is a provision to set aside an Arbitral Award on certain limited grounds by an application under section 34 of the Arbitration and Conciliation Act 1996 in the local courts. The judicial trend in such matters has been somewhat mixed, few courts holding that the courts don’t possess power to modify an award but to only ‘set aside’ on certain grounds which the aggrieved party can avail under Section 34 of the Arbitration and Conciliation Act, 1996. However quite a few have held that the courts possess to modify the award to the degree it feels fit. This is an important issue since the extent to which courts can interfere with the arbitration process must be kept in check since excessive intervention of the Court must be avoided in case of entertaining applications against arbitral awards as it would cause unnecessary delay in arbitral proceedings thus defeating the objective of the Act. This dispute was recently resolved by the Hon’ble Supreme Court of India on 20 July 2021 in the matter of Project Director, NHAI vs M. Hakeem.

Brief History of Arbitration Acts in India (Backdrop)

The Indian Arbitration Act of 1899 was the first law in India dedicated completely to arbitration. Its application, however, was restricted to the Presidency Towns of Calcutta, Bombay, and Madras. The Second Schedule of the Civil Procedure Code, 1908, was the other specific law for arbitration. The Indian Contract Act, 1872 (Sections 10 and 28) and Specific Relief Act, 1877 (Section 21) included a reference to arbitration.

There was no integrated arbitration legislation, and the law governing arbitration was scattered among numerous statutes. Multiple committees were formed to revise the existing law and develop a more comprehensive framework for arbitration because legislators were worried about the lack of a consolidated statute.

In the year 1940, a consolidated law related to arbitration was enacted which repealed the existing laws related to arbitration. The Arbitration Act, 1940 was based on the English Arbitration Act, 1934 and was a complete code for domestic arbitrations. However, the Act did not contain any provisions related to enforcement of foreign awards. Foreign awards were enforced in India through two separate legislations viz. (i) the Arbitration (Protocol and Convention) Act, 1937 (for Geneva Convention Awards) and (ii) the Foreign Awards (Recognition and Enforcement) Act, 1961 (for New York Convention Awards).

Though, the 1940 Act attracted severe criticism and adverse remarks from the Courts however, no amendments were brought in to improve the working of the 1940 Act. Following the 1991 economic liberalization, attempts were made to attract foreign investments, which necessitated a pleasant business environment and ease of doing business. For the said reason, Arbitration and Conciliation Act, 1996 came into force and repealed the Act of 1940. The Act was based on the UNCITRAL Model Law on International Commercial Arbitration, 1985 and the UNCITRAL Conciliation Rules, 1980. It aimed at creating a consolidated legal framework dealing with arbitrations (both domestic and international) and conciliation and minimizing judicial interference and supervision along with providing for a robust enforcement system for arbitration awards

Provisions related to Modification and Setting Aside of Award in 1940 Act

The Arbitration Act of 1940 provide three kinds of remedies against arbitral awards namely, rectification, remission and setting aside of the Arbitral Award.

The Arbitration Act 1940 contained a specific provision to modify an award under section 15. The court is given the power to modify or correct an award in the circumstances mentioned in Section 15 which read as follows:

“15. Power of Court to modify award.

The Court may by order modify or correct an award-

  • where it appears that a part of, the award is upon a matter not referred to arbitration and such part can be separated from the other part and does not affect the decision on the matter referred; or
  • where the award is imperfect in form, or contains any obvious error which can be amended without affecting such decision; or
  • where the award contains a clerical mistake or an error arising from an accidental slip or omission.”[2]

The Arbitration Act 1940 also contained a specific provision to remit an award under section 16 which read as follows:

“16. Power to remit award.

  • The Court may from time to time remit the award or any matter referred to arbitration to the arbitrators or umpire for reconsideration upon such terms as it thinks fit-
    • where- the award has left undetermined any of the matters referred to arbitration, or where it determines any matter not referred to arbitration and such matter cannot be separated without affecting the determination of the matters referred; or
    • where the award is so indefinite as to be incapable of execution; or
    • where an objection to the legality of the award is apparent upon the face of it.,
  • Where an award is remitted under sub- section (1) the Court shall fix the time within which the arbitrator or umpire shall submit his decision to the Court: Provided that any time so fixed may be extended by subsequent order of the Court.
  • An award remitted under sub- section (1) shall become void on the failure of the arbitrator or umpire to reconsider it and submit his decision within the time fixed.”[3]

Thus, 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 were broader than the grounds contained in Section 34 of the 1996 Act.

