Court’s power to modify an arbitral award | Day 1: Constitution Bench contemplates extent of jurisdiction to set aside an award
Court’s power to modify an arbitral awardJudges: Sanjiv Khanna CJI, B.R. Gavai J, P.V. Sanjay Kumar J, K.V. Viswanathan J, A.G. Masih J
Today, a five-judge Constitution Bench led by Chief Justice Sanjiv Khanna heard arguments on whether courts can modify an arbitral award under Sections 34 and 37 of the Arbitration Act, 1996.
Section 34 enables the Court to “set aside” an award on certain grounds, such as patent illegality, public policy, or if the award is contrary to the provisions of the Act. Section 37 provides for appeals against decisions made under Section 34.
Solicitor General Tushar Mehta for the Union government opened the arguments for the day, stating that he was there to present both sides of the arguments and assist the Court. He contended that the legislative scheme of the Arbitration Act of 1996 only permitted the Court to wholly or partially set aside an award and did not grant the power to modify it. Even as Mehta acknowledged that the lack of a modification provision wastes judicial resources, he contended that creating such power falls under the legislature’s domain. If the legislature had intended to empower courts with the power to modify, the text of the Arbitration Act would have reflected the same.
Senior Advocate Arvind Datar argued in support of the Court’s power to modify arbitral awards. He stated that the power to partially set aside an award was essentially the power to modify it. He also contended that Section 34 of the Arbitration Act of 1996 was intended to accommodate international arbitration and was not meant for instances of domestic arbitration.
CJI Khanna stated that the Court listed this reference as a priority as several cases concerning the same question reached the Court every week. “Arbitration is expensive,” he said and it was necessary to “find a way out”. As the day’s hearings came to a close, the Chief also stated that it was crucial to determine the definition of “modification” to evaluate whether it is permissible under Section 34.
Mehta: Existing regime does not envision the Court’s power to modify an award
At the outset, Mehta took the bench through three arbitration regimes—the Arbitration Acts of 1899, 1940 and 1996—to convey how Parliament removed the Court’s role in modifying an award. The first Act of 1899 empowered courts to “remit” an award and send it back to the tribunal in certain circumstances. This did not include the power to modify the award.
Mehta explained that an arbitral award was not directly enforceable under the 1940 Act. A Court needed to pass a judgment to enforce it. Further, he highlighted that the 1940 legislation had separate provisions for modification (Section 15), remitting (Section 16) and setting aside an award (Section 30).
Section 15 empowered the Court to modify or “correct” an award under three circumstances:
- When a part of the award, which does not concern the arbitration, can be severed from the whole award without impacting the decision.
- When the award is “imperfect in form, or contains any obvious error” and
- When there is a clerical error in the award.
The 1996 Act, Mehta argued, retained the Court’s power to remit and to set aside an award in part or fully. However, the provision empowering courts to “modify” an award was intentionally omitted by Parliament. Therefore, the Court could only “set aside” an award under Section 34. Under this section, a part of the award could be set aside according to the doctrine of severability. In instances where the doctrine was not applicable, the entire award is set aside.
Mehta: UNCITRAL Model Law did not provision for courts to modify awards
The Solicitor highlighted that India’s 1996 Act was adopted from the UNCITRAL Model Law of Arbitration, 1985. This international Model Law was brought in to bring uniformity to arbitration regimes across its member states. He patiently took the Court through several notes and meetings that led to the enactment of Article 34 of the Model Law, which lays down the procedure for setting aside an award as “exclusive recourse against arbitral award.” Under this Article, the Court may set aside an award only if a party makes an application. The powers of the Court under this provision were limited and did not involve modification powers. Section 34 of the 1996 Act mimics this provision.
Mehta said the UN member states had the option to fully or partially adopt the Model Law with variations or not adopt it at all. The majority of the member states adopted the Model Law without empowering courts to modify an award. The countries which allowed modification, made separate provisions for it in their domestic laws.
Mehta: The power to remit an award exists because setting aside an award is the only other option available
Mehta also pointed out that sub-section 4 of Article 34 of the Model Law and Section 34 of the 1996 Act allow courts to remit an award in certain circumstances without setting it aside.
In other words, the Court can save an award from being set aside by remitting it to the arbitral tribunal for reconsideration. The Court can set aside an award if it meets the grounds enlisted under sub-section 2 of Section 34. It cannot modify the award by itself. “If you can save it, save it…my emphasis is that the power of remitting exists because there is no other power [under Section 34], other than setting aside,” he said.
