High Courts do not have the power to modify an Arbitral Award u/s 34 and 37 of the Arbitration Act, 1996: Supreme Court

In a landmark judgement, a Supreme Court (hereinafter "SC") bench consisting of Justice S. Ravindra Bhat and Justice Dipankar Datta, has held that the High Courts do not have the power to modify an award while considering an application u/s 34 or 37 of the Arbitration and Conciliation Act, 1996 (hereinafter the "1996 Act"). The court gave this judgement in the case of M/s Larsen Air Conditioning & Refrigration Company v. The Union of India (2023).

Brief Facts of the Case:

The dispute arose out of a contract between the parties concerning the award of a tender recieved by Larsen Air Conditioning (hereinafter "The Appellant"). While the discharging of responsibilities under the contract, certain disputes arose between the parties which the Union of India (hereinafter "The Respondent") referred to Arbitration. The Arbitral Tribunal concluded its proceeding on 24.10.1998 and on 21.01.1999, gave an Award (hereinafter "Award") in favor of the Appellants thereby awarding the respondents therein to pay 18% pendente lite interest and future compound interest on the award for Claim Nos. 1 to 8 of the Appellants.

This award was challenged by the Respondent u/s 34 of the 1996 Act, before the Kanpur District Court which dismissed it observing that it could not sit in appeal over the award and the Respondent had failed to file any proof of the grounds alleged as well. Hence, the Respondent preferred an appeal before the High Court of Allahabad (hereinafter "HC") in the year 2003. 

The HC disapproved of the reasoning in the award on Claim No. 6 holding that the sum of Rs. 3 Lakhs awarded towards compensation for loss caused due to non-issue of tender document in-turn paralysing of the business of the Appellant could not have been granted. The HC held that the proceedings (in the present case) were under the Arbitration Act of 1940 (hereinafter "Old Act") hence, the rate of interest granted should not have been 18%. It cited the SC's judgements in K. Marappan v. Superintending Engineer TBPHLC Circle Anantapur [(2019) 5 SCR 152], M/s Raveechee & Co. v. Union of India [(2018) 5 SCR 138] and Ambica Construction v. Union of India [(2017) 14 SCC 323] while deciding the issue of interest. The HC reduced the interest rate from 18% (originally awarded by the Arbitrator) to 9% per annum. It held that there was no scope of intereference with the award on other grounds.

Aggreived by this judgement of the HC, the Appellants preferred the present appeal before the Supreme Court.

The Supreme Court's Observations and Judgement:

The Supreme Court took note of the following points;

1. Section 31(7)(b) of the 1996 Act was amended in 2016, w.e.f. from 23.10.2015. The pre-amended provision empowered the abitrator to award both, pre-award and post-award interest and specified that the awarded sum would carry an interest of 18% per annum, unless provided otherwise, from the date of award till the date of payment.

2. Hence, in the present case; the arbitration had commenced in 1997, which was after the 1996 Act came into effect hence it would be subject to the same. Since, in the pre-amended section 31(7), the statutory rate of interest was itself contemplated at 18% per annum, the HC could not have interefered with the finding of the arbitrator.

3. The SC held, "..Unlike in the case of the Old Act, the court is powerless to modify the award and can only set aside partially, or wholly, an award, finding that the conditions set out in the Section 34 of the 1996 Act have been met. The scope of interference by the Court is, is well defined and delienated."

4. The SC relied on the following cases to arrive at these observations; Shahi v. State of U.P. & Ors. [(2019) 11 SCR 640], Associate Builders v. Delhi Development Authority [(2014) 13 SCR 895], Ssangyong Engineering Construction Co. Ltd. v. National Highways Authority of India [(2019) 7 SCR 522] and Delhi Airport Metro Express Pvt. Ltd. v . Delhi Metro Rail Corporation Ltd. [(2021) 5 SCR 984].

5. The SC further clarified that the limited and extremely restricted jurisdiction of the court u/s 34 of the 1996 Act permits the court to interfere with the award, sans the grounds of patent illegality, i.e., that the illegality must go to the root of the matter and should not just be of a trivial nature and that "..the tribunal "must decide in accordance with the terms of the contract, but if an arbitrator construes a term of the contract in a reasonable manner, it will not mean that the award can be set aside on this ground." The other ground would be denial of natural justice."

6. Section 37 of the 1996 Act grants a narrower still scope to the appellate court to review the findings in an award, if it has been upheld, or substantially upheld u/s 34.

7. The Old Act empowered courts to modify an arbitral award however, the power has been omitted by the Parliament on purpose while enacting the 1996 Act, meaning that the Parliamentary intent was to exclude power to modify an award, in any manner, to the courts.

Conclusion:

This is a welcome judgement delivered by the SC which upholds the inherent powers of an Arbitral Tribunal and its Autonomy while also upholding the Parliamentary intent of Section 5 of the 1996 Act of limiting the judicial intervention in the Arbitral Process.