NHAI v. M Hakim: Putting a quietus to the issue of modification of arbitral awards

In its recent judgment in The Project Director, NHAI v. M Hakim, the Supreme Court of India has cleared the air around modification of arbitral awards under Section 34 of the Arbitration and Conciliation Act, 1996.

This is a welcome judgment that reaffirms the position that the scheme of the Arbitration Act envisages minimal court intervention in arbitral awards.

Brief Facts

The Supreme Court was faced with an issue that juxtaposes the Arbitration Act and the National Highways Act, 1996 (NHA). The facts in the batch of these matters relate to: (a) certain notifications issued under the provisions of the NHA; and (b) awards passed thereunder by the competent authority under the NHA for acquisition of land for the purposes of construction of a highway, including compensation for certain trees and crops.

The awards in some of the instances were extremely low and were therefore modified by the District and Sessions Judge in a challenge under Section 34 of the Arbitration Act, and later affirmed by the Madras High Court.

Under the NHA, if the amount determined by the competent authority is not acceptable to the National Highways Authority of India (NHAI) or a landowner, the amount of compensation is to be determined by an ‘arbitrator’ who is appointed by the Central government.

Contentions of the parties

It was argued by NHAI that the scope of Section 34 is rather limited to ‘set aside’ an award and not modify an award. Whether the arbitration process provided under Section 3G(5) of the NHA is consensual or not would make no difference to the interpretation of Section 34 vis-à-vis the NHA. It was also argued that once the Supreme Court has settled by way of several judgments that an award under Section 34 cannot be modified, the Single Judge of the Madras High Court could not have taken a contrary view in Gayatri Balaswamy, where an award was modified under Section 15 of the Arbitration Act, 1940.

It was argued by the landowners that the enhancement of the award amounts were inadequate, and even though the judgment of the Madras High Court in Gayatri Balaswamy (by a Single Judge, later affirmed by a Division Bench) did not lay down the correct law qua the Arbitration Act, it correctly made a distinction between ‘consensual arbitration’ and an arbitrator appointed by the Central government. The arbitrator appointed by the Central government would be a bureaucrat, merely putting a stamp on the award amount. If the scope of Section 34 is construed to be restricted to simply ‘setting aside’ an award, it would mean starting an arbitral process afresh, which would not be an effective remedy for an aggrieved party.

Findings and analysis

Based on the above arguments, among others, the Supreme Court came to the following findings:

(a) Under Section 34 of the Arbitration Act, an award cannot be modified:

It was observed,

“Thus there can be no doubt that given the law laid down this Court, Section 34 of the Arbitration Act, 1996 cannot be held to include within it a power to modify an award.”

The Supreme Court referred to a series of judgments to affirm the view that an award can only be ‘set aside’ on limited grounds as specified in Section 34 and it is not an appellate provision. An application under Section 34 for setting aside an award does not entail any challenge on merits to an award.

(b) Arbitration Act, 1940 permitted modification while the Arbitration and Conciliation Act, 1996 does not:

The Arbitration Act is modelled on the UNCITRAL Model Law on International Commercial Arbitration 1985, under which no power to modify an award is given to a court hearing a challenge to an award. The Arbitration Act was enacted in 1996 to bring the arbitration regime in India at par with the Model Law. While Section 15 of the Arbitration Act, 1940 provided specifically for modification of an award, the Arbitration Act, 1996 does not, as it is in alignment with the Model Law.

In jurisdictions like England, the United States, Canada, Australia and Singapore, there are express provisions that permit the varying of an award. However, in the case of Section 34 of the Arbitration Act, Parliament very clearly intended that no power of modification of an award exists.

(c) The view taken by the Single Judge of the Madras High Court in Gayatri Balaswamy is incorrect:

The Single Judge of the High Court referred to para 52 of McDermott and held that the observations made therein by the apex court did not answer the question as to whether Section 34 contained a power to modify an award. Based on such interpretation, the Single Judge modified the award.

Para 52 of McDermott notes,

“The court cannot correct errors of the arbitrators. It can only quash the award leaving the parties free to begin the arbitration again if it is desired. So, the scheme of the provision aims at keeping the supervisory role of the court at minimum level and this can be justified as parties to the agreement make a conscious decision to exclude the court’s jurisdiction by opting for arbitration as they prefer the expediency and finality offered by it."

The Supreme Court held that the judgments relied on by the Single Judge were under Article 142 of the Constitution of India and for a limited purpose. The observations in McDermott bound the Single Judge and any decision to the contrary, much less the interpretation that Section 34 carried a power to modify, would be incorrect.

(d) Differential compensation cannot be awarded on the ground that a different public purpose is sought to be achieved:

The Supreme Court observed that the legislature cannot say that differential compensation is to be paid depending upon the public purpose involved or the statute involved on the ground that there is public purpose involved, and it is important to expedite the process of land acquisition.

The Supreme Court has put a quietus to the conundrum of modifying arbitral awards, stating in unequivocal terms that a challenge to an arbitral award can result only in: (a) setting aside of an award on the limited grounds provided in Section 34 and as a necessary corollary, relegating the award back to the arbitrator/arbitral tribunal for deciding afresh; or (b) upholding an award by a court hearing a Section 34 challenge.

Two observations of the Supreme Court are important, i.e., Section 34 as it stands today is based on the Model Law that does not permit a challenge on ‘merits’ to an arbitral award, and that Parliament could consider amending Section 34 to bring it at par with jurisdictions that permit challenge to an arbitral award on merits or modifying an award.

Importantly, and in addition to these two observations, the Supreme Court also notes that the mechanism of setting aside an arbitral award on limited grounds provided in Section 34 is in confirmation with the legislative policy of having minimal judicial intervention in arbitral awards. To conclude, the judgment is a welcome move as far as intervention by courts in arbitral awards is concerned and is likely to further strengthen India’s position as an arbitration friendly seat.

The author is a Partner at P&A Law Offices (Mumbai).