NLA Arbitration Newsletter
Key rulings from the Supreme Court and Delhi High Court on the impermissibility of modifying arbitral awards, delay damages and partial set-aside under Section 34, the limits of the Group of Companies doctrine, pre-arbitral clauses after contract termination, and the confined scope of Section 29A proceedings.
Supreme Court — Arbitral awards cannot be modified under Sections 34 or 37 of the Arbitration and Conciliation Act, 1996; modification is permissible only in genuine public policy violations
The Supreme Court reaffirmed the established legal position that courts adjudicating petitions under Sections 34 and 37 of the Arbitration and Conciliation Act, 1996, have no power to modify an arbitral award. This question is no longer res integra. The Court held as follows:
(i) An Arbitral Award cannot be modified under Sections 34 and 37 of the Act; and
(ii) An Arbitral Award can only be interfered with under Section 34 if it is against the Public Policy of India.
Referring to Indian Oil Corporation Ltd. v. Shree Ganesh Petroleum, (2022) 4 SCC 463, the Court reiterated that an award may be considered contrary to the public policy of India in the following circumstances: (a) when an award patently violates a statutory provision, the principles of natural justice, or is patently illegal, unreasonable, or perverse; (b) when the Arbitrator or Arbitral Tribunal has failed to adopt a judicial approach in deciding the dispute; or (c) when an award is contrary to the interests of the country, or against the ideas of justice or morality in a manner that shocks the conscience of the Court.
The Court further observed that Section 37 only enables courts to ensure that the Section 34 court did not exceed the scope of that provision; it does not empower courts to assess the merits of an award. The legislature’s intentional omission in 1996 of the power to interfere with arbitral awards (a power that existed under the Arbitration Act, 1940) must be respected. The appeal of the Claimant was allowed, and the judgments of the High Court and Civil Judge were set aside.
Key Takeaway
Courts exercising jurisdiction under Sections 34 and 37 of the Arbitration Act have no power to modify an arbitral award. An award may only be set aside—not altered—and only on the specific grounds enumerated in Section 34(2). The power to modify an award rests exclusively with the Arbitral Tribunal or Arbitrator that passed it. Any judicial adjustment of interest rates, damages, or other elements of an award constitutes impermissible modification.
Delhi High Court — Arbitral Tribunal may award delay damages even without an express clause; contractual clause restricting delay damages is against public policy; partial set-aside under Section 34 is permissible
The Delhi High Court, deciding upon a challenge under Section 34 of the Arbitration and Conciliation Act, 1996, made several significant observations on the powers of Arbitral Tribunals and courts in construction disputes.
On delay damages: The Arbitral Tribunal had held the Respondent (DMRC) accountable for delay in project execution and found the contract termination unlawful. The Petitioner was entitled to damages from the moment the Respondent’s delay caused losses. The contract between the parties limited the contractor’s remedy to a simple extension of time; however, the Court held that this provision could not be used to deny damages, particularly in light of Sections 55 and 73 of the Indian Contract Act, 1872. An Arbitral Tribunal may award damages for delay attributable to the employer even in the absence of an express clause permitting it, and even where the contract restricts the remedy to a time extension. In situations that were unexpected at the time of contract, the Tribunal can transgress the literal boundaries of the agreement and grant relief that the aggrieved party is rightfully entitled to.
On clauses restricting damages: A contractual clause that restricts an aggrieved party’s right to claim damages for the other party’s breach is prohibitory in character and is against the fundamental policy of Indian law. The Arbitral Tribunal retains the power to grant unliquidated damages to a party that has suffered loss due to delay attributable to the other party, notwithstanding such a clause.
On the scope of Section 34: The Court reiterated that it cannot reassess or reevaluate the merits of the arbitral award. However, a court exercising powers under Section 34 can sever an offending portion of the award, amounting to a partial annulment rather than a revision. Merely setting aside separate, unrelated tribunal rulings on unrelated issues does not amount to modifying the award. Overturning portions that are clearly legally impermissible does not require the entire award to be set aside. The Court maintained the award in relation to the denial of claims for reputational harm, arbitration fees, and certain interest components, as the Petitioner had not established these heads of loss.
Key Takeaway
In construction contracts, contractual clauses that limit a contractor’s remedy to a time extension and preclude claims for delay damages are void as contrary to the fundamental policy of Indian law, read with Sections 55 and 73 of the Indian Contract Act. Arbitral Tribunals may award such damages even without an express contractual clause. Courts exercising Section 34 jurisdiction may partially set aside an award by severing the offending portion, without disturbing the remaining valid portions of the award.
Delhi High Court — Group of Companies doctrine cannot be applied to make directors of a company parties to arbitration
The Delhi High Court (Justice Dinesh Kumar Sharma) held that directors of a company cannot be made parties to arbitration proceedings through the application of the Group of Companies doctrine. The relationship between a company and its directors is that of ‘Principal’ and ‘Agent’ as defined under Section 182 of the Indian Contract Act, 1872.
