Principle of severability made applicable to arbitration award
One of the key concerns of recent times has been the interference of the courts in the process of arbitration in India. The judgment passed in the Ircon Case has provided new hope to parties seeking enforcement of awards in India.
FACTS OF THE CASE
M/s Ircon International Limited (“Respondent”) was awarded a contract by the Maharashtra State Road Development Corporation (“MSRDC”) for constructing a rail over bridge. The Respondent floated a tender for sub-contracting a part of the project which was thereafter awarded to RS Jiwani (“Appellant”) and the parties signed an agreement dated January 29, 1999 (“Agreement”). Although the Agreement stipulated that the work was to be completed by November 18, 1999, the Respondent alleged that there was considerable delay and thus disputes arose between the parties. The Appellant also raised claims on account of extra expenses incurred and unanticipated losses. The Appellant invoked arbitration in terms of clause 29 of the Agreement. Accordingly, an arbitrator was appointed and Appellant submitted his claim while the Respondent filed reply as well as raised its counter claims. The Appellant had filed 32 claims before the arbitrator out of which 15 claims with interest were allowed while the remaining claims were rejected. All the counter-claims raised by the Respondent were also rejected. Aggrieved from the award, the Respondent filed petition for setting aside the award dated May 5, 2005 in terms of section 341 and 16 (6)2 of the Arbitration and Conciliation Act, 1996 (the “Act”). However, the Appellant did not challenge the award or any part thereof. The petition was admitted and the learned Single Judge recorded the findings that out of the 15 claims allowed by the learned Arbitrator, 11 claims were sustainable and the appellant was entitled to those claims but referring to the Division Bench judgment of the Bombay High Court in Mrs. Pushpa P. Mulchandani v. Admiral Radhakrishin Tahiliani, 2008 (7) LJ Soft, 161 the learned Single Judge set aside the entire award.
In Mrs. Pushpa P. Mulchandani v. Admiral Radhakrishin Tahiliani the Division Bench had held :
“Power to set aside only part of the award is conferred on court by section 34 of the Arbitration Act only in one contingency which is to be found in clause (iv) of sub-section (2) of section 42 of the Arbitration Act. In all other cases, if the Court finds that only a part of the award is affected by illegality which is pointed out to the court, the court cannot itself modify the award, but if a party to the petition applies to the court in exercise of its power under sub-section 4 of section 34, the court can direct the arbitral tribunal to resume the proceedings and take such action to eliminate the ground for setting aside the award. In such situation, the arbitral tribunal on resumption may be able to delete that part of the award which the Court finds to be invalid and illegal and make suitable modification in the award.”
Aggrieved by the decision of the Single Judge, the Appellant appealed to the Larger Bench which accordingly framed the following questions for consideration:
1. Whether doctrine of severability can be applied to an award while dealing with a petition under section 34 of the Arbitration Act, 1996; and
2. What is the scope of proviso to Section 32 (2) (iv) and whether its application is restricted to clause (iv) alone or it applies to the whole of section 34 (2) of the Arbitration Act, 1996
DECISION OF THE LARGER BENCH
The Larger Bench rejected the interpretation put forth by the Respondent and observed that such interpretation would cause great hardship, inconvenience and even injustice to the parties. Accordingly the Larger Bench expressed the view that the dictum of law in the case of Mrs. Pushpa P. Mulchandani v. Admiral Radhakrishin Tahiliani is not the correct position of law. The Larger Bench predicated the contrary view which it felt was in comity with the legislative intent and object of the Arbitration Act, 1940. The Larger Bench held that the judicial discretion vested in the court in terms of section 34 of the Arbitration Act, 1996 takes within its ambit power to set aside an award partly or wholly depending on the facts and circumstances of the given case. The Legislature has vested wide discretion in the court to set aside an award wholly or partly, of course, within the strict limitations stated in the said provisions The proviso to section 34 (2) (a) (iv) has to be read ejusdem generis to the main section, as in cases falling in that category, there would be an absolute duty on the court to invoke the principle of severability, where the matter submitted to arbitration can clearly be separated from matters not referred to arbitration and a decision has been given thereupon by the arbitral tribunal.
The judgment clearly sets out the correct position of law with regard to severability of an arbitration award. The decision will ensure that parties successful in arbitration are not caused unnecessary hardship when losing parties attempt to second guess arbitral awards in courts. While the decision is binding only on the Bombay High Court, it holds persuasive value and will come to the rescue of several such matters where due to a defect within a part of the arbitration award, the entire award was in the danger of being set aside. This decision will be helpful in saving considerable time both of the court and the parties, as the parties will not need to commence fresh arbitration or approach the courts for other reliefs.
1 34.Application for setting aside arbitral award.- (1) Recourse to a Court against an arbitral award may be made only by an application for setting aside such award in accordance with sub-section (2) and sub-section (3).
2 16.Competence of arbitral tribunal to rule on its jurisdiction.- (1) The arbitral tribunal may rule on its own jurisdiction, including ruling on any objections with respect to the existence or validity of the arbitration agreement, and for that purpose,------