Parliament and not the Supreme Court should grant courts the power to modify arbitral awards

As the question of whether courts can modify an arbitral award has been referred to a larger Bench, the author argues that though international best practices suggest an affirmative answer, whether the Parliament or the Supreme Court grants such power makes a crucial difference.

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THE Supreme Court, vide an Order dated February 20, 2024, in Gayatri Balasamy versus M/s ISG Novasoft Technologies, has referred for a definitive determination to a larger Bench the question as to whether courts can modify an arbitral award in proceedings under Section 34 and 37 of the Arbitration and Conciliation Act, 1996 (the 1996 Arbitration Act).

The reference to a larger Bench comes as on one hand the Supreme Court in a slew of cases, including McDermott International Inc versus Burn Standard Co. Ltd, Project Director, NHAI versus M. Hakeem, Larsen Air Conditioning and Refrigeration Company versus Union of India and S.V. Samudram v State of Karnataka, has categorically held that courts hearing challenges to awards under Section 34 and Section 37 of the 1996 Arbitration Act have no power to modify an award.

However, as observed in the Order dated February 20, 2024, the Supreme Court has either modified arbitral awards or upheld modified awards numerous times.

This article argues that the Supreme Court should not read modification of an award into a court's powers under Section 34 and Section 37 of the 1996 Arbitration Act.

However, a compelling case exists for the Parliament to amend the statute to allow courts to modify awards in limited circumstances. This amendment to the law will align the 1996 Arbitration Act with arbitration statutes in global arbitration hubs such as the United Kingdom (UK) and Singapore.

The law around the world

In order to make a compelling case for an amendment to the 1996 Arbitration Act, it is important to understand the position of law in other countries.

The arbitration statutes of the UK, Singapore, the United States of America (US) and Australia all contain provisions granting courts hearing challenges to arbitral awards the power to modify the award. The Supreme Court of India acknowledges this fact in Paragraph 43 of the judgment in M. Hakeem.

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In the UK, Section 67 and Section 69 of the Arbitration Act of 1996 allow for variation of an arbitral award by the court hearing a challenge to the award.

Section 67 deals with a challenge to the award only in the tribunal's jurisdiction. Section 69 pertains to a challenge to award on a point of law. It is important to note here that Section 69 requires a party to first apply to the court for leave to appeal an award under the Section.

Furthermore, sub-Section 5 of Section 69 provides that the application for leave to appeal is to be decided without a hearing unless the court deems it appropriate to conduct one.

Arbitration in Singapore is governed by two separate legislations: the International Arbitration Act (Cap 143A, 2002 Rev Ed) applies to international arbitrations, and the Arbitration Act (Cap 10, 2002 Rev Ed) governs arbitrations where the place of arbitration is Singapore and the International Arbitration Act is not applicable.

While Singapore's International Arbitration Act does not allow courts to modify arbitral awards, Section 49 of the domestic Arbitration Act permits variation of an award in an appeal on a point of law. Section 49 of the Singapore law is similar to Section 69 of the UK Arbitration Act.

The United States Arbitration Act of 1925 is the statute that primarily governs arbitrations in the US. Section 11 of the said Act permits a court to modify an arbitral award when:

1. There is an evident miscalculation of figures or mistakes in the description of a person, property or thing; or
2. Where there is an award passed on something not referred to the arbitrator for adjudication unless the same does not affect the merits of the issues submitted for arbitration; or
3. Where the award is imperfect in a manner or form not affecting the merits of the decision on the reference.

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In Australia, before 2010, each state or territory had its own statute to govern domestic arbitration. However, in 2010, the Standing Committee of General Attorneys agreed on the Model Commercial Arbitration Bill (the Model Bill). As of 2024, all states and territories in Australia have enacted statutes effectively adopting the Model Bill.

Although the Model Bill is broadly based on the UNCITRAL Model Law on International Commercial Arbitration, Section 34A of the Model Bill provides for an appeal against an arbitral award in addition to the provision for setting aside an award under Section 34, which is identical to Article 34 of the UNCITRAL Model Law.

A perusal of Section 34A of the Model Bill reveals that it is similar to Section 69 of the UK Arbitration Act and Section 46 of the Singapore Arbitration Act, albeit more stringent. While both provisions limit an appeal to questions of law, the UK and Singapore statutes allow either party to move the court.

