Project Director, NHAI v M Hakeem: Analysis on Supreme Court's power to modify Arbitral Award
A Supreme Court Bench, comprised of Justice RF Nariman and Justice BR Gavai, delivered a watershed judgment, in the case of Project Director, NHAI v. M Hakeem, on the scope of the power granted to the Court while hearing a challenge to an arbitral award under Section 34 of the Arbitration and Conciliation Act, 1996 (hereinafter “Arbitration Act”).
The present appeal before the apex court comes from a decision of a division bench of the Madras High Court which laid down as a matter of law that arbitral awards, insofar as they are made under the National Highways Act, 1956, can be modified to enhance compensation awarded by the arbitrator under the power granted to the courts in Section 34 of the Arbitration Act. The merits of the case are concerned with certain notifications issued under the National Highways Act, 1956 which consists of awards made by the Special District Revenue Officer. The dispute arose as a result of the awards being based on the ‘guideline value’ of the lands, sought to be acquired and not on the basis of sale deeds of similar lands, which resulted in the compensation for such lands being ‘abysmally’ low. The arbitrator, being an appointee of the government, affirmed this award in spite of the sub-par compensation awarded. The District and Sessions Judge while hearing the challenge under Section 34 to the award increased the compensation awarded, hence modifying the award. The Madras HC reaffirmed this decision and therefore, this decision was subsequently appealed before the Supreme Court by the National Highway Authorities.
Issue: Whether the Court has the power to modify the arbitral award under Section 34 of the Arbitration Act?
Parties Submissions: The counsel for the appellants argued that, unlike the power granted to an appellate court under the Land Acquisition Act, the power under Section 34 of the Arbitration Act is limited to either “setting aside the award” or “remit the award”. Furthermore, they contended that the object of the NHA was so that a speedy procedure was provided by which a challenge to the arbitrator’s award is then made only under Section 34 of the Arbitration Act, which, as has been held by several decisions of the apex court, is not a challenge on the merits of the award. The appellants referred to the Arbitration Act, 1940 and argued that there was an explicit power under Section 15 to the court to remit/modify an award, however, the Arbitration Act, 1996, being based on the UNCITRAL Model Law on International Commercial Arbitration, 1985, has specifically restricted the grounds of challenge and the consequent remedy, which is only to set aside or remit in limited circumstances.
The respondents, on the other hand, contended that if Section 34 was to be construed in the manner suggested by the appellants, then for a very grievous wrong there would be no remedy as all that the District Judge could then do in Section 34 jurisdiction is to set aside the award, resulting in a fresh arbitration before either the same bureaucrat or another bureaucrat appointed by the Central Government in these cases. It was further contended that the Madras HC had rightly followed the decision in the case of Gayatri Balaswamy v. ISG Novasoft Technologies Ltd., which had drawn a distinction between consensual arbitration and an arbitrator appointed by the Central Government, who would merely be giving his approval to the compensation awarded by yet another Government servant. It also contended that merely setting aside the present award and instituting a fresh arbitration, as suggested by the opposing counsel, will not accrue much benefit as such fresh arbitration will also be before a similar bureaucrat who is appointed by the Central Government.
Court’s findings: The Supreme Court, with regards to the aforementioned issue, found that Section 34 of the Arbitration Act only provided for limited grounds on which the arbitral award could be set aside under sub-sections (2) and (3) of Section 34. The court highlighted that this provision is in fact modeled on the UNCITRAL Model Law and that the legislative policy for the same is to preserve the principle of minimum interference of the courts in the arbitral process. The court also noted several judgments such as SsangYong Engg & Construction Co. v. NHAI and Renusagar Co. Ltd. v. General Electric Co. which held that a challenge under Section 34 did not mean that there would be challenge on the merits of the dispute.
In this regard, the Court also cited itself in the earlier case of McDermott International Inc. v. Burn Standard Co.wherein it had held, “The 1996 Act makes provision for the supervisory role of courts, for the review of the arbitral award only to ensure fairness. Intervention of the court is envisaged in few circumstances only, like, in case of fraud or bias by the arbitrators, violation of natural justice, etc. The court cannot correct errors of the arbitrators.” It also highlighted a recent case of the SC which in following the McDermott case had held that Section 34 did not include a power to modify an arbitral award. The judgement also refers to the decision of the Delhi HC in the case of Cybernetics Network Pvt. Ltd. v. Bisquare Technologies Pvt. Ltd. wherein the court held that the power of the court under Section 34 is not akin to that of the powers of an appellate court and hence, it could not deal with claims which have been already dealt with by the arbitral tribunal. If it did so, the court would be acting contrary to the statutory scheme of Section 34.
Drawing a reference to the Gayathri Balaswamy case, which had been cited by the respondents, the court held that in that judgment the cases relied on were such that the modification of the award was in the exercise of the powers under Article 142 of the Constitution. Therefore, the court opined that it was erroneous to read this judicial trend into the wording of Section 34 of the Arbitration as a power to modify, revise and change awards. This would be inconsistent with the plethora of judgments as well as the scheme of the Arbitration Act, which sought to limit judicial interference.
Interestingly, to substantiate the aforementioned findings, the court in the present case stated, “in interpreting a statutory provision, a Judge must put himself in the shoes of Parliament and then ask whether Parliament intended this result. Parliament very clearly intended that no power of modification of an award exists in Section 34 of the Arbitration Act, 1996. It is only for Parliament to amend the aforesaid provision in the light of the experience of the courts in the working of the Arbitration Act, 1996, and bring it in line with other legislations the world over.” Therefore, through this extensive analysis of the provision of Section 34, the Court settled the law that Section 34 could not be interpreted to include a power to the court to modify the arbitral award.
Conclusion: The decision of the court in the present case helps solve the inconsistencies in previous judgments of various courts and settle the law on the scope of powers granted to courts under Section 34 of the Arbitration Act. This is a welcome decision as it strengthens the pro-arbitration rhetoric of the court in recent judgments by limiting the judicial interference in the arbitral process. However, in spite of the court’s decision on the law, the appeal was dismissed on the merits of the case. The court refused to exercise its jurisdiction under Article 136 in favor of the appellants, with respect to the facts of the case. The rationale for the same is that it would be unfair that the awards be sent back to an arbitrator who is also appointed by the Central Government on a non-consensual basis so that he can merely render the same award again, without ensuring any real remedy to the respondents. Therefore, the Court dismissed the appeal on the facts of the case but overturned the position of the HC with respect to the law laid down regarding Section 34.
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