When can Courts Partially Set Aside an Arbitral Award? Gayatri Balasamy Reveals a Surprising Answer

Decision in Gayatri Balasamy case appears to unsettle the settled legal position on the question of severability of arbitral awards in challenge.

Background

The Constitution Bench decision of the Supreme Court in Gayatri Balasamy v. ISG Novasoft Technologies Ltd.¹ (Balasamy) has invited extensive legal commentary. The questions referred to the Constitution Bench pertained to whether the Court had the power to “modify” an arbitral award while exercising its jurisdiction under Section 34, Arbitration and Conciliation Act, 1996 (Arbitration Act). While the question of “severability” of awards at the stage of challenge under Section 34 was not directly in issue before the Supreme Court, one of the questions in reference impinged on the question of “severability” of arbitral awards. The same is extracted below:

2. If the power to modify the award is available, whether such power can be exercised only where the award is severable, and a part thereof can be modified?

Question of severability of awards

Due to the above question being framed in reference, both the majority opinion authored by the Chief Justice Sanjiv Khanna (speaking for himself, Justices Gavai, Sanjay Kumar and Masih) and the minority view (partly concurring and partly dissenting) expressed by Justice K.V. Viswanathan, had occasion to comment on the question of “severability” of arbitral awards. While the question of “severability” of arbitral awards was not in issue before the Supreme Court, the conclusions arrived at in respect of “severability” and the reasoning therefor in the majority opinion has the potential to play mischief with the existing jurisprudence on this point. Though the question of “modification” of arbitral awards has been extensively commented upon in the year following Balasamy case², the question of “severability” has received little, if any, attention. The present piece seeks to address this void.

Severability as codified in Section 34

Before discussing the question of “severability” in the Balasamy case, it is helpful to understand the broad contours of Section 34 relevant for present purposes. Section 34 provides that an arbitral award may be set aside on the grounds mentioned in sub-sections (2) and (2-A). The grounds under sub-section (2) are further sub-divided into clauses (a) and (b). The grounds under clause (a) deal with procedural grounds, while the grounds under clause (b) relate to situations where the subject-matter of the dispute is not capable of settlement by arbitration or the award is in conflict with the public policy of India. The grounds under sub-section (2-A) deal with patent illegality which is attracted in cases of domestic arbitral awards.

The grounds in clause (a) of sub-section (2) which deal with procedural grounds, are further sub-divided into sub-clauses: (i) party incapacity; (ii) validity of the arbitration agreement; (iii) lack of notice of the arbitrator’s appointment or of the arbitral proceedings; (iv) the award being passed on matters beyond the scope of submission to arbitration; and (v) the Arbitral Tribunal’s composition/arbitral procedure not being in accordance with the agreement of parties. If any of the grounds in either sub-section (2) or sub-section (2-A) are satisfied, the arbitral award is liable to be set aside.

The proviso to Section 34(2)(a)(iv) — severability of award

While the above is the case, there exists a proviso as far as one of the grounds [sub-clause (iv) of clause (a) of sub-section (2)] is concerned. The proviso provides that when an award is being challenged as being rendered on matters not submitted to arbitration, then the Court can separate and set aside only those portions of the award that relate to matters not submitted to arbitration. It is important to note that such a proviso regarding separation is provided only for one of the grounds [sub-clause (iv) of clause (a)] and for none of the other grounds, either in clause (a) or clause (b), or under sub-section (2-A). Therefore, one possible implication of the placement of the proviso only after sub-clause (iv) of clause (a) is that in cases where the grounds of challenge did not involve sub-clause (iv), the power to sever/separate or partially set aside the arbitral award was not available.

Whether severability of awards is confined to proviso to Section 34(2)(a)(iv)?

In light of the above statutory background, the above question came up for court’s consideration. The question was: Whether the Court’s power to set aside an award in part is available only in cases governed by the proviso to sub-clause (iv) of clause (a) of sub-section (2)?

In Pushpa P. Mulchandani v. Admiral Radhakrishin Tahiliani³, a Division Bench of the Bombay High Court had held that the power of partial setting aside was available only in cases governed by the proviso to Section 34(2)(a)(iv). Subsequently, a Full Bench of the Bombay High Court in R.S. Jiwani v. Ircon International Ltd.⁴, overruled its earlier judgment in the Pushpa P. Mulchandani case and recognised the power of courts to partially set aside that portion of the award which is susceptible to challenge under Section 34 without reference to the proviso to Section 34(2)(a)(iv).

In J.G. Engineers (P) Ltd. v. Union of India⁵, a Division Bench of the Supreme Court held that:

25. 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.

The Supreme Court, therefore, expressly recognised the power to partially set aside that portion of the award which falls foul of Section 34.

