Modification of arbitral awards under Article 142 to prevent hardship and ensure substantial justice.

The appellants (Owners) entered into a collaboration agreement on 09.04.2010 with the respondents' predecessor (Builder) for the reconstruction of a building

Clause 7 stipulated completion within 12 months (plus a 2-month grace period) from the date of providing vacant land, failing which a penalty of ₹10,000/- per day was payable

The Builder abandoned construction in August 2011, having paid only ₹45 lakh of the ₹64 lakh earnest money

The Owners terminated the agreement on 11.11.2011

An Arbitrator found the Builder in breach and awarded the Owners ₹72 lakh in penalties but directed the refund of the Builder's ₹45 lakh earnest money and ₹36.92 lakh construction costs

A Single Judge of the High Court modified the penalty amount under Section 34

On appeal under Section 37, the Division Bench set aside the Owners' penalty entirely, holding they failed to prove actual damages

1. Whether the court has the power to modify an arbitral award under Sections 34 and 37 of the Arbitration Act

2. Whether the Owners were required to adduce separate evidence of actual loss to claim a contractually stipulated penalty under Clause 7

3. Whether the computation of the "delayed period" for penalty must align with the date vacant land was provided and the date of termination

The Court applied the principles governing Sections 34 and 37 of the Arbitration and Conciliation Act, 1996, specifically the ground of "patent illegality" under Section 34(2A)

It relied on the Constitution Bench precedent in Gayatri Balasamy v. ISG Novasoft Technologies Limited (2025), which established that Courts possess a nuanced power to modify awards—rather than just annulling them—to prevent hardship and delay

The court also invoked Article 142 of the Constitution of India to do substantial justice and provide a quietus to long-standing litigation

The Court found the Arbitrator’s and lower courts' computations factually flawed. Under Clause 7, the 12-month clock only started when "vacant land" was provided; as the Builder’s uncontroverted evidence showed demolition took until 09.07.2010, the 14-month completion period expired on 09.09.2011

The Court held the Division Bench erred in requiring proof of actual loss; since the contract stipulated a daily penalty for delay, damage was "implicit," and separate evidence was unnecessary

However, the penalty could only run until the date the Owners terminated the contract (11.11.2011), as the Builder could not legally continue work thereafter

While the Arbitrator’s failure to allow forfeiture under Clause 13 (breach) alongside Clause 7 (delay) was a "patent illegality," the Owners' failure to challenge the award under Section 34 made that finding final

The Respondents/Builder are entitled to a refund of ₹81,92,400/- (earnest money and construction costs) as previously awarded and unchallenged. After offsetting the penalty, the Appellants must pay the Respondents a balance of ₹25,62,400/- (accounting for ₹50 lakh already deposited); and no interest is payable to either party.