ARBITRATION AWARD CANNOT BE MODIFIED UNDER SECTION 34 OR SECTION 37 OF ARBITRATION AND CONCILIATION ACT, 1996

[Mr. M. GOVINDARAJAN]

Introduction

The Arbitration and Conciliation Act, 1996 (‘Act’ for short) was enacted to replace the 1940 Arbitration Act in order to provide for-

• an arbitral procedure which is fair, efficient and capable of meeting the needs of arbitration;
• to provide that the arbitral tribunal gives reasons for an arbitral award;
• to ensure that the tribunal remains within the limits of its jurisdiction; and
• to minimize the supervisory roles of courts in the arbitral process.

Arbitration agreement

In order to curtail the prolonged civil cases the alternative dispute resolution has been found out.  Accordingly laws relating to arbitration were enacted.  To refer the dispute to arbitration for settlement of disputes there shall be an agreement made between the parties to the agreement and provides for the provision to settle the dispute by means of arbitration.  The Act provides the method of appointment of arbitrator, conduct of arbitration proceedings, the rights and responsibilities of the parties to the agreement in the course of arbitration proceedings.

Arbitral award

Once the arbitrator is appointed either by the parties to the agreement or by the Court, the claimant files his claim before the Arbitrator.  The other party may counter the same by giving reply to the claim.  The Arbitrator shall hear the parties to the proceedings and consider the documents produced by the parties.  The Arbitrator after giving the parties a reasonable opportunity of being heard will pass the award which is binding on the parties.  The award shall be deemed to be a decree of the Court of Law. 

Issue

Section 34 of the Act provides for the aggrieved person to file an application before the Court.  The Court may uphold the award or set aside the award on any of the grounds specified in Section 34(2) of the Act.  The issue to be taken in this article is as to whether the arbitral award can be modified by the Court with reference to the deciding case laws. 

Supervisor role of Court

There is no appellate mechanism as available in other Civil Laws.  Only section 34 gives helping hand to the aggrieved party.  The Court is having only supervisory role at minimum level.  The Court can set aside the arbitral award.

In MEDERMOTT INTERNATIONAL INC. VERSUS BURN STANDARD CO. LTD. & ORS. - 2006 (5) TMI 442 - SUPREME COURT, the Supreme Court held that the Act makes provisions for the supervisory role of Courts, for the review of the arbitral award only to ensure fairness. Intervention of the Court is envisaged in few circumstances only, like, in case of fraud or bias by the arbitrators, violation of natural justice, etc. The court cannot correct errors of the arbitrators. It can only quash the award leaving the parties free to begin the arbitration again if it is desired. So, the scheme of the provision aims at keeping the supervisory role of the court at minimum level and this can be justified as parties to the agreement make a conscious decision to exclude the court’s jurisdiction by opting for arbitration as they prefer the expediency and finality offered by it.

Modification of award

Even though Section 34 provides for the aggrieved person to challenge the arbitral award before Court, the Court has no power to interfere with the award of the arbitrator.  The Court can either uphold the award or set aside the award.  It cannot go into the merits of the award and make any modification on the award. 

In DAKSHIN HARYANA BIJLI VITRAN NIGAM LTD. VERSUS M/S NAVIGANT TECHNOLOGIES PVT. LTD. - 2021 (3) TMI 137 - SUPREME COURT, the Supreme Court held that under Section 34 of the 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) of section 34 are made out.  There is no power for the Court to modify the award. 

In PROJECT DIRECTOR, NATIONAL HIGHWAYS NO. 45 E AND 220 NATIONAL HIGHWAYS AUTHORITY OF INDIA VERSUS M. HAKEEM & ANR. - 2021 (7) TMI 1343 - SUPREME COURT, the Supreme Court held that any Court under Section 34 would have no jurisdiction to modify the arbitral award, which at best, given the same to be in conflict with the grounds specified under section 34 would be wholly unsustainable in law.  Any attempt to modify an award under section 34 would amount to crossing the Lakshman Rakha.

In S.V. SAMUDRAM VERSUS STATE OF KARNATAKA & ANR - 2024 (1) TMI 295 - SUPREME COURT, the appellant was a registered contractor.  He secured a contract from the Karnataka PWD to construct office and residence of the Chief Conservator of Forests for an amount of Rs.14.86 lakh.  An agreement was entered into between the Department and the appellant on 29.01.1990.  The site would be handed over to the appellant on 08.03.1990 by the Department.    The agreement stipulated that the work should be completed within 18 months from the date of agreement excluding monsoon season.

The appellant did not complete the work within the stipulated time as per the agreement.   The appellant alleged that the State has not paid the bills in time and also due to delays caused for change of site in delivery of material for such construction.  The parties to the contract resorted to arbitration.  The Chief Engineer was appointed as arbitrator on 30.07.2002.  The appellant claimed a sum of Rs.18.06 lakh before the Arbitrator along with interest @ 18% payable from 09.03.1994 to till the date of payment.

The arbitrator heard both the parties and identified three primary issues as detailed below-

• inordinate delay in handing over of site for performance of contract;
• non-supply of working drawings and designs; and
• delay in supply of materials.

Out of the 11 claims the arbitrator awarded for 9 claims to the tune of Rs.14.18 lakhs along with interest @ 18% on all amount from 09.03.1994 till the date of payment.  The arbitrator awarded Rs.50,000/- as costs. 

