Signed, Sealed, Still Editable? A Judicial Detour in Arbitral Awards

This article examines the view undertook by the Supreme Court of India in its recent judgment in the matter of Gayatri Balasamy v. M/S ISG Novasoft Technologies Limited¹ while providing a descriptive account of the judicial detour that the Indian legal system has taken with regards to the finality of arbitral awards writes Rasveen Kaur Kapoor.

Introduction

Arbitration in India has long been positioned as a preferred alternative to traditional litigation due to its perceived benefits of efficiency, finality, and minimal judicial interference. Section 35² of the Arbitration and Conciliation Act, 1996 (the “1996 Act"), declares an arbitral award as final and binding on the parties. Further, Section 36³ of the 1996 Act treats an arbitral award at par with the decree of a court. It allows parties to enforce an award in accordance with the provisions of the Code of Civil Procedure 1908, in the same manner as if it were a decree of the court. These values were entrenched in the 1996 Act which was modelled on the UNCITRAL Model Law on International Commercial Arbitration. Section 34⁴ of the Act provides for recourse against arbitral awards, but it restricts courts to "setting aside" an award under limited grounds. However, it can be seen that the Indian Courts have oscillated between a strict interpretation of this provision and a more purposive approach aimed at doing justice in exceptional circumstances. This debate finds its most resonant expression in the divergence between the legislative intent to limit court interference and the judiciary’s pragmatic response to address procedural and substantive deficiencies in arbitral awards.

Legislative Framework and Evolution

The 1996 Act was a significant departure from the Arbitration Act, 1940⁵. The earlier statute expressly allowed for modification of arbitral awards under Section 15 on specific grounds: (a) a part of the award was upon a matter not referred to arbitration and such part could be separated from the other parts without affecting the decision on those parts; or (b) the award was imperfect in form, or contained any obvious error which could be amended without affecting such decision; or (c) the award contained a clerical mistake or an error arising from an accidental slip or omission. However, the 1996 Act, reflecting the Model Law, eliminated such explicit modification powers and confined judicial recourse to setting aside under Section 34. Section 34(2) sets out exhaustive grounds for challenge, including lack of capacity, invalid arbitration agreement, lack of proper notice, ultra vires decisions, and conflicts with Indian public policy. Notably, it does not mention modification, leading to a dominant view that courts must either uphold or set aside an award in whole or in part—but not alter it.

Section 34: Scope and Judicial Supervision

Section 34 of the Arbitration and Conciliation Act, 1996 specifies the restricted grounds on which a court may set aside an arbitral award. These reasons consist of incapacity of a party, invalidity of the arbitration agreement, failure to issue a notice or offer an opportunity to hear the case, award considering disputes not intended in the arbitration, improper constitution of the arbitral panel, and violation of India's public policy. Most importantly, Section 34 does not leave any room for the modification or correction of the arbitral award by the court. Section 34 grants courts a supervisor and not appellate jurisdiction over arbitral awards.

The Supreme Court of India in the matter of Larsen Air Conditioning and Refrigeration Company v. Union of India and Others⁶ set aside the order of the High Court modifying the rate of interest awarded by the Arbitrator holding that the Arbitration Act did not give any power to the Court hearing a petition under Section 34 to modify the award passed by the arbitrator. The Supreme Court further held that though the award can be severed in parts, those severed part must be dealt with in totality provided such severance does not impact the remaining award. While considering the “appellate nature” of the provision contained in Section 34, the Supreme Court of India in National Highways Authority of India v. M. Hakeem⁷(“Hakeem”) held that an award could be set aside only per the grounds mentioned in sub-Sections (2) and (3) of Section 34. It further held, “Quite obviously, if one were to include the power to modify an award in Section 34, one would be crossing the Lakshman Rekha and doing what ought to be done according to the justice of a case. In interpreting a statutory provision, a Judge must put himself in the shoes of Parliament and then ask whether Parliament intended this result. Parliament intended that no power to modify an award exists in Section 34 of the Arbitration Act. It is only for Parliament to amend the provision above in the light of the experience of the Court in the working of the Arbitration Act, 1996, and bring it in line with other legislations the world over.” The narrow scope of challenge to arbitral award is grounded on the reasoning that the modus operandi in arbitration is to ensure the least interference from the courts. In this regard, the decision of Supreme Court of India in “K. Sugumar v. Hindustan Petroleum Corporation Limited”⁸ deserves reference, wherein it was observed that the arbitral award discloses the view taken by the arbitrator upon consideration of evidence and material before him. So long as the conclusion is plausible and reasonable, it ought not to be interfered with. The parties choose to avail themselves of an alternate dispute resolution mechanism, and they must be left to reconcile themselves to the wisdom of the arbitrator. Unless any such perversity or misconduct is apparent on the face, the interference was held to be unjustified.

