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SEVERING THE OLD FROM THE NEW: INDIA’S TRYST WITH SEVERABILITY AND CHALLENGES TO ENFORCEMENT OF ARBITRAL AWARDS

SURANA & SURANA > SSIA  > SEVERING THE OLD FROM THE NEW: INDIA’S TRYST WITH SEVERABILITY AND CHALLENGES TO ENFORCEMENT OF ARBITRAL AWARDS

SEVERING THE OLD FROM THE NEW: INDIA’S TRYST WITH SEVERABILITY AND CHALLENGES TO ENFORCEMENT OF ARBITRAL AWARDS

SEVERING THE OLD FROM THE NEW - INDIA’S TRYST WITH SEVERABILITY

Ayushman Somani

Student Intern, Dispute Resolution Practice

Introduction

Of the many principles that have been used to enforce arbitration awards in a more equitable manner in the last decade, few have proven to be as practical and effective as the ‘Doctrine of Severability’. This principal provides a middle-ground to an enforcing court by allowing it to only enforce that part of the award deemed to be free of certain encumbrances, thereby maintaining the sanctity of arbitration while ensuring an equitable award is enforced.

Proposed originally as the ‘Doctrine of Blue Pencil’, the Nordenfelt v Maxim Nordenfelt Guns and Ammunition Co Ltd. (1) case decided by the House of Lords is regarded as the genesis of this principal. Put briefly, a portion of a legal document that is tainted by some illegality, invalidity or unconstitutionality, if severable, should be severed and declared void, while the rest of the document is enforced as is. This idea, when superimposed on enforcement of arbitral awards, allows for a pragmatic solution to the problem of enforcing awards that are partially tainted.

Slowly but surely, India has developed both legislation and jurisprudence to not just meet but far surpass the international standard of enforcement of arbitral awards, and incorporated ‘Severability’ in its contemporary understanding of arbitration and enforcement, making this middle ground available to Indian practitioners across domestic and international arbitration.  

The History of the Doctrine in India

India adopted the ‘Doctrine of Severability’ into its legal jurisprudence through the landmark judgement of A.K. Gopalan vs. the State of Madras (2) wherein the Apex Court upheld the Preventive Detention Act, 1950 barring Section 14, which was severed from the main Act and accordingly struck down. This capacity flows from an essential pre-requisite of ‘Severability’. If in an Act, Legislation or Proposition, the invalid or illegal elements are so intrinsically intertwined with the rest of the material so as to make it impossible to be severed, the entirety of the material would be struck down (3).

The specific applicability of the ‘Doctrine of Severability’ in arbitration in the domestic context in India can be traced back to the early 2010s. The Bombay High Court decided RS Jiwani v. Ircon International Ltd, (RS Jiwani) (4), a case where a dispute arose between Ircon International Limited (Respondent) and RS Jiwani (Appellant) over delays in a construction project. An arbitrator allowed 15 of the Appellant’s 32 claims, allowing the claims in relation to Accommodation works and Land as under the contract between the parties. He rejected other non-contractual claims as well as the Respondent’s counter-claims. The Respondent filed a petition to set aside the award, which was accepted by a Single Judge, referencing the case of Mrs. Pushpa P. Mulchandani v. Admiral Radhakrishin Tahiliani (5).

The Appellant appealed to a larger Bench, which disagreed with the Single Judge’s interpretation, arguing that Section 34 of the Arbitration and Conciliation Act, 1996 (the Act) grants courts the authority to partially or fully set aside an award. The illegal parts of the award were severed and held to be unenforceable while the valid parts were enforced by the Court. This flowed from an understanding of Section 34 that incorporated ‘Severability’ under the proviso to Section 34(2)(a)(iv) of the Act. The judgement laid down this doctrine’s applicability to Awards and judicial judgements in the same way it did to contracts or statutes.

The Supreme Court soon stepped in to clarify and establish the separation as specified in the ratio of RS Jiwani to apply to arbitration awards as a whole as well. In the J.G. Engineers Private Limited vs. Union of India (6) the court rightly applied the ‘Doctrine of Severability’.

This doctrine has since been reinforced by its application in more recent cases wherein awards have been partially set aside, (7) and that this setting aside of the severed award has been excluded from the definition of “modification of an award”(8) which is prohibited under Indian Jurisprudence (9).

