M/S Larsen Air Conditioning and Refrigeration Company v. Union of India & Ors.
- Reha Bhargav
- 16 October, 2025
Introduction
This case arose from a contractual dispute between M/s Larsen Air Conditioning and Refrigeration Company (Petitioner) and the Union of India (Respondent). The dispute was referred to arbitration following disagreements regarding payment and execution of contractual obligations.
The arbitral tribunal ruled in favor of Larsen, granting both the principal claim and interest at 18% per annum, compounded annually, in accordance with Section 31(7)(b) of the Arbitration and Conciliation Act, 1996.
Dissatisfied with the rate of interest, the Union of India approached the Allahabad High Court, which modified the award by reducing the interest from 18% compound to 9% simple interest. Larsen appealed this modification before the Supreme Court of India, raising an important question about the extent of judicial interference with arbitral awards under the Arbitration Act, 1996 — specifically, whether courts can modify an arbitral award or only set it aside under limited statutory grounds.
Facts of the Case
M/s Larsen Air Conditioning and Refrigeration Company entered into a government contract for execution of air conditioning and refrigeration works.
Disputes arose during execution concerning payments and work completion, which were referred to arbitration per the contract terms.
The arbitral tribunal awarded Larsen both the principal sum and interest at 18% per annum compounded annually, from the date the cause of action arose until full payment.
The Union of India challenged the award before the Allahabad High Court under Section 34 of the Arbitration and Conciliation Act, 1996.
The High Court upheld the award on merits but reduced the interest from 18% compound to 9% simple interest, terming the higher rate as excessive.
Aggrieved by this partial modification, Larsen appealed to the Supreme Court, asserting that the High Court lacked jurisdiction to alter any part of the arbitral award.
Issues of the Case
Whether a court, while exercising powers under Section 34 of the Arbitration and Conciliation Act, 1996, has the jurisdiction to modify or alter an arbitral award?
Whether the reduction of interest from 18% compounded to 9% simple interest amounted to unlawful modification of the award?
Whether the award of 18% interest by the arbitral tribunal was valid and enforceable under Section 31(7)(b) of the Act?
What is the scope of judicial interference under the 1996 Act — can courts alter an award’s terms or are they limited to setting aside the award on specific statutory grounds?
Petitioner’s Arguments
Counsel for Larsen Air Conditioning and Refrigeration Company argued that:
The arbitral tribunal lawfully awarded 18% interest under Section 31(7)(b), which allows post-award interest unless parties agree otherwise.
The High Court’s jurisdiction under Section 34 is strictly limited to setting aside awards on specific grounds such as patent illegality, fraud, or violation of natural justice — not modifying them.
By reducing the rate of interest, the High Court effectively rewrote the arbitral award, which is prohibited under the 1996 Act.
The Arbitration Act embodies a pro-arbitration policy emphasizing finality and minimal judicial interference.
Hence, the High Court’s action was ultra vires and undermined the autonomy and credibility of the arbitral process.
Respondent’s Arguments
The Union of India contended that:
The 18% compound interest awarded by the tribunal was excessive and unreasonable, particularly in contracts involving public funds.
Courts possess the inherent power to correct manifestly unjust or disproportionate awards, especially where the financial burden falls on the public exchequer.
The High Court’s reduction of the interest rate did not amount to a modification but was a fair correction ensuring equity and public interest.
Even if Section 34 imposes limits, the High Court’s constitutional powers under Articles 226 and 227 allowed it to intervene in the interest of justice.
Judgment
The Supreme Court allowed Larsen’s appeal and set aside the judgment of the Allahabad High Court, restoring the original arbitral award in full.
The Court held that:
“The power under Section 34 of the Arbitration and Conciliation Act, 1996 does not extend to modifying, revising, or altering an arbitral award. The court’s jurisdiction is confined to setting aside the award in whole or in part if it meets one of the statutorily defined grounds.”
Key Observations:
The arbitral tribunal’s grant of 18% interest was valid under Section 31(7)(b).
The High Court exceeded its jurisdiction by reducing the interest rate.
Judicial interference in arbitral awards must be minimal and within the four corners of the statute.
The decision reinforced India’s pro-arbitration framework and the finality of arbitral awards.
Accordingly, the Supreme Court restored the original award, including the 18% per annum compound interest granted by the arbitral tribunal.
Conclusion
The Supreme Court’s decision reaffirmed the limited scope of judicial intervention under the Arbitration and Conciliation Act, 1996. It held that courts have no power to modify arbitral awards, including components like interest rates, as doing so would breach the finality and autonomy of arbitration.
By reinstating the original award, the Court emphasized that the judiciary must act as a guardian of the arbitral process, not as a reviewing authority rewriting its terms.
This ruling strengthens India’s pro-arbitration jurisprudence, ensuring that arbitral awards — once made — remain final, binding, and enforceable, except in cases of clear statutory violations.
