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Judicial Symphony: Supreme Court's Resolute Refrain on Modification of Arbitral Awards

Third-year law student at Government Law College, Mumbai

 

I. Introduction


In January 2024, the Supreme Court ("SC") resolved a prolonged 22-year dispute in S.V. Samudram v. State of Karnataka & Anr.  It addressed a crucial plea regarding the interference with arbitral awards under Sections 34 and 37 of the Arbitration and Conciliation Act, 1996 ("Act"). The Division Bench, comprising  Justices Abhay S. Oka and Sanjay Karol reiterated the established legal principle that attempting to modify an award during Sections 34 and 37 adjudication is impermissible. This landmark judgment settles controversies surrounding the setting aside and modification of arbitral awards in India. Subsequently, the article provides varied perspectives and analyses.

 

II. Factual Background


Contractual arrangement initiated on 29 January,1990, between Mr. S.V. Samudra, ("Appellant"), and Karnataka State PW Department, ("Respondent"), for constructing the Chief Conservator of Forests' office and residence in Sirsi for Rs. 14.86 Lakhs. The agreement mandated possession of the construction site to be handed over to the Appellant by 8 March,1990, with completion slated for 6 May,1992, excluding monsoon season.


Acknowledging challenges in meeting the deadline, attributed to delays in bill clearance, site alterations, and material delivery, both parties engaged in arbitration. On 31 May,2002, Mr. S.K. Angadi, Chief Engineer (Retd.), was appointed as the Arbitrator, formalized on 30 July,2002, to address and resolve disputes stemming from these challenges.


III. Proceedings before the Arbitral Tribunal, Civil Judge & High Court


In the Arbitration proceeding, the appellant presented 11 claims, seeking Rs.18,06,439/- with an 18%p.a. interest from 9 March,1994, to the Arbitrator. On 8 February,2003, the Arbitral Tribunal, after thorough evaluation, granted 9 claims totaling Rs.14,68,239/- with an 18% interest.


The case was appealed to the Civil Judge in Sirsi (Civil Misc.No.08/2003) under of the Act. On 22 April,2010, the judge modified the award to Rs.3,71,564 (25% of tender amount) including Rs.10,000/- Arbitration costs with a 9% interest rate. The modification was based on factual considerations of mutual fault, arguing that an award nearly equal to the tender amount with a high-interest rate would burden the exchequer.


The Karnataka High Court (Dharwad Bench) on 7 February,2017, in MFA.No. 24507/2010 upheld the modification, leading to the dismissal of the appellants' application. The case eventually reached the SC to assess the legal justification of the modification under Sections 34 & 37 of the Act.


IV. Observations by the Court and its Decision


The dispute centered on three main aspects; firstly, interpretation of S.34 of the Act regarding modification, which ideally offers insight for setting aside an arbitral award secondly, the scrutiny of any breach of public policy as a ground under S.34(2)(b) of the Act and lastly, examining of the appellate court's power for supporting modification under S.37. It held as follows: -


1.     Prohibition on Modifying Arbitral Award under Section 34:

Citing the precedent set in NHAI vs M.Hakeem, it emphatically restated that any attempt by Court under Sections 34 to modify the Arbitral Award is beyond its jurisdiction. Such an endeavor, even if it conflicts with the grounds specified under Sections 34, would be legally unsustainable. Further, it “observed that any attempt to ‘modify an award’ under Sections 34 would amount to ‘crossing the Lakshman Rekha’.” In Kinnari Mullick vs Ghanshyam Das Damani, SC contended that Sections 34, seemingly restricts the powers of the Court to remand matters, only for awards with ‘curable defects’ .


The court while referring to Dakshin Haryana Bijli Vitran Nigam Ltd. vs Navigant Technologies Pvt. Ltd., it asserted, “the court cannot correct errors of the Arbitrators. It can only quash the award leaving the parties free to begin the arbitration again if it is desired.”


Relying on the Dyna Technologies Pvt. Ltd. vs Crompton Greaves Ltd. case, the court stressed the importance of giving primacy to the Arbitral Tribunal in resolving disputes agreed to be settled through Arbitration. It emphasized the need for a fair and just interpretation of the award and discouraged an unduly literal approach, that if the Tribunal applies error or irrational reasoning, it requires quashing of the award and prompting parties to revisit the Arbitration procedure. Consequently, the court affirmed that no modification of the award is permissible when adjudicating Sections 34 Petition.


2.    No violation of Public Policy:

In this case, the only basis for contesting the award was its potential deviation from India's public policy under Section 34(b)(ii) of the Act. Citing IOCL vs Shree Ganesh Petroleum, the court meticulously outlined circumstances leading to an award being considered against India's public policy. This includes blatant violations of statutory provisions, lack of judicious approach by Arbitrator, breaches of natural justice, unreasonableness, perverseness, patent illegality, contravention of substantive laws, and actions against the country's interest, justice, or morality.


However, the SC rejected the idea of breach, noting that the reasons provided by Civil Judge, Sirsi did not even remotely suggest the award's inconsistency with public policy, thereby precluding a review of its merits.


