Modification, Merits, and Mayhem: Can Indian Arbitration Regain Coherence? (Part I)

Introduction

Indian courts have grappled with the permissible extent of intervention, leading to inconsistent approaches, particularly on issues of setting aside, modification, and remittal of awards within S. 34 of the Arbitration and Conciliation Act 1996 (“the Act”). The scope of setting aside and modifying arbitral awards remained unsettled, until the Supreme Court (“SC”) in Gayatri Balasamy v ISG Novasoft Technologies Limited (2025) (“Gayatri Balaswamy”), took the first step towards allowing variance by courts in such matters.

The jurisprudence started consolidating in The Project Director National Highways v  M. Hakeem (2021), but courts nonetheless continued to modify awards on different footings of interest, specific performance and damages leading to incoherent interpretations of challenge under the Act. The present two-part piece examines this incoherent jurisprudence surrounding partially setting aside, modification and remittal of arbitral awards. In Part I, the authors trace the unsettled jurisprudence on modification and setting aside, highlighting inconsistencies in judicial reasoning. Thereafter, Part II of the article examines the power to partially set aside, key policy implications in modification, statutory alternatives, and offers a critical analysis of the Gayatri Balaswamy judgment against the backdrop of India’s unsettled arbitral framework. Furthermore, it also critiques the recommendations of the T.S. Vishwanathan Report (2024) evaluating their effectiveness in advancing India’s aspiration to become a ‘hub of international commercial arbitration.’

1. The Current Legal Regime

The appealability of arbitral awards attempts to balance the tension between finality and due process in arbitration. It evaluates concerns over the extent to which judicial review should be permitted in a process designed to minimise court intervention. In doing so, successful challenges result in two outcomes, modification or setting aside.

In this regard Indian arbitration law currently does not provide statutory recognition for the modification of awards. Courts were limited to either setting aside an award under S.34 of the Act or enforcing it under S.36. On one hand, setting aside is concerned with determining whether an award is fundamentally vitiated due to violations of procedure, public policy or natural justice and thereby restarts arbitration. On the other hand, modification entails amending the award itself without reopening arbitration proceedings.

2. Impact of the Judgment and Gaps in Existing Literature

The judgment has generated considerable debate. One strand of opinion contends that the constitutional bench ought to have adhered to the “hands-off” approach where courts are precluded from modifying arbitral awards at all. (here, here and here).The Supreme Court itself has vigorously endorsed this approach in recent years, as seen in The Project Director National Highways v  M. Hakeem (2021). Conversely, others maintain that permitting modification, albeit confined to the four grounds delineated in the majority opinion, is a more pragmatic alternative to wsetting aside, which would otherwise compel parties to endure yet another round of proceedings.(here and here)

Although both positions are persuasive, the critical question is whether a middle path was possible between this dichotomy, one that balanced efficiency with arbitral autonomy. The argument that prohibits modification and imposes hardship by forcing parties into repeat proceedings appears attractive to party autonomy. Yet, allowing courts to directly modify awards without clear limitations upon this power undermines the very ethos of arbitration, a process chosen by parties to escape the rigours of judicial adjudication. Even ostensibly minor modifications, when undertaken by a court, risk diluting the finality and independence of the arbitral process without clear guidelines.

This piece therefore argues that while modification in a strictly limited sense may not mitigate efficiency concerns, in the absence of clear contours, a strict “hands-off” approach is preferable. Allowing modification without defined boundaries merely compounds uncertainty, producing a regime where courts intrude upon arbitral autonomy. In furtherance of this position, it is important to note that although modification is frequently justified by academics on grounds of procedural efficiency, cost-effectiveness, and expeditiousness, since it enables courts to correct errors without resorting to re-arbitration or remittals (here, here and here), two critical legal lacunas remain unresolved-

• The permissible scope and extent of modification is still ambiguous.

