Judicial Arrogation of the Power to Modify Arbitral Awards: An Incorrect Way Forward

[Suyash is a student at National Law School of India University.]

In its recent judgment on modification, the Supreme Court (SC) has answered in affirmative the following question: are Indian courts empowered to modify an arbitral award? The case before the SC was based on a reference by a three-judge bench last year to determine the above question due to several conflicting judgments on the issue. In this piece, it is argued that the decision of the SC to judicially supply the power of modification is problematic. This is because, first, the ambit of the power is overbroad and it sanctions increased judicial intervention, and second, such conferral of power undoes the legislative intention and judicial precedents on post-arbitral award stage role of the court. We begin by first perusing the holdings and implications of the judgment. 

Section 34(2)(a)(iv) and Inherent Powers: What the Court Said on Modification Powers

The court read the power of modification within the power to partially set aside the arbitral awards, provided under the proviso to Section 34(2)(a)(iv) [paragraphs 44 and 45]. It held that the power of the court to sever an award to uphold its ‘valid’ parts while discarding the ‘invalid’ parts shall include the power to modify. This, the court held, is because the power to modify is a feebler power than partial setting aside which has the consequence of the selected part of the award being voided in toto. Moreover, the court also justified such a reading of the provision in light of the significant hardships, including delays, that the parties may have to undergo due to denial to modify the award. Another important holding of the judgment was that the power to rectify computational, clerical, typographical errors, or manifest errors are inherent to the court, even when the legislature has not explicitly granted them under the Arbitration and Conciliation Act 1996 (Act) [paragraph 49].

Based on the above reasoning, it appears that the power of modification, unless it relates to manifest errors, can be exercised by courts in situations where the parts of the award are severable. Impliedly, such power may not be exercised in situations where the parts are intrinsically interlinked. However, while the court has tried to circumscribe its own jurisdiction in this fashion, we shall see next that the reasoning adopted by the courts as well as potential consequences of conferring modification powers without legislative sanction are undesirable.

Allowing Modification through Judicial Craftiness: Increased Intervention, Overbroad Coverage, and International Practices

The SC has undertaken the recognition of the power to modify without any legislative process. This means that the power may not have the guidance which is present in other powers conferred upon the court under the Act (for instance, Schedules 5 and 7, or the grounds for challenge of award under Section 34). Moreover, the reading of the power to modify in Section 34 renders all arbitral awards subject to potential modification. This may be understood in reference to the UK Arbitration Act 1996 [Section 69(7)(b)] and Singapore Arbitration Act 2001 [Section 49(8)(b)] wherein the modification powers to the courts are given as part of an appellate mechanism [paragraph 239]. Such an appellate role of the court in these jurisdictions could also be a tacit acknowledgement that the power to modify entails an adjudicatory process wherein the courts may, depending on the determination of applicable law, alter how facts are interpreted and understood. Moreover, there are certain grounds, based on which alone, an arbitral award may be appealed in these jurisdictions (Section 49(5) of the Singapore Act and Section 69(3) of the UK Act). 

We can also understand the issues with the judicial approval of modification in India by a perusal of the UK Arbitration Act more closely. In the UK, there are two challenge provisions against arbitral award, based on (i) substantive jurisdiction (Section 67), and (ii) appeal on point of law (Section 69).

Under (i), the challenge is only when the party seeks to challenge the substantive jurisdiction of the tribunal, where the authority of the tribunal to hear the matter on merits is disputed. It is in such cases that the court may vary the award. In India, on the other hand, the reading of such power in Section 34 proviso implies that they can vary it for all arbitral awards before them as long as the part being varied is severable from the main award. Such a limitation on the power to modify (a) is not adequate and (b) allows more cases being subject to prospective modification as opposed to the power to modify only upon a challenge to the substantive jurisdiction. 

