Larsen Air Conditioning v. Union of India: the Section 34 court has no power to modify an arbitral award

The architecture of judicial supervision over arbitral awards in India has, since the 1996 Act, rested on a deliberate legislative choice: the 1940 Act's express power to "modify or correct" an award was carried into Section 15 of that statute, and was then consciously omitted from the 1996 Act. The Section 34 court inherited only the power to set aside. Two decades of Section 34 jurisprudence had nonetheless produced a corpus of High Court orders that — by various devices, including the appellate-style substitution of interest rates and the surgical pruning of award quanta — read a modification power back into the section. The Supreme Court's 11 August 2023 decision in Larsen Air Conditioning & Refrigeration Co. v. Union of India closed that door. Two years on, the Constitution Bench in Gayatri Balasamy v. ISG Novasoft Technologies has opened a narrow corridor for limited modification. The two rulings now sit alongside each other as the controlling architecture for the Section 34 reviewer.

The 11 August 2023 ruling, authored by Justice S. Ravindra Bhat for himself and Justice Dipankar Datta, arose on an appeal from the Allahabad High Court. The arbitrator had awarded the appellant 18% compound interest on the principal sum payable by the Union of India. The High Court, exercising jurisdiction under Section 34, modified the award by reducing the interest rate to 9% simple interest. The appeal to the Supreme Court raised — squarely — the question whether the High Court had the power to so modify.

The factual matrix

The underlying dispute was a long-running contractual matter between Larsen Air Conditioning & Refrigeration Co. and the Union of India, arising out of a works contract. The arbitrator had passed an award in the appellant's favour with the operative interest provision at 18% compound, calculated from a specified date until realisation. The Union of India challenged the award under Section 34 before the Allahabad High Court. The Single Judge of the High Court — proceeding on the view that the 18% compound rate was excessive — substituted 9% simple interest in its place, retaining the rest of the award.

The appeal to the Supreme Court was on two grounds. First, that the High Court had exceeded its Section 34 jurisdiction by modifying — as distinct from setting aside — the arbitral award. Second, that the arbitrator's interest rate, having been arrived at on a reasonable construction of the contract and the applicable statutory framework, did not disclose any patent illegality going to the root of the matter and could not be interfered with even on a proper Section 34 analysis.

The reasoning

The Bench's reasoning operates on three connected threads.

The absence of modification power in Section 34

The foundational thread is textual and structural. Section 34 of the 1996 Act, both before and after the 2015 amendments, confers on the court only the power to set aside an arbitral award — wholly or in part — on the grounds enumerated in sub-sections (2) and (2A). The section contains no express power to modify. The Bench read that omission against the comparator of Section 15 of the 1940 Act, which had expressly empowered the court to "modify or correct" an award in three specified situations. The 1996 Act, modelled on the UNCITRAL Model Law, consciously departed from the 1940 architecture; the modification power was not carried over.

The Bench's reading is that the omission is deliberate and not an oversight. Parliament, in adopting the Model Law framework, intended to restrict judicial intervention to the narrow corridor that the Model Law contemplated — set aside on enumerated grounds, leaving the merits to the tribunal. To read a modification power back into Section 34 would be to undo the legislative choice and to reintroduce, by judicial construction, the appellate model that the 1996 Act had abandoned.

The narrow corridor of Section 34 review

The second thread is the substantive content of the Section 34 review power. The Bench restated the proposition — now familiar from Associate Builders v. Delhi Development Authority and Ssangyong Engineering v. NHAI — that the Section 34 jurisdiction is "limited and extremely circumscribed". The grounds for interference are confined to those enumerated in the section: incapacity, invalid arbitration agreement, lack of notice, excess of jurisdiction, irregularity in the constitution of the tribunal, and the public-policy grounds (which include the post-2015 ground of patent illegality for purely domestic awards).

On patent illegality — the ground most likely to be invoked in a Larsen-type interest-rate challenge — the Bench reiterated that the illegality must go to the root of the matter. A merely erroneous application of law, or an alternative view that the court might have taken, does not suffice. The illegality must be such that it goes to the foundation of the award; trivial or peripheral errors are not within the reviewing court's jurisdiction.