The question whether modification can include major changes like addressing claims for damages, or are they limited to minor corrections such as the interest rate remains unresolved. For example, recently in I.K. Merchants Pvt. Ltd v The State Of Rajasthan (2025), the court dealt only with simpler adjustments like changing the rate of interest, whereas in Larsen AC & Refrigeration Co. v Union of India (2023), and S.V. Samudram v State of Karnataka (2024) the High Courts dwelled into the merits of the case to modify the award altogether. Under challenge, the Apex Court made it clear that the ‘domino effect’ of a review on merits under S.34 & S.37 appeals, makes modification impermissible.

A deeper concern arises where modifications may run counter to the arbitrator’s substantive reasoning. For instance, whether a court can legitimately alter the core reasoning of the tribunal, thereby awarding damages to the opposing party in a manner other than originally decided, under the guise of modification? The absence of judicial consensus on the threshold of permissible modification whether to ancillary errors or substantive re-determinations creates uncertainty and conflicting doctrines.

In this regard, the bench in Gayatri Balaswamy recognizes certain inherent powers of the court (¶49 & ¶50) which are implicitly granted by the legislature.  Depending upon its appellate, reference or limited jurisdiction, these powers within S.34 include the authority to rectify computational, clerical or typographical errors and any such errors which do not require a substantive merit-based evaluation, thus, allowing for any modification based on a ‘procedural merit-based review’.

While it may seem like this argument has settled the conflicting jurisprudence, the court’s distinction between a substantive merit-based review and a procedural review is flawed. The Court relies on Grindlays Bank Ltd. v Central Government Industrial Tribunal & Others (1980) to draw a distinction between statutory reviews and procedural reviews. It holds that merit-based reviews are permitted only when expressly provided by statute, whereas procedural reviews, such as the correction of inadvertent errors, are inherent in every court or tribunal. Consequently, courts and tribunals possess the inherent power to rectify procedural defects or errors committed by itself or by another tribunal. (¶50).

Herein, the Court’s reasoning is incomplete as it does not give any objective criterion or elements for distinguishing merit-based review from procedure-based review, thereby granting courts excessive discretion to define the scope of their own review powers. Additionally, the interpretation of a procedural review remains vague and lacks contours. The court treats substantive merit-based review exhaustively by limiting it to statutorily conferred powers (¶50) and treats procedural review as inexhaustive to assume that any review falling outside the scope of substantive review must be procedural. This negative definition of a procedural review lacks contours or restrictions. Furthermore, the use of the word ‘inherent’ exacerbates the vagueness in discerning the boundaries between a substantive merits-based review and a procedural review. Instead of clarifying the scope of procedural review, it leaves open the possibility of judicial overreach.

Without clear objective tests, the permissible limits of court intervention remain unsettled. First, in the absence of defined metrics, how are courts to differentiate circumstances warranting substantive merit-based review from those confined to procedural merits? Second, what level of intervention is allowed before it amounts to a substantive change in the award? Third, without a clear distinction or limitation, can procedural review under the garb of inherent powers, extend to modifying substantive terms of the award?

The aftermath of Gayatri Balaswamy has made these ambiguities particularly visible. Several High Courts have adopted conflicting interpretations, oscillating between restrictive and expansive approaches. For instance the Orissa High Court and the Chhattisgarh High Court have adopted a narrow reading, applying only the restrictive element of the judgment restraining court interference without considering the distinction between procedural review and substantive review. Both courts confined themselves to the binary of either remitting or setting aside an award, without engaging with the distinction between procedural and substantive reviews or reading a limited power to modify. The Orissa High Court was emphatic in its rejection of modification post-Balaswamy, observing that is no power to modify within S. 34 and stated that

“ …..if one were to include the power to modify an award in Section 34, one would be crossing the Lakshman Rekha.” (¶13)

In contrast, the Delhi High Court (¶82)  has taken a more expansive view. Relying on the broad phrasing of Gayatri Balaswamy, it has held that S.34 does indeed contemplate a limited power of modification, particularly where procedural errors or ancillary corrections are involved.

Most recently, the Bombay High Court in the case of Municipal Council v Vivek, Government Contractor (2025) has attempted to strike a middle ground. Correctly recognising the distinctions and limitations inherent in Gayatri Balaswamy, it held that

“ ……it is apparent that this Court has a limited power while scrutinising the material on record. This Court cannot go into the merits of the matter, but if the material on record demonstrates that it is a fit case to remand the matter, then the Court can interfere in it.”.

