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Doctrine Of Severability Applicable To Arbitral Awards: Allahabad High Court's Ruling Explained

The Allahabad High Court has recently rendered a crucial verdict affirming the doctrine of severability concerning arbitral awards. This doctrine enables the separation of valid segments from invalid ones, provided they can exist independently. The court emphasized that as long as the findings in the award remain untouched, the courts possess the authority to apply the doctrine.

The Allahabad High Court has recently rendered a crucial verdict affirming the doctrine of severability concerning arbitral awards. This doctrine enables the separation of valid segments from invalid ones, provided they can exist independently. The court emphasized that as long as the findings in the award remain untouched, the courts possess the authority to apply the doctrine.

A bench comprising Justices Manoj Kumar Gupta and Vikram D. Chauhan underscored that the Arbitration and Conciliation Act does not impose limitations on the court's power to apply the doctrine of severability while addressing objections under Section 34 of the Act. The court stressed that the only constraint is that the court cannot modify the findings returned on any issues by the arbitral tribunal, and the remaining part should be capable of survival on its own.

Furthermore, the Court endorsed the Commercial Court's finding that the Arbitral Tribunal had attempted to alter the contract terms between the involved parties by discarding the Supplementary Memorandum of Understanding (MoU). The Court concurred that there was no evidence regarding economic duress and deemed the finding as based on conjectures and surmises. Consequently, the Commercial Court's intervention under Section 34 of the Act was warranted.

Understanding the Background

The case at hand involves Hindustan Steel Works Construction Limited (HSCL), a Government of India Undertaking, and the New Okhla Industrial Development Authority (NOIDA). Their contract encompassed the construction of two flyovers with clover leaves and associated work, totaling Rs. 106.10 crores. However, disputes erupted over the project costs and various other aspects, leading to arbitration.

As the factual background reveals, HSCL initially agreed to forego claims for damages and price escalation during the suspension of work. Yet, after the project's completion, HSCL raised claims for damages for both the suspension period and price escalation.

HSCL initiated a Section 11 application, leading to the appointment of a sole arbitrator. The arbitrator adjudicated on most matters, favoring HSCL. Consequently, NOIDA filed Section 34 objections before the Commercial Court, resulting in the setting aside of damages for the suspension period and upholding the validity of a Supplementary Memorandum of Understanding (MoU). Claims of coercion, duress, undue influence, and unequal bargaining power by HSCL were rejected.

Citing a Supreme Court judgment, the Commercial Court invalidated the entire award, asserting that certain findings were against public policy and fell within the purview of Section 34(2) and (2-A) of the Act. The Commercial Court maintained that partial modifications were impermissible.

Upon review by the Allahabad High Court, arguments were presented, disputing the Commercial Court's reliance on precedent and its authority to modify an award. The High Court scrutinized two key issues: the award of damages during the suspension period and the court's power to sever a portion of the award.

Detailed High Court Verdict

The Court framed two primary issues for consideration:

  • (A) Whether the award of damages during the period of suspension of the contract (Claim No.2), by the arbitral tribunal, warrants interference by the Court under Section 34 of the Act.
  • (B) Whether the Court has the power to sever the flawed part of the award from the valid part, even in situations not covered under the proviso to Section 34 (2) (a) (iv) of the Act.

The Court referred to the Supreme Court's judgment in Central Inland Water Transport Corp, which examined the issue of judicial review in contracts concerning the unequal power of bargaining between the employer and the employee. The Court noted that each case must be judged based on its unique facts and circumstances.

Justice Gupta, speaking for the bench, held that findings regarding coercion and duress returned by an Arbitral Tribunal can be interfered with under Section 34 of the Act, depending on the case's facts. The Court emphasized its power to interfere if the findings suffer from patent illegality or other grounds stipulated under Section 34 of the Act.

