Court Cannot Substitute Simple Interest With Compound Interest Under Section 33 Arbitration Act; It’s A Substantive Modification: Supreme Court

"The characterisation of the mode of interest – whether simple or compound - goes to the very of the Arbitrator’s assessment of the equities of the case and reflects a substantive determination on the merits. It is neither a slip of the pen, nor an inadvertent arithmetical mistake." Supreme Court, in a decisive judgment dated May 26, 2026, held that the power to correct an arbitral award under Section 33(1)(a) of the Arbitration and Conciliation Act, 1996, is strictly limited to clerical, typographical, or computational errors.

A bench of Justice Pamidighantam Sri Narasimha and Justice Alok Aradhe observed that substituting "simple interest" with "compound interest" constitutes a substantive change to the merits of the award, which is impermissible under the limited corrective jurisdiction of the Act.

Brief Background Of The Case

The dispute arose from rate contracts awarded by the Gujarat Water Supply and Sewerage Board (Appellant) to Saryu Plastics Pvt. Ltd. (Respondent) between 1998 and 2002. Following allegations of excess payments, the Board blacklisted the company in 2003, leading to arbitration proceedings that commenced in 2012. The Arbitrator eventually passed an award in 2015, granting the company Rs. 1.01 Crores with simple interest for the pendente lite period.

The company subsequently sought a correction of the award to change "simple interest" to "compound interest" for the pendente lite period. While the Arbitrator declined to interfere due to pending Section 34 proceedings, the Commercial Court, in exercise of purported review jurisdiction, modified the award. This modification escalated the Board's liability from approximately Rs. 30.38 crores to a staggering Rs. 144.93 crores, a decision later upheld by the Gujarat High Court.

Legal Issues Before The Court

The primary question before the court was whether a court or tribunal possesses the jurisdiction to modify an award under Section 33(1)(a) of the Act to substitute simple interest with compound interest. The court was also called upon to determine whether the arbitral mandate had expired and whether the proceedings were conducted in violation of the principles of natural justice.

Arbitral Mandate And Natural Justice - Tacit Consent To Extension Of Mandate

The Supreme Court first addressed the challenge regarding the expiry of the Arbitrator's mandate. The Court noted that although the Arbitrator had unilaterally extended the mandate on three occasions, the Board continued to participate in the proceedings without raising any objection. The bench held that by participating and not asserting the expiry of the mandate in its communications, the Board had tacitly agreed to the extensions.

Principles Of Estoppel In Arbitration

The Court emphasized that the grievance regarding the mandate was a matter governed by contract and the Board’s conduct. Having participated and acquiesced to the proceedings, the Board was estopped from challenging the award on the ground of expired mandate after the decision went against them. The bench clarified that since there was no breach of a mandatory statutory provision, the principle of waiver would apply.

No Violation Of Natural Justice For Dilatory Parties

Regarding the allegation of natural justice violations, the Court scrutinized the Board's conduct over the three-and-a-half-year duration of the arbitration. The bench found that the Board had been consistently dilatory, failing to file point-wise replies and repeatedly seeking adjournments. The Court held that a party cannot convert its own failure to utilize opportunities into a grievance about the denial of natural justice.

The Arbitrator was fully justified in treating the matter as heard and proceeding to pass the Award.

Scope Of Section 33 Of The Arbitration Act

Section 33 Limited To Clerical And Arithmetical Errors

On the core issue of modifying interest types, the Court analyzed Section 33(1)(a) of the Act. It held that this provision confers only a limited power to correct computational, clerical, or typographical errors. The bench emphasized that the provision is not intended to serve as a vehicle for the substantive modification of an award or a review of the merits of the findings recorded by the Arbitrator.

Prohibition On Re-examining Substantive Findings

Citing precedents like State of Arunachal Pradesh v. Damani Construction Co. and Gyan Prakash Arya v. Titan Industries Ltd., the Court reiterated that Section 33 does not contemplate a review of the award. The power is confined strictly to "slips of the pen" and cannot be stretched to re-examine or revise the substantive findings. A change in the mode of interest is a material change that alters the very basis of the award.

The power of modification of an Award under Section 33 of the Act extends only to the correction of arithmetical or clerical errors and does not permit any material change to the Award.

Commercial Court Exceeded Jurisdiction In Award Modification

The Court observed that the Arbitrator had consciously and deliberately awarded simple interest for the pendente lite period. The characterization of interest as "simple" reflects a substantive determination on the merits based on an assessment of equities. Therefore, the Commercial Court manifestly exceeded its jurisdiction by substituting it with compound interest under the guise of a "correction."

Staggering Financial Implications Of Modification

The bench noted that the modification led to a staggering increase in liability from Rs. 30.38 crores to Rs. 144.93 crores. Such a result, the Court held, underscores the need for a circumspect exercise of jurisdiction. To allow such modifications would render Section 33 an instrument of appellate correction, which is contrary to the scheme of the Arbitration Act and the principle of minimal judicial intervention.

"To hold otherwise would be to render Section 33 an instrument of review and appellate correction, which is plainly contrary to the scheme of the Act and the consistent judicial interpretation placed upon it."

The Supreme Court concluded that while the arbitral mandate was valid and natural justice was followed, the modification of the interest type was illegal. The Court quashed the orders of the Commercial Court and the High Court to the extent that they substituted simple interest with compound interest. The Respondent company was held entitled only to simple interest at the rate of 21.675% for the pendente lite period as originally awarded by the Arbitrator.

Date of Decision: May 26, 2026