POWER OF COURTS TO MODIFY ARBITRAL AWARDS

ABSTRACT

Under Section 34 of the Arbitration and Conciliation Act, 1996, the principle of minimum judicial interference has been followed, as courts can set aside arbitral awards inly on some specific grounds, without eve authorizing the modification of arbitral awards. The UNICTRAL Model Law has been followed, which follows a restricted judicial intervention in an arbitral award for it to be final and independent. Independent. Under Section 34 of the Arbitration and Conciliation Act, 1996, the principle of minimal judicial interference has been further extended to prohibiting courts from setting aside arbitral awards while modifying them in conformity with the UNCITRAL Model Law. This is in sharp contrast to the earlier Indian Arbitration Act, 1940, which permitted courts to effect modifications in awards. The 1996 Act, replacing the Indian Arbitration Act, 1940 (1940 Act), follows the UNCITRAL Model Law, 1985, particularly Article 34, which restricts courts from modifying or altering awards. Under Section 34, courts can only set aside awards on specific grounds such as incapacity, lack of notice, jurisdictional excess, or violation of public policy. Appeals under Section 37 are limited to issues under Section 34.

Key Words: UNICTRAL Model, Arbitration, Conciliation, Section 34, Modification, Alteration.

INTRODUCTION

While Sections 15 and 16 of the 1940 Act empowered courts to “modify, correct, or remit” awards, Section 34 of the 1996 Act limits courts to either uphold or set aside awards based on specific grounds. The exclusion of modification aligns with the Model Law. Judicial review under Section 34 is only limited to procedural fairness and patent illegality. But there can be an exception under Article 142 of the Constitution of India wherein Supreme Court can pass any order to ensure complete justice. Legislative reforms inspired by global practices limited judicial authority for altering awards due to minor errors and grave injustices. The balance would work to enhance arbitration efficiency while the same continues to be final and independent contrary to international values.

The ability of courts to amend arbitral awards highlights an attempt to balance between respecting arbitration’s autonomy and ensuring procedural justice.

The Supreme Court’s decision in “Gayatri Balasamy v. ISG Novasoft Technologies Ltd. (2024)” reignited the debate on whether courts can modify arbitral awards under Sections 34 and 37. While cases like “McDermott International (2006)” and “NHAI v. Hakeem (2019)” held that courts cannot modify awards, others like “Vedanta Ltd. v. Shenzhen Shandong Nuclear Power Construction (2018) and Oriental Structural Engineers v State of Kerala (2011)” allowed modifications. To resolve these contradictions, the matter has been referred to a larger bench for clarity on judicial intervention in arbitration. The key issue here revolved around the scope of judicial intervention and whether or not court may correct evident errors in awards as opposed to completely setting aside of the award. The judgment intended to resolve these conflicting demands with regard to arbitration by balancing the autonomy of arbitral process and preventing against procedural injustice.

The Supreme Court held that the court would intervene in a case of Section 34(4) of the Arbitration Act when it appears that the arbitral award suffers from procedural lapse like absence of reasoning or gap wherein reasoning, the same could be cured instead of setting it aside. Though not expressly allowing for such amendments, the Court highlighted its powers under Section 34 to set aside part of the award to uphold justice and equity.

SUPREME COURT’S APPROACH TO MODIFICATION OF AWARDS

While “Larsen Air Conditioning v. Union of India” reaffirmed the principle of non-interference with awards, “Babaji Nayak v. RITES Ltd.” and Others held that the scope of judicial review was limited to examining whether the award was based on evidence and reasoning. Likewise, the cases “IRCON International v. Amalgamated Construction” and “Principal Secretary to Govt. of Odisha v. Jagganath Chaudhary” highlighted that the courts only intervene when there are patent violations of the law or the public policy.

Supreme Court has exercised its powers under Article 142 of the Constitution to modify awards in specific cases to ensure “complete justice.” 

1. “Tata Hydro-Electric v. Union of India”: The Court changed the effective date of the award.
2. “JC Budhraja v. Chairman, Orissa Mining Corporation Ltd.”: The award amount was reduced.
3. “Oriental Structural Engineers v. State of Kerala” and “Vedanta Ltd. v. Shenzhen Shandong Nuclear Power Construction”: Exorbitant interest rates were adjusted.

