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  • Sidhant Singh

Modifying Arbitral Awards: A Dilemma under Sections 34 and 37 of the Arbitration Act

[Sidhant is a student at Hidayatullah National Law University.]


The Indian Arbitration Act 1940 (1940 Act) was replaced with the Arbitration and Conciliation Act 1996 (Act) providing far less scope for judicial interference in the arbitral process. Based on the UNCITRAL Model Law on International Commercial Arbitration, the Act had similar provisions to Article 34 which does not confer any power on the court to modify an award. In an even more significant manner, Section 34 of the Act prohibited the courts from altering the challenged awards, limiting their role to affirming/dismissing the original arbitration award or setting aside the award. In contrast to the 1940 Act, the Act does not contain provisions similar to Sections 15 and 16 of the prior legislation, which conferred upon the courts the power to correct, modify, or remit an award back to the arbitral tribunal. Thus the Act brought in a significant change in the direction of reducing the amount of judicial intervention and respecting the finality of private dispute resolution.


Another important point of discussion is Section 37 of the Act which allows for an appeal of a decision issued under Section 34. The scope of power of courts under Section 37 was discussed in UHL Power Company Limited v. State of Himachal Pradesh, where the court held that interference under the section must adhere to the limitations established in Section 34, and conducting a separate evaluation of the award’s merits is not allowed. Hence, Sections 34 and 37 of the Act limit the court's ability to interfere with arbitral awards. Over the years, various High Courts and the Supreme Court of India (SC) have been divergent on the issue of whether the power to set aside arbitral awards under Section 34 can be extended to modification of arbitral awards.


In a recent ruling in Gayatri Balasamy v. ISG Novasoft Technologies Limited (Gayatri Balasamy), the SC has referred a significant question to a larger bench: whether courts have the power to modify an arbitral award while exercising power as per Sections 34 and 37 of the Act. More particularly, the larger bench will decide whether the power conferred under Sections 34 and 37 includes the power to modify an arbitral award, and whether such power can be implied from the power to set aside an award as per Section 34 of the Act. Earlier, in a significant judgment in Project Director NHAI v. M Hakeem (M Hakeem), SC held that the ‘limited remedy’ under Section 34 of the Act corresponds to the ‘limited right’ to either set aside an award or seek remand of the matter to the Arbitral Tribunal under specific circumstances enumerated in Section 34 of the Act. In this regard, Gayatri Balasamy case puts the court in a position where it has to interpret the meaning of the term ‘setting aside’ and whether ‘setting aside’ under Sections 34 and 37 of the Act includes the power to modify the arbitral award.


This article provides a detailed comparison between the 1940 Act and the Act highlighting the differences in court powers concerning arbitral awards. It also explores how courts have dealt with substantive rights under Section 34 and the implications of limiting court powers to setting aside awards. The article concludes by contemplating how future judgments, particularly from the SC, might interpret the term 'setting aside' and whether a narrower curative power to modify awards might emerge under Section 34 of the Act.


Court's Authority under Section 34: Set Aside v/s Modify


The only remedy available under the Act to challenge an ‘unfavourable’ arbitral award is to initiate legal proceedings in court by filing an application to ‘set it aside’ as per Section 34 of the Act. Another critical aspect of Section 34 of the Act is the marginal note which states that challenging an arbitral award in court can only be done through an application for setting aside such award. The term ‘set aside’ is defined to invalidate or nullify the award or to render any interim orders that might have been made in respect of that award ineffective or non-existent. Black’s Law Dictionary also gives further explanation to this term where ‘set aside’ has been defined as the act whereby a judgment or order is annulled or revoked. It is also important to note that no specific subsection in Section 34 of the Act uses terms, phrases, or concepts like ‘modify’, ‘revises’, ‘reverses’, or ‘varies’ to guide the interpretation of the powers of the court under Section 34 of the Act. Therefore, the court has the authority to either dismiss the filed objections and uphold the award, or set aside the award if the criteria mentioned in subsections (2) and (2-A) are met. Further, neither Section 34 nor Section 37 of the Act provides for any application procedure for seeking modification of arbitral award.


The term ‘modify’ has been defined by the Hon’ble Delhi High Court as a change or variation in the ultimate Award that an Arbitral Tribunal may pass or a substitution of the court's decision for the arbitrator's decision on a particular claim or counterclaim. Nonetheless, the SC, in Larsen Air Conditioning & Refrigeration Co. v. Union of India, made a distinction from the 1940 Act by stating that the court does not have the power to modify an award and it can only partially or fully set aside an award after finding the conditions stipulated under Section 34 of the Act are met. Therefore, in the context of setting aside proceedings, the modification of arbitral award under Section 34 and Section 37 of the Act does not allow the court to correct arbitral mistakes or grant the original relief claimed before the Arbitrator.


