[Pallav Mongia is a dual-qualified lawyer, and an empanelled arbitrator, practising before the Supreme Court and Delhi High Court and Prince Todi is an advocate practising before the Supreme Court and Bombay High Court]
After a stream of divergent and contrasting judicial precedents on whether Indian courts are jurisdictionally empowered to modify arbitral awards, a five-judge Constitution Bench of the Indian Supreme Court has conclusively settled the issue in Gayatri Balasamy v. ISG Novasoft Technologies Limited. In a 4:1 majority ruling led by former Chief Justice of India Mr. Sanjiv Khanna, the Supreme Court held that Indian courts can modify arbitral awards, albeit in limited circumstances, while exercising their powers under sections 34 and 37 of the Arbitration & Conciliation Act, 1996 (“the Act”). Further, the Court affirmed that Article 142 of the Indian Constitution, which empowers it “to do complete justice”, can be invoked for modifying awards. In contrast, Justice Vishwanathan delivered the dissenting opinion, inter alia holding that courts cannot modify awards under the legislative framework of the Act.
This post critically analyses both the majority judgment and the dissent and presents an alternative course of action for modification of awards under the Act.
The Majority Judgment
The majority judgment provides that courts may exercise limited powers to modify awards in certain circumstances, such as (a) when the award is severable, by severing the invalid portion from the valid portion; (b) correcting apparent errors which do not require merits-based evaluation (clerical, computational or typographical errors), as well as other manifest errors; (c) modifying post-award interest; and (d) invoking the powers under Article 142 of the Constitution in a restrictive manner.
In determining the permissibility and scope of the modification powers, the majority relied upon section 34 of the Act (which inter alia empowers the courts to set aside or sever a part of an award) and held that the court’s power to set aside or sever an award includes an implied and limited power to modify it. Further, while acknowledging that section 34 limits a party’s recourse to courts to an application for setting aside the award, the majority held that section 34 does not restrict the range of reliefs which may be granted by the court.
The majority clarified that notwithstanding the arbitral tribunal’s authority to modify an award under sections 33 and 34(4), a section 34 court can modify the award, provided there is absolute certainty about its appropriateness. Thus, if there is an uncertainty or if the error is not apparent on the face of the record, the courts must refrain from modifying the award and, instead, remand the award to the arbitral tribunal under section 34(4). Upon remand, the tribunal can take necessary corrective measures to cure the defects or anomalies in the award, to prevent it from being set aside by the court under section 34. The majority also rejected the apprehension that modification of awards by courts under section 34 may affect their enforceability under the New York Convention and held that these awards would be read “as modified by the judgment/order”.
Further, in justifying the power of a section 34 court to modify post-award interest, the majority held that post-award interest is future-oriented and, since future is unpredictable and unknown to the tribunal, the interest awarded by the tribunal may not sustain true to the future circumstances. Lastly, the court affirmed the invocation of Article 142 of the Constitution in modifying awards to save time and costs of parties and bring an end to the dispute.
Analysis of the Majority Judgment
In holding that courts can modify awards, the majority, to a great extent, emphasized on equitable considerations (such as endemic judicial delays, hardships and escalating costs), which could result if the majority held otherwise. While the intent behind the ruling deserves appreciation, it appears that the majority did not give due consideration to the express statutory provisions and legislative framework of the Act.
Section 5 of the Act mandates that no judicial authority shall intervene except where so provided in the Act. Section 34(1) of the Act provides that “Recourse to a Court against an arbitral award may be made only by an application forsetting aside such award……” [emphasis added]. A combined reading of the highlighted expressions, i.e., “recourse”, “only by” and “setting aside” and section 5 make it clear that the only manner of interfering with the award is to set it aside. As such, a court tasked with adjudicating an application under section 34 can either set aside the award or refuse to do it. There is no statutory ambiguity indicating any second way of recourse or leaving any scope for modification of awards under section 34. Therefore, to the extent the majority judgment holds that section 34 does not restrict the range of reliefs that courts may grant, the same may not be the correct interpretation of law. Pertinently, the majority has neither referred to judicial precedents or legislative authorities nor provided any reasoning in support of the said finding.
