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Court's power to modify arbitral awards: A cure worse than the disease

Arbitration users worry over poor-quality awards and prolonged litigation; some propose allowing courts to modify awards, but this raises concerns over finality and judicial overreach Dheeraj Nair Anjali Anchayil For some time now, arbitration users in India have voiced grave concerns over the poor quality of adjudication and awards. Parties often go through elaborate arbitration proceedings only to receive a poorly written award which invites lengthy litigation in courts. They run the risk of the award being set to naught at any stage of this litigation process. In this context, some have proposed a solution in the form of permitting modification of awards by courts. Last week, a five-judge Bench of the Supreme Court of India gave a definitive view on this issue through its decision in Gayatri Balaswamy v. ISG Novasoft Technologies Limited. A 4:1 majority of the Supreme Court, led by Chief Justice of India Sanjiv Khanna, held that courts can modify arbitral awards in limited circumstances. This power can be exercised where the award can be severed into valid and invalid portions; or to correct clerical, typographical or computational errors on the face of the record; or to modify post-award interest. In addition, the Supreme Court can modify awards in exercise of its powers under Article 142 of the Constitution of India to do complete justice. The plain language of Section 34 of the Arbitration and Conciliation Act, 1996, permits courts to only confirm an arbitral award or set it aside. However, this is far from ideal, since where an arbitral award is set aside, parties are back to square one and must restart arbitration proceedings. While parties may seek a remand back to the arbitral tribunal, this remedy cannot be used to correct substantive errors in the arbitral award. The judgment recognises this problem and attempts to provide a solution to parties instead of sending them back to restart arbitration proceedings. Yet, the ambiguous language of the judgment leaves room for clever manoeuvring and thereby inflicts a cure worse than the disease it seeks to remedy. What does the judgment mean for arbitration users? The judgment permits courts to modify an arbitral award by severing invalid portions of the award from the rest of the award. However, it is unclear whether what is being permitted here is merely setting aside the invalid portions — as opposed to any other modification. This lack of clarity in the judgment may allow clever litigants to seek substantive modifications of the invalid portions of an award, which would certainly complicate and prolong court proceedings. Courts may also interpret the judgment as permitting modifications of this nature and may not restrict themselves to simply pruning away the invalid portions of an award. While the Supreme Court has cautioned the courts against a merits-based review of arbitral awards, any modification of an award would invariably involve some assessment of the merits. In such cases, there are no specific guardrails on the power to modify arbitral awards. The judgment also permits courts to modify an arbitral award to rectify computational, clerical or typographical errors and 'other manifest errors'. While the former is uncontroversial, there is little clarity on what is captured under 'other manifest errors'. This may provide a backdoor entry for parties to seek substantive modifications to awards in the garb of correcting such errors. Further, by providing for modification of post-award interest, the Supreme Court has inadvertently created a perverse incentive for parties to prolong court litigation over arbitral awards in the hope of securing a reduction in post-award interest. In India, due to court delays, post-award interest can often exceed the value of the claims themselves. Lastly, by expressly providing for the exercise of power under Article 142 to modify arbitral awards, the Supreme Court has opened the door for every party dissatisfied with an arbitral award to try their luck before it. This will create incredible uncertainty over the fate of arbitral awards in India. In this context, one may recall how the Supreme Court's exercise of its extraordinary curative jurisdiction to set aside the arbitral award in favour of Delhi Airport Metro Express Private Limited became the subject of criticism from many quarters. If awards are easily susceptible to modification, then it will erode the finality of arbitration and thereby undermine confidence in arbitration as a dispute resolution mechanism. It is worth remembering that in a robust arbitration system, the role of courts is to facilitate and support arbitration and not interfere with the decision-making capacity of arbitral tribunals. In any case, a broad power to modify arbitral awards ought to be based on explicit legislative provisions. Thus, unless the Supreme Court quickly provides necessary clarity, it seems inevitable that the judgment will lead to increased judicial intervention in arbitral awards — which Indian courts have been attempting to consciously avoid. Impact on ease of doing business While most businesses in India are all too familiar with the unpredictability of court litigation in India, this judgment will add a layer of further complications and concerns. It may become the proverbial straw that finally breaks the camel's back. Indian parties may now actively choose to have their arbitrations in other jurisdictions to avoid the complications created by this judgment. If so, at a time when India is competing with other well-established jurisdictions such as Singapore or the United Kingdom to have disputes arbitrated in India, this judgment may push parties in the other direction. Dheeraj Nair and Anjali Anchayil are partners at JSA Advocates & Solicitors. Dheeraj is co-chair of JSA's disputes practice.