Provisions related to Modification and Setting Aside of Award as Arbitration and Conciliation Act 1996 ie Section 34

The section 34 of the 1996 Act is modelled on the UNCITRAL Model Law on International Commercial Arbitration, 1985, under which no power to modify an award is given to a court hearing a challenge to an award.

Section 34(2) (a) of the Arbitration and Conciliation Act of 1996 mentions some grounds for setting aside an arbitral award by a Court if the party proves that:

  1. a party was incapacitated,
  2. the arbitration agreement is not valid under the law to which the parties to the Agreement have subjected it.
  3. It had not been provided appropriate notice of the arbitrator’s appointment or the procedure.
  4. The arbitral award deals with a matter that does not fit within the provisions of the arbitration agreement, or the award contains a decision that is outside the scope of the arbitration agreement.
  5. The tribunal’s composition was not in conformity with the parties’ agreement.

Furthermore, under section 34 (2) (b) of the Act, the court may set aside the Decision if:

  1. the issue cannot be resolved through arbitration; and
  2. the arbitral award is contrary to Indian public policy.

The statutory scheme under Section 34 of the Arbitration Act, 1996 is in keeping with the UNCITRAL Model Law and the legislative policy of minimal judicial interference in arbitral awards. Section 34 of the 1996 Act is in consonance to Article 34 of the UNCITRAL Model Law and also to section 30 of the Arbitration Act, 1940. However, the scope of section 34 is limited in consideration to section 30 of the Arbitration Act,1940 since:

  • It forbids any other appeal against an arbitral award than the one set forth in Section 34, Subsection (1).
  • In Subsection (2) Section 34, it restricts the grounds on which the award can be challenged.
  • In Subsection (3) of Section 34, it promises a relatively short amount of time during which the application for setting aside may be filed.
  • It provides for the arbitral tribunal to be remitted the award in order to correct any deficiencies.

Therefore, the scope of enquiry under Section 34 of the Arbitration and Conciliation Act, 1996 was extremely limited in nature, and consequently, inhibited adjudication on the basis of documents. Challenge to the arbitrator’s award is made under Section 34 of the Arbitration Act, which, as has been held by a catena of judgments, is not a challenge on the merits of the award.

Whether section 34 of the 1996 act confers the court with the power to modify Arbitral Awards?

The Hon’ble Supreme Court in the matter of Project Director, NHAI vs M. Hakeem answered this very question. The question of law before the court was whether “the power of a court under Section 34 of the Arbitration and Conciliation Act, 1996 [“Arbitration Act”] to “set aside” an award of an arbitrator would include the power to modify such an award.” The matter was heard by the Bench of Justices Rohinton Fali Nariman and Justice BR Gavai.

The Director NHAI had challenged a group of cases wherein a Division Bench of the Madras High Court had disposed of a large number of appeals filed under Section 37 of the said Act laying down as a matter of law that “at least insofar as arbitral awards made under the National Highways Act, 1956 [“National Highways Act”], Section 34 of the Arbitration Act must be so read as to permit modification of an arbitral award made under the National Highways Act so as to enhance compensation awarded by a learned Arbitrator.”

The bench noted the history of the provision of setting aside an award and also considered many decisions on the same question of law.

“Section 34 being in the nature of an appellate provision, it provides only for setting aside awards on very limited grounds, such grounds being contained in sub-sections (2) and (3) of Section 34. Secondly, as the marginal note of Section 34 indicates, “recourse” to a court against an arbitral award may be made only by an application for setting aside such award in accordance with sub-sections (2) and (3). “Recourse” is defined by P Ramanatha Aiyar’s Advanced Law Lexicon (3rd Edition) as the enforcement or method of enforcing a right. Where the right is itself truncated, enforcement of such truncated right can also be only limited in nature.

