Introduction
The Debate over modification of the arbitral award has been going over a decade, where the courts themselves have been divided without any unanimity. For instance, in Oil and Natural Gas Corporation Limited v. Western GECO International Limited, the Hon’ble Supreme Court provided for the power to modify under Section 34 for the first time, stating that where the tribunal has drawn a ‘manifestly untenable inference’, then such awards can be set aside or modified by the Courts. However, a similar-sized Bench in Project Director, National Highways No. 45 E and 220, National Highways Authority of India v. M. Hakeem and Another (‘M. Hakeem’) held that a Court’s power under Section 34 is limited to the grounds provided and the Court cannot modify awards.
These diverging opinions came up for consideration in the recent landmark judgment of Gayatri Balaswamy v. M/s ISG Novasoft Technologies Ltd. (‘Gayatri Balaswamy’). The case itself was a long-drawn battle over enforcement of an award passed in favour of the Appellant; however, the value of the award was unsatisfactory to her. After a reduction in compensation amount by the Division Bench of the Madras HC, she appealed to the SC, where five questions were posed to a Constitutional Bench via reference:
(1) Do Sections 34 and 37 empower courts to modify arbitral awards?
(2) If modification is permissible, is it limited to cases where the award is severable?
(3) Does the broader power to set aside an award under Section 34 inherently include the power to modify, and to what extent?
(4) Can the power to modify be implied within the court’s authority to set aside an award?
(5) Whether the judgment in M. Hakeem, followed in other cases, lays down the correct law, given that other benches have modified or accepted modification of arbitral awards?
Judgement
The Court, via a 4:1 majority, affirmed the power to modify and held that the maxim omne majus continent in se minus (the greater includes the lesser), applies and every court has ancillary or incidental powers necessary for effective function and doing justice. The Court also observed that mere silence of the law on a proposition does not amount to denial.[i] In light of this, the Court held the following powers are available to a Section 34 court:
1. Inadvertent errors, including typographical and clerical errors, without going into the merits, can be modified by the court,
2. Where the erroneous part of the award can be severed from the remaining award, then the award can be modified or set aside to that extent,
3. Post-award interest can be modified by the court while pendente-lite interest can only either set aside or the matter remanded back for arbitration,
4. Supreme Court can exercise its powers under Article 142 to modify the award and ‘do complete justice’.
Justice Vishwanathan, in his dissent agreed that severance of patently illegal parts of the award by an enforcement forum is an established principle of arbitration and that clerical and typographical errors can be rectified. However, he disagreed with the majority rationale that modification is similar to setting-aside, stating that the two are distinct powers, and also provided reasons as to why the judgments cited do not squarely apply in favour of modification. Hence, he held that courts under Section 34 cannot modify the interest (whether awarded or not) and that Article 142 powers cannot be used, as it would infringe upon party autonomy, given such matters are best left to the Legislature to decide.[ii]
What Does It Mean for the Future of Arbitration?
The error of errors
In para 49 of the majority judgment, the court has affirmed the authority to rectify manifest errors, provided that such modification does not require factual re-evaluation. However, the judgment nowhere defines what would entail manifest, or how the courts should decide that an error is manifest. In Pramatha Nath Taluqdar v Saroj Ranjan Sarkar, the Hon’ble Supreme Court has held that new evidence can be accepted where there is manifest error. Hence, the Courts as a practice do examine the facts in such a scenario, something which even the majority has consistently mentioned as against arbitration.
Moreover, another problem arises with the power given to rectify computational errors. While ascertaining the principal amount and the interest thereafter, different industries have different formulae for determination of damages. In Mcdermott International Inc v Burn Standard Co. Ltd. & Ors, the Hon’ble Supreme Court observed that computation depends on circumstances and is the domain of the arbitrator. A single-judge bench of the Delhi High Court in SMS Ltd. v. Konkan Railway Corporation Ltd, set aside an award because the tribunal used an unknown formula for calculation of damages. Hence, rectification of computational errors would also entail going into the facts of a case to a certain extent, such as whether the formula used is accepted by industry, is used commonly for quantification of damages and whether the formula has been correctly applied as per the parties’ contentions.
The interest perceived
It has been long noted by commentators that a major problem with arbitration is the fact that interest amount (especially post-award interest) exceeds the principal sum awarded. In Delhi Development Authority v. Sardar Singh & Sons, the Hon’ble Delhi HC held that interest rate applies to the award amount, even when the judgment-debtor deposits the award amount to the Court. Furthermore, in M/S D. Khosla and Co. v. Union of India, the Supreme Court referencing to Hyder Consulting (UK) Limited vs. Governor, State of Orissa, held that interest on interest can be awarded by the tribunal, given that the same is allowed by the terms of the contract.
Hence, it is highly probable that due to delays in award enforcement, the post-award interest may turn out to be unjustifiably high. Following this rationale, the majority allowed for modification of post-award interest. Moreover, the judgment notes that Section 31(7) of the Act is a unique creation of the Indian legislature, not present in the Model Law, and that tribunals cannot foresee future delays and latches that may occur in the enforcement stage. Hence, the majority notes the need for modification may arise in such circumstances.