He also highlighted the word “resume” under sub-section 4 of the provision, which gives the arbitral tribunal an opportunity to resume its proceedings “to eliminate the grounds for setting aside the arbitral award”. This meant that after passing an award, the tribunal ceases to exist and must re-assemble/ resume if a court remits an award. Remitting meant reopening a completed award. However, modification meant changing an existing award. This could not be done.
Mehta: Justification to modify does not confer jurisdiction
The Solicitor submitted that there may be several instances where the Court could justify the modification of an award. He also agreed that “judicial oversight was essential in arbitration.” However, the regime under the 1996 Act did not confer courts with such jurisdiction. “Justification does not confer jurisdiction,” he said. Attempting to read such a power under Section 34 would mean entering into the legislative domain, pointing out that the Court could not add words to the provision or create guidelines for modification of awards.
For instance, in the Vishaka Verdict, he explained that the Court framed guidelines for the prevention of sexual harassment at the workplace because there was no legislation to address the issue. However, in this case, the Arbitration Act exists and establishes the contours for the Court’s involvement in arbitration. These contours could not be modified or breached by the Court. It was up to the legislature to do so.
Datar: Section 34 was hastily inserted into the Arbitration Act
Datar argued for about an hour before the close. He submitted that the Model Law was enacted keeping international arbitration in mind and that Article 34 or by extension Section 34 was not meant for domestic arbitration. Reading the objects and reasons of the Arbitration Act, Datar highlighted paragraph 3 which reads:
Though the said UNCITRAL Model Law and Rules are intended to deal with international commercial arbitration and conciliation, they could, with appropriate modifications, serve as a model for legislation on domestic arbitration and conciliation.
He contended that India made no “appropriate modifications” to Section 34 when it adopted the Model Law.
The Model Law under Article 34, Datar submitted, envisioned the two parties of arbitration to be two different countries. Section 34 of India’s Arbitration Act which mimics this provision was also hastily inserted without modifications and as such, applied to international arbitration. Signatories of the Model Law, Datar said, had taken the trouble to legislate different laws allowing modification separately. India had not. His arguments suggested that had India made modifications in its domestic law, the Court would have the power to modify arbitral awards.
He further highlighted Section 34 (2A), inserted via the 2015 Amendment Act, allows courts to set aside awards “other than international arbitration awards” on the ground of patent illegality. The inclusion meant that Section 34 was intended for international arbitration.
Datar: If a Section is begging for change, we can’t wait for the legislature to change it
Datar cited an example:
- If the Supreme Court in a case had held that a+b=c.
- Ignoring this, an arbitral tribunal had passed an award stating that a+b= d.
In this event, he suggested that it was cumbersome to set aside an award and send it back to the tribunal instead of modifying it and fixing the error.
Quoting Lord Dennings, Datar submitted that if an award was unconscionable, the Court could modify it. He contended that the Court could add a few words to Section 34 as it would solve a lot of the issues surrounding its power to modify awards. He recommended adding the words “and to the extent” and “wholly or partially” to Section 34 2A to make Section 34 workable.
Mehta stated that if words need to be added, he would take it to Parliament. The bench also pointed out that it would have the effect of amending the Section. Datar stated that the Supreme Court had added words to a provision in eight judgements to make them workable. Section 34 was not workable at the moment as it only provided for setting aside an award.
Datar: The larger power includes the smaller power
Datar also contended that the power to modify an award can be read into the provision empowering the Court to partially set aside an award. He stated that partially setting aside an award can be a “modification also”. “The larger includes the smaller,” he said, suggesting that since modification was smaller than setting aside, the scheme of Section 34 provided for modification as well. This was nothing but a modification of the award. His argument seemed to respond to Mehta’s submission that partially setting aside an award did not amount to modification as the former did not change the award in any way. It only eliminated it.
In support, he referred to the single-judge decision of the Madras High Court in the present case. He noted that though, as a Constitution Bench the Court was not bound by the High Court judgement, the decision had explained why modification was part of Section 34.
The bench noted that it was important to define “modification” and delineate its lines. As the hearings came to a close, Datar stated that nobody had defined what partially setting aside entailed. CJI Khanna urged the counsel to find judgements from foreign jurisdictions that define modification of an award, what the Court can do and what the parameters are.
Arguments will resume on Tuesday 18 February 2025.