INTRODUCTION

Recently, the Hon'ble Kerala High Court (“Court”) in the case of M/s. Navayuga Engineering Company Limited vs. Union of India1 (“Navayuga Engineering”) was posed with the question ‘as to what amounts modification of award by a court?' The said question was faced by the Court in light of a recent judgment of the Hon'ble Supreme Court (“Apex Court”) in Project Director, National Highways Authority of India vs. M. Hakeem2 (“M. Hakeem”). Herein, the Apex Court has held that Section 34 of the Arbitration and Conciliation Act, 1996 (“Act”) does not contemplate modification of an award.

Therefore, the issue which was dealt in by the Court was “As to what constitutes ‘modification of an award'? Wherein if the Arbitrator has awarded separate amounts on various independent claims, then, would setting aside some of the claims, which are separable and independent of the remaining claims, constitute modification of the arbitral award?”

ORIGIN OF DOCTRINE OF SEVERABILITY

The principle of ‘Doctrine of Severability' marks its origin from the decision of House of Lords in Nordenfelt vs. Maxim Nordenfelt Guns and Ammunition Company Limited3 , wherein the House of Lords separated the unlawful portion of a trade clause, as much as declaring the remaining clause as lawfully valid. Subsequently, the principle entered the Indian jurisprudence when the Apex Court4 while deciding on the fate of the Prevention Detention Act, 1950 upheld the entire statute barring Section 14 which got severed from the Prevention Detention Act, 1950 and was struck down.

Therefore, the basic premise on which the principle of ‘Doctrine of Severability' holds its existence is that it allows to separate the unconstitutional or invalid or illegal portion from the remaining valid portion, thereby saving the entire portion from being struck down as unconstitutional. However, this doctrine is applicable only if it is possible to separate the legal from the unconstitutional portion of a provision, and in the absence whereof the entire provision runs into being struck down as unconstitutional5.

ACKNOWLEDGEMENT TO ‘DOCTRINE OF SEVERABILITY' BY THE ACT

This principle is also not oblivious to the Act wherein the ‘Doctrine of Severability' allows the ‘Arbitration Clause' to maintain separate existence from the contract and other clauses present in the contract. This notion of separate existence of arbitration agreement derives its basis from Article 16(1) of the UNCITRAL Model Law on International Commercial Arbitration, 1985 which was adopted under Section 16 of the Act by the Indian legislature and is also confirmed by catena of decisions of the Apex Court, holding that invalidity of a contract or any of its clause doesn't hamper the separate existence of an independent arbitration clause6.

Herein, it is important to understand that Section 34 of the Act very well incorporates the application of ‘Doctrine of Severability' under proviso to Section 34(2) (a)(iv) of the Act. The said proviso prescribes the power of the court to set aside only those portions of the arbitral award which were not submitted to arbitration, provided it is possible to separate such portion from the remaining arbitral award. Therefore, if such a separation is not possible, the entire arbitral award could be set aside by the court. However, in the case at hand, the issue to be answered does not relates to the proviso to Section 34(2)(a)(iv) of the Act. Rather, in the present case, it is explicit that the part which is called upon to be separated from the remaining portion of arbitral award was also submitted to be decided through arbitration.

KERALA HIGH COURT DISCUSSING THE ‘DOCTRINE OF SEVERABILITY' AND INDEPENDENT CLAIMS UNDER ARBITRAL AWARD

As already stated above, the matter of discussion for the Court was the ‘Doctrine of Severability', in the case of Navayuga Engineering, because of the recent prescription of the Apex Court in M. Hakeem rejecting the power of any court to modify or vary an arbitral award. Pertinently, in terms of the factual matrix posed, the Court sees a distinction in the case before itself from what has been dealt in the decision in M. Hakeem. In fact, the Court has noted inter alia another decision of Apex Court in the case of J.G. Engineers Private Limited vs. Union of India7 (“J.G. Engineers”) in support of its findings. The reasoning and observations of the Court for separating the illegal/infirm portion of an arbitral award from a legally operating portion, are significant, which are briefly couched hereafter.

Notably, in the case of M. Hakeem, the Apex Court arrived at the conclusion that Section 34 of the Act does not include the power to modify and vary the arbitral award. In that case, the compensation granted by the Arbitral Tribunal was abysmally low, which was enhanced by the district court exercising power under Section 34 of the Act. The Apex Court noted that the appointment of arbitrator was not legally sustainable, however, since the enhancement of award amount has already been taken benefit of by many people, it would be inconvenient to set aside the award and reinitiate the arbitration. In this light, the use of power under Section 34 of the Act by the concerned district court was sustained. 

