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This article is authored by Akash Krishnan, a law student from ICFAI Law School, Hyderabad. It analyses the present case in light of Section 34 of the Arbitration Act and Article 14 of the Constitution of India.

Introduction

Several petitions were clubbed together by the Supreme Court in the instant case regarding the power of a Court to modify the arbitral award whilst exercising its jurisdiction under Section 34 of the Arbitration and Conciliation Act, 1996.

The Supreme Court after referring to various cases concluded that an arbitral award cannot be modified by a Court of law while exercising its jurisdiction under Section 34 of the Arbitration Act. Further, the Court dismissed the appeal in the interests of justice because the National Highways Authority of India had acted in a prejudicial manner by providing differential compensation to similarly situated persons.

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Brief facts

Several notifications were issued under the National Highways Act, 1956 (NHA) and multiple orders were passed by the competent authority regarding the same. The competent authority in this context is the Special District Revenue Officer (SDRO). The SDRO is authorised to determine the amount of compensation w.r.t land acquired for the construction of highways. If any party is not satisfied with the compensation granted by the SDRO, then the matter is settled by arbitration.

In this case, the SDRO, while making the orders, used the guideline value of the lands instead of the sale deeds of similar lands. This led to abysmally low and inappropriate amounts to be released in the form of compensation by the SDRO. On an application made to the arbitral tribunal challenging this compensation, the tribunal held that there was no infirmity with the granted compensation and thus the order of the SDRO was valid. Due to this, all other applications regarding grant of compensation were disposed of by granting the same amount of compensation.

Petitions before the District Court

Several petitions were filed before the District and Sessions Judge for enhancement of the arbitral award under Section 34 of the Arbitration and Conciliation Act, 1996. The District Court observed that Section 34 of the Arbitration and Conciliation Act empowered the court to not only set aside an arbitral award but also modify it. In light of the same, the Court held that the compensation granted by the arbitral award was low and therefore enhanced/modified the compensation to Rs. 645 per square metre.

Appeal before the Madras High Court

The Madras High Court held that Section 34 of the Arbitration and Conciliation Act gives jurisdiction to the Courts to modify the award given by the arbitral tribunal and therefore the Court had the power to enhance the sum granted by the arbitral tribunal in the present case. Thus, the High Court upheld the order passed by the District Court in this regard.

Appeal before the Supreme Court

The National Highways Authority of India (NHAI) approached the Supreme Court and sought a direction for setting aside the orders passed by the District Court and the High Court.

Issues

  1. Whether a court can modify an arbitral award while exercising its jurisdiction under Section 34 of the Arbitration Act?
  2. Whether NHAI had acted prejudicially by providing differential compensation to similarly situated persons?

Submission of the parties

Submissions on behalf of the Appellant (NHAI)

  1. The provisions for the acquisition of land for the construction of highways under the National Highways Act, 1956 (NHA) ensure that there should be no delay in the acquisition of land as the said land is being acquired for a public purpose.
  2. A competent authority, i.e., the Special District Revenue Officer (SDRO) has been set up under Section 3(a) of the NHA. The competent authority is empowered to determine compensation for the acquired land, under Section 3G of NHA.
  3. If either party, i.e., the landowner or the NHAI is not satisfied with the amount of compensation granted, an application for arbitration can be filed by either party and the Central Government shall appoint an arbitrator to decide the matter.
  4. The factors to be taken into consideration while determining the amount of compensation include the market value of land, damages sustained by the person taking possession, and other factors provided under Section 3G (7) of the NHA.
  5. The power of Courts under Section 34 of the Arbitration and Conciliation Act, 1996 (Arbitration Act) is limited to setting aside the award or remitting the award. Thus, the order of the District Court and the High Court wherein the amount of compensation was modified is in contravention to the provisions of the Arbitration Act.
  6. Once an arbitral award has been set aside under Section 34 of the Arbitration Act, it does not mean the end of proceedings in the matter. Either party could opt for initiating fresh arbitral proceedings in the same matter.

Submissions of the respondents

  1. The SDRO while making the orders used the guideline value of the lands instead of the sale deeds of similar lands. This led to abysmally low and inappropriate amounts to be released in the form of compensation by the SDRO, which was further upheld by the arbitral tribunal.
  2. If the arbitral award is set aside under Section 34 and fresh proceedings are initiated, there is no surety as to the change in the sum granted as compensation by the tribunal, since the arbitrator would be appointed by the Central Government itself. This would result in undue delay and continuous proceedings in this regard.

Observations of the Supreme Court

Relevant provisions under the NHA and the Arbitration Act

Section/Provision No.Provision
NHA
Para 2 of the Statement of Objects and ReasonsThe object of this Act is to avoid undue delay in land acquisition for the construction of highways. Any dispute w.r.t the compensation being granted in exchange for the acquired land should be settled by arbitration.
Section 3(a)Competent authority: The competent authority shall be the Special District Revenue Officer (SDRO). The SDRO should be appointed by the Central Government.
Section 3APower to acquire land: If any land is required for the construction of highways or any related works, the Central Government may acquire such lands and issue notifications in the official gazette in this regard.
Section 3GAmount of compensation: On acquisition of land by the Central Government, compensation shall be paid based on the determination made in this regard by the SDRO. If either party, i.e., the landowner or the NHAI is not satisfied with the amount of compensation granted, an application for arbitration can be filed by either party and the Central Government shall appoint an arbitrator to decide the matter.
Arbitration Act
Section 34Recourse to a Court for setting aside the arbitral award, the court may adjourn the proceedings thereby allowing the tribunal to continue proceedings or take an action to eliminate the grounds for setting aside the arbitral award.

