Allahabad HC: Arbitral Award Partially Severable Under S.34 Arbitration Act; S.70 Contract Act Does Not Confer Arbitrability to Independent Works - 2025-05-08

Allahabad High Court Clarifies: Arbitral Awards Can Be Partially Set Aside, Independent Work Claims Not Arbitrable Under Original Contract

Lucknow, UP – The Allahabad High Court, Lucknow Bench, in a significant ruling, has clarified the application of severability under Section 34 of the Arbitration and Conciliation Act, 1996, and the arbitrability of claims arising from work performed outside the scope of an original contract. The division bench, comprising Chief Justice Arun Bhansali and Justice Jaspreet Singh , held that an arbitral award can be partially set aside, and work wholly independent of a contract containing an arbitration clause cannot become an arbitrable dispute under that contract, even if principles of quantum meruit (Section 70 of the Contract Act, 1872) might apply.

The decision came in an appeal filed by M/S Shyam Lalit Dubey against a Commercial Court order that had set aside an entire arbitral award passed in their favour against the Union of India (Northern Railway).

Case Background: A Bridge Contract Derailed , Extra Work Performed

The dispute originated from a tender awarded to M/S Shyam Lalit Dubey in 2017 for rebuilding Bridge No. 70 for a sum of Rs. 2.50 crore. The work was to be completed by December 31, 2017. However, the appellants claimed that Northern Railway failed to provide the approved drawings necessary to execute the bridge work, leading to delays and eventual non-execution of the contracted bridge project. The contract period was extended once but drawings were still not supplied.

Separately, in June 2018, the appellants were allegedly directed by a Senior Divisional Engineer to perform epoxy grouting work on numerous other bridges, a task not included in the original contract for Bridge No. 70. The appellants claimed to have spent approximately Rs. 65 lakhs on this additional work, which was approved by railway authorities but remained unpaid.

Due to the non-provision of drawings for Bridge No. 70 and non-payment for the epoxy grouting, the appellants invoked arbitration. An arbitrator was appointed by the High Court in January 2020.

Arbitrator's Award and Commercial Court's Intervention

On November 6, 2020, the sole Arbitrator awarded M/S Shyam Lalit Dubey a total of Rs. 1,41,06,623.68. This included amounts for earnest money, performance guarantee, the epoxy grouting work (Rs. 61.24 lakhs), mobilization of resources (Rs. 34.13 lakhs), loss of profit, and fees, along with 12% pendente lite interest.

Aggrieved, Northern Railway challenged the award before the Commercial Court, Lucknow, under Section 34 of the Arbitration Act. The Commercial Court allowed the petition and set aside the entire arbitral award. It found that the claim for epoxy grouting was not an arbitrable dispute under the original contract and that the award of interest was contrary to Section 31(7) of the Act read with GCC Clause 16(3).

Arguments Before the High Court

M/S Shyam Lalit Dubey appealed to the High Court, arguing: 1. The Commercial Court erred in setting aside the entire award, especially since it found the award for mobilization of resources justified. They cited the proviso to Section 34(2)(a)(iv) of the Arbitration Act, which allows for partial setting aside of an award if offending parts can be separated. 2. The rejection of the epoxy grouting claim was incorrect, as the work was done non-gratuitously and Railways benefited from it, making it payable under Section 70 of the Contract Act, 1872 (quantum meruit). 3. The appellants conceded on the issue of pendente lite interest, not pressing it in the appeal.

Northern Railway supported the Commercial Court's judgment, contending: 1. The epoxy grouting work was entirely separate from the Bridge No. 70 contract. An attempt to include this new item in the original contract was specifically rejected by the competent railway authority. 2. Thus, the epoxy grouting dispute was outside the scope of the arbitration clause in the Bridge No. 70 contract. 3. Reliance on Section 70 of the Contract Act cannot make a non-arbitrable dispute arbitrable under a specific contract. 4. Given these fundamental flaws, the Commercial Court was right to set aside the entire award as patently illegal.