The reasonable-construction safe harbour

The third thread is the deference accorded to the arbitrator's contractual construction. Where the arbitrator has construed a contractual term — or a term of the relevant statutory framework — on a view that is reasonable and supportable, the award cannot be set aside merely because the court takes a different view. The arbitrator is the chosen forum; the parties' bargain on the choice of forum extends to acceptance of the arbitrator's reasoned construction within the band of reasonableness.

Applied to the interest-rate question, the Bench held that the arbitrator's construction — settling on 18% compound — was a reasoned exercise within the framework of Section 31(7)(b) of the 1996 Act and the contractual matrix. It was not patently illegal. The High Court's substitution of 9% simple was therefore a substitution of view, not a correction of patent illegality — and was, on either the modification ground or the merits ground, beyond Section 34.

The 1996 Act, modelled on the UNCITRAL Model Law, does not contain the modification power that the 1940 Act expressly conferred. The Section 34 court may set aside; it may not modify.

The doctrinal lineage

The 11 August 2023 ruling sits at the apex of a doctrinal chain that the Supreme Court had been building for nearly a decade.

Associate Builders v. Delhi Development Authority (2015) 3 SCC 49 — the foundational restatement of the public-policy ground post-Renusagar and pre-Ssangyong — had read the Section 34 review power narrowly and had warned against the appellate-substitution temptation. Ssangyong Engineering Construction Co. Ltd. v. NHAI (2019) 15 SCC 131 — addressing the post-2015 Amendment Act architecture — confined the patent-illegality ground to purely domestic awards and emphasised that the ground does not authorise merits review. Project Director, NHAI v. M. Hakeem (2021) 9 SCC 1 — the immediate predecessor to Larsen — had already held, in terms, that the Section 34 court has no power to modify an arbitral award. Larsen Air Conditioning is the Supreme Court's clearest reiteration of the Hakeem proposition, applied on an interest-rate fact pattern and with the Allahabad High Court's modification expressly set aside.

The doctrinal sequence — Associate Builders → Ssangyong → Hakeem → Larsen — produced, by mid-2023, a settled position that the High Court Section 34 reviewer could only set aside, not modify. The pro-arbitration arc of those four rulings was the doctrinal backdrop against which the practitioner bar advised through 2023 and 2024.

The post-Larsen turn: Gayatri Balasamy and the narrow modification corridor

Two years after Larsen, the Supreme Court returned to the modification question — this time on a Constitution Bench reference. Gayatri Balasamy v. ISG Novasoft Technologies Ltd, 2025 INSC 605, decided on 30 April 2025 by a 5-judge Bench, qualified — without overruling — the Hakeem-Larsen proposition. The Bench split 4:1: CJI Sanjiv Khanna authored the majority opinion for himself, Justices B.R. Gavai, P.V. Sanjay Kumar and Augustine George Masih; Justice K.V. Viswanathan dissented.

The majority recognised a limited modification power in four narrowly defined circumstances: (i) severability — where part of the award is separable from the rest and can be excised without disturbing the remainder; (ii) clerical, computational or typographical errors apparent on the face of the record; (iii) post-award interest — the Section 34 court may modify the post-award interest component of an award; and (iv) the Supreme Court's Article 142 power, to be exercised sparingly and only in the most compelling cases. Beyond those four corridors, the Hakeem-Larsen prohibition on modification remains intact: the Section 34 court cannot rewrite the award, cannot substitute its view on quantum, cannot rebuild the reasoning.

Larsen Air Conditioning therefore remains good law for the foundational proposition that Section 34 confers no general modification power and that merits-substitution is barred. What Gayatri Balasamy has done is to open four narrow corridors — for severance, for clerical correction, for post-award interest, and for Article 142. The 18% compound versus 9% simple substitution on the Larsen facts is not within any of those corridors; the rate-substitution in Larsen would today fail in the same way and on the same reasoning.

The first substantial post-Gayatri Balasamy application has been Bhupesh Bhayana v. Kunal Seth, 2026 INSC 546, where the Court — confronted with a 14-year-old redevelopment dispute and a ₹10,000-per-day penalty clause — preferred modification over a fresh setting-aside, on the reasoning that to set aside and remit would compound the very delay that the modification corridor was designed to address. The doctrinal architecture for the modification corridor will continue to develop case-by-case through 2026 and beyond.