Application of the Doctrine to Foreign Awards

The convenience and ease with which courts have severed arbitral awards in domestic arbitration cases under Section 34 of the Act does not translate to similar empowerment when it comes to International Arbitration. Any challenges to the enforcement of a foreign award are entertained under Section 48 of the Act. The wordings of Section 48(1)(c) of the Act and its proviso are an almost identical replication of Section 34(2)(a)(iv) and its proviso.

Yet, the enforcing courts when dealing with a challenge or application under Section 48 find themselves almost powerless when it comes to the application of the ‘Doctrine of Severability’. One line of reasoning presented and argued by scholars is that of a narrow interpretation of Section 48 emerging from the use of the words “may be refused”, which suggest that there is no mandatory application of the criteria under Section 48. This reasoning is well reinforced by binding judgments from the Apex Court, (10) which have made the applicability of any of the defenses available under Section 48 to be airtight.  The wordings used under Section 34 however, are identical in their suggestive and non-mandatory phrasing.

Section 34Section 48
Application for setting aside arbitral award:- (2) An arbitral award may be set aside by the Court only if – (a) the party making the application establishes on the basis of the record of the arbitral tribunal that – (iv) the arbitral award deals with a dispute not contemplated by or not falling within the terms of the submission to arbitration, or it contains decisions on matters beyond the scope of the submission to arbitration: Provided that, if the decisions on matters submitted to arbitration can be separated from those not so submitted, only that part of the arbitral award which contains decisions on matters not submitted to arbitration may be set asideConditions for enforcement of foreign awards:- (1) Enforcement of a foreign award may be refused, at the request of the party against whom it is invoked, only if that party furnishes to the court proof that –   (c) the award deals with a difference not contemplated by or not falling within the terms of the submission to arbitration, or it contains decisions on matters beyond the scope of the submission to arbitration: Provided that, if the decisions on matters submitted to arbitration can be separated from those not so submitted, that part of the award which contains decisions on matters submitted to arbitration may be enforced;

Surely, the intention of the legislature must not have been to read the same phrase differently.

While Section 48 replicates Article V of the “New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, 1958” (New York Convention), the Apex Court most recently held in Government of India v. Vedanta Limited and Others, (Vedanta) (11) that the power to set aside awards on the basis of proven grounds under Section 48 did not lie in the hands of the enforcing court, rather, it lay in the hands of the Curial Court. In Vedanta, Malaysian courts rejected an appeal from the Indian government alleging a breach of public policy. The arbitration took place in Kuala Lumpur, notwithstanding the fact that the contract’s substantive law was Indian law and the arbitration agreement was regulated by English law. As Malaysia is the location of the arbitration, this designated Malaysia as the curial court. In light of this, the Malaysian Courts considered the reasons made by the Government of India and used Malaysian Law on Public Policy to determine that the concept of Public Sharing Contract (PSC) and the claimed misunderstanding of it were not against Malaysian Public Policy.

Therefore, the application of the ‘Doctrine of Severability’ does not carry forward into challenges made under Section 48, even if the wordings of the section explicitly allow for such an application.

A Twist in the Tale

All hope is not lost for the pragmatism of this doctrine in International Arbitration in the context of India yet. The application of this doctrine in international commercial arbitration far pre-dates its application in Indian domestic arbitration. The “UNCITRAL Secretariat Guide to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards” (UNCITRAL Guide) explains the approaches adopted by courts navigating challenges made under Article V of the New York Convention (based on which Section 48 of the Act has been modelled). While addressing the challenges typically made under Article V(2)(b) of the Convention – grounds of violation of public policy – the UNCITRAL Guide clarifies that the ‘Doctrine of Severability’ finds an important place in a potential solution that can be adopted by courts. Article V(1)(c) of the New York Convention is the embodiment of this doctrine, expressly stating that courts may partially enforce an award when there are grounds for refusing to recognize or enforce some aspects of the award.

The High Court of Hong Kong in J.J. Agro Industries (P) Ltd. V. Texuna International Ltd.,(J.J. Agro) (12) found that it would be absurd not to apply this doctrine where appropriately applicable. This dispute, between two Indian parties, was seated in Hong Kong, and thus the challenges to the enforcement of any award rendered would have to be contended under the laws of Hong Kong, which in this case were a verbatim adoption of the UNCITRAL Model Laws, 1985 (MAL).

