Can Arbitral Awards be modified? – The Blog of Daksh Pandit

Section 34 of the Arbitration and Conciliation Act, 1996 [“the Act”] provides remedy to a party aggrieved by the Award passed by the Arbitrator, to seek a recourse to court for setting aside the Arbitral Award. However, the Award passed by the Arbitrator, under the scheme of the Act is sacrosanct and the courts, as a matter of principle, abstain from interfering with the findings rendered by the Ld. Arbitrator, as he/she is the master of evidence having the final say upon the facts and the law. Therefore, an aggrieved party can seek setting aside of the Arbitral Award only on the limited grounds envisaged in Section 34 of the Act. The grounds for setting aside which are set forth in clause (a) of Section 34 strike at the very foundation of the validity of the arbitration proceedings. The grounds encapsulated in Section 34(2)(b) on the other hand are related to the merits of the challenge that may be raised in respect of an award and do not deal with the fundamental invalidity. The Scope of Section 34 is explained herein, in detail. It is pertinent to note that proviso to Section 34(a)(iv) embodies the doctrine of severability stipulating as follows-

“Provided that, if the decisions on matter submitted to arbitration can be separated from those not so submitted, only that part of the arbitral award which contains decisions on matters not submitted to arbitration may be set aside..”

The proviso to Section 34(a)(iv) of the Act enables the court to segregate the award and only set aside that part of the award which contains decisions on matters not submitted to arbitration. It was in the backdrop of the above proviso, the Supreme Court, in The Project Director, National Highways Nos. 45E and 220, National Highways Authority of India Vs M. Hakeem and Ors¹ [“M. Hakeem”], was posed with the question of law as to whether the power of a court under Section 34 of the Act to set aside an Award of an arbitrator would include the power to modify such an award.

The fact situation before the Supreme Court in M. Hakeem (supra) was that, pursuant to notifications issued under the provisions of the National Highways Act, Arbitral Award was made by the District Collector, granting same amount of compensation to all the Claimants. The said Arbitral Award was challenged under Section 34 before the District and Sessions Judge who enhanced the amount of compensation, thereby modifying the Award rendered by the Arbitrator. It is pertinent to mention that the Arbitration and Conciliation Act, 1940 [“the Old Act”] categorically equipped the Court with the power to modify the award, under Section 15 of the said Act. However, the 1996 Act did not adopt the said provision and conspicuously omitted the same, which led the Supreme Court to observe that the Legislature did not intend to equip the courts with the power to modify the Award under the 1996, Act. Furthermore, the Supreme Court in McDermott International Inc. v. Burn Standard Co. Ltd.² has held that in Section 34 proceedings the Court cannot correct the errors of the arbitrators. It can only quash the award leaving the parties free to begin the arbitration again if it is desired. The aforesaid decision of the Supreme Court was followed in another judgment rendered by the Supreme Court in Kinnari Mullick v. Ghanshyam Das³ and subsequently, the Supreme Court in Dakshin Haryana Bijli Vitran Nigam Ltd. vs Navigant Technologies Pvt. Ltd. vs Navigant Technologies Pvt. Ltd, categorically held that under Section 34 of the Arbitration Act, the Court may either dismiss the objections filed, and uphold the Award, or set aside the award if the grounds contained in sub-section (2) and (2A) are made out. There is no power to modify an arbitral award.

Therefore, the Supreme Court, in M. Hakeem (supra), after observing the scheme of the Act and that the issue is settled by at least three judgments of the Apex Court, concluded that the Court does not have the power to modify an Arbitral Award under Section 34 of the Act.

However, the Delhi High Court in National Highways Authority of India Vs Trichy Thanjavur Expressway Ltd.⁴ [“Trichy Thanjavur”] adopted a different approach and distinguished the ratio laid down in M.Hakeem (supra) by the Supreme Court. The Delhi High Court, although agreed with the position of law settled by the Supreme Court that court cannot modify the Award under Section 34, proceeded to carve out a difference between ‘modification of award’ and “Partial Setting aside of award under Section 34” , as follows-

“43. The Supreme Court in M. Hakeem, as would be evident from the passages of that decision extracted hereinabove, has enunciated the setting aside power as being equivalent to a power to annul or setting at knot an Arbitral Award. It has essentially held that bearing in mind the plain language of Section 34 coupled with the Act having desisted from adopting powers of modification or remission that existed in the erstwhile 1940 Act, a court while considering a challenge under Section 34 would not have the power to modify. The expression “modify” would clearly mean a variation or modulation of the ultimate relief that may be accorded by an AT. However, when a Section 34 Court were to consider exercising a power to partially set aside, it would clearly not amount to a modification or variation of the award. It would be confined to an offending part of the award coming to be annulled and set aside. It is this distinction between a modification of an award and its partial setting aside that must be borne in mind.”

