In a ruling with significant implications for commercial dispute resolution, the Supreme Court on Wednesday held that courts have the authority to modify arbitral awards under the law on arbitration and conciliation, though such power must be exercised with significant restraint.
The 4:1 majority verdict, delivered by Chief Justice Sanjiv Khanna along with Justices BR Gavai, Sanjay Kumar, and Augustine George Masih, established that under specific circumstances, arbitral awards can be modified using provisions of the Arbitration and Conciliation Act, 1996.
While pronouncing the judgment, the Chief Justice stated that "the court has limited power to modify arbitral awards under Sections 34 and 37 of the Arbitration and Conciliation Act, 1996," while emphasizing that this authority should be wielded with "great caution."
“The special powers of the Supreme Court under Article 142 of the Constitution can be applied to modify awards. But this power must be exercised with great caution within the limits of the Constitution,” he said.
The CJI added, “The question of law is answered to say that the court has limited power to modify arbitral awards under Sections 34 and 37 of the Arbitration and Conciliation Act, 1996."
The majority verdict referred to circumstances in which the “limited power” to modify arbitral awards could be exercised by the courts.
The CJI added, “When the award is severable by separating the invalid portion from the valid portion of the award, the power can be exercised to correct any clerical, computation or typographical errors which appear erroneous on the face of the record”.
The majority verdict said the power could be exercised to “modify post-award interest in some circumstances".
Article 142 of the Constitution empowers the Supreme Court to pass any decree or order necessary for "doing complete justice" in any case or matter pending before it.
Justice K.V. Viswanathan stood alone in dissent, maintaining that courts should not have the power to alter arbitral decisions.
The majority opinion outlined specific scenarios where modification would be permissible, including cases where "the award is severable by separating the invalid portion from the valid portion," or to correct clerical, computational, or typographical errors evident on the face of the record. The court also noted that post-award interest could be modified "in some circumstances."
A detailed judgement is awaited.
The court on February 19 reserved its judgement on the contentions legal issue after hearing parties for three days.
The final hearing in the matter began on February 13 after the issue was referred to it by a three-judge bench on January 23.
Solicitor general Tushar Mehta aside from senior advocates Arvind Datar, Darius Khambata, Shekhar Napahade, Ritin Rai, Saurabh Kirpal and Gourab Banerji had argued in the case.
Lawyers led by Datar argued that the courts, which were empowered under Section 34 of the Arbitration and Conciliation Act, 1996 to set aside the arbitral awards on certain grounds, could also modify it as their powers included the smaller discretion.
Another set of lawyers argued that the term "modify" which was not there in the statute couldn't be read into it to assume the non-existent powers.
Arbitration is an alternate mode of dispute resolution under the 1996 law and it minimises the role of courts to interfere with the awards by the tribunals.
While Section 34 of the Act provides for setting aside of an arbitral award on limited grounds such as procedural irregularities, violation of public policy, or lack of jurisdiction, Section 37 governs appeals against orders related to arbitration, including those refusing to set aside an award.
Like Section 34, it also aims to minimise judicial interference while addressing exceptional cases requiring oversight.
"While examining the aforesaid question, the court will also examine the contours and scope of the power of the court … and if the power of modification exists, to what extent the same can be exercised,” the bench had said earlier.
The matter arose from Gayatri Balasamy v. ISG Novasoft Technologies Ltd.
The courts have traditionally interpreted this section narrowly, avoiding a review of the merits of the award to uphold arbitration’s principles of finality and efficiency.
In February 2024, a three-judge bench comprising Justices Dipankar Datta, K V Viswanathan, and Sandeep Mehta framed a few questions and referred the case to the CJI for consideration.
(With PTI inputs)
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