The above judicial approach of severing the portions of the award that fell foul of Section 34 while upholding the rest, was followed by the Supreme Court in M.P. Power Generation Co. Ltd. v. ANSALDO Energia SpA⁶, wherein the Court severed the award with regard to the return of amounts ordered on the bank guarantees dated 22 February 2000 and 23 February 2000, which pertained towards the amount advanced by the award debtor therein.

Court’s approach to severability of awards before Balasamy

The above line of decisions had held that in cases where the award consists of multiple independent claims and that a decision on each such claim can be treated as an award in itself, if one part of the award is invalid (for any reason), it should be set aside, and the other parts should survive. The courts held that the very existence of the proviso confirms the power to set aside in part and such power is not confined to the proviso alone.

Therefore, in light of the above decisions of the Supreme Court, and particularly the Full Bench decision of the Bombay High Court in the R.S. Jiwani case⁷, it was well settled that the Court under Section 34 had the power to separate and set aside those portions of an arbitral award that fell foul of Section 34, and such power was not confined only to cases covered under the proviso to Section 34(2)(a)(iv).

It is in the above background that the decision in the Balasamy case⁸ appears to unsettle the settled legal position on the question of severability of arbitral awards in challenge. This is explained below.

Decision in Balasamy

The majority opinion frames the question as whether the power to set aside an award includes the power to partially set it aside. The Court holds that the proviso to Section 34(2)(a)(iv) permits the court to sever non-arbitrable portions of an award from arbitrable ones. According to the majority opinion, in doing such exercise, the court is separating and preserving the “valid” portions from the “invalid” portions. The Court clarifies by way of a footnote that “validity” and “invalidity” is mentioned only in terms of the proviso to Section 34(2)(a)(iv). Therefore, the Court states that the larger power of setting aside the award includes the lesser power of setting aside the award in part.

After having arrived at the above conclusion, the Court repeatedly states that “valid” and “invalid” portions of an award can be separated by the Court under Section 34, provided that such “valid” portions are not interdependent or intrinsically intertwined with the “invalid” portions, in which case, the award cannot be set aside in part. To support its conclusion, the Court also places reliance on the Privy Council decision in Ram Protap Chamria v. Durga Prosad Chamria⁹. This decision involved a situation where the arbitrators had pronounced findings on matters beyond the scope of submission to arbitration.

Throughout the above discussion, the Supreme Court consistently uses the words (validity/invalidity) and specifically links the usage of such words to the proviso to Section 34(2)(a)(iv). Due to this, it is possible to argue that the majority opinion contemplates the severance of arbitral awards only in situations governed by the proviso to Section 34(2)(a)(iv). Such a result is also supported by the conclusion to the majority opinion, where the Court takes pain to reiterate that “invalid” portions can be severed from the “valid” portions “as held in the Part II of our analysis”.

In sharp contrast to the majority opinion (which did not refer to any prior decisions on “severability”), the minority opinion placed reliance on the prior Supreme Court decisions in the J.G. Engineers case¹⁰ and M.P. Power Generation case¹¹, the Full Bench decision of the Bombay High Court in the R.S. Jiwani case¹², and especially the decision of the Single Judge of the Delhi High Court in NHAI v. Trichy Thanjavur Expressway Ltd.¹³, to hold that the Court had power to separate and set aside portions of the award that fell foul of Section 34, even in cases not covered by the proviso to Section 34(2)(a)(iv).

Implications of the decision in Balasamy

The above discussion reveals that there appears to be some divergence between the majority and minority opinions on the question of “severability”. The majority opinion may inadvertently depart from the settled legal position in suggesting that severability of awards is confined to cases governed by the proviso to Section 34(2)(a)(iv). On the other hand, the minority opinion adheres to the previously settled legal position that severability of awards extends to all cases, including those not covered by the proviso to Section 34(2)(a)(iv).

While the majority opinion may, on one reading, suggest that awards can be severed only in cases governed by the proviso to Section 34(2)(a)(iv), it could also be argued that the majority opinion cannot be read to arrive at that conclusion because the Court also states that the proviso is clarificatory in nature and the power to sever is inherent in the court’s jurisdiction setting aside the award. Further, the Court also notes that valid determinations should not be unnecessarily set aside.

Conclusion

In any event, it must not be lost sight of the fact that the Supreme Court was not confronted with the question of “severability” or whether the same extended to cases outside the proviso to Section 34(2)(a)(iv). Even the counsels for the opposite parties were agreed that courts do have the power to sever the portions that fall foul of Section 34. Therefore, while the implications of the majority opinion cannot be wished away, the same would have to be tempered with the above caveats. Due to the same, it will be helpful if the Supreme Court has occasion to clarify its findings in the Balasamy case¹⁴ on the question of severability, in a future case.