Under (ii), the appeal on point of law is allowed only in certain cases and the power of the court to vary the award is supplemented by the declaration that where the award is varied, it has the effect of being a part of the main award [Section 71(2)]. Such a stipulation is absent in India, rendering open the question whether the modified award would constitute the award to be enforced or the modification may only be a separate decree of court without any implications on the enforceability. This issue also becomes pertinent in cases of enforcement involving the New York Convention under which only arbitral awards and not court orders/decrees are enforceable. A similar point was also raised by the parties against the modification power [paragraphs 20 and 21]. Thus, the modification, not a part of the main award, may not be accepted as a part of the award in the absence of a specific declaration like the UK. Moreover, as stated above, in India, the modification power is read within the provision for set aside. Even in Singapore, for instance, the provision for setting aside the award does not include the power to modify the award. It is only in the case of appeal against award that the Singapore Domestic Arbitration Act confers the power to modify the award. In India, however, there is an absence of such distinction due to the power to modify being sought to be incorporated through judicial craftiness. This ties up into the problem highlighted above regarding all awards being subject to potential modification. 

Turning the Clock: Undoing Legislative and Judicial Hard Work to Maintain a “Supervisory” Jurisdiction at Section 34 Stage?

In India, on the other hand, it has been consistently held (pages 445 and 446) previously that the jurisdiction of the court at Section 34 stage is supervisory and does not entail a review on merits. Furthermore, such modification, going into the substantive merits of the award, makes arbitration an extra step that precedes litigation (page 749) since the lowest courts that can hear cases under section 34 can modify the award and the award becomes far from being final as it has to pass through numerous stages of appeal. Instances like these have happened in cases such as Numaligarh Refinery case (paragraphs 3 and 11) wherein by the time the dispute reached the Supreme Court, the lower courts had already adjudicated upon the merits of the dispute and deviated from the majority award. 

Even the legislature has consistently sought to ensure that Section 34 proceedings are not turned into an adjudicative process by reducing the intervention of courts at this stage. First, under the earlier regime of the 1940 law, the courts had an explicit power to modify under Section 15. However, the same was removed in the 1996 legislation. Interestingly, the decision of the court allows modification on the grounds of severability which has reverted the position back to the 1940 law that allowed modification as long as the award was severable [Section 15(a)]. This indicates that the intention of the legislature to limit the scope of intervention of the courts in the post-arbitral award stage has been counteracted by the SC. The same intention can also be gauged from the 2015 amendment of the Act. Before 2015, the SC in the case of ONGC v. Saw Pipes expanded the scope of review of arbitral awards. The same, however, was sought to be done away by the legislature through the 2015 amendment which clarified that the assessment of arbitral award under the section shall not entail a review on the merits of the dispute. Second, the Act itself envisages situations involving need for changes to award and includes them in provisions such as Section 33(3). This implies that the legislature intends that the parties refer to the arbitrator in cases of correction or interpretation of the arbitral awards. Such a power has also been recognized by the Model Law (Article 33). At the same time, however, a reference to the preparatory works of the UNCITRAL Model Law showcases the reluctance of the framers with respect to giving the power to modify even to the tribunal (page 495). An extension of such power to the courts, especially in India where the enforcement proceedings take significant time, would entail uncertainty regarding the true ambit of the arbitral award itself- impacting its finality. 

The above indicates that the legislature as well as the courts have actively taken steps to avoid opening-up the awards at the enforcement stage. However, now, with the conferral of the power of modification, without any legislative guidance in the statute, the court has rendered the enforcement proceedings vulnerable to adjudicatory tendencies, resulting in (i) more judicial intervention; (ii) concerns with certainty and finality of arbitral awards; and (iii) further delays in enforcement of arbitral awards. 

Conclusion

Therefore, while the power of modification may not necessarily be antagonizing to the Indian arbitration regime, the source of such power shall be through legislative means rather than judicial craftiness. Otherwise, the problems of overbroad coverage, increased intervention , uncertainty of the award, and delays in Section 34 applications become imminent. Lessons in this regard may be taken from other progressive jurisdictions as well as the model law.