[This article has been authored by Ajay Raj and Renuka Mishra, fourth year law students at Symbiosis Law School, Pune.]
Key words: Arbitral Awards, Modification Power, Section 34, Judicial Intervention, Fairness
An Indian court’s power to set aside an arbitral award, legislatively provided under Section 34 of the Arbitration and Conciliation Act 1996 (the Act), acts as a safety valve to scrutinise awards—such as patently illegal decisions and the like. Nothing in the text of the Act explicitly addresses the power of modification of the merits of an award. Besides, Section 5 precludes courts from intervening with awards and Section 35 recognises the finality of awards. However, Indian courts have often diffusely dealt with this issue and, at times, assumed the power of modification. For instance, in ONGC v Saw Pipes, the Supreme Court (SC) recognised that there exists no such power under Section 34. In contrast, the court, in ONGC v Western Geco International, assumed the power to modify, thereby raising concerns on the legitimacy of this competence.
A Division Bench of the SC recently attempted to impose some clarity on this area, in its decision in The Project Director, National Highways Authority of India v M. Hakeem and Another(Hakeem). Put simply, the issue was: whether courts can implicitly assume the power to modify an award under Section 34. The court answered it in negative. Divided into three parts: background of the case, its ramifications and conclusion; the purpose of this post is to analyse whether the SC’s approach is prejudicial to the tenets of fairness and efficiency, which are key traits of arbitration.
Background of the Case
The appeals concerned the notifications—consisting of awards rendered by a Special District Revenue Officer—issued per the National Highways Act 1956. Since these awards were based on the ‘guideline value’ of specific lands and not sale deeds, the granted amounts were low. The appointed arbitrator, however, did not find any irregularity in the amounts. Aggrieved by this decision, the petitioners challenged the awards before the District Court under Section 34 of the Act. The court modified the award by enhancing the compensation. This modification was subsequently upheld by the Madras High Court (HC), prompting the Appellant, National Highways Authority of India (NHAI) to appeal before the SC.
The SC, while answering the said question, began its analysis on Section 34 by laying out:
a. Modelled on the UNCITRAL Model Law 1985, Section 34 does not provide for the power to modify.
b. The lack of such power is consistent with the policy of minimal judicial intervention, introduced in the Act. Thus, distinguishing it from the 1940 Act.
c. A challenge on the substantive merits of an award is not permitted, as settled in Ssangyong v NHAI.
Thereafter, following the SC’s decision in McDermott International Inc. v Burn Standard Co. Ltd. (McDermott), the court first observed that minimal judicial intervention restrains courts from “correct[ing] errors of the arbitrators”. Further, the court held that the Madras HC’s decision in Gayatri Balaswamy v Novasoft Technologies (Gayatri) allowing modification is per incuriam because the single-judge disregarded the binding Division Bench decision in Central Warehousing v ASA Transport (Central Warehousing), which rejected the existence of such power.
Responding to the contradictory decisions: e.g., DDA v R.S. Sharma,the court held that the modifications therein were made under Article 142 of the Indian Constitution which provides exclusionary powers to the SC to do complete justice. Thus, those decisions do not constitute ratio decidendi. The court observed that as opposed to the Indian Arbitration Act, the Arbitration Acts of the England and the USA explicitly recognise the power of modification. Consequently, it is trite to assume such power in the Indian legislation.
It is at this point the court highlighted that inclusion of the power of modification under Section 34 would mean crossing “Lakshman Rekha” (Indian parlance for strict limitations), thereby overturning the Madras HC’s move to modify the award.
Ramifications: Finality and Minimal Judicial Intervention over Fairness and Efficiency?
Doubtlessly, Hakeem is noteworthy in several ways. It shows that a literal interpretation of the legislative scheme of Section 34 prohibits courts from delving into the merits of an award and, consequently, from modifying the same. It also reiterated the value of binding precedents in India through the conflicting decisions in Gayatri and Central Warehousing. Specifically, restraining the scope of “recourse against an award”, the court reaffirms the high threshold of minimal judicial interventionism in India. Yet, certain complications remain.
Arbitration is oft-employed by parties for the binding nature of awards and minimal judicial intervention.[i] Oddly enough, the trade-off of these tenets is substantive fairness and efficiency. The former is concerned with obtaining the “right result”, i.e., an error-free award, and the latter with the “iron triangle”, comprising of time, cost, and quality of arbitration. As posited by Poser J., it is also a truism that “[a]rbitrators are no more infallible than judges. They make mistakes […]”. Thus, with no recourse for an award’s modification and the lack of appellate arbitration mechanism in India, business circles, especially in high-value disputes, may have to compromise with these tenets. Such a view has been endorsed by the US SC in AT&T Mobility LLC v Concepcion, where it held that due to an award’s finality, arbitration would not be preferred in cases involving high stakes. Likewise, if minimizing judicial interference is an idiosyncratic objective of the Act, so is the speedy disposal of the case. However, another round of arbitration will hinder the speedy disposal of the dispute.
