Arbitral Award Can't Be Modified, Only Set Aside Under S.34 & S.37 Arbitration Act; Courts Can't Remand for Re-quantification: Supreme Court - 2025-07-06

Supreme Court Upholds Severing of Arbitral Award, Affirms Courts Cannot Modify or Remand for Re-quantification

New Delhi: In a significant judgment reinforcing the limited scope of judicial review over arbitral awards, the Supreme Court has upheld a Delhi High Court decision that set aside the monetary claims in an award while affirming the finding of a contractual breach. A bench led by Justice Abhay S.Oka dismissed appeals from both Puri Construction Private Limited (PCL) and Larsen and Toubro Limited (L&T), bringing a 24-year-old dispute over a failed real estate project to a close, while leaving the door open for PCL to seek fresh quantification of its damages.

The Court also took the opportunity to express serious concern over the "prolix and near interminable arguments" in arbitration-related cases, urging restraint from the legal fraternity to prevent such matters from being argued like regular civil appeals.

Case Background: A Development Deal Gone Sour

The dispute originated from a 1998 Development Agreement between PCL and L&T for a large group housing project in Gurgaon. After L&T cited a real estate recession, a Supplementary Agreement (1999) and a Tripartite Agreement (2000) involving Lord Krishna Bank were executed to restructure the project and financial obligations, including the payment of External Development Charges (EDC).

In December 2000, PCL terminated the agreement, alleging L&T had abandoned the project, failed to pay EDC, and committed other fundamental breaches. The matter was referred to a sole arbitrator.

From Arbitral Tribunal to the High Court

The Arbitral Tribunal, in its 2002 award, ruled in favour of PCL. It found that L&T had abandoned the project, committed fundamental breaches, and that the Supplementary Agreement was vitiated by "economic duress." The Tribunal awarded PCL damages and compensation totaling over ₹160 crores, including: - ₹35 crores for damages. - ₹75 crores in lieu of releasing mortgaged title deeds. - ₹50 crores as indemnity against claims from a third party (ITCREF).

A Single Judge of the Delhi High Court, under Section 34 of the Arbitration Act, set aside the entire award, finding it perverse and contradictory. However, the Division Bench, in an appeal under Section 37, partially reversed this. It upheld the Tribunal's core findings that L&T had breached the contract and that the Supplementary Agreement was a "non-starter."

Crucially, the Division Bench set aside the quantification of damages (₹35 crores, ₹75 crores, etc.), deeming it unsupported by evidence and contrary to Section 73 of the Contract Act. While upholding the permanent injunction against L&T, it left the parties to "pursue the appropriate course of action under law" for the monetary claims.

Key Arguments Before the Supreme Court

• L&T argued that the Division Bench had effectively modified the award by severing its parts, which is impermissible under the law as established in NHAI v. M. Hakeem . It contended that the reasoning and operative parts of the award were intrinsically linked and that the finding of "economic duress" was baseless and contrary to PCL's own pleadings. L&T also claimed the Tribunal ignored contractual clauses that permitted delays due to adverse market conditions.

• PCL contended that the Arbitral Tribunal's view on L&T’s breach was a plausible one and should not be interfered with. It argued that L&T’s abandonment of the project, non-payment of EDC, and failure to fulfill conditions precedent of the Supplementary Agreement were well-established. PCL urged the Supreme Court to restore the damages awarded by the Tribunal, arguing they were based on L&T's own profit estimations.

Supreme Court's Analysis and Decision

The Supreme Court meticulously analyzed the findings of the Arbitral Tribunal, the Single Judge, and the Division Bench. It affirmed the Division Bench’s approach, grounding its decision in established legal principles.

On Scope of Judicial Review and Modification of Award

The Court reiterated the principle laid down in NHAI v. M. Hakeem , stating that a court under Sections 34 or 37 cannot modify an arbitral award. Its power is limited to setting an award aside. The bench observed: > "The powers of the Appellate Court under Section 37 of the Arbitration Act are not broader than those of the Court under Section 34 of the Arbitration Act. Therefore, what cannot be done in the exercise of the powers under Section 34 cannot be done in an Appeal under Section 37. An Arbitral Award cannot be modified."

The Court found that the Division Bench had correctly applied this principle. By setting aside the unreasoned quantification of damages while upholding the reasoned finding of breach, the High Court did not modify the award but severed the illegal parts. The final order rightly left PCL to pursue fresh proceedings for quantifying its claims.

On Merits of the Case

• Breach of Contract: The Supreme Court agreed with the Tribunal and the Division Bench that L&T had committed fundamental breaches and abandoned the project. The finding that the Supplementary Agreement was a "non-starter" because L&T failed to meet its conditions precedent was deemed a "possible finding which could not have been interfered with."
• Economic Duress: The Court upheld the finding that the subsequent agreements were tainted by economic duress, noting L&T's failure to pay EDC had put PCL in a vulnerable position, leaving it no choice but to agree to the new terms.
• Damages: The Court affirmed the Division Bench's decision to set aside the damages, stating, "the award of ₹35 crores as damages was fundamentally contrary to Section 73 of the Contract Act." It held that the Tribunal’s reliance on L&T’s counter-claim figures, without independent proof of loss by PCL, was a patent illegality.

A Stern Message to the Bar

In a notable postscript, the bench strongly deprecated the practice of arguing arbitration appeals at excessive length, treating them as first appeals on facts. Justice Oka wrote: > "We have noticed that there is a tendency on the part of the senior members of the Bar to argue as if these proceedings were regular appeals... The high monetary stakes involved in the proceedings should not result in unnecessarily long oral submissions or bulky written submissions... There is a need to impose time limit on oral submissions in such cases."

By dismissing both appeals, the Supreme Court has solidified the legal position on the finality of arbitral awards while ensuring that awards based on patent illegality, such as unreasoned quantification of damages, can be set aside without disturbing the core findings on liability.