Arbitral awards that are severable can be partly set aside under Section 34 of Arbitration Act: Delhi High Court

The Delhi High Court on Monday ruled that under Section 34 of the Arbitration and Conciliation Act, 1996, courts can partially set aside an arbitral award if the part of the award is capable of being severed or validly incised from the rest. [NHAI v. Trichy Thanjavur Expressway Ltd].Justice Yashwant Varma noted that the proviso to Section 34(2)(a)(iv) of the 1996 Act already acknowledged that arbitral awards may sometimes be capable of being severed. Such awards can be partially set aside (or partially upheld)..As such, he ruled that such a course of partially setting aside arbitral awards is not only confined to the scenarios enumerated in Section 34(2)(a), but can also be applied to all scenarios provided for in Section 34.“Section 34(2)(a)(iv) cannot be construed as being indicative of the legislative intent for a partial setting aside power being available to be invoked only in cases that may fall within the ambit of that clause…we are of the firm opinion 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,” the judgment stated..The Court concluded that merely because the proviso under Section 34(2)(a)(iv) was not replicated in clause (b) of Section 34(2), it does not lead to an “inevitable conclusion that a partial setting aside is considered alien” in other scenarios under Section 34 of the 1996 Act.“Once an award is understood as comprising of separate components, each standing separately and independent of the other, 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 Court said.It, however, cautioned,"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 which is found to stand on its own and its setting aside would not have a cascading impact that the Court could consider adopting the aforesaid mode.".Justice Varma also observed that setting aside an arbitral award partially is different from “modifying” an award or varying its terms.Modifying an award involves substituting the Court’s opinion for the opinion of the arbitral tribunal, which is not allowed under the present Arbitration Act. The Supreme Court in the decision of NHAI v. M Hakim had also clarified that courts cannot modify arbitral awards..NHAI v. M Hakim: Putting a quietus to the issue of modification of arbitral awards.On the other hand, the proviso to Section 34(2)(a) leaves room to partially set aside awards (where the components of such awards are severable and not interconnected) to save parties to an arbitration from having to restart arbitral proceedings from scratch, if it is possible to do so, it was held.The blue pencil test, which allows courts to sever offending parts of a contract while preserving the substantial part of the contract, can be validly adopted for arbitral awards, the Court said.“However, while hypothetically the adoption of the blue pencil rule could be permissible, Courts would have to proceed with precedence and circumspection bearing in mind the obligation to ensure that the use of the surgeon‘s scalpel does not scar the other parts of the award.".Notably, the High Court also held that Section 34(4) of the 1996 Act does not allow an arbitral tribunal to hold a “merit review” of an arbitral award that has already been decided.Section 34(4) allows the court to adjourn a Section 34 case to allow an arbitral review to resume arbitration in the meanwhile in order to eliminate any ground for setting aside the arbitral award.The High Court has now emphasised that this provision is a curative or remedial provision which cannot be extended to allowing the arbitral tribunal to undertake a review or revisit its earlier recorded opinion. Rather, this provision only gives an opportunity for the arbitral tribunal to correct typographical or arithmetical errors.“What M. Hakeem proscribes under Section 34(2) cannot be introduced by way of a side wind and read into Section 34(4). Consequently, it must be 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),” the judgment stated..The ruling was passed in the backdrop of two cross petitions being filed under Section 34 of the 1996 Act, both of which sought to set aside different parts of an August 2022 arbitral award. The dispute was between the National Highways Authority of India and Trichy Thanjavur Express Limited.Having decided on this preliminary issue, the Court has directed that the case be placed before the appropriate bench for further consideration..[Read Judgment]