The Supreme Court by way of a landmark judgment in Gayatri Balasamy v. ISG Novasoft Technologies Limited, dealt with the issue of whether courts have the power to modify an arbitral award under Sections 34 and 37 of the Arbitration and Conciliation Act, 1996 (“Arbitration Act“). The 5 (five) judge bench of the Court in a 4:1 majority led by CJI Sanjiv Khanna ruled that courts have limited powers to modify an arbitral award under Section 34 and 37 of the Arbitration Act.
Background
Section 34 of the Arbitration Act allows the parties in an arbitration to approach the Court to set aside an arbitral award. The Court may set aside such an award only in specific circumstances when a party making an application furnishes proof that: (i) a party was under some incapacity; (ii) the arbitration agreement was legally invalid; (iii) the party filing the Section 34 application was not given proper notice of the appointment of an arbitration or of the arbitral proceedings; (iv) the arbitral award dealt with a dispute not falling within the terms of the submission to arbitration or contains decision on matters beyond the scope of submission to arbitration; (v) the composition of the arbitral tribunal or the arbitral procedure was not in accordance with the arbitration agreement. The Court may also set aside an arbitral award in case (i) it is found that the subject matter of the dispute is not capable of settlement by arbitration; or (ii) such an arbitral award is found to be in contravention with the public policy of India.
Under Section 37 of the Arbitration Act, Courts are authorised to hear an appeal against an order relating to setting aside of an arbitral award under Section 34 of the Arbitration Act.
Indian Courts have taken divergent views on whether courts have the power to modify an arbitral award. In decisions such as McDermott International Inc. v. Burn Standard Co. Ltd.1, Project Director, NHAI v. M Hakeen2, and Sangyoung Construction Ltd. V. NHAI3, the Courts have held that its power under Section 34 and Section 37 of the Arbitration Act are limited to setting aside awards on narrowly defined grounds. In contrast, cases like Vedanta Limited v. Shenzden Shandong Nuclear Power Construction Company Limited4, Oriental Structual Engineers Pvt. Ltd. v. State of Kerala5, and Tata Hydroelectric Power Supply Co. Ltd. v. Union of India6, reflect a more flexible approach where modified awards were either upheld or granted. In view of the conflicting judicial opinion, it became necessary for a larger bench of the Supreme Court of India to authoritatively clarify the legal position on the power of the judiciary to modify arbitral awards.
Facts of the Case
Gayatri Balasamy was the Vice President at ISG Novasoft Technologies Limited (“ISG“). Balasamy lodged a criminal complaint against ISG’s CEO and Vice-President. In turn, ISG filed criminal complaints of defamation and extortion against Balasamy. Eventually the Supreme Court referred the parties to arbitration wherein the arbitral tribunal awarded Balasamy Rs. 2,00,00,000/- (Rupees Two Crores) as compensation.
Balasamy approached the Madras High Court seeking to set aside the arbitral award on the ground that the tribunal had failed to consider several of her claims. On September 2, 2014, a single-judge bench of the High Court, rather than setting aside the award, modified it by awarding her an additional compensation of Rs. 1,60,00,000/- (Rupees One Crores Sixty Lakhs) over and above the Rs. 2,00,00,000/- (Rupees Two Crores) already granted by the arbitral tribunal. This adjudication was further altered by a Division Bench of the High Court on August 8, 2019, which agreed with the single judge’s decision to grant additional compensation but found the quantum excessive and lacking any clear arithmetic basis. Terming the additional amount “excessive and onerous”, the Division Bench reduced it from Rs. 1,60,00,000/- (Rupees One Crores Sixty Lakhs) to Rs. 50,000/- (Rupees Fifty Thousand). Appealing such reduction, Balasamy filed a Special Leave Petition before the Supreme Court.
The Court dealt with the following 2 issues:
- Whether a Court’s power to set aside an arbitral award under Section 34 and Section 37 of the Arbitration Act includes the power to modify an award?
- If the Courts have the power to modify an arbitral award, to what extent can it be exercised?
