Can Arbitral Awards be Modified by the Courts?

Introduction

There have been inconsistent rulings on the long-standing question of whether courts can alter arbitral verdicts in the exercise of their authority under Sections 34 and 37 of the Arbitration and Conciliation Act, 1996 (henceforth referred to as the "ACA").

Section 34 Arbitration Act deals with the circumstances in which the court may exercise power to set aside, i.e., nullify an arbitral award, while Section 37 Arbitration Act lays down the grounds for filing an arbitration appeal process in India against orders relating to arbitration law India.

In a recent order dated 23.01.2025 in Gayatri Balaswamy v. M/s ISG Novasoft Technologies Limited¹ ("Novasoft"), a three-judge bench of the Supreme Court arbitration judgments consisting of Chief Justice of India Sanjiv Khanna and Justices Sanjay Kumar and KV Vishwanathan has referred this matter to a five-judge constitutional bench on arbitration.

Background

To give a brief background in this context, there are two major streams of opinions regarding court powers in arbitration cases to modify arbitral awards. The landmark judgment of Project Director, NHAI v. M Hakeem² case summary (hereinafter 'Hakeem') and certain following judgments form one stream that holds that courts are NOT empowered to modify an arbitral award under Sec. 34 or 37 of ACA.

In Hakeem, the question arose regarding court powers in arbitration cases to grant enhanced compensation by modifying the arbitral award under Section 34 Arbitration Act.

However, it was observed that:

• The nature of Section 34 is not appellate but merely lays down some grounds for setting aside an arbitral award.
• The legislative policy and intent behind enacting the Arbitration and Conciliation Act 1996 was to minimize judicial interference in arbitration.
• The provisions granting explicit powers of courts in arbitration cases to modify arbitral awards existed in the Arbitration Act, 1940, but were deliberately removed from the 1996 Act, indicating a legislative policy to restrict such powers.

Issues to be Heard by the Constitutional Bench in Novasoft

• Whether the ratio in Project Director, NHAI v. M Hakeem requires reconsideration—i.e., does the court have power to modify an arbitral award under Section 34 and 37 of ACA?
• What are the contours and scope of court powers under Section 34 and 37, and do they extend to modification of awards? If so, to what extent?
• If the power to modify the award is available, can it only be exercised where the award is severable and a part thereof can be modified?

Legislative Intervention

Recently, the issue has been addressed in the Report of the Expert Committee on Arbitration Law submitted to the Law Ministry on February 07, 2024. Interestingly, even if courts do not currently have the power to modify arbitral awards, the report envisions granting such powers within the ambit of setting aside an arbitral award under Section 34 of the Arbitration Act.

The legislative changes in the Arbitration and Conciliation Act 2024 recommended in the report suggest:

• Amendment to sub-sections (2) and (2A) of Section 34, replacing "set aside by the Court" with "set aside in whole or in part by the Court."
• Adding a proviso stating:

  "Provided that in cases where the Court sets aside the arbitral award in whole or in part, the Court may make consequential orders varying the award only in exceptional circumstances to meet the ends of justice."

This ensures that judicial non-interference in arbitration remains intact while allowing modifications in exceptional circumstances.

Concluding Remarks

Thus, modification of arbitral awards has moved from courtrooms to the parliament, making it largely a question of legislative policy. However, it will be interesting to see judicial interpretation of the law as it exists today. What remains to be seen is how the constitutional bench on arbitration navigates the direct conflict between a cursory review permissible under Section 34 and a detailed review and reframing required for modifying an arbitral award.

Ref - ¹SLP (C) No. 15336-15337/2021, ²Civil Appeal 192/2025

March 2, 2025