The Court clarified that raising a plea of duress or coercion in a commercial contract is not absolutely barred between two business entities. However, the burden lies on the party raising it to prove its authenticity. The Court opined that the arbitral tribunal's finding of competence to examine the plea of duress, coercion, and unequal bargaining power does not suffer from any such illegality as to warrant interference under Section 34 of the Act.

Regarding the understanding of the nuances of HSCL giving up claims to price escalation and damages during the suspended work period in the Supplementary MoU, the Court held that the claim of duress and coercion was an afterthought and sham. The Court cited Chitty's words, emphasizing that not all pressure is illegitimate, especially in ordinary commercial activity.

Power of the Court to Sever the Arbitral Award

The Court then turned to the second issue: the power of the court to sever the flawed part of the award from the valid part, even in situations not explicitly covered under the Act. The Court highlighted that the Arbitration Act of 1996 restricts the court's power to modify an arbitral award or remit it back to the arbitrator, unlike the Act of 1940, to avoid judicial interference. The Court emphasized that the courts have been assigned a supervisory role to ensure fairness and curb arbitrariness, violation of public policy, patent illegalities, jurisdictional errors, and similar concerns.

The Court refuted the Commercial Court's finding on the issue of severability of the arbitral award, stating that the decision of the Supreme Court in Dakshin Haryana Bijli Vitran Nigam Ltd. primarily focused on the limitation of filing objections under Section 34.

The Court noted that when Section 34 confers the power to set aside an award, the power could be exercised to set aside any or all such awards, whether composite, interim, final, or additional.

The Court emphasized that if the award is set aside as a whole, it would force parties into another round of litigation, causing grave injustice and defeating the purpose of the Act of 1996, which aims to provide speedy recourse to the parties.

The Court invoked legal precedents to support the doctrine of severability, illustrating that valid claims can survive independently, even when certain claims within the award are found to be invalid.

Consequently, the Court applied the doctrine of severability and set aside liquidated damages sought, as they were distinct and separate from the remaining valid and lawful claim. The Court highlighted that the claims found to be valid can stand on their own without being affected by the severance of Claim No.2 related to liquidated damages.

The Allahabad High Court's ruling reinforces the doctrine of severability in arbitral awards. It upholds the principle that valid segments of an award can be preserved and enforced independently, promoting a fair and efficient arbitration process. The Court's comprehensive analysis and application of legal principles underscore the significance of maintaining fairness and upholding the integrity of the arbitral process. This decision aligns with the broader objectives of arbitration, which aim for expediency, fairness, and impartiality in resolving disputes outside the traditional court system.

By allowing the separation of valid portions of an award from those found invalid, the Court ensures that the enforceability and legitimacy of the valid parts are preserved. This approach not only serves the interest of justice but also promotes the expeditious resolution of disputes, a key objective of the Arbitration and Conciliation Act. It discourages unnecessary and prolonged litigations, thereby supporting the Act's intent of providing a speedy recourse to parties involved.

The Allahabad High Court's stance, affirming the doctrine of severability, clarifies the Court's role as a supervisor and arbiter of fairness in the arbitration process. It strikes a balance between ensuring the integrity of the arbitral award and preventing grave injustice to the parties involved. By doing so, it contributes to maintaining trust and confidence in the arbitration system, which is essential for attracting and retaining investments.

Furthermore, this ruling underscores the importance of legal precedent and the application of legal principles within the specific context of arbitration. It acknowledges that each case is unique and must be evaluated on its own facts and circumstances, emphasizing the nuanced approach required in the realm of commercial contracts and arbitration.

In essence, the Allahabad High Court's decision serves as a significant legal interpretation that reinforces the doctrine of severability as a vital tool for upholding the integrity and efficiency of the arbitration process. It sheds light on the Court's commitment to ensuring that the essence of valid claims in an award remains intact and enforceable, even in the presence of invalid elements. This, ultimately, is a step forward in fostering a robust and credible arbitration system in India.

Case Title: Hindustan Steelworks Construction Limited vs. New Okhla Industrial Development Authority 2023