Power To Modify Arbitral Award Under Section 34 Of The Arbitration & Conciliation Act, 1996: Analyzing The Three Judge Reference In Gayatri Balasamy V. M/S ISG Novasoft Technologies Limited

1. Introduction

In a recent order in “Gayatri Balasamy v. M/S ISG Novasoft Technologies Limited”¹ (“Gayatri Balasamy”), Hon’ble Supreme Court of India (“Court”) has referred the question of whether Courts are empowered to ‘modify’ the arbitral award while exercising powers under Section 34 and Section 37 of the Arbitration and Conciliation Act, 1996 (“Act”), to a larger bench. Specifically, the question framed for larger bench is, whether the power under Section 34 and Section 37 of the Act includes the power to modify an arbitral award and whether the power to modify an award can be read into the power to set aside an award under Section 34 of the Act. Previously, the Hon’ble Supreme Court in Project Director NHAI v. M. Hakeem² (“M. Hakeem”) had ruled that the ‘limited remedy’ under Section 34 of the Act is co-terminus with the ‘limited right’ namely, either to set aside an award or remand the matter back to the Arbitral Tribunal under the circumstances mentioned in Section 34 of the Act. In this backdrop, the reference made in Gayatri Balasamy (Supra) would require the Hon’ble Court to interpret the meaning of “setting aside” and whether “setting aside” under Section 34 and Section 37 of the Act includes power to modify the arbitral award. This Article analyzes the meaning of ‘modification of arbitral award’ in the context of setting aside the arbitral award. This Article also analyzes the substantive rights of parties in setting aside proceedings and whether speedy resolution of lis would permit the modification of arbitral award under Section 34 of the Act.

2. Modification of Arbitral Award

2.1. Modification as variance of Arbitral Award

Under the Act, the sole remedy against an ‘unfavorable’ arbitral award is recourse to the Court against the arbitral award by filing an application for ‘setting aside’ in accordance with Article 34 of the Act. The marginal note to Section 34 of the Act states that the recourse to Court against an arbitral award may be made only by an application for setting aside such award. The term ‘set aside’ has been defined to revoke or quash, the effect of which is to make the interim order inoperative or non-existent³. Black Law Dictionary defines “set aside” as to annul or to vacate a judgment or order. Notably, none of the sub-sections of Section 34 of the Act uses expressions such as “modify”, “revise”, “reverse” or “vary” to guide interpretation of the power of the Court under Section 34 of the Act. Thus, the Court may either dismiss the objections filed, and uphold the award or set aside the award if the grounds contained in sub-sections (2) and (2-A) are made out. Section 34 and 37 of the Act also do not provide for application to be made for modification of the arbitral award. The expression “modify” has been defined by Hon’ble Delhi High Court to mean a variation or modulation of the ultimate relief that may be granted by an Arbitral Tribunal or to substitute the Court’s own decision for the decision made by the arbitrator on any given claim or counterclaim⁴. The Hon’ble Supreme Court in Larsen Air Conditioning & Refrigeration Co. v. Union of India⁵ observed that unlike the 1940 Act, the Court is powerless to modify the award and can only set aside partially, or wholly, an award on a finding that the conditions spelt out under Section 34 of the 1996 Act have been established. Thus, in terms of the setting aside proceedings, modification of the arbitral award under Section 34 and Section 37 of the Act cannot result in the Court correcting the errors of the arbitrators or grant the original relief which was prayed for before the Arbitrator.

