Arbitration Reforms: The Imperative for Codifying the Residual Power of Courts to Modify Arbitral Awards

The power of courts to modify arbitral awards has been a subject of contention. It is important to settle this matter by enacting legislation that codifies the power of modification of awards. We argue that courts must have some discretion, i.e., residual power, to modify awards. Legislative intervention is necessary to bring clarity and consistency to this aspect of arbitration law.

While the NHAI v. M. Hakeem ((2021) 9 SCC 1) judgment initially seemed to resolve the controversy by ruling that courts have no power to modify awards, several factors must be considered. First, the judgment may be per incuriam. Secondly, its observations on modification appear to be obiter dicta. Lastly, the judgment is inconsistent with Vedanta Limited v. Shenzhen Shandong Nuclear Power ((2019) SCC 11 465), where the court granted other courts the authority to modify awards regarding interest, stating that “Courts may reduce the interest rate awarded by an Arbitral Tribunal where such rate does not reflect prevailing economic conditions or is found unreasonable, or does not serve the interests of justice”.

In brushing aside past judgments that modified awards as having been delivered while exercising powers of Article 142, the Court in Hakeem may not be entirely correct. Several judgments, including those of three-judge benches, modified awards without relying on Article 142, for example, Tata Hydro Electric Power Supply Co. Ltd. v. Union of India ((2003) 4 SCC 172). When courts exercise power under Article 142  or conversely when they “are settling the law in exercise of this court's discretion, such law so settled, should be clear and become operational instead of being kept vague, so that it could become a binding precedent in all similar cases to arise in future” (Union of India And Others v. Karnail Singh, ((1995) 2 SCC 728)).

Under Section 34(4) of the Arbitration and Conciliation Act, 1996 (“ACA”), the court has the power to remand an arbitral award back to the tribunal on the grounds of “curable defects”(Kinnari Mullick & Anr. vs. Ghanshyam Das Damani, (2018) 11 SCC 328; Dyna Technologies Pvt. Ltd. v. Crompton Greaves Ltd., (2019) 20 SCC 1; I-Pay Clearing Services Pvt. Ltd. v. ICICI Bank Ltd., (2022) 3 SCC 121). Case law suggests that curable defects include awards lacking reasoning that can be cured (Dyna Technologies Pvt. Ltd. vs. Crompton Greaves Ltd., (2019) 20 SCC; Som Datt Builders Limited v. State of Kerala (2009) 10 SCC 259 and I-Pay Clearing Services Pvt. Ltd. v. ICICI Bank Ltd., (2022) 3 SCC 121] . It would be important to mention that the plain language of Section 34(4), unlike Section 33, suggests otherwise. It appears to impose no such fetters. Per contra, a bare perusal of the language of Section 34(4) appears to grant wide powers to the court - to adjourn proceedings “for a time period determined” by the court, to direct the arbitral tribunal “to resume the arbitral proceedings”, or “to take such other action as in the opinion of the arbitral tribunal will eliminate the grounds for setting aside the arbitral award”.

The court has the power to set aside an award on the grounds set out in Section 34(2) and (2A) of the ACA. If the law as is currently being interpreted is taken, then if the relief of modification/variation is not sought, and only an application to set aside is filed, or the defects in the award are within the meaning of “curable defects”, the court is only vested with the power to set aside the award. Thereafter, the only option for the parties would be “to begin the arbitration again if it is desired.” (McDermott International Inc. v. Burn Standard Co. Ltd., (2006) 11 SCC 181).

It is not our case that the court's intervention should be in the nature of a first appeal or that the courts should have the power to reappreciate evidence de novo, or that the courts should usurp the power of the arbitral tribunal under Section 34(4) of the ACA. However, the courts must retain some residual power when an award falls in a grey area between the two extremes - of setting aside an award or mere curing defects. The power granted to court could be akin to the “Doctrine of Small Repairs” (Empire Industries Limited & Ors. v. Union of India, (1985) 3 SCC 314), which could help bridge the gap between setting aside an award and rectifying its defects.

Although the exact extent of this residual power has not been fully detailed, a review of judgments where courts have modified awards provides some guidance. These modifications include enhancing compensation (Hakeem), adjusting the rate of interest [McDermott, Vedanta, Tata Hydro Electric Power Supply Co. Ltd., M/s Jagson International Ltd. v. OHT Hawk As (2019) 16 SCC 650, Oriental Structural Engineers Pvt. Ltd. vs. State of Kerala (2021) 6 SCC 150], altering the per square foot rate (Gautam Construction and Fisheries Limited v. National Bank for Agricultural and Rural Development reported in (2000) 6 SCC 519), and price enhancement (Hindustan Zinc Limited v. Friends Coal Carbonisation, (2006) 4 SCC 445), overlooking the contents of the document (State of Karnataka v. Siddaiah, AIR 2001 SC 397). Courts have also intervened when an excessive amount of time has passed.

A nine-judge bench in the matter of Ahmedabad St. Xavier's College Society v. State Of Gujarat, (1974) 1 SCC 717 held that a greater power includes a lesser power. It is therefore a wholly unreasonable proposition that the court can have the power to set aside but not the power to modify, the latter being a lesser power.

It is important to consider that the two judgements that are considered the authority on courts not having the power to modify awards i.e. McDermott and Hakeem, have both modified the awards in question in the exercise of power under Article 142. It must therefore be safe to conclude that there is clearly a need to have some residual power with the courts.

To reconcile divergent views, it is crucial to acknowledge that the court's authority to modify awards is an essential aspect of its broader power to ensure justice. Granting courts the power to modify awards when necessary allows for the correction of errors or the rectification of injustices. Recognizing this inherent power would help maintain consistency and coherence in the approach to arbitration matters.

The recently constituted expert committee tasked with revamping the Arbitration and Conciliation Act, 1996 should strongly consider incorporating a residual power of modification for the courts. This provision would serve to prevent parties from approaching the Supreme Court in the hope of invoking its powers under Article 142. Moreover, it would address the situation where an award is set aside, and the parties are left with no option but to reagitate the entire matter. A statutory provision would streamline the process, saving time, effort, and resources for all parties involved. Granting the courts the authority to modify awards within well-defined limits strikes a balance between preserving the finality of the arbitral process and ensuring fairness.

Also, read Arbitration Reforms: The Case for Statutory Recognition of Arbitrability of Fraud

Payal Chawla is a practicing advocate specializing in arbitration and commercial litigation and is the founder of JUSCONTRACTUS, India’s only all-women law firm.

Hina Shaheen is independent advocate practicing before the Delhi High Court.