Doctrine Of Severability Applicable To Arbitral Awards, If Good Part Can Survive On Its Own: Allahabad High Court

The Allahabad High Court has held that doctrine of severability can be applied to arbitral awards for separating the good part from the bad, provided they are independent of each other and findings in the award are not substituted by the Court. The bench comprising of Justices Manoj Kumar Gupta and Vikram D. Chauhan held,“We have thus, no hesitation in holding that scheme of the Act does not put any limitation on power of the court to apply the doctrine of severability to an arbitral award while considering the objections under Section 34 of the Act. It is well within the power of court to segregate, severe and set aside part of the award and uphold the remaining part. The only restriction is (i) that while exercising the power, the court cannot proceed to modify the findings returned on any of the issues decided by the arbitral tribunal and (ii) the remaining part is capable of surviving on its own.”Further, the Court upheld the finding of the Commercial Court that the Arbitral Tribunal had tried to rewrite terms of the contract between the parties by discarding the Supplementary MoU entered by them. It was held that there was no evidence as to the role of economic duress. The finding so returned was based on conjectures and surmises. Thus, it was patent illegality and warranted interference by the Commercial Court under Section 34 of the Act.FACTUAL BACKGROUNDHindustan Steel Works Construction Limited (HSCL), a Government of India Undertaking, entered into a contract with NOIDA for construction of two flyovers with clover leaves and allied work at M.P. Road No.3 Express Highway near Amity School and at T-junction near Film City, Gautam Budh Nagar at Rs. 106.10 crores. A report by IIT Delhi estimated that the cost was inflated by about Rs.60 crore, pursuant to which HSCL was directed to stop all work. After several rounds of negotiations, HSCL gave up its right to claim damages and price escalation during the period work remained suspended. However, after completion of work, HSCL raised claim for damages during suspension period as well as price escalation for the period – prior to and post recommencement of work. HSCL filed Section 11 application wherein sole arbitrator was appointed, who decided most issues in favour of HSCL. Consequently, NOIDA filed Section 34 objections before the Commercial Court wherein damages on account of suspension of work for period of 928 days were set aside. Further, validity of the supplementary MoU was upheld and the plea of coercion, duress, undue influence and unequal bargaining power by HSCL was rejected. Relying on the decision of the Supreme Court in Dakshin Haryana Bijli Vitran Nigam Ltd. Vs. M/s Navigant Technologies Pvt. Ltd., the Commercial Court set aside the award in its entirety as findings regarding some issues were perverse, against public policy of India and covered by grounds contained in sub-section (2) and (2-A) of Section 34 of the Act. Since modification was not permitted, the award could not be upheld in part, observed the Commercial Court. Before the High Court, Counsel for the Appellant contended that Commercial Court wrongly relied upon the judgment in Dakshin Haryana Bijli Vitaran Nigam Ltd. by holding that it cannot modify an award and has set it aside in its entirety despite upholding the findings of the Arbitrator with respect to price variation.It was further argued that the question of coercion and duress was purely a question of fact which was decided by the Arbitrator after hearing both parties and considering the material available on record. It was beyond the scope of Commercial Court u/s 34 to re-appreciate evidence and give its own interpretation to the same. Commercial Court wrongly relied upon the judgment in Central Inland Water Transport Corp. Vs. Brojo Nath Ganguly to hold that simple Commercial pressure is not enough to vitiate consent. HIGH COURT VERDICTThe Court framed two issue:“(A) Whether award of damages during the period of suspension of contract (Claim No.2), by the arbitral tribunal falls within the clutches of sub-section (2) or (2-A) of Section 34 of the Act, so as to warrant interference by the Court.(B) Whether the Court, in proceeding emanating from Section 34 of the Act has power to sever bad part of the award from good part even in situations not covered under the proviso to Section 34 (2) (a) (iv) of the Act?”The Court held that the judgment of the Supreme Court in Central Inland Water Transport Corp examined the issue of judicial review in contracts in terms of the unequal power of bargain between employer and employee. In that case, the Apex Court had also noted that each case must be judged on its own facts and circumstances.Justice Gupta, speaking for the bench, held that finding relating to coercion and duress returned by an Arbitral Tribunal can be interfered with under Section 34 of the Act depending on the facts of the case. The Court held that it is empowered to interfere in such finding if the same...

Doctrine Of Severability Applicable To Arbitral Awards, If Good Part Can Survive On Its Own: Allahabad High Court

Upasna Agrawal

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