Being aggrieved with the award of the arbitrator the State filed an application under Section 34 of the Act before the Civil Court, Sirsi. The Civil Judge modified the award passed by the arbitrator.   The Civil Court directed the State to pay a sum of Rs.3.72 lakh along with cost Rs.10,000/- and interest @ 9%.   For the modification of the order the following reasons are recorded-

• The appellant had not started excavation work in order to lay a foundation.  Therefore the question of loss of payment to the laborers and materials collected for construction does not arise and the losses allegedly suffered by the Claimant-Appellant were ‘only at his imagination’.
• The appellant did not explain the details of idle time of machineries.
• In regard to the water facility the Court agreed to the contentions of the Department that the same was looked by the appellant himself.   Therefore the Court held that the Department was not liable for this.
• Since the appellant did not complete the construction in time he could not make a claim for the rates for the year 1989-90 and cannot claim interest.
• The appellant did not produce any evidence and explain as to the delay in supply of material.
• Despite the clearance of all bills the appellant had not picked up speed on the work.
• The changes made in design were minor and it did not require any additional amount.
• The cost of arbitration @ Rs.50,000/- is exorbitant. 
• The Arbitrator has not given any justification for the award of equal amount of render and interest at higher rate.

The appellant challenged the arbitral award before the High Court under Section 37 of the Act.  The High Court dismissed the application of the appellant.  The High Court held that the escalation in claim by the appellant allowed by the Arbitrator has been perverse and contrary to the public policy. 

Against the judgment of High Court the appellant filed the present appeal before the Supreme Court.  The Supreme Court considered whether the modification of arbitral award as carried out by the Civil Judge as confirmed by the High Court was justified within law.  The Supreme Court analyzed the provisions of Section 34 of the Act before the amendment 2015 Act and after amendment 2015 Act.  Prior to amendment 2015 Act Section 34 listed the grounds on which the Courts may intervene against arbitral award.  The Supreme Court observed that it is evident from the provisions of Section 34 before amendment, it was open to the Court to examine the award as to whether it was in conflict with-

• public policy of India;
• induced or affected by fraud;
• corruption; and
• any violations of the provisions of Section 75 and 81 of the Act.

In the present case, the Supreme Court observed that only provision under which the award could have been assailed was for it to have been in conflict with the public policy of India.

The Supreme Court perused the judgment and order of the Civil Court.  The Supreme Court observed that the judgment did not reflect fidelity to the text of the statute.   The Civil Court did not give reasons under which grounds mentioned in Section 34 of the Act the Court intervened the award of the Arbitral Tribunal.  The merits of the award are only to be gone into if the award is to the contrary to the public policy of India.  During the arbitral proceedings no party raised objection to the Arbitrator including bias.  Each claim has been considered by the Arbitrator separately. 

The view taken by the Arbitrator is plausible one and the same could not be substituted by the Court.  The reasons assigned by the Civil Court in passing its order are totally erroneous to the contrary, to the lis between the parties and not borne out from the record.  They are mutually contradictory.  The Civil Court accepted every contentions of the claimant appellant.  All that is required by the Court is to see as to whether the contracting parties have agreed to bind themselves to the terms with the only supervisory jurisdiction of the Court to consider breach thereof, in the light of the grounds specified under section 34. 

The Supreme Court noticed that the Arbitrator have accepted the contention of the Claimant-Appellant that there was a delay in supply of drawings, which in turn caused delay in placing the orders for steel and other such requirements. The Civil Judge had disagreed therewith showing prompt supply. There is no discussion whatsoever. It was observed that the question of

idleness of the labour does not arise if there was another building to be constructed, and therefore, such claim cannot be paid. This is a clear instance of the court supplanting its view in place of the Arbitrator, which is not a permissible exercise, and is completely de-hors to the jurisdiction under Section 34.

The Supreme Court, therefore, held that the modification of award of the arbitrator does not stand scrutiny and liable to be set aside.

Next the Supreme Court considered the judgment of High Court under Section 37 of the Act upholding the modification of an arbitral award.   In MMTC LTD. VERSUS M/S VEDANTA LTD. - 2019 (2) TMI 1085 - SUPREME COURT the  Supreme Court  held that the court cannot undertake an independent assessment of the merits of the award, and must only ascertain that the exercise of power by the court under Section 34 has not exceeded the scope of the provision. 

The Supreme Court observed that the Civil Judge under Section 34 appears to have not concerned themselves with the contours of Section 37 of the Act. The impugned judgment reads like a judgment rendered by an appellate court, for which reexamination of merits is open to be taken as the course of action.  In the opinion of the Supreme Court the High Court while confirming the modification order committed the same mistake which was done under Section 34. 

In regard to interest the Arbitrator award 18% interest per annum from 09.03.1994 till the date of payment which was reduced to 9%.  The reduction of interest is without any basis.  The transaction being commercial in nature, the Supreme Court saw no reason as to why the claimant could not be entitled to interest in terms of the rate quantified by the Arbitrator which includes the period of pre-arbitration, pendante lite and future.

The Supreme Court set aside the impugned order since the same is without compliance with the well laid parameters and contours of both sections 34 and 37 of the Act.  The Supreme Court restored the award passed by the Arbitrator.  The Supreme Court also directed the State of Karnataka to pay the amount as directed by the Arbitrator expeditiously.

Conclusion

The arbitral award cannot be interfered with unlike the first appeals.  On the merits of the award the Court has no power to interfere.  The Court either can uphold or reject the award.  The Court can remand the award to the arbitrator for its reconsideration.  Section 34 provides limited grounds to challenge an arbitral award.