The Supreme Court of India has time and again reiterated that the only exclusive recourse against an arbitral award is by making an application before the Court for setting aside the award under Section 34 of the Arbitration Act. In 2006, the Supreme Court of India in the case of “McDermott International v. Burn Standard⁹ held that “The 1996 Act makes provision 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 against 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 the 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.” Therefore, the Supreme Court in this case made it clear that courts under Section 34 of the Arbitration Act could not correct errors of arbitrators but could only quash the award, leaving the parties to commence arbitration afresh. Despite this unequivocal finding, the Supreme Court proceeded to modify the arbitral award by reducing the rate of interest. The Supreme Court reiterated that the courts may interfere only where the award suffers from perversity, patent illegality, or contravention of public policy. It has to be noted that despite these limitations, courts have often faced situations where setting aside an entire award appeared disproportionate, especially when the defect was confined to a particular segment or quantum of the award. This has prompted some judges to adopt creative approaches—interpreting 'setting aside' to encompass partial annulments or even constructive modifications under the guise of severability. Several judgments passed by the Supreme Court of India demonstrate the judiciary's inclination to modify awards despite statutory silence. In Krishna Bhagya Jala Nigam Ltd. v. G. Harischandra Reddy¹⁰, the Supreme Court reduced both interest and compensation awarded, even though Section 34 does not expressly allow such revisions. Similarly, in “Numaligarh Refinery Ltd. v. Daelim Industrial”¹¹, the Supreme Court re-evaluated and molded reliefs from two competing awards, constructing an entirely new composite relief structure. These decisions show that courts, especially the Supreme Court, have exercised de facto modification powers either through inherent powers or by invoking Article 142 of the Constitution. The use of such powers, however, introduces doctrinal inconsistencies and blurs the line between appellate and supervisory functions.

The Doctrine of Severability and Partial Setting Aside

The doctrine of severability in layman terms, means that where it is possible to sever the good part from the bad part, the good part can always be enforced while the bad part may be struck out. The Arbitration Act also embraces the doctrine of severability, with: (a) Section 16(1)(a)¹² providing that “an arbitration clause which forms part of a contract shall be treated as an agreement independent of the other terms of the contract”; and (b) the proviso to Section 34(2)(iv) (“Subject Proviso”) providing that “if the decisions on matters 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”. Section 34(2)(a)(iv) allows courts to partially set aside an award when decisions on matters not referred to arbitration can be separated from those properly submitted. This provision, based on the severability doctrine, has been expanded in practice to address broader issues.

Courts have interpreted this doctrine to uphold valid parts of an award while nullifying flawed segments. In J.G. Engineers v. Union of India¹³, the Supreme Court validated severability in awards with multiple independent claims holding that “if an award deals with and decides several claims separately and distinctly, even if the court finds that the award in regard to some items is bad, the court will segregate the award on items which did not suffer from any infirmity and uphold the award to that extent”. The Bombay High Court in R.S. Jiwani v. Ircon International¹⁴ extended this logic, asserting that where different claims are unconnected, the court is not compelled to strike down the entire award. The Bombay High Court noted that: (a) the Arbitration Act does not contain any bar or prohibition on applying the principle of severability to arbitral awards; (b) rather, the Subject Proviso permits courts to set aside awards partially in cases falling under Section 34(2)(iv); (c) the Subject Proviso has to be read ejusdem generis to the entirety of Section 34; (d) if the principles of severability can be applied to a contract as well as a statute, there is no reason as to why it cannot be applied to a judgment or an arbitral award; and (e) since partial challenge to an award is permissible, partial setting aside of an award should be permissible as well. Accordingly, the Bombay High Court concluded that “section 34 of the Arbitration and Conciliation Act, 1996 takes within its ambit the power to set aside an award partly or wholly depending on the facts and circumstances of the given case”. The Bombay High Court also cautioned that “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”. The doctrine has thus served as a workaround in cases where statutory language prohibits modification but equity demands nuanced relief.