Notwithstanding the above, the standards laid down by the majority to identify errors modifiable by courts under section 34 are open ended and ambiguous. The majority judgment uses expressions such as “errors apparent on the face of the record” and “manifest errors” without clearly delineating their contours, leaving scope for inconsistent and differing interpretations by section 34 courts.
Further, the majority’s affirmation to the invocation of Article 142 of the Constitution in modifying awards is puzzling. Article 142 is generally invoked to fill a gap or vacuum in the law or when no other legal mechanism suffices to achieve justice. Given that the majority had already recognized that a court’s powers under section 34 include a limited power of modification, it is difficult to fathom what necessitated an inquiry about the applicability of Article 142. This is exacerbated by the fact that the majority judgment is silent on the circumstances or instances when such power “to do complete justice” may be invoked. This in itself gives rise to a stream of unaddressed issues such as whether Article 142 may be invoked for supplementing the power of modification under section 34, or whether it can be invoked in circumstances apart from the modification of awards. Thus, the majority ought to have defined the contours within which such power may be exercised by the courts.
Furthermore, given that only the Supreme Court has the authority to invoke Article 142, such a ruling may incentivise the parties to keep litigating until the matter reaches the Supreme Court in a Special Leave Petition. This would seriously undermine the finality of arbitration proceedings potentially affecting the enforceability of the award.
As to the majority’s finding on post-award interest, there is no express provision in the Act which empowers the court to modify post-award interest. The majority appears to have effectively enabled a section 34 court to exercise appellate powers and reassess the validity of the interest awarded by the tribunal, which is dehors the Act. Moreover, this may incentivise the parties to file a section 34 application seeking modification of post-award interest by the court and, in the event a court modifies the post-award interest, it may result in an aggrieved party challenging the same, thereby resulting in prolonged litigation.
Lastly, without an express provision in the Act, empowering a section 34 court to modify awards would directly lead to an unwarranted judicial interference with the merits of the dispute. Pertinently, the majority acknowledged the scenario, but it held that the same will depend upon the “extent of modification powers” recognised by them. The authors respectfully disagree with the aforesaid outcome and believe that any interference in the arbitration process that is not expressly spelt out in the Act is unwarranted and beyond the embargo placed by section 5 of the Act.
Dissenting Opinion and its Analysis
In the dissenting opinion, Justice Vishwanathan held that due to the absence of an express legislative sanction, the courts cannot modify awards. He reasoned that since power to set aside an award and power to modify it are distinct powers and do not emanate from the same genus, no implied power to modify can be read under section 34. Further, he rejected the applicability of Article 142 in modifying awards and held that it would be in contravention of the Act. He also held that interest awarded cannot be modified and the award can be remanded to the tribunal for any modifications in the same.
Despite clearly holding against modification of awards by courts, paragraph 141 of the dissent nonetheless provides that a section 34 court can “correct computational, clerical or typographical errors or any other errors of similar nature without modifying, altering or adding to the original award.” Thus, in effect, the dissent has ultimately provided for a limited modification of awards by courts in the same vein as the majority judgment, albeit without characterizing it as “modification”. As such, by permitting courts to correct errors under section 34, however narrowly defined, the dissent appears to have effectively validated the majority judgment.
Conclusion and Alternative Course of Action
The Balasamy judgment appears to be driven by equitable considerations such as judicial delays; however, the authors believe that by reading a power of modification under section 34 without any legislative sanction and without definitive contours, the majority may have prescribed a cure worse than the disease. This may now result in increased complications for parties under section 34, potentially increasing the pendency and the time taken to dispose of such petitions.
As an alternative, the Supreme Court ought to have reinforced rather than overlooked the power of remand under section 34(4) of the Act, a mechanism which was even acknowledged by the Bench. The Court may well have laid down guidelines for the invocation of such a power so that the curable defects in the award can be appropriately dealt with by the arbitral tribunal under the said provision.
– Pallav Mongia & Prince Todi