BACKGROUND

In this landmark decision, a Constitution Bench of the Hon’ble Supreme Court (by 4:1) has settled a long-standing legal conundrum regarding the extent of judicial intervention under Section 34 of the Arbitration and Conciliation Act, 1996. The judgment addresses whether courts, while hearing a challenge to an arbitral award, have the power to modify it. Given the inconsistent positions taken by various benches of the Supreme Court in the past, the matter was referred to a larger bench for clarity. The Court has now conclusively held that courts do possess a limited power to modify arbitral awards in specified circumstances, without exceeding the confines of Section 34.

ISSUES

From the questions sent to the larger bench for reference, an authoritative pronouncement mainly on the said issues was warranted:

• Whether the courts can modify the arbitral award?
• Whether the power to set aside an arbitral award includes the power to modify the award?
• If yes, to what extent? Are there any guardrails to it, or is the power unbridled?

CONTENTIONS OF THE PARTIES

In favour of modification

The judgment in M. Hakeem warrants reconsideration as the same is in conflict with several two- and three-judge decisions where modification was allowed. On the basis of the maxim omne majus continet in se minus (the greater contains the lesser), the power to set aside includes the power to modify (a lesser intervention). The power to modify and set aside an award can be exercised when the award is in conflict with public policy in terms of Section 34(2)(b)(ii) or to the extent it is vitiated by patent illegality in terms of Section 34(2A) of the 1996 Act. Other jurisdictions (such as the UK, Singapore, Australia, etc.) grant such limited power to the Courts to modify the awards. The expression “recourse” u/S. 34 is broad in scope, and the recourse to set aside an award includes within its ambit the recourse to modify or vary it. The power to grant, reduce, or increase interest should be read into S. 34, without requiring the parties to go through a fresh arbitration process, which would be expensive and time taking. The grant of interest does not necessitate an elaborate enquiry. In matters under the NHAI Act where the Act mandates arbitration, courts should have the power to enhance compensation for acquired land.

Against modification

1. The UNCITRAL Model Law on International Commercial Arbitration (1985) was a result of a collective effort by several countries to establish a uniform and cohesive legal framework. It does not permit courts to modify arbitral awards—only to set them aside. Courts holding beyond this would violate the spirit of the Model Law.
2. The power to set aside an award is a sui generis power, which is different from the power of modification. Hence, the maxim omne majus continent in se minus is wholly inapplicable.
3. The arbitral tribunal, after rendering an award, becomes functus officio. Thus, the exercise of any modification would lead to the courts adopting appellate powers. Assuming modification powers would be contrary to both the express language and the intent behind S. 34 of the 1996 Act.
4. Doctrine of Merger is inapplicable as the nature and scope of powers of a court are distinct from that of an arbitral tribunal. Even if the interest component is modified by the Court, the same could cause issues at enforcement as the New York Convention allows only the enforcement of an arbitral award, not a court’s judgement/order.

ANALYSIS & FINDINGS

• Judicial Divergence:

Case	Remarks
McDermott International Inc. v. Burn Standard Co. Ltd. (2006) 11 SCC 181	Court invoked Article 142 only to reduce interest. Discussed limited scope of courts under Section 34 of 1996 Act as compared to previous Arbitration Act of 1940. The court cannot correct the errors of the Arbitrators and it can only quash the award leaving the parties free to begin the arbitration afresh.
Vedanta Ltd. v. Shenzhen Shandong Nuclear Power Construction Co. Ltd. (2019) 11 SCC 465	Interest on Euro component was modified; no reference to court’s power under Article 142.
Ssangyong Engineering v. NHAI (2019) 15 SCC 131	Interference based on public policy violations under Section 34(2)(b)(ii) is limited to the fundamental policy of Indian law. The court cannot interfere merely because the arbitrator lacked a judicial approach. In this matter however, fundamental principle of justice was violated hence the majority award was set aside and the minority award was by the Court using its power Article 142.
ONCG Ltd. v. Western GECO International Ltd. (2014) 9 SCC 263	If the arbitral tribunal drawn an inference that is manifestly untenable causing gross injustice, such award is amenable to challenge. In such circumstances, the award may be set aside or modified, depending on whether the offending part of the award is severable or not.
Project Director, NHAI v. M. Hakeem (2021) 9 SCC 1	If one were to include the power to modify u/S. 34, one would be crossing Lakshman Rekha. Parliament very clearly intended that no power of modification of an award exists in Section 34 of 1996 Act. The cases where awards have been modified pertain to exercise of extraordinary jurisdiction by the Supreme Court.

