THE AUTHOR:
Ammad Manzur, Advocate of the High Courts of Pakistan
Introduction
Under the Arbitration and Conciliation Act, 1996 (the “Act”), parties to an Indian-seated arbitration may have recourse against an arbitral award pursuant to the grounds provided in Section 34 thereof. The Viswanathan Expert Committee (the “Committee”), which had recently been tasked by the Indian government with reviewing the country’s arbitration regime, accurately described the appropriate role of courts under Section 34 as being restricted to having only a ‘second look’ at the arbitral award.
However, recent caselaw and proposed amendments to Section 34 of the Act appear to expand the judicial review power of arbitral awards. This post will explore how the ongoing shift towards fundamentally altering this power poses a risk to the enforcement regime of arbitral awards in India.
Judicial Review as Framed under the Act
A stated objective of the Act is to implement the Model Law (the “ML”), which has been developed with the intention of ensuring a harmonized implementation of the New York Convention 1958 (the “NYC”).
This is obvious on a reading of the Act’s preamble, which refers to the ML in four of its five clauses. It comes as little surprise, then, that Section 34 of the Act largely mirrors the equivalent (and identically numbered) provision of the ML.
More importantly, the only recourse available under Section 34 is to set aside the award, on grounds that largely mirror those provided under Article 34 of the ML.
Patent Illegality – A Distinct and Limited Ground
The only additional ground not present in the ML is the power of courts to set aside awards which suffer from ‘patent illegality appearing on the face of the award’ (hereafter, “patent illegality”). This is provided in Section 34 (2A), which, as the provision suggests, was inserted following an amendment to the Act in 2015 (the “2015 Amendment”).
As detailed in the Law Commission’s report, which preceded the 2015 Amendment, Section 34 (2A) had been proposed for creating a distinct ground on which awards may be set aside. This was necessary because, earlier in Oil & Natural Gas Corporation Limited v Saw Pipes, the Supreme Court had held that patent illegality was subsumed within the public policy ground. Thus, arbitral awards could potentially be set aside or refused recognition under Sections 34 (2) (b) (ii) and 48 (2) (b) of the Act, respectively. This was an unacceptable state of affairs because setting aside and non-recognition of arbitral awards on such a basis was neither contemplated under the ML nor the NYC.
As a result, the Law Commission proposed reframing patent illegality as a standalone ground, limited in its application to purely domestic arbitrations. Thus, Section 34 (2A) expressly excludes from its scope of application ‘international commercial arbitrations’, namely, Indian-seated arbitrations with a foreign nexus (hereafter, “ICA”). Notably, Article 1(3) of the ML also limits its scope of application to ICA alone.
Thus, even with patent illegality present, the Indian regime on the enforcement of awards remains compliant with the NYC and ML.
Proposed Legislative Change and Judicial Ingress
As noted above, there has been a conscious effort to ensure that the Indian arbitration regime on the enforcement of arbitral awards remains compliant with international best practices, with the legislature intervening to course-correct where necessary.
However, there now appears to be a steady move towards expanding the judicial review power under Section 34 of the Act, in a manner which is inconsistent with the ML on which the provision is based.
Proposed Legislative Change – A Reckless Undoing
The Indian Government has recently introduced a draft Arbitration and Conciliation (Amendment) Bill, 2024 (the “Bill”) that has a stated objective of reducing court intervention.
Oddly, however, the Bill proposes to expand the power of judicial review by deleting the reference to ‘international commercial arbitrations’ found in Section 34 (2A) of the Act. This is significant because this precise carve-out had deliberately been employed in the 2015 Amendment to ensure compliance with the ML regime.
What is even more perplexing is that the Committee, which had been tasked with recommending changes to the Act where necessary, made no proposal to extend the patent illegality ground to ICA. In fact, the Committee stressed in its report that it was necessary to minimize court intervention within the strict confines of Section 34 of the Act. Thus, it is surprising that the Bill, which was presented in light of the Committee’s recommendations, proposes an amendment that goes against their very spirit. Significantly, no reasons for this crucial departure have been provided in the Bill.
If the Bill’s proposed change to Section 34(2A) is adopted, it would undo a carefully drafted amendment specifically enacted to mitigate the potentially damaging effects of an earlier Supreme Court judgment.
Judicial Ingress – Reading in Additional Powers
In Gayatri Balasamy v. ISG Novasoft, a five-member bench of the Supreme Court, by a majority of 4:1, has recently held that, other than the express power to set aside awards, courts also have the power to modify awards under Section 34 of the Act.
