Arbitration has long served as a preferred mode of dispute resolution in India, particularly in commercial contracts between corporations. The Former Chief Justice of India, Justice DY Chandrachud, had emphasized the importance of “robust institutionalisation of arbitration” to enhance dispute resolution, not just in India but across the Global South. The framework offered by institutional arbitration is structured in such a manner to ensure efficiency and credibility in resolving disputes. Over the years, India has progressively aligned its arbitration laws with global best practices through various amendments to the Arbitration and Conciliation Act, 1996 in the years 2015, 2018, 2019, and 2021.
The latest Arbitration and Conciliation (Amendment) Bill, 2024 seeks to further modernise arbitration by reducing judicial intervention and promoting institutional mechanisms. The Arbitration Act was introduced with a strong emphasis on minimal judicial interference, ensuring that arbitration remains an efficient and final method of resolving disputes. However, a long-standing legal debate has persisted on whether courts have the power to modify arbitral awards under Sections 34 and 37 of the Arbitration Act.
This issue has led to conflicting judicial pronouncements which has prompted a three-judge bench of the Supreme Court, consisting of Chief Justice Sanjiv Khanna and Justices Sanjay Kumar and KV Vishwanathan, to refer the matter to a five-judge constitutional bench. The decision of this constitutional bench will have far-reaching implications for arbitration law in India by clarifying the extent of judicial intervention permissible under the Arbitration Act.
Legal Framework: Sections 34 and 37 of the Arbitration Act
The power of courts to modify an award in an arbitration-related dispute is governed by Sections 34 and 37 of the Arbitration Act:
● Section 34 provides the grounds for setting aside an arbitral award, which are limited to procedural irregularities, fraud, and violations of public policy. The section does not explicitly confer any power to modify an award.
● Section 37 provides for appeals against orders relating to arbitral proceedings, including those under Section 34.
These provisions were drafted in line with the UNCITRAL Model Law on International Commercial Arbitration, 1985, which aims to limit judicial interference in arbitration. Unlike the Arbitration Act, 1940, which explicitly allowed modification of awards, the Arbitration Act, 1996 does not contain similar provisions. The key issue before the constitutional bench is whether Indian courts can read the power to modify awards into the Arbitration Act or if such power is entirely excluded?
Conflicting Judicial Precedents
The ‘No Modification’ Approach
One set of judgments holds that courts cannot modify arbitral awards under Sections 34 and 37. The leading case in this line is Project Director, NHAI v. M. Hakeem (2021). The present ruling is a ruling by a division bench of the Supreme Court, comprising Justices RF Nariman and BR Gavai which ruled that the courts only have the power to set aside an award, and not to modify it.
The rationale behind this line of ruling was given, following a comprehensive examination of Section 34 and 37. Firstly, the court observed the limited nature of Section 34. The Court found that it is not an appellate provision but only allows courts to set aside an award on specific grounds. The Arbitration Act was designed to align with the UNCITRAL Model Law, which does not provide for modification of awards. The overarching goal of the Arbitration Act is to ensure that courts do not interfere unnecessarily in arbitral proceedings.
The Hakeem ruling was followed in Larsen Air Conditioning and Refrigeration Co. v. Union of India and SV Samudram v. State of Karnataka, reinforcing that courts lack the power to alter arbitral awards.
The ‘Modification Permissible’ Approach: The Vedanta Line of Judgments
In contrast, some judgments have allowed courts to modify arbitral awards when necessary to serve justice. This approach has been outlined in the Vedanta Limited v. Shenzden Shandong Nuclear Power Construction Co. Ltd. judgement, the J.C. Budharaja v. Chairman, Orissa Mining Corporation Ltd. and the Tata Hydroelectric Power Supply Co. Ltd. v. Union of India rulings.
These judgments suggest that courts can intervene to modify awards in limited circumstances, particularly when the award is severable and a portion of it can be corrected without setting aside the entire decision. This view is based on the principle that arbitration, while autonomous, should not lead to gross injustice.
Recent Reinforcement of Hakeem in S. Jayalakshmi Case (2024)
In S. Jayalakshmi v. The Special District Revenue Officer & Ors., the Supreme Court reaffirmed its ruling in Hakeem. The case involved land acquisition compensation under the National Highways Act, 1956. The District Court had modified the compensation awarded by the arbitral tribunal. The Madras High Court overturned this decision, relying on Hakeem, and the Supreme Court upheld this ruling.
However, in an interesting twist, the Supreme Court exercised its extraordinary power under Article 142 of the Constitution to direct payment of enhanced compensation to the appellant. This case highlights the tension between the rigid interpretation of Sections 34 and 37 and the need for judicial intervention in exceptional cases.
Expert Committee Recommendation On Reforming Section 34
Recognizing the practical challenges posed by a strict interpretation of Hakeem, the Expert Committee on Arbitration Law Reforms, in its report to the Law Ministry (February 2024), recommended an amendment to Sections 34 and 37.
The Proposed Amendments include modifying Sections 34(2) and (2A) to replace the words “set aside by the Court” with “set aside in whole or in part by the Court”. The Expert Committee has also recommended introducing a proviso allowing courts to vary or modify an award in exceptional circumstances.
The committee’s suggestion, if implemented, would bring a fundamental shift in Indian arbitration law. This would allow limited judicial modification while maintaining arbitration’s autonomy.
Constitutional Bench Reference & Its Significance
Due to conflicting judicial interpretations, the Supreme Court has recently referred the case of Gayatri Balasamy v. ISG Novasoft Technologies Limited to a five-judge Constitution Bench for authoritative determination. The present case involves a similar question of law concerning the modification of arbitral awards. The referral arises from the need to clarify the extent of judicial intervention permissible under the Arbitration and Conciliation Act. The Court has framed key issues for consideration, including whether the precedent established in Hakeem requires reconsideration, what is the precise scope of judicial powers under Sections 34 and 37 of the Act, and if modification of arbitral awards is permitted, what is the extent and conditions under which such intervention should be allowed.
The ruling of the Constitution Bench will have significant and far-reaching implications for arbitration jurisprudence in India. If the Hakeem precedent is upheld, the Indian arbitration framework will continue to function with minimal judicial interference. This will reinforce the country’s pro-arbitration stance and align with global best practices that prioritize party autonomy and finality of arbitral awards. However, if the Court recognizes judicial authority to modify arbitral awards, it will introduce a new dimension of judicial oversight, allowing courts greater flexibility in ensuring substantive justice. While such a shift could enhance the fairness of outcomes in certain cases, it may also give rise to concerns regarding excessive judicial intervention. This might potentially dilute the efficiency and autonomy of the arbitration process. The decision of the Constitution Bench will thus be a defining moment for arbitration law in India, shaping the balance between judicial review and arbitral finality in the years to come.
Authors: Aditya Khare, Rebecca Singh & Aaryan Bansal