In “Project Director, NHAI v. M. Hakeem”, the Supreme Court clarified that such modifications under Article 142 are case-specific and do not set a precedent for judicial overreach under Section 34. However, in cases like “Vedanta Ltd. v. Shenzhen Shandong Nuclear Power Construction Co. Ltd.”, the Court reduced an exorbitant interest rate to ensure fairness, and in “Ssangyong Engineering & Construction Co. Ltd. v. NHAI”, limited exceptions were allowed for “complete justice.”

Restricted Powers of Courts Regarding Arbitral Awards

The doctrine of functus officio limits arbitrators and courts from revisiting awards once they are made. The Act permits only limited rectifications under Section 33, such as correcting clerical or computational errors. The Supreme Court in M. Hakeem highlighted the following:

1. The language of Section 34 (“setting aside”) and the absence of provisions for modification underline the legislature’s intent to minimize interference.
2. Tribunals may correct minor errors under Section 33, but major errors in law or fact cannot be addressed, often resulting in inefficiencies.

Implication of Restricted Powers

1. Courts often resort to setting aside awards even for minor substantive errors due to their inability to modify them. Data shows:
   • In the first quarter of 2020, the Bombay High Court’s set-aside rate for arbitral awards was 31%.
   • The Delhi High Court’s set-aside rate for the same period was 36%.
2. Setting aside awards often necessitates initiating new proceedings, leading to increased costs and delays. This undermines arbitration’s purpose of providing a quick and cost-effective dispute resolution mechanism.

VISHWANATHAN COMMITTEE REPORT AND PROPOSED SOLUTIONS

Inspired by global trends, the 2017 Vishwanathan Committee Report suggested changes to provide courts the power to modify or alter arbitral awards: 

For instance, 

• United Kingdom: Sections 67 and 69 of the Arbitration Act give judges powers to modify arbitral awards.
• Singapore: Section 49 of its Arbitration Act vests similar powers.

It was also proposed that limited modifying powers could prevent avoidable annulments while preserving the sanctity of arbitration, with a warning against the misuse of such powers by the courts, lest it damage the arbitral process.

The Supreme Court said, in the case of “JG Engineers v. Union of India”, that courts could order the setting aside of an award’s part if such part was severable, while keeping intact the other remaining parts. Severance necessitates that the provision to be removed is separate and independent, that the overall functionality or enforceability of the rest of the provisions and the Award are not impacted and that it will not defeat the essential purpose of the Award. An opt-in mechanism for rectification could be suggested by the NYC Bar Association, whereby parties could authorize tribunals to correct major errors within time limits. This setup promises to guarantee efficiency and maintenance of autonomy for the parties.

ANALYSIS AND WAY FORWARD

The court currently can only set aside arbitral awards Section 34 of the Arbitration Act. This signifies that there is minimum judicial intervention and the arbitral award is final. This inefficacy of minimum judicial intervention becomes apparent when an award is set aside entirely; it demands resumption of arbitration which is usually a time-consuming and costly process.

By applying Article 142 of the Constitution , the Supreme Court has allowed changes to awards under special situations but these cannot be referred to in future owing to difference in experience.

The practical approach lies in a truly liberal interpretation of Section 34, allowing awards to be modified partially. This would ensure fairness without compromising efficiency in arbitration and party autonomy.

As a way of solving actual problems deriving out of practicalities, legislative amendments should empower courts to partially set aside or alter awards in exceptional cases. In this way, it would help in reducing the use of Article 142 and ensuring a just compromise between finality of awards and fairness and efficiency in arbitration proceedings.

CONCLUSION

The tussle between maintaining the sovereignty of arbitration and providing justice is best reflected in the capabilities accorded by the courts under the Arbitration and Conciliation Act, 1996, for the modification of awards. What the Act does is limit the scope of interference outside a narrow set of grounds for setting aside awards according to practical difficulties and contradictory precedents and hence the need for reform. It is argued that this should be achieved through balanced amendments in legislation permitting limited modifications in exceptional circumstances, which can redress procedural inefficiencies while keeping the much-needed principles of arbitration intact. Indian arbitration will thus align with global standards and provide a robust base for qualifying India as a pro-arbitration jurisdiction.