The Majority Judgment
The majority placed considerable emphasis on the power of courts to partially set aside awards, as stipulated in Section 34 (2) (iv) of the Act.
Under this provision, courts are permitted to partially set aside awards that deal with issues falling outside the parties’ arbitration agreement. However, this power may only be exercised in a situation where the award on matters within the arbitration agreement’s purview is separable from those which are not (hereafter, “severable awards”).
Based on the above power to partially set aside severable awards, the majority held that a limited power to modify such awards is also implied under Section 34. However, such power may only be exercised within the contours of the said provision (as opposed to an appellate power proper).
Thus, while admitting that the power to modify is not contemplated under the ML, on which Section 34 is based, the majority held that such a relief can nevertheless ‘be fashioned’ within the said provision.
The Dissent
Justice Viswanathan, on the other hand, issued a detailed and instructive dissenting opinion calling into question the power to modify awards under Section 34 of the Act. While it was accepted that courts have the power to partially set aside severable awards under Section 34, the argument that a supposed lesser power of modification is subsumed within it was rejected.
Viswanathan J stressed that the powers to set aside and modify awards are qualitatively different from each other and not of the same genus. This interpretation appears to be in line with the ML, which, despite containing a similar provision on partial setting aside of severable awards under Article 34 (2) (a) (iii), is widely accepted as not containing a modification power. Such power is specifically added to the statute, as conceded by the majority, while referring to the arbitration laws of other jurisdictions.
The main thrust of the dissenting opinion is that the power to modify awards is not contemplated under Section 34 of the Act. Instead, the recourse provided in the said provision — prefaced with the ‘shackle “only if”’ — is limited to setting aside of awards alone, on the grounds stipulated therein. In the presence of such plain restrictive language, there is no room for reading in an additional modifying power. Perhaps in the strictest terms possible, Viswanathan J held that doing so would amount to a ‘virtual mutilation’ of the fabric of Section 34.
Unheeded Recommendations
The move towards encouraging court intervention at the most critical enforcement stage has been made possible because the Committee’s recommendations, aimed at making India a major player in the global arbitration sector, have fallen on deaf ears.
For instance, the Committee had expressly noted the controversy surrounding the issue of award modification in its report and referenced competing judgments on the subject at length. To settle the issue, the Committee recommended that a limited power to modify severable awards — to be exercised ‘only in exceptional circumstances to meet the ends of justice’ — be introduced in Section 34.
The Committee’s recommended amendment to Section 34 lends credence to Viswanathan J’s dissenting opinion, which he also made reference to. It is obvious from the recommendation to include an express modification provision in Section 34 that such power is not akin to setting aside an award, and, thus, cannot be subsumed therein. More importantly, the Committee’s recommendation to subject award modification to preconditions makes it clear that it is the legislature which is the correct forum for developing such criteria — not the ‘sculptor’ judge, as alluded to in the majority judgment.
Unfortunately, this recommendation was ignored and the controversy surrounding modification of awards was ‘well left’ — to use a cricketing metaphor — in the Bill. If the Committee’s recommendation on this divisive issue had been implemented, the Supreme Court might have exercised judicial restraint.
Not to mention the increased appetite to examine the underlying merits of arbitral awards, particularly with the Bill’s proposed extension of the patent illegality ground to ICA — in yet another crucial Committee recommendation for minimal court intervention, which was overlooked.
Conclusion
The finality of the arbitral award is a core feature of the arbitration process, and any move to allow judicial intervention at the enforcement stage must be carefully considered by the appropriate forum. Therefore, it is hoped that the legislature will debate all aspects concerning Section 34 of the Act when considering the Bill’s proposal for reform. To ensure that India’s arbitration regime complies with international best practices, the scope of judicial review should be limited to a second look at the award, rather than second-guessing it.
ABOUT THE AUTHOR
Ammad Manzur is an Advocate of the High Courts of Pakistan, with a wide-ranging experience in both contentious and non-contentious commercial law. He has a keen interest in international arbitration and has represented clients in cross-border disputes before international arbitral tribunals as well as in associated litigation before courts. His qualifications include an LL.M in International Commercial Law from the Brunel University London.
*The views and opinions expressed by authors are theirs and do not necessarily reflect those of their organizations, employers, or Daily Jus, Jus Mundi, or Jus Connect.