In terms of Section 230 of the Indian Contract Act, an agent cannot be held personally liable for acts carried out on behalf of the principal. The Court observed that the agreements in question were in essence between the Petitioner and the Respondent company (Respondent No. 1), and that the agreements had been signed by Respondents Nos. 2 and 3 purely in their capacity as directors of Respondent No. 1—i.e., in their capacity as agents of the principal. For directors to be held personally accountable, Section 230 requires an express agreement to the contrary. No such agreement existed between the parties.
The Court declined to apply the Group of Companies doctrine to include the directors as parties to arbitration. The dispute was accordingly referred to arbitration as between the Petitioner and Respondent No. 1 only, without Respondents Nos. 2 and 3. The Court noted that this judgment serves as a crucial supplement to the Supreme Court’s ruling in Cox & Kings Ltd. v. SAP India (P) Ltd., 2023 SCC OnLine SC 1634, clarifying the limits of the doctrine in Indian law and preventing its potential abuse.
Key Takeaway
The Group of Companies doctrine, as affirmed in Cox and Kings, cannot be extended to make directors of a signatory company parties to arbitration. Directors who sign agreements solely in their capacity as agents of the company incur no personal liability and are not bound by the arbitration agreement. Personal liability of a director requires an express agreement to that effect under the proviso to Section 230 of the Indian Contract Act. This ruling demarcates an important boundary on the scope of the Group of Companies doctrine.
Delhi High Court — A party that terminates the contract cannot subsequently insist on fulfilment of pre-arbitral steps as a condition to arbitration
The Delhi High Court held that a party which has unilaterally terminated an agreement cannot then insist upon the fulfilment of the pre-arbitration conciliation clause as a precondition to arbitration. When the Respondents terminated the contract with the Petitioner and the Petitioner thereafter invoked the arbitration clause, the Respondents objected to maintainability on the ground that the agreement required disputes to first be referred to negotiations—a mandatory pre-arbitral step that the Petitioner had allegedly not completed.
The Court held that the pre-arbitration clause was part of the same agreement that the Respondents had terminated. A party cannot terminate the agreement in its entirety and simultaneously seek to enforce a particular clause of that same agreement against the other party. The termination of the agreement extinguished the pre-arbitration clause along with the rest of the agreement’s provisions. Furthermore, once a party terminates the agreement without following the pre-arbitration steps itself, it cannot object to the other party’s petition by invoking the very same pre-arbitral clause. The Court also noted that the authority to whom the dispute was to be referred under the pre-arbitration clause loses its powers upon termination of the contract.
Key Takeaway
A party that terminates a contract cannot use the pre-arbitral steps in that same contract as a shield against the other party’s arbitration petition. Termination of the agreement extinguishes the pre-arbitration clause; the terminating party cannot selectively rely on it to create a procedural bar. Parties must ensure they exhaust all contractual remedies before taking drastic actions such as termination, failing which they forfeit the right to invoke those contractual protections against the aggrieved party.
Delhi High Court — Allegations of arbitrator bias and irregularities in conduct of arbitral proceedings cannot be adjudicated under Section 29A
The Delhi High Court held that the scope of the Court’s power under Section 29A of the Arbitration and Conciliation Act, 1996, is strictly confined to examining the validity of reasons for which an extension of the arbitration timeline is sought, and to deciding whether such an extension should be granted. Issues relating to the alleged bias of an Arbitrator or irregularities in the conduct of arbitral proceedings fall outside this scope and cannot be determined in Section 29A proceedings.
In the submissions before the Court, one of the objections raised by the Respondents concerned the manner in which the arbitral proceedings had been conducted, alleging that the Arbitrator was biased in favour of the Petitioner. The Petitioner countered that such grievances could not be raised in Section 29A proceedings. The Court agreed, holding that a party’s grievance regarding the conduct of arbitral proceedings, or any other substantive challenge to the arbitration, is not a matter that can be decided under Section 29A. Referring to Wadia Techno-Engineering Services Ltd. v. Director General of Married Accommodation Project, 2023 SCC OnLine Del 2990, the Court held that such grievances must be pursued separately through the appropriate mechanism—i.e., under Section 13 of the Act, which provides for challenge to an arbitrator on grounds of bias.
Key Takeaway
Section 29A is a narrow provision: the Court’s jurisdiction under it is limited to evaluating whether the arbitration timeline should be extended. It is not a forum for raising substantive challenges to the arbitration, including allegations of arbitrator bias or irregularities in the conduct of proceedings. Such objections must be brought through Section 13 of the Arbitration Act, which provides the dedicated mechanism for challenging an arbitrator’s appointment or impartiality. Mixing procedural extension requests with substantive challenges will result in the latter being rejected outright.
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