Section 34 Court Has Limited Power to Modify Arbitral Award — But It Exists: Supreme Court Endorses Judicial Calibration of Damages in Arbitration

“Modification of Arbitral Award Within Contractual Boundaries Is Not Judicial Overreach”, In a significant reaffirmation of the evolving jurisprudence on judicial intervention in arbitral awards, the Supreme Court of India clarified that while courts do not sit in appeal over arbitral awards, Section 34 of the Arbitration and Conciliation Act, 1996 does permit a limited power of modification — provided such intervention is narrowly tailored, principled, and consistent with the terms of the contract.

“We are of the opinion that the Section 34 Court can apply the doctrine of severability and modify a portion of the award while retaining the rest,” the Supreme Court held, applying the principles laid down in the 2025 Constitution Bench decision in Gayatri Balasamy v. ISG Novasoft Technologies Ltd.

The Court was dealing with a challenge to an arbitral award arising from delays in the commissioning of a solar power plant under a Power Purchase Agreement (PPA) executed under the Jawaharlal Nehru National Solar Mission (JNNSM).

“Judicial Intervention Is Legitimate When It Furthers the Ends of Justice”: Supreme Court Clarifies Section 34 Purpose

The core legal dispute revolved around the extent to which a court exercising jurisdiction under Section 34 can go in altering an arbitral award. In this case, the Arbitral Tribunal by majority awarded only ₹1.2 crores as damages to NTPC Vidyut Vyapar Nigam Ltd. (NVVNL), despite admitted delay in project commissioning by M/s Saisudhir Energy Ltd. (SEL).

The Delhi High Court’s Single Judge interfered with the award, observing that the damages awarded were disproportionately low given the contractual formula under Clause 4.6 of the PPA. Exercising what it termed a “reasonable compensation” standard, the court modified the award and granted ₹27.06 crores, amounting to 50% of the pre-estimated damages.

This was challenged by SEL on the ground that Section 34 permits only setting aside of awards, not modification.

Rejecting this contention, the Supreme Court categorically held:

“The modification is in exercise of jurisdiction under Section 34… without undertaking any examination of the merits of the dispute.”

It clarified that where a part of the arbitral award deviates from the fundamental policy of Indian law or ignores material contractual provisions, courts are not helpless.

“To Deny Courts the Authority to Modify Would Defeat the Raison d’être of Arbitration”: Supreme Court Warns Against Mechanical Interpretation

Relying on Gayatri Balasamy, the Bench consisting of Justice P.S. Narasimha and Justice Atul S. Chandurkar observed:

“If we were to decide that courts can only set aside and not modify awards, then the parties would be compelled to undergo an extra round of arbitration… This would render the arbitration process more cumbersome than even traditional litigation.”

The Court noted that Section 34 does not expressly prohibit modification and should be interpreted purposively:

“The power cannot contradict the essence or language of Section 34. The court would not exercise appellate power… but a nuanced and limited power of modification remains available.”

In other words, the judiciary is not rewriting the contract, but realigning the award with the contract, particularly when the award undermines agreed terms or results in manifest injustice.

“Majority Award Granting ₹1.2 Crores Was a Perversion of Clause 4.6”: Court Found Justification for Modification

The Supreme Court noted that Clause 4.6.2 of the PPA had a clear formula for computing liquidated damages at ₹1,00,000 per MW per day of delay. Given that SEL had admitted to delays ranging from two to five months, the Tribunal’s award of ₹1.2 crores was held to be incongruent with the contractual scheme.

“The learned Single Judge having determined the amount of reasonable compensation by relying upon Clause 4.6 of the PPA and thereafter awarding 50% of such amount… no interference with such determination was called for.”

The Court agreed that while courts cannot re-evaluate evidence, they can apply the contract to undisputed facts, which in this case included admitted delays and the existence of a liquidated damages clause.

“Section 37 Is Not an Avenue for Substitution of Views”: Apex Court Restricts Appellate Interference in Modified Awards

The judgment also addressed the Division Bench’s interference under Section 37, which had reduced the damages from ₹27.06 crores to ₹20.70 crores by reworking the calculation method. The Supreme Court was clear:

“Such a course of taking a different view… would be beyond the scope of Section 37 of the Act of 1996.”

The Court explained that unless the Section 34 court’s decision is shown to be perverse, arbitrary, or ultra vires the contract, the appellate court has no jurisdiction to substitute its reasoning or re-calculate figures.

Striking the Balance Between Arbitral Finality and Contractual Fidelity

This judgment contributes significantly to Indian arbitration law by carving out a middle ground: arbitration must be respected, but not at the cost of contractual sanctity or legal reasonableness.

The Court's holding can be summed up as follows:

“The power of judicial review under Section 34… includes a limited power to modify the award within the confines of Section 34.”

The ruling is particularly relevant in the context of public-private contracts, where strict enforcement of agreed clauses, balanced with judicial calibration, is critical to maintaining fairness, certainty, and rule of law.

The Supreme Court upheld the ₹27.06 crore compensation awarded by the Single Judge, dismissed SEL’s objection to the modification under Section 34, and held that the limited judicial power to modify an award is essential to maintain faith in arbitration while ensuring justice.

Date of Decision: January 30, 2026