However, Section 34A of the Australian law can be invoked only with the agreement of the parties.

International Commercial Arbitration in Australia is governed by the International Arbitration Act of 1974, which gives the UNCITRAL Model Law the force of law. Therefore, the grounds for challenge and powers of the courts hearing the challenge to awards in international commercial arbitration in Australia are limited to those provided in the UNCITRAL Model Law.

The above jurisdictions, especially Singapore and the UK, are global arbitration hubs. This shows that allowing courts to modify arbitral awards when necessary does not come at the cost of compromising on the core principles of party autonomy and minimal judicial intervention that make arbitration an effective dispute resolution mechanism.

It is, however, essential to ensure that the circumstances when a court can modify an arbitral award are limited and well-defined and that the proceedings are disposed of quickly.

Judgment or amendment

It is now apparent that the courts in India hearing challenges to arbitral awards must have the power to modify or vary the award. The question is whether this power should come from the Supreme Court through a judicial pronouncement or from the Parliament through an amendment to the 1996 Arbitration Act.

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This author believes that the correct way for the power to modify arbitral awards to be given to the courts is through an amendment to Section 34 of the 1996 Arbitration Act and not from a judicial pronouncement.

With all due respect to the Supreme Court, if the larger Bench holds that courts hearing challenges to awards under Section 34 or 37 of the 1996 Arbitration Act have the power to modify awards, it would be contrary to the legislative intent of the Parliament.

As pointed out earlier, the UNCITRAL Model Law, upon which the 1996 Arbitration Act is based, does not grant courts the power to modify arbitral awards.

Furthermore, as pointed out by the Supreme Court in M. Hakeem, the power to modify an arbitral award available to courts under the 1940 Arbitration Act was consciously omitted from the 1996 Arbitration Act. The Parliament could have retained the power to vary an arbitral award in the 1996 Arbitration Act, but it consciously elected not to.

In Paragraph 48 of the judgment, the Supreme Court observed, "In interpreting a statutory provision, a judge must put himself into the shoes of the Parliament and then ask whether the Parliament intended this result.

The Parliament very clearly intended that no power of modification of an award exists in Section 34 of the A&C Act, 1996. It is only for the Parliament to amend the aforesaid provision in light of the experience of the courts in the working of the A&C Act, 1996 and bring it in line with other legislations the world over."

The above observation of the Supreme Court aligns with the settled principle of interpretation of statutes that a construction requiring the addition or substitution of words should be avoided.

This principle of interpretation of a statute was explained in detail in Shiv Shakti Co-op Housing Society, Nagpur versus Swaraj Developers and Others. In Paragraph 19 of the judgment, the Supreme Court observed, "The intention of the legislature is primarily to be gathered from the language used, which means that attention should be paid to what has been said as also to what has not been said.

"As a consequence, a construction which requires for its support, addition or substitution of words or which results in rejection of words as meaningless has to be avoided…

"It is contrary to all rules of construction to read words into an Act unless it is absolutely necessary to do so… Courts are not entitled to read words into an Act of Parliament unless clear reason for it is to be found within the four corners of the Act itself."

A slightly earlier judgment of the Supreme Court in Grasim Industries Limited versus Collector of Customs Bombay also contains similar observations.

Applying these principles of interpretation of statutes to the 1996 Arbitration Act, one can say with certainty that the legislature did not intend for courts to be able to modify arbitral awards.

Considering the above discussion, if the Supreme Court holds that the 1996 Arbitration Act provides courts with the power to modify arbitral awards, the judgment would be against the legislative intent and settled principles of interpretation of statutes.

Only the Parliament can give courts the power to modify arbitral awards by an amendment to Section 34. Therefore, the larger Bench should answer the reference in the negative.

Conclusion

While the larger Bench of the Supreme Court ought not to read a court's power to modify an award into Section 34 of the 1996 Arbitration Act, courts must be able to do so.

Therefore, it is time that the legislature bring in a suitable amendment to Section 34 of the Arbitration and Conciliation Act, 1996, thereby allowing courts hearing challenges to arbitral awards to modify or vary an award when required rather than merely upholding them or setting them aside.

Such an amendment would bring the law in India in line with that in countries such as the UK and Singapore and enhance its stature as an arbitration-friendly jurisdiction on the global stage.

Perhaps the Parliament could follow the example of the framers of our Constitution and adopt best practices from around the world.