• Court has a limited power under Sections 34 and 37 of the 1996 Act to modify the arbitral award. This limited power may be exercised under the following circumstances:

1. when the award is severable, by severing the “invalid” portion from the “valid” portion of the award;

• The proviso to Section 34(2)(a)(iv) confers the authority upon the Court to sever the invalid portion of the arbitral award and the doctrine of omne majus continent in se minus bears application to this limited extent of partly setting aside the arbitral award, the major power being to fully setting the arbitral award aside. (Paras. 32, 33, 34 | Pg. 15,16)

• Modification alters the award whereas Setting Aside annuls it. However, these words used in the statute must be read contextually. A holistic and purposive interpretation suggests that a linguistic distinction might lie between Setting Aside, Partially Setting Aside and Modification, the practical effect of partially setting aside the award is the modification of the award. (Paras. 38, 39 | Pg. 17,18)
• A denial to the Courts the power to modify an award would cause significant hardships, escalate costs, and lead to unnecessary delays, in turn would defeat the raison d’etre of arbitration. An extra round of arbitration would be more cumbersome than traditional litigation. (Paras. 41, 42 | Pg. 19)
• A relief which is de hors Section 34 cannot be granted, the power cannot contradict the essence or language of Section 34. The Court would NOT exercise appellate power, as envisaged by Order XLI of the CPC, 1908. (Para. 43 | Pg. 19,20)
• Modification represents a more limited, nuanced power in comparison to the annulment of an award, as the latter entails a more severe consequence of the award being voided in toto. Read in this manner, the restricted power of severing an award implies a power of the Court to modify the award. Silence should not be read as complete prohibition. (Para. 44 | Pg. 20)
• Where the modification, including any adjustment of costs, follows inevitably from the tribunal’s determination of a question of law, modification would be appropriate. This approach would reduce costs and delays. (Para. 45 | Pg. 20)
• Doctrine of Implied Power is to avoid the hardship and to effectuate and advance the object of the legislation, in this case the 1996 Act. The view taken is not against the object of the legislation. (Para. 52 | Pg. 23)

2. by correcting any clerical, computational or typographical errors which appear erroneous on the face of the record;

• Courts possess the power to correct computational, clerical, or typographical errors, as well as other manifest errors.
• While exercising the power of modification, the Court must be certain that the error appears on the face of it but if there is a doubt regarding it then also if the Court intervenes, it would be entering the realm of uncertainty.In such a situation, it would be more appropriate to seek recourse to Section 33 and approach the Arbitral Tribunal for appropriate resolution. (Paras. 49,50,51,52,53,54 | Pgs. 21-24)
• Section 34(4) gives a discretionary power to the Court to remand the matter to the Arbitral Tribunal. The word “may” is indicative of that the power may be exercised by the Court where it identifies a defect that could lead to setting aside. A chance may be given to the Arbitral Tribunal to rectify the defect. Accordingly, it may not grant a remand when the defect in the award is inherently irreparable. A key consideration is the proportionality between the harm caused by the defect and the means available to remedy it. (Para. 58 | Pg. 25)
• In Kinnari Mullick and Anr. V. Ghanshyam Das Damani (2018) 11 SCC 328, the SC held that power under S. 34(4) shall be exercised on a written request by either party and that once the application for setting aside u/S. 34(1) has been decided and the award has been set aside, the Court becomes functus officio hence the matter cannot be remanded to the Arbitral Tribunal.