Let us briefly explore the facts of the case and the findings of the tribunal to better understand the application of this doctrine. A deposit of 250,000 Indian rupees had been made by the plaintiffs as a down payment for the delivery of goods that were ultimately not delivered. The plaintiffs initiated the arbitration process to demand the refund of the deposit and compensation for the contract’s breach. The plaintiffs requested court enforcement of the award once it was made in their favour. The defendants claimed that the plaintiffs had kidnapped their key witness and coerced him/her into signing a false affidavit in the arbitration, and that doing so would be against public policy. The court ordered that evidence be collected about the kidnapping claim, and enforcement was postponed until the defendant’s application had been decided. 

On the basis of article 35 (1) MAL, the plaintiffs then requested the prompt enforcement of the portion of the judgement pertaining to the deposit. In approving the application, the court determined that domestic law, which is equivalent to articles 34(2)(a)(iii) and 36(1)(a)(iii) MAL, allowed for the separation of the arbitral award relating to the deposit from the rest of the award. The court further stated that the alleged kidnapping had no bearing on the deposit award notwithstanding its severability.

Conclusion

A conjoined reading of the application of MAL in the J.J. Agro case along with the interpretation of the Supreme Court in the Vedanta case is necessary here. While challenges under Section 48 against foreign awards based on arbitration proceedings conducted in a foreign seat would not set aside, or even partially set aside, an arbitral award, the ‘Doctrine of Severability’ can still be applied through the application of not just Article V of the New York Convention, but also Articles 34 and 36 of the MAL in the curial court – provided that the seat of arbitration is in a nation that is a signatory to either of the two conventions. It is fortunate that the New York Convention is considered to be one of the most successful treaty in Private International Law (13), with 160 member States, and the MAL has been adopted into domestic legislation of over 80 countries (14). This near-universal application ensures the equitable enforcement of arbitral awards tainted by elements of illegality, invalidity or unenforceability without compromising the sanctity of an arbitral procedure. 

India ratified the New York Convention on July 13, 1960, after signing it on June 10, 1958. In addition to the 1985 MAL and the 2006 Amendment to the MAL, India is a founding member of UNCITRAL and approved the most recent UNCITRAL Expedited Arbitration Rules in 2021. The manner in which the ‘Doctrine of Severability’ has been applied in domestic arbitration is in complete alignment with the understanding of the doctrine in the treaties and conventions that India has signed. Practitioners are at the liberty to interpret the application of this doctrine and apply it according to the international standard set out in both the MAL and the New York Convention. This aligned interpretation adds strength to the argument in favor of India becoming a new hub for International Commercial Arbitration in the near future.

Citations

1. Nordenfelt v Maxim Nordenfelt Guns and Ammunition Co Ltd. [1894] AC 535.

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

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

4. RS Jiwani v. Ircon International Ltd. 2010 (112) BOMLR491

5. Mrs. Pushpa P. Mulchandani v. Admiral Radhakrishin Tahiliani 2008 (7) LJ Soft, 161

6. J.G. Engineers Private Limited vs. Union of India (2011) 5 SCC 758

7. Saptarishi Hotels Private Limited vs. National Institute of Tourism and Hospitality Management, 2019 SCC OnLine TS 1765; Amazing Research Laboratories Ltd. V. Krishna Pharma, 2023 SCC OnLine Del 1498 [OMP (COMM) No. 376 of 2020 – decided on 13.03.2023].

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

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

10. Gautam Bhatikar, Madhavi Doshi and Shruti Salian, “India: Supreme Court on Enforcement of Foreign Arbitral Awards.” Accessed at 25.05.2023 <https://www.mondaq.com/india/arbitration–dispute-resolution/1048054/supreme-court-on-enforcement-of-foreign-arbitral-awards>

11. Civil Appeal No. 3185 of 2020 (Arising out of SLP (civil) No. 7172 of 2020

12. J. J. Agro Industries (P) Ltd. v. Texuna International Ltd., High Court, Supreme Court of Hong Kong, Hong Kong, 12 August 1992, HCMP000751/1992.

13. Briefs, New York Arbitration Convention. Accessed on 26.05.2023 <https://www.newyorkconvention.org/in+brief#:~:text=The%20Convention%20on%20the%20Recognition,by%20more%20than%20160%20nations>

14. Texts and Status, United Nations Commission on International Trade Law. Accessed on 26.05.2023 <https://uncitral.un.org/en/texts/arbitration/modellaw/commercial_arbitration/status>

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