From the reading of the said provisions it can be inferred that, given the limited grounds of challenge under sub-sections (2) and (3), an application can only be made to set aside an award. This becomes even clearer when we see sub- section (4) under which, on receipt of an application under sub- section (1) of Section 34, the court may adjourn the Section 34 proceedings and give the arbitral tribunal an opportunity to resume the arbitral proceedings or take such action as will eliminate the grounds for setting aside the arbitral award. Here again, it is important to note that it is the opinion of the arbitral tribunal which counts in order to eliminate the grounds for setting aside the award, which may be indicated by the court hearing the Section 34 application.”[4]

It is the opinion of the arbitral tribunal which counts in order to eliminate the grounds for setting aside the award, which may be indicated by the court hearing the Section 34 application.

Further, the Court stated that Section 34 is modelled on the UNCITRAL Model Law on International Commercial Arbitration, 1985 under which no power to modify an award is given to a court hearing a challenge to an award.

Bench added that by way of contrast, under Sections 15 and 16 of the Arbitration Act, 1940, the court is given the power to modify or correct an award in the circumstances mentioned in Section 15, apart from a power to remit the award under Section 16.

Thus, 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.

Supreme Court stated that, to state that the judicial trend appears to favour an interpretation that would read into Section 34 a power to modify, revise or vary the award “would be to ignore the previous law contained in the 1940 Act; as also to ignore the fact that the 1996 Act was enacted based on the UNCITRAL Model Law on International Commercial Arbitration, 1985.”

The Supreme Court further expressed that “If one were to include the power to modify an award in Section 34, one would be crossing the Lakshman Rekha”

Past Judgements considered by the Bench

The Supreme Court Bench of Justices Rohinton Fali Nariman and Justice BR Gavai considered many past judgements and case laws to draw the conclusion that Section 34 does not confer powers onto the courts to modify Arbitral Awards. Few of the past judgments considered by the Bench are as follows.

It is settled law that a Section 34 proceeding does not contain any challenge on the merits of the award. This has been decided in MMTC Ltd. v. Vedanta Ltd., (2019) 4 SCC 163, at 167 as follows: –

“14. As far as interference with an order made under Section 34, as per Section 37, is concerned, it cannot be disputed that such interference under Section 37 cannot travel beyond the restrictions laid down under Section 34. In other words, the court cannot undertake an independent assessment of the merits of the award, and must only ascertain that the exercise of power by the court under Section 34 has not exceeded the scope of the provision. Thus, it is evident that in case an arbitral award has been confirmed by the court under Section 34 and by the court in an appeal under Section 37, this Court must be extremely cautious and slow to disturb such concurrent findings.”[5]

In Dyna Technologies (P) Ltd. v. Crompton Greaves Ltd. (2019) 20 SCC 1, the Supreme Court held that:

“37. In case of absence of reasoning the utility has been provided under Section 34(4) of the Arbitration Act to cure such defects. When there is complete perversity in the reasoning then only it can be challenged under the provisions of Section 34 of the Arbitration Act. The power vested under Section 34(4) of the Arbitration Act to cure defects can be utilised in cases where the arbitral award does not provide any reasoning or if the award has some gap in the reasoning or otherwise and that can be cured so as to avoid a challenge based on the aforesaid curable defects under Section 34 of the Arbitration Act…”[6]

However, in Union of India v. Arctic India 2007 (4) Arb LR 524 (Bom), a learned Single Judge of the Bombay High Court opined that the Court can modify the Award even if there is no express provision in the Act permitting it.

In Managing Director v. Asha Talwar 2009 (5) ALJ 397, the Allahabad High Court held that while exercising the powers to set aside an Award under Section 34 of the Act the Court does not have the jurisdiction to grant the original relief which was prayed for before the Arbitrator.