3.     Modification of Arbitral Award not allowed under Section 37:

Examining the High Court's verdict to accept a modification under Section 37 of the Act, the SC referred to the precedent, MMTC Ltd. vs Vedanta Ltd. It emphasized that Section 37 interference must adhere to the Section 34 restrictions outlined in the Act. The court clarified that the role is not to independently assess award merits but to ensure Section 34's proper application.


In the UHL Power Company Ltd. vs State of HP case the court endorsed the perspective that the jurisdiction granted by Section 34 of the Act is limited, and therefore, the appellate court's jurisdiction in examining an order, setting aside or refusing to set aside an award, is all the more circumscribed under Section 37.


The SC concluded that the High Court Judge overlooked Section 37 intricacies, akin to the Civil Judge under Section 34. As, under judicial scrutiny, court u/s 37 does not have power to amend/modify the award. Invoking extraordinary jurisdiction under Article 142, SC cited Hyder Consulting (UK) Ltd. vs State of Orissa, to ensure substantial justice, lowering interest rate from 18% to 9%p.a. from the award date pendente lite and future, until payment. 


In its decision, the Court has granted the appeal, overturning the impugned judgment issued by the Ld. High Court Judge and the Ld. Civil Judge. Consequently, the court has reinstated the award dated 18 February,2003, passed by the Ld. Arbitrator, albeit with a lowered interest rate, thus indirectly modified the award for justifiable fairness.


V. Analysis & way forward


In the elucidation of the verdict, a comprehensive five-fold argument is articulated to support divergent perspectives.


Firstly, the Bharat Sewa Sansthan vs U. P. Electronics Corporation Limited case held that the SC will not “ordinarily” bypass the provisions of the special Act (A&C Act) while exercising power under Article 142. Although the Article is undoubtedly meant to do complete justice between the litigating parties, it quoted that “Article 142 power is conceived to meet the situations which cannot be effectively and appropriately tackled by the existing provisions of law.”  


Secondly, the Court contends that such modification aligns with the procedural framework, but deems it impermissible under  Sections 34 and 37. Despite the principle of minimum judicial interference, in Arbitration, the practical considerations arise. So, the Court has allowed modifications to do complete justice under Article 142 relying on various landmark cases like McDermott International Inc. vs Burn Standard Co. Ltd. & Ors. and Hindustan Zinc Ltd. vs Friends Coal Carbonisation. It reiterated its stance on  Sections 34 and 37 but allowed the modification i.e., reduction of the quantum of the award under Article 142.


Thirdly, in another judgement, Oriental Structural Engineers vs State of Kerala, the SC modified the arbitral award by invoking principles of judicious recourse showcasing judicial sagacity as the ground. This clearly highlights that the issue is not with modification of the arbitral award but with reading the Court’s powers under  Sections 34 and 37 which highlights the issue of jurisdiction. The SC posits that if modifications are deemed essential in the pursuit of justice, it will exercise such authority under the powers conferred upon it by Article 142.


Fourthly, debates and controversies surrounding the modification of awards are not exclusive to India as various jurisdictions globally have addressed this issue. In England, the English Arbitration Act, 1996 empowers courts to modify awards based on substantive challenges or legal appeals. Australia relies on section 34 of the International Arbitration Act of 1974, with a subsequent amendment introducing section 34-A for appeals and modifications. The United States, under the Federal Arbitration Act of 1925, u/s 11 allows courts to modify awards for evident material mistakes or imperfect award or issues not submitted. Singapore, uniquely, enables courts to independently modify and simultaneously set aside awards u/s 51(2), 48, and 49 of the 2001 Arbitration Act.


Overall, diverse jurisdictions have established provisions or amendments to facilitate award modifications. Unlike the Arbitration Act of 1940 the current legislation omits Section 15, which allowed courts to alter awards. In NHAI vs M.Hakeem, SC astutely asserts and supports  the amendment of the aforementioned provision. It states that the power to modify lies within the exclusive purview of the Parliament and should be guided by the practical experiences of the courts, aligning it with global legislative standards. Drawing parallels, through a comparative examination of award-setting and modification provisions globally, it is evident that nations, including India draw inspiration from other statutes. For instance, Australia has a similarly worded section incorporating specific modification powers into their statutes, this underscores the significance attached to it.


Lastly, despite SC astutely highlighting its authority, amending an award cannot be inferred from Sections 34 & 37 of the Act. There exists a compelling necessity for a distinct provision accommodating such modifications.

 

Invalidating the award and referring matters back to the Arbitral Tribunal for a completely new hearing each time when there are issues with the award would undermine the very purpose of favoring arbitration. The essence of arbitration lies in its ability to facilitate the expeditious and effective resolution of disputes. Despite Arbitration serving as an alternative to litigation, it does not represent a complete departure from the judicial system; rather, it coexists with it. Given that the primary objective of arbitration is to ensure the issuance of just and legitimate awards, there is a need for legislative amendments to the 1996 Act that empower the courts to modify awards. A nuanced and balanced approach is imperative to align with the true intent of the Act.


 


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