- Whether Courts have the power to sever an arbitral award and if so, under what circumstances is an arbitral award severable?
Court’s Analysis and Findings
The Supreme Court, in this judgment, reaffirmed the limited role of courts under the Arbitration Act. Emphasizing Section 5 of the Arbitration Act, the Court held that judicial interference in arbitral proceedings is permissible only in circumstances explicitly provided for in Part I of the Act. Under Section 34(1), an arbitral award can be challenged only through an application for setting aside, and only on the specific grounds enumerated under Section 34(2) and 34(3). These include lack of party capacity, invalid arbitration agreements, procedural irregularities, or violations of public policy, patent illegality among others.
A key clarification made by the Court concerned the severability of arbitral awards. It held that Courts have the authority to set aside only the invalid portion of an award—provided that portion is clearly separable from the valid part. This interpretation, the Court said, is both practical and legally sound. However, where the invalid and valid parts of an award are intertwined, courts must deal with the award as a whole and cannot set it aside partially.
The Court drew a nuanced distinction between the power to set aside an arbitral award and the limited ability to modify or vary it under Section 34 of the Arbitration Act. It held that while Section 34 primarily contemplates the setting aside of awards, the inherent power to sever invalid portions necessarily implies a limited authority to modify the award and that to deny this power to Courts would frustrate the objectives of the Arbitration Act, especially in the Indian context where challenges under Section 34 and subsequent appeals often drag on for years. Thus, a Section 34 court may subject to separability modify or sever an award to uphold its valid portions without overstepping its limited supervisory jurisdiction.
The Court also clarified the distinction between modifying an award and exercising other related powers. While a court under Section 34 can set aside an award or remit it under Section 34(4) for limited correction, and an arbitrator can make corrections under Section 33, courts do not have the power to modify the substance of an award. The only exception to this rule relates to correcting typographical or clerical errors—changes that do not alter the essence of the award.
The Court further held that its remedial powers under Section 34(4) are discretionary and limited to facilitating corrections in the arbitral award. Such remedial powers are meant to preserve the award and must be exercised cautiously only when such defects are clearly remediable.
In the context of rate of interest, the Court took a more nuanced view. It held that while interest awarded in violation of contractual terms could be set aside or remanded for reconsideration, Courts also had the power to intervene in matters of post-award interest under Section 31(7)(b) of the Arbitration Act. Given that post-award interest is contingent on future events, Courts may reduce or increase the rate of interest if warranted by subsequent conduct, such as delay or obstruction in enforcing the award.
Previously, in cases for instance Sangyoung Construction Ltd. v. NHAI, the Supreme Court set aside the majority arbitral award and upheld the minority award citing its powers under Article 142 of the Constitution of India On this subject, the Supreme Court in the present case held that while Article 142 can be relied on to bring an end to prolonged litigation, it cannot be used to rewrite or modify arbitral awards on merits. This power must be used with restraint and only when necessary to achieve complete justice.
In a detailed dissent, Justice Viswanathan disagreed with the majority on the question of modification. He reiterated that courts under Section 34 do not have the power to modify an arbitral award or the rate of interest and stated that modification and severance are distinct—while severing an invalid portion of an award is permitted, rewriting or substituting terms is not. He aligned with the Court’s earlier decision in Project Director, NHAI v. M Hakeen, which categorically held that modification of arbitral awards lies outside the jurisdiction of Section 34 courts, except for correcting minor computational or typographical mistakes.
Conclusion
This judgment marks an important milestone in clarifying the scope of judicial intervention under Section 34 of the Arbitration Act. By firmly distinguishing between setting aside, severing, and modifying arbitral awards, the Court has put to rest the long-standing ambiguities and reaffirmed the principle of minimal interference – preserving the finality and integrity of arbitral awards, while allowing limited corrections in specific circumstances.
1 2006 (11) SCC 181
2 AIR 2021 SUPREME COURT 3471
3 AIR 2019 SUPREME COURT 5041
4 AIR 2018 SUPREME COURT 4773
5 AIR 2021 SUPREME COURT 2031
6 AIR 2003 SUPREME COURT 1581
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