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 BACKGROUND

Hindustan 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 VERDICT

The 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 suffers from patent illegality or any grounds stipulated under Section 34 of the Act.

“The position which thus emerges is that there is no absolute bar in raising plea of duress/coercion and unequal bargaining power in a commercial contract between two business entities, albeit a heavy burden lies on the party who raises it, to prove the same. Therefore, we are of the opinion that finding of the arbitral tribunal that it was competent to examine the plea of duress, coercion and unequal bargaining power does not suffer from any such illegality as would require interference under Section 34 of the Act.”

While holding that HSCL understood the nuances of giving up claims to price escalation and damages during the period work remained suspended in the Supplementary MoU, the Court held that the claim of duress and coercion was an afterthought and sham.

“In the words of Chitty - “Clearly, not all pressure is illegitimate, nor even are all threats illegitimate. In ordinary commercial activity, pressure and even threats are both commonplace and often perfectly proper,”” observed the Court.

On the second issue, the Court noted that the Act of 1996 specifically curtails the power of the Court to modify the arbitral award and to remit it back to the arbitrator unlike the Act of 1940 to avoid judicial interference. “The courts have been given only supervisory role to ensure fairness and strike at arbitrariness, violation of public policy of India, patent illegalities appearing on the face of record, jurisdictional error and the like (Section 34 (2) and (3)).”

The Court held that the decision of the Supreme Court in Dakshin Haryana Bijli Vitran Nigam Ltd. only says that the arbitral award cannot be modified which is a settled principle. Further, it was noted that the said decision was primarily on the issue of limitation of filing objections under Section 34.

“When Section 34 confers power in the court to set aside an award, the power could be exercised to set aside any or all such awards, whether composite, interim, final or additional,” observed the Court. If the award is set aside as a whole, it would force parties through another round of litigation, thereby causing grave injustice to the parties. It would also defeat the purpose of the Act of 1996 providing speedy recourse to the parties. The Court, thus, rejected the finding of the Commercial Court on the issue of severability of the arbitral award.

Reliance was placed by the Court on R.S. Jiwani (M/s.) Mumbai Vs. Ircone International Ltd. Mumbai wherein full bench of Bombay High Court held that the Arbitration Act 1996 does not in any manner prohibit the court to apply the doctrine of severability of an arbitral award. Further, the Court relied on the decision of the Supreme Court in J.G. Engineers Pvt. Ltd. Vs. Union of India and another, wherein doctrine of severability was applied set aside certain claims holding that they were a separate and distinct part of the award. The Supreme Court had observed

“It is now well- settled that if an award deals with and decides several claims separately and distinctly, even if the court finds that the award in regard to some items is bad, the court will segregate the award on items which did not suffer from any infirmity and uphold the award to that extent.”

Accordingly, applying the doctrine of severability, the Court set aside liquidated damages sought as they were separate and distinct from the remaining claim which were valid and lawful. “The claims found to be valid are capable of surviving on their own strength, without in any manner getting affected by severance of Claim No.2 towards liquidated damages.”

Case Title: Hindustan Steelworks Construction Limited vs. New Okhla Industrial Development Authority 2023 LiveLaw (AB) 346

Case Citation: 2023 LiveLaw (AB) 346

Counsel for Appellant: Amit Saxena, Senior Advocate assisted by Varad Nath and Pranay Agarwala

Counsel for Respondent: Manish Goyal, Senior Advocate assisted by Kaushalendra Nath Singh and Anjali Goklani

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