S 34 (4) cannot save or aid an arbitral award suffering from illegalities stipulated under S. 34(2) Arbitration Act: Delhi High Court

Section 34 of the Arbitration Act is a clear and unequivocal embodiment of the Legislature‘s intent to balance the competing facets of arbitration, I.e., on one hand, while courts are enjoined to follow the minimalist intervention route, it would clearly be a travesty of justice if they were to fail to intervene where circumstances warrant, and demand corrective measures being adopted.

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Delhi High Court: Two cross petitions were filed under Section 34 of the Arbitration and Conciliation Act, 1996, Trichy Thanjavur Expressway Limited seeking to set aside a part of the arbitral award dated 07-08-2022 to the extent that it had rejected claims amounting to INR 30,27,33,01,844, while National Highway Authority of India seeking to set aside the arbitral award to the extent of the findings returned in respect of Claim No. 1(b) and (g) as well as on Claim No. 8. Yashwant Varma, J., held that if an award is found to suffer from any of the illegalities given under Section 34(2) (a) or (b), it must suffer the fate of being set aside and cannot be saved with the aid of Section 34(4) and further directed the cross petitions to be placed before the Roster Bench concerned for further consideration on 14-09-2023.

The petitioner NHAI has moved an interim application for eliminating grounds to set aside under Section 34(4) of Arbitration Act. When the two appeals were initially called, the question raised was with respect to whether parts of an award could be severed and whether it could be partially set aside. The attendant question that arose was whether the grant of such a relief would be contrary to the decision of the Supreme Court in NHAI v. M. Hakeem, (2021) 9 SCC 1, which had essentially held that the power to set aside as conferred by Section 34 cannot be read so as to include the power to vary or modify the award as rendered by the Arbitral Tribunal.

The issue under consideration was whether the concept of partial setting aside or severance would stand restricted to a challenge to an Arbitral Award on grounds enumerated in clause (iv) of Section 34(2)(a) or would also be applicable to other clauses falling in that Section. The second aspect which was canvassed for the consideration of the Court related to the scope and intent of Section 34(4) and contemplates the Court adjourning proceeding on the request made by one of the parties in order to enable the AT to resume proceedings and take such further action as in its opinion would eliminate the grounds for setting aside the Arbitral Award itself.

The Court noted that the Proviso placed in Section 34(2)(a)(iv) is not only an acknowledgment of partial setting aside not being a concept foreign to the setting aside power but also of parts of the award being legitimately viewed as separate and distinct. The Proviso itself envisages parts of an award being severable, capable of segregation and being carved out. The Proviso is, in fact, the clearest manifestation of both an award being set aside in part and comprising of distinct components and parts. An award may comprise a decision rendered on multiple claims. Each claim arising out of a composite contract or transaction may be founded on distinct facts and flowing from separately identifiable obligations. Just as claims may come to be preferred resting on a particular contractual right and corresponding obligation, the decision that an Arbitral Tribunal may render on a particular claim could also be based on a construction of a particular covenant and thus stand independently without drawing sustenance on a decision rendered in the context of another.

The Court further noted that if such claims are separate, complete, and self-contained in themselves, any decision rendered thereon would hypothetically be able to stand and survive irrespective of an invalidity that may taint a decision on others. If a claim is not subordinate, in the sense of being entwined or interdependent upon another, a decision rendered on the same by the Arbitral Tribunal would constitute an award in itself. While awards as conventionally drawn, arranged, and prepared may represent an amalgam of decisions rendered by the Arbitral Tribunal on each claim, every part thereof is, in fact, a manifestation of the decision rendered by it on each claim that may be laid before it. The award rendered on each such claim rules on the entitlement of the claimant and the right asserted in that regard. One could, therefore, validly, subject of course to the facts of a particular case, be entitled to view and acknowledge them as binding decisions rendered by the Arbitral Tribunal on separate and distinct claims. Thus, each such decision rendered by an Arbitral Tribunal could be validly viewed as the decision rendered on a particular claim and constituting an independent award, thus, there appears to be no hurdle in the way of courts adopting the doctrine of severability and invoking a power to set aside an award partly. The power so wielded would continue to remain confined to ‘setting aside' as the provision bids one to do and would thus constitute a valid exercise of jurisdiction under Section 34 of the Act.

On the aspect of whether the adoption of such a course would be contrary to what the Supreme Court had forbidden in M. Hakeem (supra), the expression ‘modify' would clearly mean a variation or modulation of the ultimate relief that may be accorded by an Arbitral Tribunal. However, when a Court under Section 34, was to consider exercising a power to partially set aside, it would clearly not amount to a modification or variation of the award. It would be confined to an offending part of the award coming to be annulled and set aside. It is this distinction between a modification of an award and its partial setting aside that must be borne in mind. Thus, where parts of an award are found to be unsustainable and severable, the setting aside would clearly not amount to a modification. It was against this backdrop, that it would be wholly unnecessary for a court to set aside the award in its entirety even though the challenge itself may stand confined to certain parts thereof.

The Court opined that the expression “setting aside” as employed in Section 34 would include the power to annul a part of an award provided it is severable and does not impact or eclipse other components thereof. Even though an award may be viewed as an agglomeration of the decisions rendered by an AT on various claims, the question of partial setting aside would ultimately depend on whether there is an inextricable link between the offending part of the award with any other part of the disposition. A partial setting aside should not lead to a component of the award being rendered vulnerable or unsustainable. It is only when the award relates to a claim that is found to stand on its own and it's setting aside would not have a cascading impact that the Court could consider adopting the aforesaid mode. Thus, while considering the question of severability, the Court would have to necessarily examine the issue not from a facile or textual point of view but be convinced that the principles of severability can be validly invoked and exercised to exorcise an offending part of the award without effecting or impacting any other part thereof.

On the aspect of scope and intent of Section 34(4), the Court stated that the structure of Section 34(4) thus appears to be limited to an opportunity being afforded to the AT to rid the award of defects which are manifest and can be remedied without the foundation of the award or the various findings and conclusions recorded therein being impacted. The remit to the AT in terms of the said provision also cannot be read as a conferral of authority on the AT to reconsider or modify a finding and which may entail what in legal terms is alluded to as a “merit review”. It is within this limited window that a court could possibly invoke Section 34(4) and consequently enable the AT to take appropriate measures. Section 34(4) is undoubtedly and fundamentally curial in character since the same is liable to be invoked in a situation where the Court finds that the adoption of such a course would save the award from being otherwise set aside. Therefore, what M. Hakeem(supra) proscribes under Section 34(2) cannot be introduced by way of a side wind and read into Section 34(4).

Thus, the Court held that if an award be found to suffer from any of the illegalities which are spelt out in Section 34(2) (a) or (b), it must suffer the fate of being set aside and cannot be saved with the aid of Section 34(4).

[National Highways Authority of India v Trichy Thanjavur Expressway Limited, 2023 SCC OnLine Del 5183, decided on 21-08-2023]

Advocates who appeared in this case :

Mr. Santosh Kumar, Standing Counsel with Mr. Daksh Arora, Mr. Manish K. Bishnoi and Ms. Pallavi Singh Bishnoi, Advocates for petitioner

Ms. Kaadambari, Mr. Pankaj Agarwala, Mr. Sahil Khanna, Ms. Ayushi and Mr. Amir Zaidi, Advocates for respondent

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