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As per section 37 of the Arbitration and Conciliation Act, 1996 (“Act”) an appeal shall lie from the orders (and from no others) as listed under the provision, one of which is order setting aside or refusing to set aside an arbitral award under section 34 of the Act. As per sub-clause (3) to section 37, “[n]o second appeal shall lie from an order passed in appeal under this section, but nothing in this section shall affect or take away any right to appeal to the Supreme Court.” The rights provided under section 37, being in the nature of appeal, unlike rights under section 34 of the Act, being in the nature of challenge to the award on the limited grounds provided thereunder, give rise to a natural question that what is the scope of interference under each of these sections – what is the difference in terms of degree, if any – and what are the limitations. In other words, does the scope of interference provided under section 37 of the Act, in any manner, wider than the scope of interference permitted/stipulated under section 34 of the Act? In order to understand the same, the article first dives into the meaning of ‘appeal’.

WHAT IS AN APPEAL

The provision for first appeal arising out of a decree in a civil suit has been provided under Code of Civil Procedure, 1908 (“CPC”). There is, however, no formal definition of an “appeal” under the CPC 1908. As per Section 96(1) of CPC, an aggrieved party can file an appeal to a superior court against a decision of a subordinate court either on a question of fact or a question of law or a question involving a mix of both fact and law. In an appeal, the appellate court may reverse or modify the impugned order or dismiss the appeal. Section 100 (1) allows the filing of second appeals in the High Court if it is satisfied that the case involves a “Substantial Question of Law”. A test for whether a substantial question of law is involved in a case was given by the Supreme Court of India in Chunilal Mehta and Sons Ltd. V. Century Spg. & Mfg. Company, wherein it was held that it is ‘substantial question of law’ when matter is of general importance (that it has a far-reaching effect in the justice administration of the state) or it directly and substantially affects the rights of parties and if so.

CHALLENGE UNDER SECTION 34 OF THE ACT

While decree in a civil suit is appealable under section 96 or under the specific statutory provisions, an arbitral award cannot be appealed against but can be challenged on the basis of limited grounds provided under section 34 of the Act. It has been held that while considering a petition under Section 34 of the Act, it is well-settled that the court does not act as an appellate forum. In The Project Director, National Highways No.45 E and 220 National Highways Authority Of India v. M. Hakeem & Anr. SLP (Civil) No.13020 of 2020] decided on July 20, 2021, it was laid down that given the limited judicial interference on extremely limited grounds not dealing with the merits of an award, the ‘limited remedy’ under Section 34 is coterminus with the ‘limited right’, namely, either to set aside an award or remand the matter under the circumstances mentioned in Section 34 of the Arbitration Act, 1996. This is unlike the jurisdiction in case of a regular appeal. In the same case it was further made clear that unlike the provision under Arbitration Acts of England, the United States, Canada, Australia and Singapore and also under erstwhile Indian legislation, the Arbitration Act, 1940, where there have been express provisions which permit the varying of an award, there is no such provision under Section 34 of the present Act and therefore, an arbitral award cannot be modified under section 34 of the Act.

The Supreme Court in the matter of Mcdermott International Inc. v. Burn Standard co. Ltd., (2006) 11 SCC 181 concluded in unequivocal terms that it is quite obvious if one were to include the power to modify an award in Section 34, “one would be crossing the “Lakshman Rekha”. Parliament very clearly intended that no power of modification of an award exists in Section 34 of the Arbitration Act, 1996 and 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.

APPEAL UNDER SECTION 37 OF THE ACT

A decision made under Section 34 of the Act is appealable under section 37 of the Act. However, an appeal under section 37 of the Arbitration and Conciliation Act is different from regular first appeal from a decree in a civil suit. In the case of Punjab State Civil Supplies Corporation Ltd & A v. M/s Ramesh Kumar and Company & Ors Civil Appeal No 6832 of 2021, it was held that “[t]he jurisdiction in a first appeal arising out of a decree in a civil suit is distinct from the jurisdiction of the High Court under Section 37 of the 1996 Act arising from the disposal of a petition challenging an arbitral award under Section 34 of the 1996 Act.”