Indian jurisprudence has highlighted the need to do justice and ensure efficiency. The Bombay HC, in Union of India v Arctic India (Arctic India) following the SC’s decision in Hindustan Zinc v Friends Coal Carbonisation, held that inclusion of the power of modification of an arbitral award would be in consonance with the scheme of the Act in terms of the speedy disposal of the case. In Arctic India, the dispute was settled by the court without requiring the parties to undergo a fresh round of arbitration, which would have led to excessive delays and costs.
On the fairness point, the McDermott decision is also ad rem. Here, S.B. Sinha J. had found that the Act provides “for the review of the…award only to ensure ‘fairness’”. However, non-inclusion of modification is likely to impede the fairness of an award in case of genuine errors. Moreover, the McDermott decision, on which the court in Hakeem places reliance, did not recognise the power to modify. However, towards concluding its decision, the court notably modified the award, which incidentally ensured fairness. Thus, one should not choose between fairness and finality as, in the view of the authors, both aspects are intertwined in arbitration.
The court in Hakeem acknowledged that courts on various occasions have modified the award to ‘do complete justice’ per Article 142 of the Indian Constitution. For instance, in Sikka Associates v AAI, the Delhi HC, advocating the ‘interest of justice’, modified the award. This reflects the Indian jurisprudence on delivering justice, along with preserving the sanctity of the award. Under the garb of possibly getting complete justice, parties are likely to approach the SC with a plea of modification of the award. When, for fairness, the SC can employ its constitutional discretion, by not allowing modification of an award before HCs, this tenet is largely infringed. It may be construed that such constitutional discretion is only exercisable in ‘exceptional circumstances’. In contrast thereto, the authors find that the power to modify is not even conferred in such rare circumstances, at the least.
Furthermore, the court observed that Indian courts have transgressed the limits placed by Section 34 unlike England, USA and among others, it does not expressly include the power to modify. It is pertinent to highlight that these countries have offered such express provisions to “compensate for the mysterious omission of the phrase ‘set aside only a part of the award’ from […] art.34 [of the UNCITRAL Model Law]”. Had it been that the legislature(s) intended to keep minimal judicial intervention over justice and fairness, they would have not contemplated such a power. Thus, even where the award warrants a minor modification to conclusively settle the parties’ disputes, the mere recourse available is setting aside, compelling the parties to either compromise or start a fresh round of arbitration.
It may be argued that Section 33 of the 1996 Act empowers the tribunal to modify an award, when there exists “any computation errors, any clerical or typographical errors, or any other errors of similar nature”. However, such minor errors implies, for example, any error of misapplication of fact and not calculation / clerical / typographical, which are within the purview of review. To further clarify, let us assume that the tribunal defaulted in computation of the date on which the limitation period accrued, based on which the claim was barred by the tribunal. With a recourse of modification at hand, which requires the tribunals to reassess such minor errors in the merits of the case, the set-aside proceedings could be avoided. Moreover, Section 34(4), albeit allows the set-aside court to remit the matter back to the arbitral tribunal for reconsideration, is an enabling provision and leaves the tribunal with a wide discretion to not hear the matter again. Section 34(4) is also silent in regards to the time period by which a matter can be remitted.
In any case, reconsideration by a tribunal is akin to undergoing an entire arbitral process again, which cannot be termed to mean modification. As such, the new round will be heavy on the pockets of parties and would require them to undergo each process again, right from the serving of a notice to the post-award stage. Additionally, a party might use the arguments and evidence raised by the other party in the first round to its own advantage. This would make arbitration an arduous dispute resolution mechanism in comparison to the judicial process. Accordingly, a purposive viewpoint vouches for the inclusion of the power to modify in the Act.[ii] In the authors’ considered view, modification of the award would favour expediency and efficiency and, resultantly, would give effect to parties’ choice to arbitrate.
Whilst significant in upholding the policy of minimal judicial interventionism, the Hakeem decision impedes achieving fairness and efficiency in practicality. Perhaps the inclusion of the power of modification in the 1940 Act, which was termed as “salutary”, demonstrates that there existed a need for modification, which in the garb of judicial intervention and the adoption of Article 34, UNCITRAL Model Law disappeared. As G.K. Chesterton rightly puts it, “[w]henever you remove any fence, always […] ask yourself the question, ‘why was it put there in the first place?’” Thus, yet tailwinds abide, how the legislature cures the ‘restrictive’ text of Section 34, strike a balance between judicial interventionism and parties’ interests so as to not erode either of the tenets, and simultaneously improve the arbitral efficacy in India.
[i] Aiswarya Murali, Vivek Krishnani, ‘Minority Awards’ in India: A Low-Hanging Fruit for Judicial Interference?, 37(6) Journal of International Arbitration 731 (2020). [ii] Nakul Dewan, Enforcing Arbitral Awards in India, New York: LexisNexis (1st ed. 2017).