The Project Director NHAI v. M. Hakeem & Anr.: Supreme Court settles the scope of modifying an arbitral award

[The guest post is authored by Palak Vashishth, final year law student at University of Mumbai Law Academy]

Introduction

The statutory scheme under Section 34 of the Arbitration and Conciliation Act, 1996 (‘Arbitration Act’) provides for the only recourse against an arbitral award, that is, an application in court for setting aside of the award. The competent court may set it aside on very limited grounds provided vide sub-sections (2) and (3) of Section 34. It is modelled upon the Article 34 of the UNCITRAL Model Law on International Commercial Arbitration, 1985, which sparingly empowers a national court to annul whole, or part, of the award. Per contra, the Arbitration Act, 1940, granted the courts the authority to modify, correct or set aside an award in the circumstances mentioned in Sections 15 and 17 of the 1940 Act.

This express diversion was brought in force in view of the legislative intent to curtail the judicial interference in arbitral awards. Interestingly, the scheme of the 2015 Amendment to the Arbitration Act also furthers this intention by virtue of amendments made to Sections 8, 9, 11, 17 and 34 of the said Act; wherein scope of judicial interference now stands tailored. In furtherance of this, on July 20, 2021, the Apex Court in the Project Director NHAI v. M. Hakeem & Anr. held that “If one were to include the power to modify an award in Section 34, one would be crossing the Lakshman Rekha”. This article will discuss the factual conspectus and the ratio decidendi of this case, followed by the detailed analysis of the same leading to the conclusion.

Facts

The appeals in the case concerned the notifications from 2009 onwards under the National Highways Act (‘NH Act’). The Competent Authority (‘CA’) under the NH Act, determines the amount which is payable on the compulsory acquisition of land. In an event when the amount awarded by CA is not acceptable to either of the parties, the dissatisfied party may move an application under Section 3G (5) of the NH Act and the said amount will then be determined by the arbitrator appointed by the Central Government. On the contours of this backdrop, the CA in the present cases awarded the amounts based upon the ‘guideline values’ of the respective lands in question. The disputes arose over the quantum of these amounts and the arbitrator upheld the judgment of the CA. Resultantly, under Section 34 of the Arbitration Act, appeals were preferred by the aggrieved parties before the District and Sessions Judge, who enhanced the value of the amounts awarded. The NHAI challenged this under Section 37 before the Division Bench of Madras High Court. The court decided against the NHAI by upholding the modification of the award by the lower court and interpreted Section 34 in a manner that permitted the modification of the arbitral award. Therefore, the set of appeals before the Supreme Court (‘SC’) challenge the judgment of the Division of Bench of Madras High Court.

Ratio

The SC recounted its different judgments to buttress its finding that Section 34 is a truncated right and the remedies offered by it are also limited, namely, either to set aside the award or to remand the matter back to the arbitral tribunal. It affirmed that Section 34 is far from being an appellate provision and therefore, does not entail a review on the merits of the case. The Court also observed that a judge, while interpreting a statutory provision, must put himself/herself in the place of a legislature and then inquire about the intention of the legislature. In this case, the intent of the Parliament is explicit, that is, to ensure minimal judicial interference with the arbitral awards such that an efficacious and expeditious alternate remedy in the form of arbitration is available. Hence, to interpret it otherwise will be analogous to crossing the “Lakshman Rekha”. It is also significant to note that this interpretation of Section 34 is universally applicable to arbitration provided vide any statute in India and not just the NH Act.

Analysis

The question of law raised in this set of appeals appeared to have been settled in the 2006 SC case of McDermott International Inc. v. Burn Standard Co. Ltd. The SC clearly explained that the Arbitration Act only provides for supervisory role of the courts over the arbitral award, and any interference with the same is envisaged in a highly circumscribed manner, that is, only in cases of fraud, bias by the arbitrator, violation of natural justice etc.. The court cannot correct the errors of the arbitrator, it can only quash the award in such circumstances, leaving the parties free to begin with new arbitration if desired. However, this position of law was jeopardized by the 2014 judgment of the Apex Court in ONGC Ltd. v. Western Gecco International Ltd., wherein the SC rendered an expansive interpretation of ‘public policy of India’ under Section 34 of the Arbitration Act. This opened the floodgates of possibilities in which a court could interfere with the arbitral award. To do away with this interpretation, the 2015 Amendment of the Arbitration Act amended Section 34 and constricted the scope of ‘award in conflict with public policy of India’ to an award which is (i) induced by corruption or fraud, (ii) in contravention to the fundamental policy of Indian Law (iii) is in conflict with the most basic notions of morality and justice.

