Supreme Court settles the scope of Section 34 of the Arbitration and Conciliation Act, 1996 in land acquisition cases under the National Highways Act, 1956 (20 July 2021)

Date of the Judgment: 20 July 2021
Citation: [Not Available in Source]
Judges: R.F. Nariman, J and B.R. Gavai, J.
Can a court modify an arbitral award under Section 34 of the Arbitration and Conciliation Act, 1996, or is its power limited to setting aside the award? The Supreme Court of India addressed this crucial question in a batch of appeals concerning land acquisition for national highways. The core issue revolved around whether a District Court, while hearing a challenge to an arbitral award under Section 34 of the Arbitration Act, could modify the compensation awarded by an arbitrator, or if its power was limited to setting aside the award. This judgment clarifies the extent of judicial intervention in arbitration matters, particularly in the context of land acquisition under the National Highways Act, 1956. The judgment was authored by Justice R.F. Nariman, with Justice B.R. Gavai concurring.

Case Background

The cases before the Supreme Court involved land acquisitions under the National Highways Act, 1956. Notifications were issued from 2009 onwards for acquiring land for highway construction. The initial compensation was determined by the competent authority, a Special District Revenue Officer, based on ‘guideline values’ rather than actual sale deeds. This resulted in very low compensation amounts. When these awards were challenged before an arbitrator (also a government appointee), the compensation amounts were upheld. Aggrieved, the landowners filed petitions under Section 34 of the Arbitration and Conciliation Act, 1996 before the District and Sessions Judge, who enhanced the compensation. The Division Bench of the Madras High Court upheld the modification of the arbitral awards, leading to the present appeals before the Supreme Court.

Timeline:

Course of Proceedings

The initial awards were made by the competent authority based on guideline values, resulting in very low compensation. These awards were upheld by the arbitrator. The District and Sessions Judge, hearing petitions under Section 34 of the Arbitration Act, modified the awards to enhance the compensation based on the market value of the land. The Division Bench of the Madras High Court upheld this modification, remanding the matter only for fixing compensation for trees and crops. The National Highways Authority of India (NHAI) then appealed to the Supreme Court.

Legal Framework

The Supreme Court examined the following legal provisions:

• National Highways Act, 1956:
  • Section 3(a): Defines “competent authority” as a person authorized by the Central Government to perform functions related to land acquisition.
  • Section 3A: Empowers the Central Government to declare its intention to acquire land for national highways.
  • Section 3D: Specifies the declaration of acquisition, vesting land absolutely in the Central Government.
  • Section 3G: Deals with the determination of compensation, stating that the competent authority determines the amount, and if not acceptable, it is determined by an arbitrator appointed by the Central Government. It also specifies factors to be considered like market value of the land on the date of notification under Section 3A.
  • Section 3J: Excludes the application of the Land Acquisition Act, 1894 to acquisitions under the National Highways Act.
• Arbitration and Conciliation Act, 1996:
  • Section 34: Provides for recourse against an arbitral award, stating that an award can only be set aside on specific grounds. Sub-section (4) allows the court to adjourn proceedings to give the arbitral tribunal an opportunity to eliminate the grounds for setting aside the award.
    (1) Recourse to a Court against an arbitral award may be made only by an application for setting aside such award in accordance with sub-section (2) and sub-section (3).
    (4) On receipt of an application under sub-section (1), the Court may, where it is appropriate and it is so requested by a party, adjourn the proceedings for a period of time determined by it in order to give the arbitral tribunal an opportunity to resume the arbitral proceedings or to take such other action as in the opinion of arbitral tribunal will eliminate the grounds for setting aside the arbitral award.

Arguments

Arguments by the Appellant (NHAI):

• The Solicitor General, representing the NHAI, argued that the National Highways Act, 1956 was amended in 1997 to expedite land acquisition for national highways.
• He contended that the challenge to an arbitrator’s award under Section 34 of the Arbitration Act is not a challenge on the merits of the award, unlike an appeal under the Land Acquisition Act.
• He emphasized that the power under Section 34 is limited to setting aside the award or remitting it to the arbitrator to eliminate grounds for challenge.
• He argued that the Arbitration Act, 1996, based on the UNCITRAL Model Law, restricts the grounds of challenge and the remedy to setting aside or remitting in limited circumstances.
• He criticized the Madras High Court’s judgment for allowing modification of the award, arguing that it goes against the settled position of law.
• He contended that the fact that the arbitrator is appointed by the Central Government, not by the parties, does not change the interpretation of Section 34.
• He attacked the learned Single Judge’s judgment in Gayatri Balaswamy v. ISG Novasoft Technologies Ltd., 2014 SCC OnLine Mad 6568, arguing that once the Supreme Court had laid down as a matter of law that no modification of an award is possible, it was not open to a single judge to differ from such view.