In the case of Punjab State Civil Supplies Corporation Ltd & A, the sole arbitrator rejected the claims of the first and second respondents and upheld the action of the appellants of forfeiting the security deposit. When Section 34 application was also rejected by the District Court, the decision by the District Court was challenged before the High Court under section 37 of the Act. The High Court, while erroneously exercising the jurisdiction under section 37 of the Act, not only set aside the judgment of the District Judge rejecting the petition under Section 34 of the Act, but also awarded the claim of the respondents, together with interest. The Supreme Court, while hearing the SLP in the matter sharply disapproved of the unwarranted interference by the High Court with the arbitral award while exercising its jurisdiction under section 37 of the Act. It was held that “While considering a petition under Section 34 of the 1996 Act, it is well-settled that the court does not act as an appellate forum. The grounds on which interference with an arbitral award is contemplated are structured by the provisions of Section 34. The District Judge had correctly come to the conclusion that there was no warrant for interference with the arbitral award under Section 34. The High Court seems to have proceeded as if it was exercising jurisdiction in a regular first appeal from a decree in a civil suit. The jurisdiction in a first appeal arising out of a decree in a civil suit is distinct from the jurisdiction of the High Court under Section 37 of the 1996 Act arising from the disposal of a petition challenging an arbitral award under Section 34 of the 1996 Act.” The Court further went on to explain the scope of section 37 while holding that “the High Court was required to determine as to whether the District Judge had acted contrary to the provisions of Section 34 of the 1996 Act in rejecting the challenge to the arbitral award. Apart from its failure to do so, the High Court went one step further while reversing the judgment of the District Judge in decreeing the claim in its entirety. This exercise was clearly impermissible. The arbitrator was entitled to draw relevant findings of fact on the basis of the evidence which was adduced by the parties. This was exactly what was done in the arbitral award. The award of the arbitrator was challenged unsuccessfully by the respondents under Section 34 of the 1996 Act. In this backdrop, there was no basis in law for the High Court to interfere with the judgment of the District Judge and, as we have noted earlier, to even go a step further by decreeing the claim.”

The scope of section 37, therefore, has also been well defined by the Apex Court.

SCOPE OF SECTION 37 VIS-À-VIS SECTION 34

It is settled law that a Section 34 proceeding does not contain any challenge on the merits of the award. It was decided in MMTC Ltd. v. Vedanta Ltd. (2019) 4 SCC 163 that interference under Section 37 cannot travel beyond the restrictions laid down under Section 34. It is therefore that the court cannot undertake an independent assessment of the merits of the award under section 37, and must only ascertain that the exercise of power by the court under Section 34 has not exceeded the scope of the provision. It was further stated that the above principle is to be followed more strictly in cases where arbitral award has been confirmed by the court under Section 34 and by the court in an appeal under Section 37. In such cases, the Supreme Court must be extremely cautious and slow to disturb such concurrent findings.

SECTION 34(4) AND RIGHT OF MODIFICATION OF AWARD

As per section 34(4) of the Act when an application for setting aside arbitral award is moved, the Court may, where it is appropriate and it is so requested by a party, adjourn the proceedings for a period of time 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. In the matter of Union of India v. Modern Laminators 2008 (3) Arb LR 489 (Del) it was held that the parties ought to be left to the forum of their choice i.e. to be relegated under Section 34(4) of the Act to further arbitration or other civil remedies if the courts were to find that they are unable to modify within the confines of interference permissible or on the material before the arbitrator and if the same would include further fact finding or adjudication of intricate questions of law.

Under Section 34(2) of the Act, the Court is empowered to set aside an arbitral award on the grounds specified therein. The remand to the Arbitrator under Section 34(4) is to a limited extent of requiring the Arbitral Tribunal “to eliminate the grounds for setting aside the arbitral award”. There is no specific power granted to the Court to itself allow the claims originally made before the Arbitral Tribunal where it finds the Arbitral Tribunal erred in rejecting such claims. If such a power is recognised as falling within the ambit of Section 34(4) of the Act, then the Court will be acting no different from an appellate court which would be contrary to the legislative intent behind Section 34 of the Act.

In Mcdermott International Inc. v. Burn Standard co. Ltd., (2006) 11 SCC 181, it was held that the Act makes provisions for 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. It can only quash the award leaving the parties free to begin the arbitration again if it is desired. Hence, in an application taken out under section 34 of the Act, the Court can set aside the award leaving the parties free to begin the arbitration again if it is desired.

RECENT JUDGMENTS

Following the law as interpreted and laid down by the Apex Court, the Delhi High Court most recently in the matter of Municipal Corporation of Delhi v. Sweka Powertech Engineers Pvt. Ltd., 2023 SCC OnLine Del 833, held that no grounds for interference under Section 37 of the Act were made out and the challenge to the findings of the Arbitrator are essentially based on the re-appreciation of evidence, which is beyond the scope of Section 37 of the Act.

