Constitution bench to decide if courts can modify arbitral awards

New Delhi: The Supreme Court has called upon a Constitution bench to end the realm of uncertainty over the extent of the court’s power in interfering with arbitral awards under the Arbitration and Conciliation Act, 1996.

A three-judge bench in the top court has referred to a larger bench the issue as to whether courts can modify arbitral awards while dealing with petitions under Sections 34 and 37 of the Act. The two provisions in the 1996 Act deal with the court’s authority in setting aside the arbitral awards and appeals against such orders respectively.

The bench, comprising justices Dipankar Datta, KV Viswanathan and Sandeep Mehta, emphasised that clarity in law is required for exercise of jurisdiction under Sections 34 or 37 of the Act through an authoritative pronouncement.

The top court cited two lines of judgments on the subject matter. The first set of judgments went by the bare reading of Section 34, indicating that the power of the courts is limited to setting aside the arbitral awards, strictly in terms of the specific grounds enshrined under the provision. On the other hand, there exists a second set of judgments wherein courts did not only set aside but also modified arbitral awards. A similar divergence was noted in orders under appeal under Section 37.

“It is, therefore, of seminal importance that through an authoritative pronouncement clarity is provided for the guidance of the courts which are required to exercise jurisdiction under the aforesaid Sections 34 and 37, as the case may be, day in and day out,” said the court in its order of February 20.

Sushmita Gandhi, partner at Induslaw, pointed out that the courts have on numerous occasions held that awards cannot be modified and this resonates with the intent of the legislature in consciously omitting the provision which enabled the courts to modify the award under the old Act of 1940.

“The Arbitration Act and the judicial precedents contemplate a supervisory role of the courts to ensure fairness and not to get into the facts and basis of the cases. Simply put, the courts have the power either to confirm or set aside the award, which includes setting aside the award partially,” Gandhi added.

The bench was hearing a case relating to a dispute between ISG Novasoft Technologies Limited – a company engaged in the business of dealing with various products relating to Information technology, and a former employee over termination of an employment agreement. The employment agreement was made subject to the provisions of the 1996 Act. While senior counsel Arvind Datar appeared for the former employee, senior advocate Siddharth Bhatnagar, along with a team of associates from Karanjawala & Co represented the company.

In the order of reference, the bench noted that whether or not the courts in exercise of power under Sections 34 or 37 of the Act are empowered to modify an arbitral award is a question which frequently arises in proceedings not only before the Supreme Court but also before the high courts and district courts.

The bench, therefore, framed five questions for consideration by the larger bench. These questions included whether the court’s power to set aside an arbitral award would include the power to modify it, and if so, whether such power can be exercised only where the award is severable, and a part thereof can be modified. The three-judge bench also sought an opinion from the larger bench regarding the line of judgment that the Supreme Court and other courts ought to follow.

“The special leave petitions may be placed before the Hon’ble Chief Justice of India for an appropriate order,” stated the order of reference.