Judicial Divergence: Deciphering The Conflicting High Court Approaches And Power Of Courts In A Challenge To An Award

While the courts have reiterated and consistently upheld that the court hearing a Section 34 petition has limited scope of interference and is not empowered to modify the arbitral award or substitute its view against the view taken by the tribunal in the award under challenge, in several instances, the courts have also taken contrasting views to the extent of reading into the arbitral award and modifying it. The decision of the Supreme Court in Tata Hydro Electric Power Supply Company Limited. v. Union of India¹⁵ is a stark example of a case where the Supreme Court, even though it set aside the High Court’s order, however, it also modified a part of the arbitral award while upholding the award passed by the Arbitrator. The question was whether, the parties had raised a dispute as to whether a ‘Current Transformer’ was a ‘meter’ that was not ‘correct,’ for which any contest would lie before an Electrical Inspector under Section 26 (6) of the Indian Electricity Act, 1910, thereby rendering it non-arbitrable. The arbitrator ruled that C.T was not a meter and therefore, the dispute was arbitrable. The High Court ruled against contention of appellant and ruled that the C.T was an apparatus, therefore, the dispute was not-arbitrable hence, set aside the decision of the Arbitrator. The Supreme Court found that, “if there is no dispute as to whether the meter is defective or not, there is nothing which prevents the parties from referring their other disputes to arbitration for determining the liability of the consumer in such cases.” Here, since neither parties had contested that the C.T was defective before the Arbitral Tribunal and therefore, the bar of Section 26 did not apply, hence the decision of the High Court to set aside the award was wrong. However, in this process the court modified the award to grant lesser interest in damages. It may be presumed that in light of equity the court must have considered damage award for the charge incurred pending litigation would be excessive and thus, reduced in appeal. However, the court had noted no submissions to this effect in its judgement and why it seemed equitable to make such a modification. Thus, there was no explicit discussion on the power of Courts for modification of awards. Similarly, in Hindustan Zinc Limited v. Friends Coal Carbonisation¹⁶ the Hon’ble Supreme Court set aside the High Court's order and restored the trial court's judgment, which modified the award passed by the Arbitrator. The Supreme Court did not specifically address the issue of whether the Court has the power to modify the award. Still, it affixed a seal of approval on the decision of the trial court to modify the award.

Recently, the Supreme Court's decision in Gayatri Balaswamy v. ISG Novasoft Technologies Ltd¹⁷. addresses the issue, providing clarity on the extent to which courts can modify arbitral awards under the Arbitration and Conciliation Act, 1996. With a 4:1 majority, the Supreme Court of India has held that courts may, in certain circumscribed situations, modify arbitral awards notwithstanding the impediment under the 1996 Act. While the majority based its reasoning upon its plenary powers and restricted exercise under Section 34 by limiting modification to (i) instances of severability of the offending part of the arbitral award; (ii) rectification of computation, clerical or typographical errors; (iii) post-award interest recalibration, and (iv) for doing complete justice by invoking Article 142 of the Constitution; the decision unmistakably dilutes the principle of minimal judicial interference. Justice K.V. Viswanathan’s lone but powerful dissent serves as a timely doctrinal compass steering the discourse back to legislative intent and boundaries of plenary powers under Article 142 which is to be exercised only in the absence of enacted law such as the case in Vishaka v. St. of Rajasthan ¹⁸. The Apex Court has effectively converted a narrow curative provision into a de facto post-award review thereby expanding the tribunal’s jurisdiction to record further evidence after it has become functus officio. The expansion of judicial power to modify awards raises grave concerns. The settled position post Hakeem was clear: Courts could only set aside awards under Section 34; they cannot rewrite, revise, vary or selectively enforce them.