The Court in Navayuga Engineering, distinguished on the circumstances of the case before it from those before Apex Court in M. Hakeem, in view that the Court in Navayuga Engineering was concerned about the power of a court to separate the separable claims which suffers from infirmity/illegality, and set aside those specific claims from the remaining claims awarded by the arbitrator. The Court, while highlighting this distinction, held that separating the unsustainable claims from the sustainable claims, as noted in the arbitral award, does not fall in the category of ‘modification of award', as described by the Apex Court in the case of M. Hakeem, where the issue inter alia was of district court enhancing the claimed amount granted by the arbitrator, even though the constitution of the tribunal was not legally sustainable.

Proceeding forth, the Court noted the decisions of Bombay High Court in the case of R.S. Jiwani vs. Ircon International Limited8 (“R.S. Jiwani”) and of the Apex Court in J.G. Engineers. In the case of R.S. Jiwani following important ratios inter alia were laid down by the Bombay High Court:

  1. The principle of ‘Doctrine of Severability' is also applicable to judgments and awards in the same manner as it is applied in terms of a contract or statute.
  2. Not applying the principle of ‘Doctrine of Severability' when applicable in an award would serve as unjust and unfair to the parties involved.
  3. Hence, the bad part of the award is completely independent and separable from the good part of the award, a court has the power to set aside the bad part of the award under Section 34 of the Act. However, if it is practically not possible to separate the bad part of the award from the good part, in such cases setting aside the award partially might not be an option.

The Court further noted the Judgment of Apex Court in the case of J.G. Engineers, wherein the Apex Court set aside certain claims awarded by the arbitrator and upheld the remaining claims and held that if the award deals with several claims separately and distinctly, the court has the power to severe the claims which suffers from infirmity while upholding the remaining claims holding good in law. Apposite to refer to the views of the Hon'ble Telangana High Court also in the case of Saptarishi Hotels Private Limited vs. National Institute of Tourism and Hospitality Management9 , wherein the court held that by applying ‘Doctrine of Severability' an award can be set aside partially.

CONCURRENT ANALYSIS TO THE REASONING EXPRESSED BY THE KERALA HIGH COURT

The above-discussed precedents casts enough clarity on the permissibility of application of the principle of ‘Doctrine of Severability' while exercising power under Section 34 of the Act. The views of the Court is in line with the law laid down by Hon'ble Bombay High Court in case of R.S. Jiwani, as also fortified by the Apex Court judgment in the case of J.G. Engineers. It is pertinent to mention, that the Apex Court while deciding the case of M. Hakeem made no reference to the case of J.G. Engineers, whereby neither distinguishing nor overruling the same. Therefore, it could very well be confirmed that both the decisions speak about different factual scenarios which do not overlap each other. Hence, separating the independent portion of an award suffering from infirmity, from the remaining valid portion of an award should not be considered as ‘modification of award', which connotation was defined by the Apex Court in the case of M. Hakeem.

CONCLUSION

The law in India seems to be crystal clear over the principle of ‘Doctrine of Severability' when it comes to being applied by a court while exercising power under Section 34 of the Act. Having said that, along-with sustainable legal backing, practically and logically also makes sense whereby allow the courts to separate and discard such independent portions of an arbitral award that suffers from infirmity. If not allowed, the courts would only be left with an option to either set aside the entire award including the lawful operating portion or to remand the matter back in the hands of the arbitral tribunal via Section 34(4) of the Act. This would lead to the eruption of numerous unwanted hurdles for the parties involved which inter alia may include delay in enforcement of the award and incurring uncalled for extra cost in the arbitral proceedings.

At the same time, it is important to understand that the ‘Doctrine of Severability' has already been recognized by the Act as already discussed above. Therefore, when there is no statutory prohibition on its application, there is no reason for not applying the same. More so, when a partial challenge to an award is permissible then why not partial setting aside of an award.

Footnotes

1. M/S Navayuga Engineering Company Limited vs. Union of India, Arbitration Appeal No. 38 of 2020.

2. Project Director, National Highways Authority of India vs. M. Hakeem, 2021 SCC Online SC 473.

3. Nordenfelt vs. Maxim Nordenfelt Guns and Ammunition Company Limited, [1894] AC 535.

4. A.K. Gopalan vs. the State of Madras, AIR 1950 SC 27.

5. State of M.P. vs. Ranojirao Shinde, AIR 1968 SC 1053.

6. N.N. Global Mercantile (P) Ltd. vs. Indo Unique Flame Ltd., (2021) 4 SCC 379.

7. J.G. Engineers Private Limited vs. Union of India and another, (2011) 5 SCC 758.

8. R.S. Jiwani vs. Ircon International Limited, Mumbai, 2009 SCC Online Bom 2021.

9. Saptarishi Hotels Private Limited and another vs. National Institute of Tourism and Hospitality Management, 2019 SCC OnLine TS 1765.

Originally published February 2022

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