When Can Courts Modify Arbitral Awards? A Legal Analyses

Arbitration serves as a cornerstone for alternative dispute resolution in India, aiming to provide a swift and final settlement mechanism outside traditional court systems. The Arbitration and Conciliation Act, 1996 (hereinafter referred to as “the Act”) governs this process, emphasizing minimal judicial intervention. A pivotal question arises: Do Indian courts possess the authority to modify arbitral awards under this Act? The ongoing case of Gayatri Balasamy v. M/S ISG Novasoft Technologies Limited brings this issue to the forefront.

Statutory Framework Under Sections 34 And 37

Under the Act, Section 34 has the proviso by which a party can apply for setting aside an arbitral award on the grounds listed below, namely:

• Incapacity of a party;
• Invalid arbitration agreement;
• Lack of proper notice;
• Beyond the scope of arbitration;
• Composition of the tribunal not according to the agreement; and
• Award in conflict with public policy of India.

Significantly, there is no provision in Section 34 for modification of an award. Similarly, Section 37 mentions the appeals against an order under Section 34, but does not confer upon any power to modify arbitral awards.

Divergent Judicial Interpretations

The Supreme Court explicitly ruled in Project Director, NHAI v. M. Hakeem (2021) that in terms of Section 34, no court possesses the power to modify arbitral awards. The Court stressed that the legislative intent was to confine judicial interference to the setting aside of awards, and not the modification of awards, and that any such power would mean “crossing the Lakshman Rekha” of judicial interpretation.

On the contrary, earlier in the case of Vedanta Ltd. v. Shenzen Shandong Nuclear Power Construction Co. Ltd. (2019) and Oriental Structural Engineers Pvt. Ltd. v. State of Kerala (2011), a favorable approach was adopted by the courts permitting alterations, leading to a conflicting approach through different judgments.

Current Position And Case Of Gayatri Balasamy

In the recent judgement of Gayatri Balasamy v. ISG Novasoft Technologies Ltd., the Constitution Bench of the Supreme Court has resolved a longstanding judicial conflict that was created due to divergent rulings provided previously. The conflict: can courts modify arbitral awards under the Arbitration and Conciliation Act, 1996, has been resolved with a 4:1 majority, confirming that courts can indeed modify awards, but only under tightly defined circumstances.

In the above case, the appellant, a former employee of ISG Novasoft Technologies, alleged sexual harassment and claimed that the company failed to constitute a committee as mandated by the Supreme Court in the Vishaka guidelines. The arbitral tribunal awarded her ₹2 crore. Dissatisfied, she approached the Madras High Court, which modified the award by granting an additional ₹1.68 crore. However, this additional compensation was reduced by the Division Bench to ₹50,000, citing limited powers of the court under Section 34 to modify awards.

This case reached the Supreme Court which examined whether courts could modify arbitral awards under Sections 34 and 37. Considering the confusion created due to conflicting decisions in previous cases, the Apex Court also had to provide a final ruling to settle the issue.

The previous ruling in M. Hakeem  (supra) held that modification is not allowed under Section 34, and Section 34 only allows for setting aside an award. On the contrary, Vedanta Ltd. (supra) and Oriental Structural Engineers (supra) held that modification is allowed.

When Is Modification Permissible?

The Supreme Court of India, in its judgment addressed the inconsistency, and ruled that modification of arbitral awards is permissible under Sections 34 and 37 of the 1996 Act, but only in four clearly defined scenarios:

• Severability of Awards:

Where an award has parts which are separable and invalid according to law, the courts may modify that award by setting aside only the portions that are invalid and keeping those parts which are valid.

• Clerical or Apparent Errors:

Courts can correct any computational, typographical, or clerical errors which are apparent on the face of the record.

• Post-award Interest:

Courts may alter the post award interest rate depending on a particular case where the tribunal failed to mention the statutory rate, or on the other hand, where the facts demanded a change.

• Under Article 142 of the Constitution:

The Supreme Court has the jurisdiction to do complete justice under which it can modify awards in situations where such acts are required to avoid undue delay or injustice.

However, the Court warned that these powers do not mean full-fledged appellate review of factual or legal findings in the award since a court is not an appellate forum over arbitral tribunal.

What Courts Cannot Do?

• No Review on Merits: Factually, courts cannot go to the extent of reviewing or reconsidering evidence under the guise of modification.
• No Independent Redrafting: The courts are not entitled to rewrite an award on the grounds that they do not agree with the interpretation by the arbitrator.
• No Unlimited Powers: The Court plays a limited role in arbitration as per the globally accepted pro-arbitration norms.

Conclusion

This ruling significantly alters the earlier perception that Section 34 only allows annulment, not alteration. While upholding the sanctity of arbitral awards, the Court has carved out pragmatic exceptions to ensure justice and efficiency. The judgment offers a balanced approach reaffirming the autonomy of arbitral tribunals, while recognizing the courts’ supportive role in correcting manifest errors without requiring fresh arbitration.