By doing so, the Bombay High Court aligned modification with remittal rather than with a merits review, thereby giving some guidance to the multiple possibilities between modification, setting aside and remittal. Later, it attempted to give some coherence and guidance to the Supreme Court’s framework while still acknowledging the practical necessity of judicial correction in certain circumstances without dwelling into factual findings.

Taken together, these decisions show that the Balaswamy framework has not eliminated uncertainty but has instead generated divergent readings across jurisdictions. The Delhi High Court  itself has also acknowledged that the legal position on the permissible scope of intervention and the contours of the power of modification in the judgement remain incoherent and require guidelines and clarifications for its exercise.

• The procedural implications of modification cast doubt on the efficiency argument.

For courts to modify an award, they must inevitably engage with the substantive merits of the dispute. While this argument is noted in Gayatri Balaswamy, the SC ultimately rejects it by drawing the aforementioned distinction between a procedural-merits review and a substantive merits review. The majority decision fails to acknowledge that the modification process requires more than the mere identification of a legal error (¶39). It requires the courts to assess not only whether a legal inaccuracy has occurred but also the precise extent of that inaccuracy in order to modify it to the most just and proportionate level.

This standard of just and proportionate is not foreign to judicial reasoning. In ONGC v Saw Pipes Ltd. (2003), for instance, the Court justified intervention by assessing whether the award was so patently illegal that it would shock the conscience of the court, and require  evaluative and proportional determination. Similarly, in Hindustan Zinc Ltd. v Friends Coal Carbonization (2006), the Court considered whether excessive interest awarded by the tribunal was disproportionate, thereby requiring adjustment. Now while the standard of “just and proportionate” is constant, the Balaswamy Bench has necessarily reduced the threshold at which this intervention can be conducted from modification. As seen in aforementioned cases, the assessment of “just and proportionate” demands a qualitative and quantitative evaluation of the tribunal’s reasoning and conclusions, rather than a mechanical correction of error.

This exercise is categorically restricted under the prevailing statutory framework. The Supreme Court has consistently affirmed the prohibition on dwelling into merits. In decisions such as McDermott International Inc. v Burn Standard Co. Ltd. (2006) and Ssangyong Engineering and Construction Co. Ltd. v National Highways Authority of India (2019), the Court made clear that judicial interference with arbitral awards is permitted only under limited grounds which include violations of the principles of natural justice or situations where the award is in direct conflict with the public policy of India, imposing a strict bar upon courts to evaluate on merits in all cases. The legislative scheme following the 2019 amendments in S.34(2)(a), reflects an unequivocal intent to insulate arbitral awards from judicial reconsideration or reappreciation and new substantive findings. It confines courts to the record of proceedings before the tribunal.

Despite this clarity in both the statute and precedents, courts in practice have often deviated from these boundaries. In decisions such as Union of India v Besco Ltd. (2024),  and   Rakesh Kalia v Sanjay Kumar Vyas (2023), courts have evaluated the merits of the dispute under the garb of procedural scrutiny.

In Besco Ltd. the issue before the Court was whether the delay of 112 days in filing an appeal under S.37 could be condoned. At first glance, this appeared to be a procedural question of limitation. However, the Court went further by closely scrutinised the appellant’s explanations, including departmental delays and missing records, and weighed whether these could constitute “sufficient cause.” It scrutinized the bona fides of each reason advanced ranging from procedural delays within government departments, to counsel’s personal difficulties, to missing documents. While styled as an inquiry into procedural compliance, this exercise required the Court to make qualitative assessments about diligence, negligence, and the proportionality of the appellant’s conduct. In effect, therefore, the Court was not simply applying a procedural inquiry but was engaging with the substance of the appellant’s behavior, thereby illustrating how easily procedural review can slip into a merits-based evaluation, precisely the loophole left unaddressed and uncovered by Balaswamy.