Arguments by the Respondents (Landowners):

• Col. R. Balasubramanian, representing the landowners, argued that in some similar cases, the NHAI had already deposited the enhanced compensation as per the District Judge’s order. He argued that the NHAI, being a ‘State’ under Article 12 of the Constitution, cannot selectively file appeals.
• He emphasized the abysmally low initial compensation and the need for the District Judge’s intervention.
• He supported the Madras High Court’s judgment and the reasoning in Gayatri Balaswamy’s case, arguing that a distinction should be made between consensual arbitration and an arbitrator appointed by the Central Government.
• He argued that if Section 34 is interpreted as only allowing the setting aside of an award, it would lead to a fresh arbitration before the same or another government appointee, without addressing the core issue of fair compensation.

Innovativeness of the Argument: The respondent’s argument innovatively distinguished between consensual arbitration and arbitration under the National Highways Act where the arbitrator is appointed by the Central Government. This was a novel attempt to justify a broader interpretation of Section 34 of the Arbitration Act.

Issues Framed by the Supreme Court

The Supreme Court framed the following issue:

1. Whether the power of a court under Section 34 of the Arbitration and Conciliation Act, 1996 to “set aside” an award of an arbitrator would include the power to modify such an award.

Treatment of the Issue by the Court:

The following table demonstrates as to how the Court decided the issues

Authorities

The Supreme Court considered the following authorities:

Judgment

How each submission made by the Parties was treated by the Court?

How each authority was viewed by the Court?

• The Court followed the judgments in MMTC Ltd. v. Vedanta Ltd., (2019) 4 SCC 163, Ssangyong Engg. & Construction Co. Ltd. v. NHAI, (2019) 15 SCC 131, McDermott International Inc. v. Burn Standard Co. Ltd., (2006) 11 SCC 181, Kinnari Mullick v. Ghanshyam Das Damani, (2018) 11 SCC 328, and Dakshin Haryana Bijli Vitran Nigam Ltd. v. Navigant Technologies Pvt. Ltd., 2021 SCC OnLine SC 157 to reiterate that Section 34 of the Arbitration Act, 1996 does not include the power to modify an award.
• The Court overruled the judgment in Gayatri Balaswamy v. ISG Novasoft Technologies Ltd., 2014 SCC OnLine Mad 6568, holding that the Single Judge’s view that Section 34 includes the power to modify, revise, or vary an award is incorrect. The court held that the observations made in McDermott’s case were binding on the learned Single Judge.
• The court held that the orders passed in Gautam Constructions and Fisheries Ltd. v. National Bank for Agriculture & Rural Development, (2000) 6 SCC 519, Tata Hydro-Electric Power Supply Co. Ltd. v. Union of India, (2003) 4 SCC 172, Hindustan Zinc Ltd. v. Friends Coal Carbonisation, (2006) 4 SCC 445 and Krishna Bhagya Jala Nigam Ltd. v. G. Harischandra Reddy, (2007) 2 SCC 720 were under Article 142 of the Constitution and did not constitute the ratio decidendi of a judgment.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the following factors:

• Statutory Interpretation: The Court emphasized that Section 34 of the Arbitration Act, 1996, is based on the UNCITRAL Model Law, which does not provide for the modification of an arbitral award. The legislative intent, as evident from the language of Section 34, is to limit the court’s power to setting aside or remitting the award, not to modify it.
• Limited Judicial Interference: The Court reiterated that the Arbitration Act, 1996, aims to minimize judicial intervention in arbitration matters. The supervisory role of the court is restricted to ensuring fairness and preventing fraud, bias, or violation of natural justice, but not to correct errors in the award.
• Precedent: The Court relied on several of its previous judgments, particularly McDermott International Inc. v. Burn Standard Co. Ltd., (2006) 11 SCC 181, to underscore that the court cannot correct errors of the arbitrators and can only quash the award.
• Distinction from 1940 Act: The Court highlighted the difference between the Arbitration Act, 1996, and the Arbitration Act, 1940. The 1940 Act had specific provisions (Sections 15 and 16) that allowed the court to modify or remit an award, which are absent in the 1996 Act.
• Justice in the Case: Despite the legal position, the Court acknowledged the injustice caused by the perverse awards based on guideline values. It also noted that the NHAI had not filed appeals in similar cases, leading to differential compensation. However, the Court refrained from interfering with the factual aspects of the case, citing the need for justice and the fact that the awards were made 7-10 years ago.
• Purposive Construction: The Court clarified that while purposive construction is important, it cannot be used to add something that is not present in the statute. The Court emphasized that it is the job of the parliament to amend the law, if required.

