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09 January 2024

Supreme Court Affirms Limits on Court's Authority to Modify Arbitral Awards

In a recent ruling, the Supreme Court clarified the limitations on a court's power to modify an arbitral award under Section 34 of the Arbitration and Conciliation Act, 1996. The decision came in response to an appeal challenging the Karnataka High Court's judgement under Section 37(1) of the Arbitration and Conciliation Act, 1996 (A&C Act). The two-Judge Bench, comprising Justice Abhay S. Oka and Justice Sanjay Karol, emphasized the court's lack of jurisdiction to modify an arbitral award, citing the precedent set in National Highways Authority of India v. M. Hakeem (2021) 9 SCC 1.

The court highlighted the importance of upholding the arbitrator's decision, deeming it a plausible view that should not be substituted by the court. Advocate Anil Kaushik represented the appellant, while AAG Avishkar Singhvi represented the respondent in this case.

The dispute originated from a contract secured by the appellant with the Karnataka State Public Works Department in 1990. The contract involved the construction of the office and residence of the Chief Conservator of Forests at Sirsi for Rs. 14.86 lakhs. The agreement stipulated the handover of the construction site to the claimant/appellant, with a completion deadline of May 6, 1992, excluding the monsoon season. However, the claimant faced delays attributed to the State authorities' alleged failure to clear bills and other disruptions, leading the parties to resort to arbitration.

Before the arbitrator, the claimant filed a claim amounting to Rs. 18,06,439/-. While the arbitrator found the respondents liable, the Senior Civil Judge modified the arbitral award, reducing the awarded amount. The appellant challenged the High Court's confirmation of this modification under Section 34 of the Arbitration and Conciliation Act, 1996.

Upon hearing the arguments, the Supreme Court criticized the lower court's deviation from the statutory text and its unauthorized re-appreciation of the evidence. It emphasized the restricted nature of the court's power under Sections 34 and 37, denoting legislative intent to limit interference with arbitral awards. The court noted the absence of any specific grounds under Section 34 justifying the court's intervention.

The court criticized the lower court's characterization of the award as perverse and contrary to public policy, highlighting the lack of supporting evidence on record for such a finding. Additionally, the court addressed the issue of cost escalation, deeming the 100% escalation between 1989-90 and 1992 as exaggerated. However, it also acknowledged the absence of justification for a lump sum escalation of 25% of the contract value, emphasizing the need to adhere to the agreed-upon terms and conditions.

On the matter of interest, the Supreme Court supported the arbitrator's decision to award interest at 18% p.a., reducing it to 9% by the lower courts without legal justification. Recognizing the commercial nature of the transaction, the court held that the claimant was entitled to interest at the rate determined by the arbitrator, covering the pre-arbitration, pendente lite, and future periods.

In its conclusion, the Supreme Court allowed the appeal, overturning the judgement of the Civil Judge, reinstating the original arbitral award, and directing the State to expedite the payment. The case, titled S.V. Samudram v. State of Karnataka & Anr. (Neutral Citation: 2024 INSC 17), saw appearances from advocates Abhishek Mishra, Shashi Sharma, Arunima Dwivedi for the appellant, and V. N. Raghupathy, Manendra Pal Gupta, and Vivek Kumar Singh for the respondents.

This judgement holds significance in the context of the Indian Council of Arbitration and the evolving landscape of international commercial law. Furthermore, it aligns with the recent developments in the Arbitration Act Amendment 2023. Legal experts and practitioners in the field of arbitration will find this latest Supreme Court judgement on arbitration as a guiding precedent, shedding light on the court's stance on the execution and modification of arbitral awards, particularly under Section 34 of the Arbitration Act.