However, while the majority notes the need for modification arises from the requirement of finality to the proceedings, it may also lead to longer litigation, since essentially all courts of instance can look into the post-award interest and adjudicate upon the same. Hence, a situation similar to this case itself may arise, with courts of different instances, providing for different rates of interest, as per their own notions of equity.
On Article 142: Inherent or Infringement of Autonomy?
In its analysis, the majority references to Shilpa Sailesh v Varun Sreenivasan, to discuss the scope of the powers of the Supreme Court under Article 142, particularly that the SC is empowered to do ‘complete justice’ without being bound by the statutory provisions. The question to be decided by the Court here was whether the mandatory six-month cool-down period under Section 13-B of the Hindu Marriage Act, 1995, in divorce proceedings can be subverted where there is an irretrievable breakdown of marriage. The Hon’ble SC held that using its inherent powers under Article 142 of the Constitution, the SC can annul a marriage where there is no scope for cohabitation left, even when the consent of either party is missing. However, the Court further went on to state the grounds on which such powers can be exercised and the particular circumstances that have to be looked into by the Court before doing so.[iii]
Such contours are missing in the majority opinion of the judgment. The majority has merely provided that restraint must be exercised while using its power, and merit-based examination ought not to be followed. However, it ends by stating that ‘the power can be exercised where it is required and necessary to bring the litigation or dispute to an end.’ On what factors the Court may decide the same is not provided in the majority. Hence, modification of the award by using Article 142 has been left to the good conscience of the Court and the ingenuity of litigators, and apprehensions linger that the Court as an unconscious exercise, delve into the merits of the arbitrator’s reasoning or the dispute to ‘do complete justice.’ A similar caution has been sounded in Justice Vishwanathan’s dissent, by referencing Shilpa Sailesh and Supreme Court Bar Association v. Union of India and Another and holding that inherent powers cannot be used to circumvent express statutory provisions.
On Equity: Defeating the Contractual Provisions?
Another facet of Article 142 which arises is whether concepts of equity can be used to modify the award or not. It is a common fact that contractual disputes cannot be explicitly governed by precepts of equity.[iv] Furthermore, arbitration agreements are entered into after several levels of due diligence, with teams of lawyers formulating the contract and reasonable commercial players entering into the same, knowing well the risks of the trade or business. In such a scenario, can the Court use equity to govern such dispute and use Article 142 to bring finality to litigation? Or can the Court read down contractual terms, mutually agreed and entered into by the parties, as referenced by the majority opinion in para 89 of the judgment? Hence, the extent to which equity would be applicable is also questionable since, arbitration is not akin to commonplace contractual disputes, with huge sums of money involved and the rate of award enforcement also defining India’s position has a centre for foreign investment,
Conclusion
Such apprehension can only be answered by future decisions in furtherance of Gayatri Balaswamy. The question remains: whether the Court, in its noble pursuit to provide an end to litigations in enforcement proceedings, has laid down ambiguity through discretion to modify the original award, and in fact, lowered India’s standing as a destination of international arbitration,[v] given the underdeveloped arbitration infrastructure in India.
Reference:
[i] This follows from the rationale laid down in Shankar Balwant Lokhande (Dead) By L.Rs v. Chandrakant Shankar Lokhande & Anr, where the Hon’ble Supreme Court, deciding whether more than one final decree can be passed or not, held that the question to be considered is not whether the Code of Civil Procedure allows for passing of more than one final decree, but whether there exist provisions of express prohibition against the same. This notion in itself, follows from the judgment of the Hon’ble Madras High Court in Kasi alias Alagappa Chettiar v. Ramanathan Chettiar alias Sreenivasan Chettiar.
[ii] Para 94 of the dissent itself notes the existence of the Dr. T.K. Vishwanathan Report, which recommended the inclusion of the power to modify, however, the Legislature had not adopted it as of yet. Hence, he notes that it is the domain of the Legislature to decide on it.
[iii] The Hon’ble SC held that the Court must be satisfied that the marriage is ‘totally unworkable, emotionally dead and beyond salvation’. Moreover, the Court also provided the minimum time period of separation which would be relevant (six years) and circumstantial factors such as number of dependants, educational qualification etc., which can be considered by the Court while progressing at a decision.
[iv] Maruti Traders v. Itron India Pvt Ltd, the Hon’ble Delhi HC held that commerce is devoid of equity and that commercial transactions are driven by a harsh reality, and the principle of universal brotherhood does not extend to commercial dealings.
[v] This comes in light of a recent Delhi Public Works Department notification (F.10(31)/2023/PWD-I/Court Matters/4309-17, dated 21 April, 2025), whereby the arbitration clause was deleted from all future PWD contracts, and replaced by only litigation. This came in light of a Ministry of Finance memorandum (No. F.1/2/2024-PPD), which outlined the disadvantages of arbitration in domestic public procurement contracts.
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Author: Aryan Chowdhury and Utsav Biswas, 3rd year BALLB (Hons) students at National Law University Odisha, Cuttack
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