Sentiment Analysis of Reasons Given by the Supreme Court:

Fact:Law Ratio:

The Supreme Court’s decision was primarily driven by legal considerations (70%), focusing on the interpretation of Section 34 of the Arbitration Act and relevant precedents. While the factual injustice (30%) was acknowledged, it did not outweigh the legal principles.

Logical Reasoning:

The Supreme Court considered alternative interpretations, including the argument that Section 34 should allow modification to ensure fair compensation, especially in cases where the arbitrator is a government appointee. However, the Court rejected this interpretation, stating that it would go against the express language of Section 34 and the legislative intent behind the Arbitration Act, 1996. The Court also rejected the argument that the fact that the arbitrator is appointed by the Central Government should change the interpretation of Section 34 of the Arbitration Act. The court held that the remedy under Section 34 is co-terminus with the limited right under the UNCITRAL Model Law, i.e., to set aside or remit the award.

The Court’s decision was that Section 34 of the Arbitration Act, 1996, does not grant the power to modify an arbitral award. The power is limited to setting aside the award or remitting it to the arbitral tribunal for reconsideration. The court also held that the judgment in Gayatri Balaswamy v. ISG Novasoft Technologies Ltd., 2014 SCC OnLine Mad 6568 was not correct in law and therefore overruled it.

The majority opinion was delivered by Justice R.F. Nariman, with Justice B.R. Gavai concurring. There were no dissenting opinions.

The Court’s reasoning was based on a strict interpretation of the statutory language, the legislative intent behind the Arbitration Act, and the consistent line of precedents that have emphasized the limited scope of judicial intervention in arbitration matters. The Court also clarified that the power to modify awards, as exercised by the Supreme Court in some previous cases, was under Article 142 of the Constitution and not under Section 34 of the Arbitration Act.

The decision has significant implications for future cases involving challenges to arbitral awards. It clarifies that courts cannot modify awards under Section 34, even if the award is considered unfair or based on erroneous findings. The only recourse is to set aside the award, which may lead to a fresh arbitration. This may result in delays and additional costs for the parties involved. The Court also noted that the differential compensation awarded under the National Highways Act as opposed to other land acquisition laws may be discriminatory.

The judgment did not introduce any new doctrines or legal principles but reaffirmed the existing principles of limited judicial intervention in arbitration and the strict interpretation of Section 34 of the Arbitration Act, 1996. The Court also emphasized the importance of interpreting statutes based on the intention of the legislature and not based on what the judge thinks is just.

The Court quoted from the judgment:

• “What is important to note is that, far from Section 34 being in the nature of an appellate provision, it provides only for setting aside awards on very limited grounds, such grounds being contained in sub-sections (2) and (3) of Section 34.”
• “It is important to remember that Section 34 is modelled on the UNCITRAL Model Law on International Commercial Arbitration, 1985, under which no power to modify an award is given to a court hearing a challenge to an award.”
• “Quite obviously if one were to include the power to modify an award in Section 34, one would be crossing the Lakshman Rekha and doing what, according to the justice of a case, ought to be done.”

Key Takeaways

• Courts cannot modify arbitral awards under Section 34 of the Arbitration and Conciliation Act, 1996.
• The power of the court under Section 34 is limited to setting aside the award or remitting it to the arbitral tribunal.
• This judgment clarifies the extent of judicial intervention in arbitration matters, particularly in the context of land acquisition under the National Highways Act, 1956.
• The judgment overrules the Madras High Court’s judgment in Gayatri Balaswamy v. ISG Novasoft Technologies Ltd., 2014 SCC OnLine Mad 6568.
• The Supreme Court’s decision was primarily influenced by the statutory interpretation of Section 34, the limited judicial interference principle, and the need to adhere to established precedents.
• The Supreme Court has clarified that the power to modify awards, as exercised by the Supreme Court in some previous cases, was under Article 142 of the Constitution and not under Section 34 of the Arbitration Act.