High Court's Analysis and Reasoning

The High Court meticulously examined the provisions of the Arbitration and Conciliation Act, 1996, and the facts of the case.

1. Severability of the Arbitral Award: The Court agreed with the appellants that the Commercial Court erred in setting aside the entire award. It highlighted the proviso to Section 34(2)(a)(iv) of the Act, which states: >"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 aside;"

The High Court observed: >"In the present case, the Commercial Court though came to the conclusion that the issue pertaining to epoxy grouting was not arbitrable and that award of interest was contrary to the provisions of Section 31(7) of the Act, 1996, still in light of the above proviso to Section 34(2)(a)(iv), the award pertaining to mobilization of resources was not required to be set aside/interfered with and to the said extent the judgement impugned passed by the Commercial Court, cannot be sustained." (Para 25)

2. Arbitrability of the Epoxy Grouting Claim: The Court upheld the Commercial Court’s finding that the epoxy grouting work was not arbitrable under the contract for Bridge No. 70. The judgment noted that the epoxy work pertained to several different bridges and was "wholly alien and independent to the work under contract [for Bridge No. 70]." (Para 34) Crucially, an attempt by railway officials to include the epoxy work (valued at Rs. 1.24 crore) into the original contract (Rs. 2.50 crore) was "specifically rejected by the competent authority i.e. ADRM on 08.03.2018" due to concerns that "asking for a rate for new item...may fetch a competitive rate in open tender." (Para 31)

The arbitration clause (GCC Clause 64) limited arbitration to disputes "arising out of or in connection with the contract." Since the epoxy work had no connection to the Bridge No. 70 contract, it fell outside this clause.

3. Section 70 of the Contract Act and its Interplay with Arbitrability: While acknowledging that Section 70 of the Contract Act (obliging payment for non-gratuitous acts enjoyed by another) might apply to the epoxy work, the Court clarified that this does not automatically make the claim arbitrable under an unrelated contract's arbitration clause. >"...though in present circumstance in relation to epoxy grouting the same may apply but as to whether on account of provisions of Section 70 of the Act, 1872, the same can ipso facto become an arbitrable dispute in relation to an arbitration clause contained in an agreement subject matter of which had no relation to the work non gratuitously done by the appellants? Qua the said aspect of the matter... for a work undertaken which is wholly independent of the contract containing the arbitration clause, the same cannot become an arbitral dispute." (Para 35)

The Court referred to the Supreme Court's test in Renusagar Power Co. Ltd. Vs. General Electric Company , stating the determining factor is "whether recourse to the contract, by which both the parties are bound, was necessary for the purpose of determining whether the claim...was justified or otherwise." (Para 36) For the epoxy grouting claim, no reference to the Bridge No. 70 contract was necessary.

The Court distinguished precedents cited by the appellants, noting they dealt with additional work related to the contract in question or disputes arising directly from it.

The Verdict: Award Partially Upheld

The High Court partly allowed the appeal: * The Commercial Court's judgment dated 28.06.2023 was set aside. * The arbitral award dated 06.11.2020 relating to the epoxy grouting claim (Rs. 61,24,732.79) and the award of pendente lite interest were set aside. * The rest of the arbitral award – covering earnest money, performance guarantee, mobilization of resources, loss of profit, and arbitrator's fees – was upheld.

The appellants are now entitled to execute the upheld portions of the arbitral award. The Court noted that the appellants "may be entitled to be compensated for epoxy grouting work somewhere else but not under the present arbitration case."

Implications of the Judgment

This judgment reinforces the doctrine of severability in arbitration law, allowing courts to salvage valid parts of an arbitral award while striking down portions that are beyond jurisdiction or patently illegal. It also provides crucial clarity on the scope of arbitration clauses, emphasizing that claims for work entirely independent of a specific contract cannot be shoehorned into that contract's arbitration mechanism, even if there might be a substantive claim for payment under principles like quantum meruit. Parties undertaking such additional, independent works may need to seek remedies through separate legal avenues or ensure a distinct contractual basis for arbitration.