The same has been overruled now as the Court, in the present judgement, notes that the request for remand may be made orally as well, although it needs to be recorded by the court. Moreover, Section 37 permits an appeal against any order under S. 34. To this extent, the appellate jurisdiction under Section 37 is coextensive with, and as broad as, the jurisdiction of the court deciding objections under Section 34. Court u/S. 37 can remand the matter to the Arbitral Tribunal. Hence, the tribunal does not become functus officio after the award is set aside. (Paras. 61, 62 | Pg. 26, 27)

• Section 48 of the 1996 Act is similarly worded as Article V of the New York Convention, which deals with situations when the enforcement of a foreign award may be refused. Section 48(1)(e) states the award may not be enforced when it has not become binding on the parties or has been set aside or suspended by a competent authority of the country in which, or under the law of which, that award was made. In other words, the award must become “binding on the parties” in terms of the law of the seat before enforcement. Sub-clause (e) therefore recognizes that, for enforcement, the domestic law of the country where the award is made shall prevail and have supremacy. Thus, the Court’s interpretation, reading modification powers into Section 34, would not be at loggerheads with the New York Convention. The Convention requires the enforcement court to consider whether an award has become binding in terms of the law of the seat.

Hence, the reinterpretation of Section 34 to include a limited power to modify awards will not affect the international commercial arbitration regime or the enforcement of foreign awards. (Paras. 67, 68, 69 | Pg. 29,30)

3. post award interest may be modified under certain circumstances; and

• The court has the power to modify post award interest as well. However, while exercising this power, the Court must be cautious and mindful not to overstep its role in appellate capacity. This power is significant as the same avoids a fresh round of arbitration due to an erroneous interest rate. (Paras. 73, 74 | Pg. 32)

4. Article 142 of the Constitution applies, albeit, the power must be exercised with great care and caution and within the limits of the constitutional power.

• While exercising powers under Article 142, the Court must be conscious of the precedents governing exercise of A. 142 power. The power seemingly unhindered is bounded by restraint, which must be exercised based on fundamental considerations of general and specific public policy. The exercise should not contravene a fundamental and non derogable principle at the core of the statute. The exercise of power must not result in rewriting the award or modification of the award on merits. However, the power can be exercised where it is required and necessary to bring the litigation or dispute to an end. (Paras. 82,83,84 | Pg. 35, 36)

DISSENT: THE WAY FORWARD?

Four judges (CJI Sanjiv Khanna, HMJ BR Gavai, HMJ Sanjay Kumar and HMJ Augustine George Masih) have given the majority opinion in this judgement, which forms the settled legal position as of now. However, what seems to catch the eye is the detailed dissenting opinion of HMJ Vishwanathan in this judgement. A brief on dissenting opinion:

• HMJ Vishwanathan relied upon the literal rule of interpretation and observed that no irreconcilable conflict was there that would result in absurdities or injustice to adopt any other rule of construction.
• The two powers (to modify and to set aside) are sui generis, operate in different spheres and are not of the same genus. Hence, the maxim omne majus continet in se minus is inapplicable.
• Arbitration has its origin in the contract between parties where parties have stepped out of the ordinary judicial process and in that sense, there is an ouster of the jurisdiction of the Court’s power to adjudicate. Allowing modification and letting the courts step in through the power of modification vitiates the ouster.
• The powers that the Appellate Courts have under the CPC are different from the ones under Section 34, granting a power to modify to S. 34 court would be tantamount to review on merits, in a way conferring appellate powers.
• The argument of hardship is wholly out of place as the 1996 Act itself provides for the situation in case the award is set aside. The statement of objects and reasons, certain sections of the act are all indicative of minimum judicial interference. S. 34 itself is worded very clearly and limited to the extent of “setting aside”. Express legislative dictum cannot be brushed aside due to convenience of parties.
• The 1940 Act did confer the power to modify. The 1996 Act does not confer the power to modify. After UNCITRAL Convention, many countries like UK & Singapore have legislated and added the power to “vary”, however, our Legislature has not conferred any such power, despite there being amendments in 2015, 2019 and 2021.
• On the similar lines, interest rate cannot be modified by the Court as well.
• To uphold the maxim actus curiae neminem gravabit (an act of court shall prejudice no man), a court u/S. 34 can invoke the power and correct computational errors, clerical or typographical errors or any other errors of similar nature without modifying, altering or adding to the original award. The expression “any other errors of similar nature” shall be read ejusdem generis.
• The judgement in M. Hakeem lays down the law correctly and does not warrant any interference.

Written by: Saksham Singh (Associate)