Modification of Arbitral Awards and Section 34: An Alternative Perspective

[Deeksha Pokhriyal is a 3^rd year B.A., LL.B. (Hons.) student and Aviral Agrawal is a 4^th year B.A., LL.B. (Hons.) student at NALSAR University of Law]

The Supreme Court of India in The Project Director, NHAI v. M. Hakeem  held that courts, while exercising jurisdiction under section 34 of the Arbitration and Conciliation Act, 1996 (‘1996 Act’) do not possess the power to modify an arbitral award. Proceedings with respect to setting-aside and modification of the arbitral award in India have always been subject to debates and controversies. With this judgement, the Court has finally settled the dispute. However, while section 34 of the 1996 Act permits limited judicial intervention, non-adversarial methods of alternative dispute resolution should enable parties and empower courts, in certain cases, to modify (albeit to a limited extent) the award. This would ensure that disputes are resolved in an efficacious, speedy, and cost-effective manner.

History of Section 34

The Indian Arbitration Act, 1940 (‘1940 Act’) was replaced by the 1996 Act, which is inspired by the UNCITRAL Model Law on International Commercial Arbitration, 1985. Section 34 of the 1996 Act is in consonance with Article 34 of the Model Law, which does not provide any power to a court hearing a challenge to an award, to modify such award. The scope of section 34 is limited in comparison to section 30 of the 1940 Act. Furthermore, the 1996 Act does not retain any provisions like sections 15 and 16 of the 1940 Act, which prescribed that the court had the power to modify, correct or remit an award to the arbitral tribunal. Under section 34, 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 (2A) are made out. Section 34 encapsulates the legislative policy of minimal judicial interference in arbitral awards. 

International Developments 

It is pertinent to note that India is not the only jurisdiction with debates and controversies in context of modification of awards. In England, under the English Arbitration Act, 1996, courts have the power to vary the award if the challenge is made on a substantive ground or when an appeal is filed on the question of law. In Australia, the courts can only set-aside an award under the provisions of similarly worded section 34 of the International Arbitration Act, 1974. However, section 34-A was later added to that legislation under which an appeal can be preferred, through which modification can be effected. Even in United States, section 11 of the United States Federal Arbitration Act, 1925 lays down that a court is empowered to make an order modifying or correcting the award under three conditions: (a) evident material mistake; (2) arbitration award on an issue not submitted for dispute; and (c) award is imperfect as to matter of form not affecting the merits. Interestingly, Singapore holds the most unique position in this regard, wherein the courts not only can modify the award under an independent provision but can modify and set-aside the award in the same proceeding by way of a combination of section 51(2), 48 and 49 of the Singapore Arbitration Act, 2001. Hence, it is clear that various jurisdictions either already had provisions or incorporated new ones through amendments to allow modification of awards.

Indian Courts and Their Approach

Through its various judgements, the Supreme Court of India has made it clear that modification of awards cannot be carried out under section 34 of the 1996 Act. However, the Court has been allowing modification of awards under Article 142 of the Constitution of India in furtherance of the power to do complete justice. While delivering the NHAI judgement, the Supreme Court relied on various landmark cases like McDermott International Inc. v. Burn Standard Co. Ltd and Hindustan Zinc Ltd. v. Friends Coal Carbonisation, and reiterated its stance on section 34, but allowed modification under Article 142. This clearly highlights that the issue is not with modification, but only with respect to reading such powers under section 34. It is pertinent to note that in Oil & Natural Gas Corporation Ltd. v. Western Geco International Ltd, the Bombay High Court held that when the arbitration tribunal draws a wrong inference on facts, the award can be “cast away or modified”.

Furthermore, in Gayatri Balaswamy v. ISG Novasoft Technologies Ltd., where the Madras High Court had allowed modification of award under section 34, the Supreme Court held that such an interpretation of section 34 is erroneous; nonetheless, it allowed modification under Article 142. In another recent judgement, Oriental Structural Engineers Pvt. Ltd. v. State of Kerala, the Supreme Court modified the arbitral award by citing “justice and equity” as the ground for making modifications. Hence, it can be clearly observed that the Court has not taken a backseat in modifying the awards, but has merely held that section 34 signifies the principle of minimal judicial intervention. The Supreme Court is of the opinion that if, in the interest of justice, modification is necessary, it shall do so under powers vested on it under Article 142.

Analysis

Having analysed the basic jurisprudence behind section 34 of the 1996 Act, it is important to note that while section 34 offers an insight into the procedure for setting aside an arbitral award, the assistance of the courts is indispensable for the smooth functioning of the arbitration system. 

Firstly, while the Supreme Court has rightly observed that it is not possible to modify awards under section 34 of the 1996 Act and the current statutory provision reflects the underlying intention of the legislature, the Court has time and again upheld the modification of award under the garb of doing ‘complete justice’ in accordance with Article 142 of the Constitution. This indicates that the Court is of the opinion that modification is not contrary to the overall procedure, but is in fact rather not allowed under section 34. Additionally, this clearly reflects an approach of the Court that does incorporate the idea of limited modification. In NHAI, the Supreme Court observed that the present judgment does not bar the exercise of its extraordinary powers under Article 142 of the Constitution in order to achieve complete justice between parties. It is apparent that while the primary objective of arbitration is ‘minimum judicial interference’, there are questions of practical considerations that co-exists. In cases where the Supreme Court has modified the awards under Article 142 of the Constitution to rectify the apparent errors, in order to provide complete justice, the modification must have been the more tenable and judicious option in their judicial wisdom.

Secondly, from the lens of a comparative analysis of provisions for setting-aside and modifying the awards across jurisdictions, it is apparent that various countries have amended their statutes to incorporate modifying power. While adopting the Model Law, the Indian legislature must have also taken ideas from the statutes of other jurisdictions which empower their courts to modify an award. Countries like Australia, which share a similarly worded section for setting aside the award, formulated additional provision that specifically allows for modification, hence reflecting the importance of the same.

Thirdly, an order that remits the parties back for de novo proceedings before the arbitration tribunal might run contrary to the very foundation of preferring alternative dispute resolution over litigation. Furthermore, ordering for afresh proceedings will add up cost and would be burdensome on parties. Such delayed and expensive justice would render the idea of preferring arbitration void in toto.

Therefore, to allow such a modification, either the 1996 Act must be amended to incorporate a new section altogether (albeit with limited powers) or a proviso should be added to the section with limited modification power. This will not only save the parties’ time and cost but will also uphold justice in its truest sense. However, as a caveat, it should be ensured that the power to modify awards should not extend to the substantial modification of an award based on reassessment of facts and evidence by the court.

Conclusion and the Way Forward

Hence, even though the Supreme Court aptly pointed out that the power to modify an award cannot be read into section 34, there is a pressing need for a separate provision that would accommodate such modification. Not only are there valid arguments to allow for modification, the fact that various jurisdictions have already incorporated such provisions further strengthens the arguments. If the court would set aside the award and remit the matter to the arbitral tribunal for de novo proceedings, in every case where there are issues with the award, it would defeat the purpose of preferring arbitration, which is to enable parties to resolve disputes in an efficacious and speedy manner. Notwithstanding the fact that arbitration is an alternative to litigation, arbitration is not a complete departure from the judicial machinery but rather co-exists with it. Since the main aim of arbitration is to ensure delivery of legitimate awards in the interest of justice, the legislature should amend the 1996 Act to permit the courts to modify the awards. A balanced approach is required to bring out the true object of the legislation.

– Deeksha Pokhriyal & Aviral Agrawal