Supreme Court: Courts cannot modify arbitral awards, only set them aside

The High Court thought it could reduce the interest rate from 18% to 9%. The Supreme Court just told them: you can't modify an arbitral award at all.

The year was 1997. A company called M/s Larsen Air Conditioning and Refrigeration Company won a government contract. Disputes erupted during execution. The matter went to arbitration. In 1999, the arbitrator passed an award granting the company Claims 1 through 8 — plus 18% compound interest. The signed award, dated 21 January 1999, sat in a file, its pages carrying the weight of a final decision.

The government was not happy. It challenged the award in the District Court, Kanpur Nagar, under Section 34 of the Arbitration and Conciliation Act, 1996 (the provision that lets a party ask a court to set aside an arbitral award on limited grounds). The District Court dismissed the challenge in March 2003. The government then appealed to the Allahabad High Court under Section 37 of the Act (the provision for appeals against orders under Section 34). In July 2019, the High Court partly allowed the appeal. It disallowed Claim No. 6. And it did something else: it cut the interest from 18% compound to 9% simple. The High Court's order sheet, stamped and initialled, recorded the modification as though it were routine.

The company appealed to the Supreme Court on one sharp question: could the High Court modify the interest rate at all?

When the arbitrator set the rate

The arbitration began after the 1996 Act came into force. That matters. The pre-amended version of Section 31(7)(b) of the Act prescribed a default statutory interest rate of 18% per annum. The arbitrator awarded exactly that — 18% compound — on the sums due.

The government argued in the High Court that 18% was too high. The High Court agreed. It reduced the rate to 9% simple interest. On the surface, this looks reasonable — a court exercising fairness. But the Supreme Court saw it differently. The question was not whether 9% was fairer than 18%. The question was whether the High Court had the legal power to make that change at all.

The ghost of the 1940 Act

Under the old Arbitration Act of 1940, Section 15 gave courts the power to modify an arbitral award. A court could change the terms, adjust the interest, or rewrite parts it found objectionable.

When Parliament enacted the Arbitration and Conciliation Act, 1996, it deliberately left that power out. The new Act, based on the UNCITRAL Model Law, was designed to minimise judicial interference. Under Sections 34 and 37 of the 1996 Act, a court can only set aside an award — wholly or partially — on specific grounds like fraud, bias, or the award being against public policy. It cannot tinker with the award, improve it, or reduce a rate it thinks is too high.

The Supreme Court made this distinction crystal clear. The power to modify, which existed under Section 15 of the 1940 Act, was consciously omitted by Parliament. Courts cannot read it back in.

What the Supreme Court actually said

The bench — Justice S. Ravindra Bhat and Justice Dipankar Datta — relied on two key precedents: Shahi & Associates v. State of UP and Project Director, NHAI v. M. Hakeem. Both cases had already established that courts under the 1996 Act cannot modify arbitral awards. In Shahi & Associates, the Supreme Court held that the jurisdiction under Section 34 is limited to setting aside an award — not rewriting it. In M. Hakeem, the Court reiterated that even in appeals under Section 37, the appellate court's scope is narrower than the Section 34 court's scope.

Applying these principles, the Supreme Court held that the Allahabad High Court had overstepped its jurisdiction. The High Court could have set aside the entire award on a valid ground under Section 34 — but it didn't. Instead, it kept the award alive and simply changed the interest rate. That, the Supreme Court said, was impermissible. The Court's own ratio put it bluntly: "courts exercising jurisdiction under Section 34 (and appellate courts under Section 37) are powerless to modify an arbitral award."

The Court also noted that the 18% rate was not some arbitrary figure chosen by the arbitrator. It was the statutorily prescribed default rate under the pre-amended Section 31(7)(b). The arbitrator had followed the law. The High Court had no basis to disturb it.

The hammer, not the scalpel

This judgment draws a bright line. Under the 1996 Act, a court can set aside an award — in whole or in part — if the conditions under Section 34 are met. It can also remit the matter back to the arbitrator for reconsideration in certain circumstances. But it cannot keep the award alive while changing its terms. That is modification, and modification is not permitted.

For practitioners, this means a strategic shift. If you are challenging an arbitral award, your argument must be that the award should be set aside entirely — or at least that a specific part of it is so flawed that it cannot stand. You cannot ask the court to fix the award by reducing the interest or adjusting the quantum. The court's only tool is the hammer, not the scalpel.

For parties who receive an award they dislike, the lesson is equally clear: your fight is with the arbitrator's reasoning, not with the numbers. If the arbitrator applied the law correctly — even if the result seems harsh — the courts will not help you soften the blow.

THE PLAY: When challenging an arbitral award under the 1996 Act, never ask a court to modify the award — ask only to set it aside, because any modification, however reasonable, will be struck down on appeal.

What happens next for the company

The Supreme Court set aside the High Court's modification of the interest rate. The original 18% per annum interest — for the past period, the period during the arbitration (pendente lite), and the future period — was reinstated. The Court directed the respondent-state to pay the dues within eight weeks from the date of the judgment. The appeal was disposed of with no order as to costs.

The company, after more than two decades of litigation, finally got what the arbitrator had awarded it in 1999.