Recourse under Section 34 of the Arbitration Act

  1. The term recourse that has been mentioned under Section 34(1) of the Arbitration Act can be defined as the mode/method for enforcing a right.  
  2. Section 34 has been enacted to ensure minimum judicial interference in arbitral awards.
  3. In MMTC Ltd. v. Vedanta Ltd (2019), the Supreme Court has held that if an application has been made under Section 34 of the Arbitration Act, the Court is not empowered to look into and consider the merits of the case and should act within the scope of Section 34 itself. In Ssangyong Engg. & Construction Co. Ltd. v. NHAI (2019), the Supreme Court had held that a challenge on the merits of an arbitral award cannot be raised under Section 34 of the Arbitration Act. Similarly, the Supreme Court in Maharashtra State Electricity Distribution Co. Ltd. v. Datar Switchgear Ltd. (2018) held that the Court cannot exercise its powers as an appellate body and go into the merits of a case in an application filed under Section 34 of the Arbitration Act.
  4. Commenting on the supervisory role of the Courts under Section 34 of the Arbitration Act, the Supreme Court in McDermott International Inc. v. Burn Standard Co. Ltd (2006) had observed that the Court is not empowered to correct the mistakes of an arbitrator in an application filed under Section 34 of the Arbitration Act and can only quash or set aside the award, thereby allowing the parties to initiate fresh arbitral proceedings. This is necessary to ensure that judicial interference in arbitral proceedings is at a minimum level.
  5. Several other judgments regarding the position of law w.r.t Section 34 of the Arbitration Act were referred to in this case. Some of the referred judgements have been reproduced below:
Name of the CaseRatio
Managing Director v. Asha Talwar (2009)The Court is not empowered to grant a relief that was originally prayed before the arbitral tribunal while dealing with an application under Section 34 of the Arbitration Act.
Nussli Switzerland Ltd. v. Organizing Committee Commonwealth Games (2014)The Court cannot modify an arbitral award while dealing with an application under Section 34 of the Arbitration Act.
Ms.G v. ISG Novasoft Technologies Ltd (2014)The Court has the power to set aside or modify the award passed by an arbitral tribunal while dealing with an application under Section 34 of the Arbitration Act. This judgment was overruled in the present case.
Tata Hydro-Electric Power Supply Co. Ltd. v. Union of India (2003)The Court modified the Arbitral award and enhanced the interest rate. However, this modification was made by the Court while exercising the powers under Article 142 of the Constitution of India.
Krishna Bhagya Jala Nigam Ltd. v. G. Harischandra Reddy (2007)The Court modified the Arbitral award and reduced the interest rate. However, this modification was made by the Court while exercising the powers under Article 142 of the Constitution of India.
  1. In light of the aforesaid observations, the Court concluded that an Arbitral Award cannot be modified by a Court of law while exercising its jurisdiction under Section 34 of the Arbitration Act.

Grant of compensation

  1. In various cases where the compensation granted by the SDRO was challenged and approved by the Arbitral tribunal, but on appeal, the compensation was enhanced by the District Court, the same was accepted by the NHAI and the enhanced compensation had been paid. No appeal against the order of the District Court was made in these cases.  
  2. The SDRO and the tribunal had failed to consider the actual market value of the acquired land while determining the amount for compensation. Section 3G (7) of the NHA enlists the factors that have to be looked into while determining the amount of compensation. These factors have been enumerated below:
  • The market value of the land on the date of issue of notification for acquisition.
  • The damages incurred by any interested party due to severing such land from a larger piece of land.
  • The damages incurred by any interested party due to any injury caused to the immovable property or earnings from the immovable property.
  • The damages incurred by any interested party if the party is compelled to change the place of residence or the place of business.  
  1. The market value of the land is to be ascertained based on relevant sale deeds. However, both the SDRO and the tribunal failed to do the same in the present case. Earlier, for the acquisition of lands in similar circumstances, the amount of compensation was determined based on relevant sale deeds. This non-application of the proper procedure has resulted in the payment of differential compensation.
  2. In Nagpur Improvement Trust v. Vithal Rao (1973), the principle of reasonable classification was laid down by the Supreme Court. There are two essential tests of this principle:
  • The classification must be founded on intelligible differentia.
  • The differentia must have a rational relation with the object sought to be achieved by the legislation in question.
  1. By applying this test in the present situation, the question that arises is whether lands acquired for different purposes can be classified differently. If yes, whether this classification would fall under the ambit of reasonable classification?
  2. The Court in light of the aforesaid question held that protection under Article 14 of the Constitution is available in cases of differential treatment of owners and the amount of compensation.
  3. Based on the aforesaid observations, the Court dismissed the appeal and concluded that interference under Article 136 would be inappropriate due to the following reasons:
  • NHAI has allowed similarly suited persons to avail compensation at higher amounts.
  • The awards in question were made 7-10 years ago and allowing fresh arbitral proceedings for the same will not be in the best interests of justice.

Conclusion

Two major conclusions can be drawn from this case. Firstly, an application under Section 34 of the Arbitration Act does not empower the Court to decide the case on its merits and modify the arbitral award and secondly, there can be no differential treatment in payment of compensation for similarly situated persons.

The Supreme Court in this case has ended a decades-old debate regarding the powers of the Court under Section 34 of the Arbitration Act and has clarified the position of law in this regard.

References

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