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Anushka Rohilla is a 3rd-year law student at NLU Jodhpur
Introduction:
The intricacies of the court proceedings were aimed at being avoided through enactment of Arbitration and Conciliation Act 1996 [“the Act”] which tends to consolidate different methods of Alternate Dispute Resolution [“ADR”]: arbitration, mediation, conciliation and negotiation. Indian judiciary has made multiple attempts to raise the level of arbitration as the preferred method of dispute settlement for foreign as well as domestic businesses carrying out their operations in India. One such judgement was very recent – S.V. Samudram v. State of Karnataka & Anr.[“Samudram case”]wherein the division bench of the Supreme Court [“SC”] interpreted Sections 34 and 37 of the Act to limit the scope of intervention, disallowing modification of arbitral awards. But the Author today intends to delve deeper into the analysis of judgments to underscore how such strict drawing of a line between the jurisdictions of arbitration and litigation can go against the interests of the litigants. Thus, this piece would explore how a balance is required between the substantial analysis undertaken by arbitrators in passing the arbitral award and powers of the courts to uphold the independency of the arbitral tribunals while also giving due consideration to the interests of the litigants.
Factual Matrix:
A contract was entered into between Mr. S.V. Samudram [Petitioner] and Karnataka State Public Works Department [Respondent] for facilities’ construction of Rs. 14.86 lakhs, which was then to be handed over on 08.03.1990, with completion by 06.05.1992. However, such timely completion was prevented due to default of the PWD in clearance of bills, change of site, and late material delivery. Subsequently, the Petitioner claimed recovery of an amount of Rs. 18,06,439 with an annual interest of 18%, and the arbitral award provided him with the same on nine claims. This award was challenged by the Respondent under Section 34 of the Act and Civil Judge revised the award. The Petitioner’s application under Section 37(1) was dismissed by Karnataka High Court [“HC”]. The issue that thus arose before the SC was whether such modification was in consonance with settled principles of law?
Findings:
The SC in the Samudram caseobserved that the arbitral award was provided only after meticulous consideration of the evidence and a reasoned decision and hence, it criticized the lower court for re-evaluating and modifying the award. It condemned such an action to be extraneous, even scandalous as there were no traces of contravention of public policy by the said award. The court drew heavily upon the M. Hakeem case, stating that the lower court was in blatant disregard of the restrictions imposed by this decision under Section 34 r/w Section 37 of the Act, and hence, was wrong in engaging in independent assessment of the award’s merits. The Court also exercised its powers under Article 142 to ensure substantial justice by ordering interest to be paid at the rate specified in the award.
Analysis:
Section 34(2) of the Act was introduced to keep a check on arbitrators’ powers by providing a procedure to set aside the arbitral award so that they do not act beyond their authority. However, the legislative intent was never to undermine the power of the arbitral tribunal in any manner. This has been evident from this court’s stance that it is not empowered to reassess the evidence even if there has been an error on part of the arbitrator. This reflects that the scope of court’s interference has been intentionally limited to instances where there has been a gross disregard of the principles of natural justice in arbitral proceedings, and hence, a sense of finality has been attached to arbitral awards by providing for limited grounds to set aside an arbitral award in Section 34(2) of the Act.
An important precedent that comes to attention, and that has been relied upon by the Court in the decision under discussion today is – National Highway Authority of India v. M. Hakeem & Anr. [“M. Hakeem case”], wherein, it was clarified that power of the Court under Section 34 does not include authority to modify arbitral award but only to set it aside if challenged on the grounds mentioned in the Act. It thus highlighted the concept of “minimal judicial interference” meaning nothing more or less than the power to set aside an award, and one such ground of Section 34 is public policy.
An award in contravention of public policy, a term not defined in the Act, can be set aside. The interpretation of this term has been widened in the SC judgement of ONGC v. Saw Pipes such that only awards “patently illegal” i.e., awards with “error of law” were qualified for being set aside. Even though, this interpretation might seem to the reader as operating to include insertions in law which were not within the intentions of the Parliament, the Author believes that a proper understanding behind such ruling is required. Even though power of the arbitrator cannot be limited arbitrarily, if an error apparent on the face is overlooked by the court just because “error of law” has not been encompassed as an intentional ground of challenge under Section 34, gross injustice would prove to the person against whom such award operates. In such gross and apparent “errors of law”, the Author believes that courts should have discretion to utilise their powers under Article 142 of the Constitution to modify such awards as has been done in some cases to put a full stop on long overdue disputes.
The M. Hakeem caselaid down what can be called as a “Lakshman Rekha” for the Courts to not be crossed when dealing with challenges to arbitral awards and has simultaneously acknowledged that de novo proceedings operate against ADR methods. These two concepts might run contrary to each other as what M. Hakeemhad held and what Samudramhas upheld is that the courts are mere gatekeepers, who can either let the arbitral award be passed or order the issue to be restarted by setting them aside. Thus, when an award is set aside, the litigant must start the process of dispute resolution all over again which causes unnecessary delays and pendency of matters, while also going against substantial and complete justice encompassed in Article 142.
The Author believes that what these two judgments hold and establish might apply in cases where well-reasoned awards had been awarded by the tribunal and had only been modified by the Courts unnecessarily and only to establish their authority. But in cases where a blatant error, not absent to the naked eye of even a layman, has been committed by the arbitral award, such “Lakshman Rekha” has to be crossed by exercising the powers under Article 142 while also respecting the decisions of the tribunal. A proper balance is required between interpretations of Section 34 and 37 of the Act and the interests of the litigant who chosen methods of ADR. The limitations encompassed by these two precedents should come to function when courts attempt to modify an award without having a holistic view of the arbitral proceedings as it would then defeat the entire purpose of creation of an Act consolidating all forms of ADR.
Way Forward and Concluding Remarks:
A progressive precedent of 2023 which conceptualizes this stance of Author, before the Samudram case, is NHAI v. Trichy Thanjavur Expressway Ltd. [“Trichy Expressway”]which emphasized upon the concept of severability, allowing courts to sever a portion of the award and also not directly modify any specific finding, thus, not setting it aside in its entirety. Following this approach, the February 2024 cases of M/s NHPC Limited v M/s Jaiprakash Associates, OMP (ENF.) (Comm)and Gayatri Balasamy v M/s ISG Novasoft Technologies Limited [“Gayatri Balasamy”] have taken care of certain questions, while circling roundabout the debate pointed out.
What has to be searched for when answering whether Courts can modify an arbitral award, is the debate between undertaking strict interpretations of Section 34 and 37 of the Act as has been done in Samudramand M. Hakeem Case; and between an approach that seems unfair to the litigants who might have to face the brunt of mere procedural defects in the awards by going the starting line again. Such limited interference or discretion to modify awards would have to be operated either through creative interpretation, a task undertaken in Trichy Expressway, or a clear parliamentary amendment would have to be brought in. But whatever the path chosen maybe, the precedents of Trichy Expressway and Gayatri Balsamy on one hand, and M. Hakeem and Samudram on the other hand would undoubtedly have to be weighed against each other in dwelling upon the success of ADR in India.