The Act mandates limited judicial interference, a deliberate legislative omission which signifies prohibition given the UNCITRAL model law framework that is resonated in our statute. The metaphor of a sculptor delicately chiselling the award, employed by the majority cannot dilute the fact that judicial hands were never meant to wield that chisel in the first place. Post Gayatri Balaswamy, India seated arbitrations will become less attractive in light of enforcement issues as post-award interest can now be modified by Courts as the trajectory of litigation will shift against orders modifying post-award interest component. Justice K.V. Viswanathan’s dissent assumes profound importance. His Lordship cautions against deploying Article 142 to modify post-award interest drawing a principled line between plenary constitutional power and legislative intent and also advocates for a remit under Section 34(4) instead of the courts modifying post-award interest. Interestingly, even the dissenting opinion recognizes that computation, clerical, and typographical errors may be judicially corrected but only if warranted by the principle of actus curiae neminem gravabit. Justice Viswanathan’s dissent may well serve as a jurisprudential north star, yet, his view on modification of computation, clerical or typographical errors by courts raises an academic but vital question: if correction of computation, clerical, and typographical errors can be achieved under Section 33, what necessitates judicial modification at all? Even in a case where upon an application under Section 33(1)(a), the Arbitral Tribunal has been obstinate in not correcting such errors the proper course for the Section 34 court is to remit the matter under Section 34(4) or to eventually set aside the award. Justice Viswanathan is critical of the majority's framework as being excessively expansive and says that it brings uncertainty and complexity to arbitration proceedings. By permitting changes such as severance or adjustment of interest, the majority stands a chance to protract disputes since parties can request long-term judicial interventions, as opposed to arbitration's intent to provide speedy resolution. He further remarks that the majority's reference to worldwide practices (e.g., Singapore and UK) is misplaced since those jurisdictions have clear statutory provisions for change, as opposed to the Act. His philosophy promotes simplicity and clarity in the judicial responsibilities, advocating a straightforward application of Section 34 either to enforce or to set aside awards without the quagmire of procedure of modification.

Conclusion

At the heart of the modification debate lies a question of balance between respecting the autonomy of arbitration and preserving the judiciary’s role in upholding justice. Modification, when narrowly tailored to correct minor yet impactful flaws, prevents unnecessary re-arbitration and upholds the principles of equity and expediency. The debate over a court’s power to modify an award is now over. The Gayatri Balaswamy majority, while attempting to strike a balance between arbitral finality and procedural fairness, has inadvertently opened a Pandora’s box. The judgment subtly but unmistakably shifts the axis of arbitral jurisprudence from party autonomy to judicial discretion from legislative clarity to constitutional override. This decision makes a sensitive compromise between two significant objectives. On the one hand, it upholds the notion that an arbitration should be final and binding. On the other hand, it also acknowledges that occasionally there could be minor but serious errors in an award which must be corrected by the court. The Court explained that although the setting aside of an award is the primary remedy provided in the law, courts also possess a limited and exceptional jurisdiction to alter an award particularly where the problem is evident and distinct from the remainder of the ruling. Most of the judges believed that if a court has the bigger power to set aside an award, it must also possess the lesser power to amend it partially, rather than rejecting the whole award. This makes the system more pragmatic and prevents unnecessary delays and additional disputes. The Court further observed that other nations permit modest variations in arbitral awards, and India cannot lag behind international standards. The ruling also makes a critical observation regarding fairness. Where a mistake in the award inflicts unfair prejudice upon a party, the court needs to have power to grant relief. Although arbitration needs to be free from excessive court intervention, justice cannot be sacrificed. The majority opinion favors this balance, and this will enhance trust in arbitration. But the dissenting judgment of Justice Viswanathan cautioned against conferring too much authority on courts to modify arbitral awards. He contended that this might prolong the arbitration process and make India a less desirable destination for arbitration. Any such authority, in his opinion, should come from Parliament and not from judges. The majority’s view helps correct clear and limited mistakes, while the dissent reminds us to be careful and not weaken the finality of arbitration. Together, they surely give a full picture of how Indian arbitration law is growing and adapting!