Courts can modify arbitral awards but must exercise ‘great caution’, says Supreme Court in 4-1 verdict

NEW DELHI: A five-judge constitution bench of the Supreme Court on Wednesday ruled by a 4-1 majority that appellate courts can modify arbitral awards “under certain circumstances”, ending uncertainty over the extent of the court’s power in interfering with the awards under the Arbitration and Conciliation Act, 1996.

The bench, however, underlined that such power was limited and must be exercised with “great caution”.

A detailed judgement is awaited.

Chief Justice of India Sanjiv Khanna and justices BR Gavai, Sanjay Kumar and AG Masih held that such limited power to modify arbitral awards could be exercised in circumstances where the award is severable, for correcting typographical or clerical errors, for correcting or modifying post award interest in certain circumstances, and that the Supreme Court can exercise its powers under Article 142 of the Constitution to modify awards to do “complete justice to a case.”

Justice KV Vishwanathan dissented from the majority on certain aspects including the appellate court’s power to modify post award interest. Justice Vishwanathan held that the Supreme Court could not use Article 142 to modify interest post award and that the issue should be referred back to the arbitrator.

The ruling came on a reference to the constitution bench by a three-judge bench on the court’s powers in January this year 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.

One set of rulings previously indicated that the power of the courts was limited to setting aside the arbitral awards, strictly in terms of the specific grounds enshrined under the provision. In a second set of judgments, the top court did not only set aside the arbitral award but also modified them.

After a three-day hearing, the constitution bench reserved the judgment on February 19.

The issue arose out of a dispute between ISG Novasoft Technologies Limited, a company engaged in the business of dealing with products relating to Information technology, and its former employee over termination of an employment agreement. The employment agreement was made subject to the provisions of the 1996 Act.

The matter was initially heard by a three-judge bench comprising justices Dipankar Datta, KV Viswanathan and Sandeep Mehta. At the time, senior counsel Arvind Datar, appeared for the former employee and senior advocate Siddharth Bhatnagar, along with a team of associates from Karanjawala & Co appeared for ISG Novasoft.

During arguments before the constitution bench, solicitor general Tushar Mehta for the Union government argued that the law only permitted courts to wholly or partially set aside an award and did not grant them the power to modify it. Mehta also urged the bench to refrain from reading such a power into the law, emphasising that the issue should be left to the “wisdom of the legislature”.

Senior Advocate Arvind Datar, who appeared for the former employee, argued in support of the courts’ power to modify arbitral awards and reasoned that the power to partially set aside an award was essentially the power to modify it. Datar argued that Section 34 of the Arbitration Act was intended to accommodate international arbitration and was not meant for instances of domestic arbitration.

Datar suggested at the time that adding a few words to Section 34 would make it workable by giving courts the power to modify.

Senior advocate Saurabh Kirpal assisted by law firm Karanjawala & Co, however, opposed Datar’s submissions and argued the addition or subtraction of words under a statute was a legislative exercise, not a judicial one. Kirpal argued that allowing modification would not necessarily expedite the arbitration process.