Comparison with the Arbitration Act 1940


In the M Hakeem case, the SC noted that interpreting Section 34 to include the authority to revise, alter, or modify an award would prove inconsistent with the earlier precedent established in the 1940 Act. It is interesting to note that SC contrasted the prevalent position under the act with the position under the 1940 Act, wherein Section 15 empowered the court to modify an award in cases where the award dealt with a matter not referred to arbitration or where the award was imperfect in form or was defective in substance as could be rectified without affecting such decision. Subsequently, Section 16 of the 1940 Act provided for the remittance of an arbitral award under certain circumstances. Remission could be claimed if the award did not deal with any of the issues raised before arbitration, or it determined a matter that was not subject to arbitration, or the award is too vague and cannot be enforced, or there were obvious legal defects in the award. Herein, it is necessary to consider the limitations in modifying the arbitral awards. There is a notable overlap between Section 15(a) and Section 16(1) (a) of the 1940 Act. This is because the courts have the authority to modify an award if it addresses a matter outside the scope of the arbitration. However, the courts can only do so if the specific part is capable of being distinguished from the remaining portion of the award without impacting the outcome of the matters that went to arbitration, whereas the court may set aside the award if it fails to determine any of the issues referred to arbitration or if it decides on an issue not referred to arbitration, and if that issue cannot be separated without affecting the decision of the referred matter.


Based on the foregoing, the term ‘modification’ would not be restricted to the mere change in the terms of the award or a re-determination of issues through a court as per Section 34 of the Act. Hence, in terms of Sections 15 and 16 of the 1940 act, the court’s power to modify an award can be considered as part of its power to remit the award for reconsideration. It is pertinent to mention here that the court’s power to modify an award under Sections 15(b) and 15(c) did not in any way affect the decision of the arbitrator on the issue. On the other hand under Section 16(c) of the 1940 Act, the court had the power to remit the award if there was an apparent objection to legality on the face of the award.


Applicant's Substantive Rights under Sections 34 of the Act


Before the M Hakeem case, the Bombay High Court had interpreted Section 34 of the Act to imply a power for modifying arbitral awards. The interpretation is based on the idea that if the court can set aside an award, it must also have the power to refer the matter back to the arbitrator, otherwise, this power would be meaningless. While interpreting Section 34 of the Act, the term ‘recourse’ has only been interpreted to mean the form of the application alone and this does not in any way affect the substantive rights that are conferred by the statute. The High Court of Madras in the case of Mr G v. ISG Novasoft Technologies Limited has clarified that the phrase ‘recourse to a court against an arbitral award’ should not be strictly construed as it encompasses only the right to seek the setting aside an award. The ruling stated that recourse against an arbitral award could be an application to set aside, modify, enhance, vary, or revise the arbitral award. However, the substantive rights that are conferred on an applicant under Section 34 of the Act are still unclear. On similar lines, the Delhi High Court in Union of India v. Modern Laminators (Modern Laminators) highlighted the significance of Section 34 of the Act to empower the courts to modify the awards. It contended that restricting the powers of the court, even when such restrictions are necessary for the finality of disputes, would be detrimental to the objective of promoting efficient and speedy resolution of legal disputes.


Hence, a reasonable interpretation of Section 34 of the Act implies that the court has the power to correct or modify the arbitral award if it has been proved to be inconsistent with the substantial evidence provided by the parties. But in the Modern Laminators case, the court cautioned that if the courts are unable to interfere within the permissible limits or if further fact-finding or complex legal adjudication is necessary then the matter should be left to the forum chosen by the parties as provided in Section 34 (4) of the Act. Section 34 of the Act makes it difficult for the court to make an initial award if the situation necessitates a re-evaluation of documents and evidence on record. Thus, if the issue is a question of law and/or relates primarily to the interpretation of a clause or other related aspects where there is no need for consideration of the evidence, the court may modify the award accordingly.


It will be interesting to see how the SC construes the term ‘setting aside’ in the light of modifying an award. Specifically, it will be interesting to see whether the SC recognizes a smaller curative power to modify arbitral awards while setting aside proceedings under Section 34 of the Act.


Conclusion


When considering Sections 34 and 37 of the Act, the court essentially determines the extent of its authority concerning arbitral awards during setting aside or annulment proceedings. The expression 'modification' of an arbitral award can be understood in different ways. In past judgments, courts have consistently clarified that the power to modify is not part of the power to set aside an arbitral award. Nevertheless, even where the court’s authority to modify an arbitral award per Section 34 was recognized, the scope of the modification has been confined to ensure the expeditious resolution of disputes. In this regard, it remains to be seen whether the court will use its curative power to alter the arbitral award within the ambit of its power to set it aside under Section 34 of the Act.

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