Source: Supreme Court 

Why in News? 

A five bench of Chief Justice Sanjiv Khanna, Justice BR Gavai, Justice Sanjay Kumar, Justice Augustine George Masih and Justice Viswanathan (minority) by a majority of 4:1 laid down the circumstances when the Court can exercise its limited power under Section 34 and 37 of the Arbitration and Conciliation Act, 1996 (the Act) to modify the arbitral award.  

• The Supreme Court held this in the case of Gayatri Balasamy v. M/s ISG Novasoft Technologies Limited (2025). 

What was the Background of Gayatri Balasamy v. M/s ISG Novasoft Technologies Limited (2025) Case?   

• In this case a 5-judge bench was constituted to answer the following questions: 
  • Whether the powers of the Court under Sections 34 and 37 of the Act will include the power to modify an arbitral award? 
  • If the power to modify the award is available, whether such power can be exercised only where the award is severable, and a part thereof can be modified? 
  • Whether the power to set aside an award under Section 34 of the Act, being a larger power, will include the power to modify an arbitral award and if so, to what extent? 
  • Whether the power to modify an award can be read into the power to set aside an award under Section 34 of the Act? 

What were the Court’s Observations? 

• The Court held that there were limited powers vested with the Court under Sections 34 and 37 to modify the arbitral award. This limited power is exercised in following circumstances: 
  • When the award is severable by severing the invalid portion from the valid portion. 
  • By correcting any clerical, computational or typographical errors which appear erroneous on the face of the record. 
  • Post award interest may be modified in some circumstances. 
    • Under Section 31(7)(a), arbitral tribunals have the authority to include interest at a reasonable rate for the period between when the cause of action arose and when the award is made, which is known as pendente lite interest. 
    • Section 31(7)(b) provides that if an arbitral award doesn't specifically mention post-award interest, a default rate automatically applies, which is 2% higher than the current rate of interest prevalent on the date of the award. 
    • Courts retain the power to modify post-award interest rates when the facts of the case justify such modification, particularly in situations where delays or other circumstances warrant adjustment. 
    • In cases where the arbitral award does not include any post-award interest, courts possess the authority to grant post-award interest, demonstrating that this power is not exclusively held by arbitrators 
    • This limited power of courts to modify interest rates helps avoid additional rounds of litigation by allowing adjustment of erroneous interest rates rather than requiring the entire award to be set aside or a fresh arbitration to be ordered. 
  • Article 142 of the Constitution of India, 1950 (COI) applies, albeit the power must be exercised with great care and caution and within the limits of the constitutional power 
    • The Court held that the power under Article 142 of COI must not be exercised where the effect of the order passed by the Court would be rewrite the award or modify the award on merits. 
    • However, power can be exercised where it is required and necessary to bring the litigation or dispute to an end. 
    • Not only would this end protracted litigation, but it would also save the parties’ money and time. 

What is the Power to Set Aside Arbitral Award under Section 34? 

• Section 34 (1) provides that recourse to a Court against an arbitral award may be made only by an application for setting aside such award in accordance with sub-section (2) and sub-section (3).    
• Section 34(2) provides that arbitral award may be set aside only if:   
  • The party making the application establishes on the basis of the record of the arbitral tribunal that-   
    • A party was under some incapacity, or   
    • The arbitration agreement is not valid under the law to which the parties have subjected it or, failing any indication thereon, under the law for the time being in force; or   
    • The party making the application was not given proper notice of the appointment of an arbitrator or of the arbitral proceedings or was otherwise unable to present his case; or   
    • The arbitral award deals with a dispute not contemplated by or not falling within the terms of the submission to arbitration, or it contains decisions on matters beyond the scope of the submission to arbitration:   
    • Provided that if the decisions on matters submitted to arbitration can be separated from those not so submitted, only that part of the arbitral award which contains decisions on matters not submitted to arbitration may be set aside.   
      • The composition of the arbitral tribunal or the arbitral procedure was not in accordance with the agreement of the parties, unless such agreement was in conflict with a provision of this Part from which the parties cannot derogate, or, failing such agreement, was not in accordance with this Part, or   
  • The Court finds that-   
    • The subject-matter of the dispute is not capable of settlement by arbitration under the law for the time being in force, or   
    • The arbitral award is in conflict with the public policy of India.   
      • Explanation 1 provides that for the avoidance of any doubt, it is clarified that an award is in conflict with the public policy of India, only if, —   
        • The making of the award was induced or affected by fraud or corruption or was in violation of section 75 or section 81; or   
        • It is in contravention with the fundamental policy of Indian law; or   
        • It is in conflict with the most basic notions of morality or justice.   
      • Explanation 2 provides that for the avoidance of doubt, the test as to whether there is a contravention with the fundamental policy of Indian law shall not entail a review on the merits of the dispute.  
• Section 34 (2A) provides for setting aside of arbitration award other than international commercial arbitration i.e. domestic arbitration.    
  • This provision provides that an arbitral award arising out of arbitrations other than international commercial arbitrations, may also be set aside by the Court, if the Court finds that the award is vitiated by patent illegality appearing on the face of the award.   
    Provided that an award shall not be set aside merely on the ground of an erroneous application of the law or by reappreciation of evidence.   
• Section 34 (3) provides that an application for setting aside may not be made after three months have elapsed from the date on which the party making that application had received the arbitral award or, if a request had been made under section 33, from the date on which that request had been disposed of by the arbitral tribunal:    
• Provided that if the Court is satisfied that the applicant was prevented by sufficient cause from making the application within the said period of three months it may entertain the application within a further period of thirty days, but not thereafter.    
• Section 34 (4) provides that on receipt of an application under sub-section (1), the Court may, where it is appropriate and it is so requested by a party, adjourn the proceedings for a period of time determined by it in order to give the arbitral tribunal an opportunity to resume the arbitral proceedings or to take such other action as in the opinion of arbitral tribunal will eliminate the grounds for setting aside the arbitral award.   
• Section 34 (5) provides that an application under this section shall be filed by a party only after issuing a prior notice to the other party and such application shall be accompanied by an affidavit by the applicant endorsing compliance with the said requirement.   
• Section 34 (6) provides that an application under this section shall be disposed of expeditiously, and in any event, within a period of one year from the date on which the notice referred to in sub-section (5) is served upon the other party.