In the case of Municipal Corporation of Delhi v. Mr Narinder Kumar FAO (COMM) 20/2023 & CM APPL. 2925-2928/2023 decided 20^th January, 2023 has most clearly laid down the reasoning for non-interference at the stage of appeal under section 37 of the Act by drawing a corollary from the provisions of Section 34 of the Act and Section 37 of the Act. According to the Court, “what is not permissible to be gone into by the adjudicating Court below under a petition under the provisions of Section 34 of the Act can certainly not be permitted to be adjudicated upon by the appellate Court under the provisions of Section 37 of the Act.” This in turn was derived from the fact that the position across all the legislations is same and the scope of interference by an appellate Court is statutorily very limited and restricted from that which is provided in the Court of first instance below.  

In the matter of Reliance Infrastructure Ltd. v. State Of Goa CIVIL APPEAL NO. 3615 OF 2023 decided on May 10, 2023 a part of the impugned judgment and order which modified the award under section 37 of the Act was set aside and the award in question was restored in its entirety.

It was held that “the High Court has substituted its own view and has reinterpreted the documentary evidence before it for setting aside the award. Such a substitution of view is not permissible for the Court under Section 34 of Act. There arises no question of it being permissible under Section 37 of the Act.” The Court further declined to uphold the reduction of rate of interest by the High Court. As per Section 31(7)(b) of the Act unless the award otherwise directs, the sum payable under the arbitral award shall carry interest at the rate of 2% higher than the current rate of interest prevalent on the date of the award, from the date of the award to the date of payment and the expression “current rate of interest” has been explained in the Explanation to the said section to have the same meaning as assigned under Section 2(b) of the Interest Act, 1978. The Court was of the opinion that the reliance of the High Court on the decision in Vedanta Ltd. v. Shenzhen Shandong Nuclear Power Construction Co. Ltd (2019) 11 SCC 465 to hold that a Court may reduce interest awarded by the Arbitrator was incorrect. The Court held that they do not find any basis in the impugned judgment of the High Court for reducing the rate of interest, as in the case of Vedanta Ltd., the Court was dealing with an International Commercial Arbitration involving rupee as well as euro components. Moreover, in the case of Vedanta Ltd., the reasoning was that the interest can be reduced when such interest does not reflect the prevailing economic condition or where it is not found reasonable or where it promotes interest of justice whichis not application in the case before the Court. The rate of interest was reduced in the case of Vedanta Ltd. in respect of the foreign currency component to bring the interest rate in line with the international rate on the ground that the rate of interest prevailing on the rupee debt in India and on international currency abroad were different and the international rates were lower.

In the most recent case namely, M/s Larsen Air Conditioning And Refrigration Company v. Union of India & Ors. [CIVIL APPEAL NO(S). 3798 OF 2023 decided on AUGUST 11, 2023], it has been laid in unwavering terms yet again that “the limited and extremely circumscribed jurisdiction of the court under Section 34 of the Act, permits the court to interfere with an award, sans the grounds of patent illegality, i.e., that “illegality must go to the root of the matter and cannot be of a trivial nature”; …The other ground would be denial of natural justice. In appeal, Section 37 of the Act grants narrower scope to the appellate court to review the findings in an award, if it has been upheld, or substantially upheld under Section 34 of the Act.” The Court, accordingly, set aside the award to the extent of modification of rate of interest for past, pendente lite and future interest. The rate of interest awarded by the arbitrator was reinstated.

EXCEPTIONAL POWER UNDER ARTICLE 142 TO MODIFY THE ARBITRAL AWARD

There are also a number of judgments of Supreme Court in which awards have been modified. These are, however, done under the powers of this Court under Article 142 of the Constitution of India. In Tata Hydro-Electric Power Supply Co. Ltd. v. Union of India, (2003) 4 SCC 172, for example, the Supreme Court while exercising its power under Article 142  of the Constitution modified the award qua interest, granting interest at the same rate but with reference to a different period from that stated in the award.

It can therefore be safely concluded that the limitation on interference by the court which is clearly laid down under section 5 of the Act has been applied uniformly and consistently i.e. in letter and in spirit. Whether it is section 34 or section 37 of the Act, the arbitral award can only be either set aside for parties to start a fresh proceeding where the time spent in the previous proceedings shall be exempted. The Courts, under section 34 or section 37 of the Act, can alternatively, remit the award back to the Arbitral Tribunal for removing the grounds because of which the award may be set aside. The scope of interference is narrow under section 34 and it is even narrower under section 37 of the Act.