What the practitioner does with this

Three operational guides emerge from Larsen read alongside Gayatri Balasamy.

For the award-debtor's Section 34 counsel. The framing of the challenge must respect the corridor. A challenge that asks the court to substitute a different interest rate, a different quantum of damages, or a different construction of the contract is — on Hakeem-Larsen — destined to fail. The corridor is set-aside on enumerated grounds, with the four narrow modification gateways from Gayatri Balasamy. Counsel that frames the challenge in modification-substitution terms invites the dismissal that the Allahabad High Court's order in Larsen itself attracted on appeal.

For the award-holder's resistance. The first defensive move on a Section 34 challenge that pleads modification-substitution is the Larsen point. Where the challenger asks the court to reduce 18% to 9%, or compound to simple, or one quantum to another, the resistance is that the relief sought is outside the Section 34 corridor. The Gayatri Balasamy corridors are narrow; the burden is on the challenger to bring the relief within one of the four named gateways.

For the High Court Section 34 Bench. The post-Gayatri Balasamy discipline is to identify, at the outset of the modification enquiry, which of the four corridors the proposed modification falls within. Outside the corridors, the choice is binary — set aside (wholly or in part) or refuse — with the merits left to the tribunal. The appellate-substitution temptation that the Larsen facts had attracted is now expressly outside the corridor.

The 1940 comparator and the legislative choice

A small but consequential point on statutory construction: Section 15 of the 1940 Act had expressly empowered the court to "modify or correct" an award in three situations — where part of the award was on a matter not referred, where the award was imperfect in form or contained an obvious error, and where the modification could be made without affecting the decision on the matter referred. The 1996 Act omitted that provision deliberately. The omission was not an oversight; it was a structural choice flowing from the adoption of the UNCITRAL Model Law framework. Larsen gives that legislative choice its full effect; Gayatri Balasamy has limited that effect by reading back, on Constitution Bench authority, a narrow set of corridors. The conversation between legislative choice and Constitution Bench reading is the doctrinal architecture that the practitioner now operates within.

The reach of the Larsen rule today

Three boundary observations help fix the Larsen rule's reach as of mid-2026.

The general rule survives. Outside the four Gayatri Balasamy corridors, the Section 34 court has no power to modify. The general prohibition that Hakeem and Larsen established remains the default rule.

The patent-illegality threshold has not moved. Larsen's restatement of the patent-illegality threshold — illegality going to the root of the matter, not merits-disagreement — remains the controlling formulation. The threshold is the same whether the relief sought is set-aside or one of the narrow modification corridors.

Reasonable construction by the arbitrator is the safe harbour. Where the arbitrator's view is within the band of reasonable construction, the award stands. The Section 34 court's role is not to choose between possible views but to identify whether the arbitrator's view crosses the threshold of patent illegality, public policy or one of the other enumerated grounds.

The doctrinal arc

The Section 34 modification question now sits at the intersection of two doctrinal lines. The first is the Associate Builders → Ssangyong → Hakeem → Larsen line on the narrow scope of Section 34 review and the prohibition on merits-substitution. The second is the Gayatri Balasamy Constitution Bench recognition of limited modification corridors — severance, clerical correction, post-award interest, Article 142 — that operates as a narrow qualification on the first line.

For practitioners drafting Section 34 challenges in 2026, the framing discipline is to ask, at the outset, whether the relief sought is within the Hakeem-Larsen set-aside corridor or within one of the four Gayatri Balasamy modification corridors. Outside both, the challenge is doctrinally barred.

The bottom line

Larsen Air Conditioning v. Union of India is the Supreme Court's clearest statement of the proposition that the Section 34 court cannot modify an arbitral award. Its restoration of the arbitrator's 18% compound interest — after the Allahabad High Court had substituted 9% simple — supplied the operational illustration of the rule. Gayatri Balasamy has, two years later, opened four narrow corridors for limited modification, but the foundational Larsen proposition — that Section 34 confers no general modification power and that the patent-illegality threshold is exacting — remains controlling. The post-2023 practitioner architecture for Section 34 review is built on Larsen as restated and qualified by Gayatri Balasamy: a narrow set-aside corridor, four narrow modification corridors, and a continuing prohibition on merits-substitution.

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