Delhi High Court in Cybernetics Network Pvt. Ltd. v. Bisquare Technologies Pvt. Ltd., 2012 SCC OnLine Del 1155, held “Under Section 34(2) of the Act, the Court is empowered to set aside an arbitral award on the grounds specified therein. The remand to the Arbitrator under Section 34(4) is to a limited extent of requiring the Arbitral Tribunal “to eliminate the grounds for setting aside the arbitral award”. There is no specific power granted to the Court to itself allow the claims originally made before the Arbitral Tribunal where it finds the Arbitral Tribunal erred in rejecting such claims. If such a power is recognised as falling within the ambit of Section 34(4) of the Act, then the Court will be acting no different from an appellate court which would be contrary to the legislative intent behind Section 34 of the Act.”[7]

Bombay High Court in R.S. Jiwani v. Ircon International Ltd., 2010 (1) Bom CR 529, where the Court held:

“An award can only be set aside under the provisions of Section 34 as there is no other provision except Section 33 which permits the arbitral tribunal to correct or interpret the award or pass additional award, that too, on limited grounds stated in Section 33… It is also true that there are no parimateria provisions like Sections 15 and 16 of the Act of 1940 in the 1996 Act but still the provisions of Section 34 read together, sufficiently indicate vesting of vast powers in the court to set aside an award and even to adjourn a matter and such acts and deeds by the Arbitral Tribunal at the instance of the party which would help in removing the grounds of attack for setting aside the arbitral award.”[8]

Decision of the Bench & Conclusion

The Supreme Court held that the judicial trend appears to favour an interpretation which would read into Section 34 a power to modify, revise or vary an award is wholly incorrect. The observation found in McDermott’s decision clearly bound the learned Single Judge and any decision to the contrary would be incorrect.

It further held that the question of law in the present case whether the power of a court under Section 34 of the Arbitration and Conciliation Act, 1996 [“Arbitration Act”] to “set aside” an award of an arbitrator would include the power to modify such an award “has now been settled finally by at least 3 decisions of this Court. Even otherwise, to state that the judicial trend appears to favour an interpretation that would read into Section 34 a power to modify, revise or vary the award would be to ignore the previous law contained in the 1940 Act; as also to ignore the fact that the 1996 Act was enacted based on the UNCITRAL Model Law on International Commercial Arbitration, 1985 which, as has been pointed out in Redfern and Hunter on International Arbitration, makes it clear that, given the limited judicial interference on extremely limited grounds not dealing with the merits of an award, the ‘limited remedy’ under Section 34 is co- terminus with the ‘limited right’, namely, either to set aside an award or remand the matter under the circumstances mentioned in Section 34 of the Arbitration Act, 1996.”[9]

It further held that “46. Quite obviously if one were to include the power to modify an award in Section 34, one would be crossing the Lakshman Rekha and doing what, according to the justice of a case, ought to be done.”[10]

It was further held by the court that the court could not read or interpret section 34 to include the power to modify arbitral awards when the Legislature specifically intend such a power to not exist by deliberately excluding the power of modification of Arbitral Awards while amending the 1940 Act and passing the 1996 Act. “In interpreting a statutory provision, a Judge must put himself in the shoes of Parliament and then ask whether Parliament intended this result. Parliament very clearly intended that no power of modification of an award exists in Section 34 of the Arbitration Act, 1996. It is only for Parliament to amend the aforesaid provision in the light of the experience of the courts in the working of the Arbitration Act, 1996, and bring it in line with other legislations the world over.”[11]

Thus, the Supreme Court in the matter of Project Director, NHAI vs M. Hakeem has established that the Courts do not possess the power to modify Arbitral Awards under Section 34 of the Arbitration and Conciliation Act 1996 but to only set aside an award in its entirety under very limited grounds as given in the provisions.


[1] Project Director, NHAI vs M. Hakeem (LL 2021 SC 311)

[2] The Arbitration Act, 1940

[3] ibid

[4] Project Director, NHAI vs M. Hakeem (LL 2021 SC 311)

[5] MMTC Ltd. v. Vedanta Ltd., (2019) 4 SCC 163

[6] Dyna Technologies (P) Ltd. v. Crompton Greaves Ltd. (2019) 20 SCC 1

[7] Cybernetics Network Pvt. Ltd. v. Bisquare Technologies Pvt. Ltd., 2012 SCC OnLine Del 1155

[8] R.S. Jiwani v. Ircon International Ltd., 2010 (1) Bom CR 529

[9] Project Director, NHAI vs M. Hakeem (LL 2021 SC 311)

[10] Project Director, NHAI vs M. Hakeem (LL 2021 SC 311)

[11] ibid

Author: Arnab Pal, Amity Law School Noida      

Editor: Kanishka VaishSenior Editor, LexLife India.

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