The Delhi High Court, then relied upon a decision of the Supreme Court in J.G. Engineers Pvt. Ltd. vs Union of India (2011) SCC 758 wherein the Supreme Court has recognized the power vested in the court to segregate different parts of the award and uphold those parts which do not suffer from any legal infirmity or fall foul of the grounds of challenge set out in Section 34(2). Pertinently, the decision of Supreme Court in J.G. Engineering (supra) was not referred by the Supreme Court in M. Hakeem (supra) and therefore, continues to hold the field of law.

After going through a conspectus of cases and taking into consideration all the judgments, for and against the proposition, the Delhi High Court in Trichy Thanjavur (supra) observed as follows-

An Award may comprise a decision rendered on separate claims. As long as a claim is not subordinate, in the sense of being entwined or interdependent upon another, a decision rendered on the same by the Arbitral Tribunal would constitute an award in itself.
Each decision of the Arbitral Tribunal upon the particular claim could be viewed as a decision constituting an independent award in itself.
Once an award is understood as comprising of separate components, each standing separately and independent of the other, there appears to be no hurdle in the way of the courts adopting the doctrine of severability and invoking the power to set aside an award partly.
Where parts of award are found to be unsustainable and severable, there setting aside would not amount to modification.
The Court relied upon the decision rendered by a full bench of Bombay High Court in S. Jiwani v. Ircon International Ltd.⁵ wherein the Bombay High Court laid emphasis upon the doctrine of severability to drive home the point that as long as the award is rendered upon multiple claims and each claim can be separated from the other claims, there is no impediment for the court to severe the offending part of the award under Section 34. However, The case would be different where it is not possible or permissible to sever the award. In other words, where the bad part of the award was intermingled and interdependent upon the good parts of the award, there it is practically not possible to sever the award as the illegality may affect the award as a whole.
“Modification” means to substitute the court’s own decision for the decision made by the arbitrator on any given claim or counterclaim which the court cannot do⁶.
The question of partial setting aside would ultimately depend on whether there is an inextricable link between the offending part of the award with any other part of the Award. If the part which is sought to be set aside is not found capable of standing independently, it would be legally impermissible to partially set aside the award.
M.Hakeem does not deal with partial setting aside of award. The court reasoned that the Supreme Court in that case was concerned with the enhancement of compensation ordered by the District and Sessions judge which amounted to modification of the award i.e. substitution of the view taken by the arbitrator by that of the court, which the court is not empowered to do. Therefore, the Supreme Court, in the facts of M.Hakeem held that court does not have the power to modify the award. The Supreme Court was not concerned with an Award where a decision has been rendered by an arbitrator on separate claims.

Therefore, the Delhi High Court, in the above terms distinguished the ratio laid down in M.Hakeem (supra) and held that modification and partial setting aside of the award are two different things and the court under Section 34 of the Act holds power to partially set aside the arbitral award subject to the above caveats.

Conclusion

The Arbitration and conciliation Act, 1996 was enacted to provide a speedy resolution of disputes to the parties in a time bound manner. When an Arbitral Award is challenged under Section 34 of the Act, the court can-

Set aside the award on the grounds as mentioned in Section 34 of the Act.
Partially set aside the award under Section 34(a)(iv) of the Act.
Remand the matter to the Arbitral Tribunal under Section 34(4) of the Act, upon the request of the party.

For partially setting aside the award, it is of paramount importance that the award rendered by the Arbitrator is severable, i.e. the offending part of the award must not have an inextricable connection with the good part of the award. If the Award is rendered on the basis of separate claims, then each claim can be considered as a separate award itself thereby opening it to a challenge under Section 34. The rigours of Section 34, in that case, can be applied to each claim separately. However, if the court does not exercise the power of partially setting aside the award, then serious prejudice would be caused to the parties as in a given situation if an award is rendered by the arbitrator allowing all the claims of the Claimant and the Respondent/Applicant challenges the award and If court follows the dictum laid down in M.Hakeem (supra) then even if the court finds that the Arbitrator committed error in allowing one of the Claims of the Claimant, then also the entire award would have to be set aside and the parties would have to start the proceedings afresh which would lead to wastage of time and money and militate against the scheme of the Act i.e. speedy resolution of disputes.

The decision of Supreme Court in M.Hakeem (supra) as clarified by the Delhi High Court in Trichy Thanjavur (supra) expounded upon the proposition that court cannot modify the award i.e. substitute the view taken by the arbitrator with that of the court. However, the said decision does not cast any fetters upon the powers of the court to partially set aside the award subject to various caveats as drawn out by the Delhi High Court hereinabove.

By Daksh Pandit