Similarly, in Rakesh Kalia v. Sanjay Kumar Vyas (2023), the central issue concerned the validity of an award signed by only two of the three members of the tribunal, after one arbitrator recused a day before pronouncement. Formally, the objection was procedural under S.34 on grounds of S.31, which requires signatures of all arbitrators. The Court, however, went beyond this narrow enquiry. It examined whether the recusal was bona fide, whether the arbitrator had participated sufficiently in deliberations to lend legitimacy to the award, and whether the signatures of the remaining two arbitrators reflected genuine consensus. In weighing the fairness of the process, the Court assessed the intent and conduct of the tribunal members, effectively evaluating the soundness of the decision-making process itself. What appeared as a procedural defect inquiry thereby transformed into a substantive appraisal of arbitral deliberations, demonstrating how the supposed boundary between procedural and substantive review collapses in practice, a gap that Balaswamy left unaddressed.

These instances reveal an enduring tension between the doctrine of minimal judicial intervention and the judiciary’s interventionist instinct to ensure substantive justice. However, such intervention, even when well-intentioned, dilutes the finality and autonomy of the arbitral process and creates uncertainty in a system that relies heavily on speed, decisiveness, and party-driven dispute resolution. In the current legal regime, the absence of statutory recognition and procedural clarity on modification has left critical questions unanswered regarding both the substantive alterations and procedural scrutiny.

Therefore, even when clothed as a procedural correction, modification under this standard essentially constitutes a merits-based review, as it requires the Court to substitute its own assessment of the appropriate outcome for that of the tribunal. In effect, this blurs the boundary the Court in Gayatri Balaswamy sought to maintain between procedural and substantive review.

3. Judiciary’s Stance

Until the Supreme Court’s decision in The Project Director National Highways v  M. Hakeem (2021), Indian High Courts had adopted conflicting positions on whether modification of awards was permissible. While the Karnataka, Bombay, and Delhi High Courts restricted judicial intervention to setting aside an award under S.34, the Madras, Telangana, and Andhra Pradesh High Courts had, in contrast, recognized a judicial power to both set aside and modify them. (p. 67, ¶3.25.2, T.S. Vishwanathan Report, 2024). The interpretive argument often advanced by the latter courts was that if the statute empowers courts to set aside (wholly destroying) an award then logically, it must also include the lesser power to modify or partially alter it. This reasoning that ‘the greater power includes the lesser power’, (¶34) fails to address the procedural or natural justice scrutiny within the constraints of S.34, limiting a merit-based evaluation.

The core issue lies in the statutory bar on reviewing the merits under S.34. Setting aside is a procedural safeguard limited to instances where the award is patently illegal, contrary to public policy, or violative of natural justice. It does not permit courts to reassess the substantive reasoning of the tribunal. Modification, however, inherently demands a re–evaluation of the merits as the courts must assess whether and how the award ought to be changed. There is a statutory tension here because modification requires engaging with the merits, but S.34 prohibits such review which makes judicial modification impermissible.

Comparative models offer possible mechanisms that could have been adopted. In Singapore, S.49 of the Arbitration Act allows variance only with party consent or court approval in cases of public importance or obvious error, while S.47 bars general interference. Similarly, in England, S.68 permits intervention only for serious irregularity amounting to a substantial breach of natural justice.

In this regard, the authors argue that if the Court had developed a clear mechanism and crystallised guidelines to distinguish between procedural and substantive merits, thereupon imposed strict limits on the power to modify or vary an award, such a power might have been efficient. However, in the absence of defined contours or guidelines for this power, and with no clear statutory source in the Arbitration and Conciliation Act, 1996, modification runs contrary to the legislative scheme of the statute.

Part II of this piece continues on this analysis to critique the power to partially set aside an award, policy considerations, remittals and the use of Art 142 to interfere with the finality of awards.

About the Authors

Dhruv Madan and Sanjana Pershad are incoming penultimate-year law student at Jindal Global Law School.  Animesh Bordoloi (LL.M., International Arbitration & Dispute Resolution, National University Singapore) is a Senior Counsel at Asian International Arbitration Centre.