Specific power to remit and modify under Arbitration Act, 1940

In M. Hakeem (Supra), the Hon’ble Supreme Court ruled that to favor 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. In M. Hakeem (Supra), the Court contrasted the prevalent position under the Act with the position under Arbitration Act, 1940 wherein Section 15 provided that Court may by order modify or correct an award where it appears that a part of the award was upon a matter not referred to arbitration or where the award was imperfect in form or contains any obvious error which can be amended without affecting such decision. Correspondingly, Section 16 of the Arbitration Act, 1940 provided for remitting of arbitral award if the award had left undetermined any of the matters referred to arbitration or where it determined any matter not referred to arbitration and 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. Herein, it is important to analyze the limits placed on the power to modify the arbitral award. The overlap between Section 15(a) and Section 16(1)(a) of the Arbitration Act, 1940 is significant as the courts may modify or correct an award if the 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; whereas the Court may remit the award if 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 matter referred. In view of the aforesaid, ‘modification’ does not only mean variation in the terms of the award or a fresh determination of issues by the Court under Section 34 of the Act. Thus, in the scheme of Section 15 and Section 16 of the Arbitration Act, 1940, the power of court to modify award may be seen as a subset of power to remit award for reconsideration. It is also pertinent to note that the power of the Court to modify the award under Section 15(b) and Section 15(c) did not impact the decision on the matter made by the arbitrator. As against the same, the Court under Section 16(c) of the Arbitration Act, 1940 was empowered to remit the award where an objection to the legality of the award was apparent upon the face of the award.

2.2. Substantive right of Applicant in setting aside proceedings under Section 34 and Section 37 of the Arbitration and Conciliation Act, 1996

Prior to M. Hakeem (Supra), the Hon’ble Bombay High Court⁶ has inferred a power for modification of arbitral award under Section 34 of the Act by interpreting that the power to set aside an award when exercised by the Court would leave a vacuum if the said power was not understood to include the power to remand the matter back to the arbitrator. In Section 34 of the Act, the reference to “recourse” was understood as the form of the application which cannot curtail the substantial right conferred by the statute. In Mr. G. v. ISG Novasoft Technologies Ltd⁷, Hon’ble Madras High Court ruled that the expression “recourse to a Court against an arbitral award” cannot be construed to mean only a right to seek the setting aside of an award. As such, Recourse against an arbitral award could be either for setting aside or for modifying or for enhancing or for the varying or for revising an award. However, it is not clear as to what substantive rights vests in an Applicant under Section 34 of the Act. In Union of India v. Modern Laminators⁸, Hon’ble Delhi High Court held that if the powers of the Court under Section 34 of the Act are restricted to not include power to modify, even where the court finds that list should be finally settled with such modification, it would not be serving the purpose of expeditious/speedy disposal of lis.

Thus, a reasonable interpretation of Section 34 of the Act would only lead to the conclusion that the Court can modify or vary the award of the arbitrator if it is contrary to the material evidence adduced by the parties. The Courts in Union of India v. Modern Laminators (Supra) had however cautioned that if the courts were to find that they cannot within the confines of interference permissible or on the material before the arbitrator are unable to modify and if the same would include further fact finding or adjudication of intricate questions of law the parties ought to be left to the forum of their choice i.e. to be relegated under Section 34(4) of the Act. If there is a question of re-appreciation of documents and materials on record, then it will be difficult for the Court under Section 34 of the Act to grant the award for the first time by appreciating the material on record. Based on the above, if there is a question of law involved and/or only question of interpretation or clause and/or related aspects, whether appreciation of evidence is not necessary, the Court may modify the award accordingly.

It will be interesting to see how Hon’ble Supreme Court would interpret ‘setting aside’ in the context of modification of award. Specifically, it will be interesting to see whether Hon’ble Supreme Court recognizes a smaller curative power to modify arbitral award in setting aside proceedings under Section 34 of the Act.

3. Conclusion

While deciding on whether Section 34 and Section 37 of the Act, the Court is in effect ruling on the contours of the power of Court vis-à-vis arbitral award passed by the arbitrator in a setting aside/annulment proceeding. However, the term ‘modification’ of arbitral award is capable of multiple meanings. In previous judgments, Courts have consistently held that power to modify (where modify is defined to mean ‘vary’) is not a constituent of the power to set aside the arbitral award. Interestingly, even in cases where existence of power to modify arbitral award under Section 34 was affirmed, the nature of what is meant by modification of arbitral award has been limited serving the purpose of expeditious/speedy disposal of lis. In this backdrop, it will be interesting to see whether a curative power to modify the arbitral award is interpreted by the Court under power to set aside in Section 34 of the Act.