Later, the position of law as settled by the McDermott judgment and 2015 Amendment to the Act was settled by the SC in its 2019 decision of  Ssangyong Engg. & Construction Co. Ltd. v. NHAI. The SC held that court’s intervention with the merits of the case in the challenge to an arbitral award cannot be permitted because it does not entail the review on the merits of the case. It has been held that the Court cannot re-appreciate the evidence on record before the arbitrator and substitute the findings of arbitrator with that of its own. The court does not sit in appeal over an arbitral award.

Similar view as taken by the SC in Ssangyong has been reiterated in its most recent judgments Dakshin Haryana Bijli Vitran Nigam Ltd. v. M/s Navigant Technologies Pvt. Ltd., and PSA SICAL Terminals Pvt. Ltd. v. The Board of Trustees of V.O. Chidambrankar Port Trust Tuticorin and Ors.

But was this question truly settled through these earlier judgments? The answer to this question is an unequivocal ‘no’. Despite these prior commandments, the highest court never clarified as to ‘what amounted to modification of award’ by a court under Section 34, considering that this pointed answer was never sought for earlier. Leveraging this, several High Courts have tilted towards the inflated interpretation of the provision which encompasses the power to correct, vary or modify the findings of an arbitrator. The sheet anchor for respondents, in this case, was the judgment of the Single Judge of Madras High Court in Gayatri Balaswamy v. ISG Novasoft Technologies Ltd.

In Gayatri Balaswamy, the Madras High Court wrongly conjectured the SC’s tacit exercise of power vide Article 142 of the Constitution of India, which confers upon it the power to pass such order/decree for doing complete justice in any cause/matter, and confused it with the powers vested in the Court under Aection 34 of the Arbitration Act. This judgment contained an elaborate discussion of the law in different countries, namely USA, UK and other Commonwealth nations, that allow the modification of an arbitral award in certain circumstances. However, the Apex Court in M. Hakeem rightly exclaimed that it is only for the Parliament to amend the Arbitration Act in the light of the experience of the courts and bring it in line with other legislations in the world.

It is also pertinent to note that while overruling the judgment of the Madras High Court in Gayatri Balaswamy, the SC came across several of its past judgments where it had interfered with the arbitral award and had modified it. Namely, in Gautam Constructions and Fisheries Ltd. v. National Bank for Agriculture & Rural Development, Hindustan Zinc Ltd. v. Friends Coal Carbonisation and Krishna Bhagya Jala Nigam Ltd. v. G. Harischandra Reddy. The SC, in these cases, itself had intermeddled with the award and changed the figure of either the interest or the amount awarded by the arbitrator. In the guiding light of these judgments, the Madras High Court conjectured the judicial trend to favour an interpretation that would read the power to modify the award in Section 34. The SC in M. Hakeem, deconstructed this wrong notion and justified the actions of the SC in the light of Article 142. The Court noted:

“…the power used was the power to do complete justice between the parties, which is a power relatable to the Constitution vested only in the Supreme Court of India as a final court of last resort under Article 142 of the Constitution of India.”

This leads to another inevitable conclusion that Section 34, however strongly construed, shall always be subservient to Article 142. This Article is invoked by the SC in myriad situations and its contours have been deliberately left open and undefined by the SC to meet the needs of future exigencies. It is only to do complete justice that this power is exercised. Like in the present case also, the SC refused to give the ruling in favour of appellants because most of the arbitral awards under challenge were 7-10 years old and it would have been unfair upon the parties to order de novo arbitration before the very arbitrator or some other arbitrator unilaterally appointed by the Central Government.

Conclusion

This judgment of the Apex Court now settles the moot question as to ‘what amounts to modification of arbitral award?’ As stated in Redfern and Hunter,[1]“The purpose of challenging an award before a national court at the seat of arbitration is to have that court declare all, or part, of the award null and void.”

Therefore, a national court can set aside all or part (if severable) of the arbitral award and the resultant effect on the quantum of damages awarded by the arbitrator will be in alignment with the terms of Section 34. However, the court cannot replace the findings of the arbitrator with its own and give a novel dimension to the award. This is most certainly a welcome move and is appreciated for providing much needed impetus to the growth of the Indian arbitration regime. It is in concurrence with the intent of the legislature to reduce the judicial interference and promote a sense of security in business environment.


[1] Alan Redfern, Martin Hunter et. al., Redfern and Hunter on International Arbitration, (2015) 6th ed., at 570

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.