Supreme Court recognises limited power of courts to modify arbitral awards

Partner: Tine Abraham, Senior Associate: Shourya Bari, Associate: Pratik Sahai

Constitution Bench of the Supreme Court settles the position on courts’ power to modify arbitral awards

Section 34 of the Arbitration and Conciliation Act, 1996 (Act) grants a court the power to ‘set aside’ an arbitral award. However, Section 34 does not expressly empower a court to modify an arbitral award. In this context, in the course of hearing challenges to arbitral awards, while certain judicial decisions had modified arbitral awards, some had ruled that Indian courts cannot modify arbitral awards. To resolve this divergence in opinions, a Constitution bench of the Supreme Court of India in Gayatri Balasamy v ISG Novasoft Technologies Limited¹ (Gayatri Balasamy) addressed the issue – ‘are Indian courts jurisdictionally empowered to modify an arbitral award? If so, to what extent?’

The Supreme Court (by a majority of 4:1) held that a court has a limited power under Sections 34 and 37 (which provides for, among other things, an appeal against an order setting aside or refusing to set aside an arbitral award under Section 34) of the Act to modify an arbitral award in relation to the following circumstances:

1. When the arbitral award is severable, by severing the ‘invalid’ portion from the ‘valid’ portion of the arbitral award.
2. To correct clerical, computational, or typographical errors which appear to be erroneous on the face of the record.
3. To increase or decrease the post-award interest where the circumstances justify such alteration.
4. Exercise of the Supreme Court’s powers under Article 142 of the Constitution of India to pass orders for doing complete justice in a matter pending before it in consonance with the fundamental principles and objectives underlying the Act towards bringing the dispute to an end.

Key reasoning behind the majority opinion inferring limited power of modification

The majority in the Constitution bench took into account various considerations, including the scope of Section 34 of the Act, the problems faced by parties in arbitration in the Indian context, and the balance courts need to strike with respect to the degree of their interference with the arbitral process. The key reasons for the majority decision are set out below.

1. Since Section 34 of the Act grants a court the power to sever the ‘invalid’ portion of an arbitral award from the ‘valid’ portion (provided the ‘valid’ and ‘invalid’ portions are legally and practically separable and not inter-dependent), the power to set aside an arbitral award necessarily includes the power to partially set aside an arbitral award.
2. While Section 34 does not permit a review of the merits of the dispute, the recognition of a limited power to modify arbitral awards under Section 34 will not inevitably lead to an examination of the merits of the dispute. Accordingly, the limited power of severing an arbitral award implies that a court has the power to modify an arbitral award, and the absence of an express power to modify arbitral awards in Section 34 cannot be read as a complete prohibition to do so.
3. Pertinently, modification of arbitral awards will prevent parties from having to undergo the hardship of an additional round of arbitration (which can be the consequence if an arbitral award is set aside). This will facilitate arbitration processes to be quicker and cost-efficient (a principal feature of arbitration).
4. The power to modify an arbitral award under Section 34 must not be conflated with the jurisdiction of an appellate court to review a judgment of a lower court. In this context, the Court has ruled that only when there is no debate around the modification or the error is apparent on the face of the record, can the courts modify an arbitral award. If these two conditions are not met, the parties must approach the arbitral tribunal under Section 33 of the Act towards correction of any clerical or typographical error or interpretation of a specific point or part of the arbitral award.

Analysis of the dissenting opinion

Given the dynamic and evolving nature of India’s arbitration jurisprudence, the dissenting opinion in this case deserves due consideration as it may impact judgments and legislative policy in the near future. While the dissenting opinion concurs with the majority opinion to the extent of upholding the court’s power to sever ‘valid’ portions of an arbitral award from the ‘invalid’ ones and rectify computational, clerical, or typographical errors in arbitral awards, it has held the following in the course of its disagreement with the rest of the majority opinion:

1. Modifying an arbitral award is impermissible under Section 34, and setting aside is the only form of interference with an arbitral award that is contemplated under Section 34.
2. Section 34 does not provide for modification of an arbitral award, and reading that power as implicit in Section 34 tantamount to exercising legislative power. Pertinently, the precursor to the Act, i.e., the Arbitration Act, 1940, provided an express power to modify an arbitral award, which was not incorporated in the Act. This confirms the Parliament’s intention that the powers under Section 34 do not include the power to modify an arbitral award.
3. The power to set aside an arbitral award does not include the power to modify, as they are qualitatively different powers in the context of the Act.
4. The argument that parties will face hardship if they have to re-arbitrate their dispute if the arbitral award is set aside is without merit. The Act itself provides for such re-arbitration in Section 43(4) of the Act (concerned with exclusion of time for computing limitation period for commencement of re-arbitration), and such statutory provisions cannot be brushed aside on the ground that hardship will be caused to parties.

Implications of the judgment and practical concerns

Viewed through the lens of pragmatism, the court’s power to modify arbitral awards is likely to prevent wastage of resources of litigants as they would not need to re-arbitrate their dispute. This is beneficial, especially since judicial proceedings under Sections 34 and 37 are often protracted. However, there are a few concerns with the decision in Gayatri Balasamy. For instance, while the Supreme Court has delineated limited grounds for modification, it is not necessary that courts across the country will strictly restrict themselves to those limited grounds while modifying an arbitral award, especially when there are compelling circumstances. This concern is also exacerbated by the Supreme Court allowing a court exercising jurisdiction under Section 34 to rectify ‘other manifest errors’ (in addition to rectifying clerical or typographical errors). As such, despite the Supreme Court’s warning to the contrary, the risk of a court effectively reviewing the merits of a dispute while modifying an arbitral award cannot be ruled out.

Therefore, it would be necessary to keep an eye on judicial decisions modifying arbitral awards pursuant to the decision in Gayatri Balsamy. In case of deviations from the limited grounds set out in Gayatri Balsamy, directions from the Supreme Court or legislative changes to the Act would also be critical in shaping the course of India’s arbitration jurisprudence on this issue.

[1] S.L.P. (Civil) No. 15336 – 15337 of 2021

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