Important point
Partial invalidity in contract will not ipso facto make the whole contract void or unenforceable. Wherever a contract contains legal as well as illegal parts and objectionable parts can be severed, effect has been given to legal and valid parts striking out the offending parts.

Headnote:Arbitration and Conciliation Act, 1996—Section 11(6)—Arbitration petition—Appointment of Arbitrator—According to petitioner, an agreement was entered into between the parties for availing broadcasting services of the petitioner for respondent—Petitioner company, having its principal office in Thailand, carries on satellite business—Agreement provided for supply of satellite services, payment of fees, etc.—Clause 23 provided for arbitration in case of dispute arising from the interpretation or from any matter relating to the performance of agreement etc.—Since dispute arose between the parties, petitioner stated that it had appointed Hon’ble Mr. Justice M.L. Pendse as its arbitrator and called upon respondent to appoint an arbitrator—Respondent contending that arbitration clause was not legal and valid—Petitioner company made an application u/s 11(6) of the Act to make an appointment of an arbitrator—Whether arbitration agreement is legal, valid and enforceable—(Yes)—Offending and objectionable part which makes arbitrator’s determination ‘final and binding between the parties’ and declares that the parties have waived right of appeal or objection ‘in any jurisdiction’, is clearly severable—It is independent of the dispute being referred to and resolved by an arbitrator.
       Held : The main contention of the learned counsel for the respondent is that clause 23 made the arbitrator’s determination “final and binding between the parties” and the parties have waived all rights of appeal or objection “in any jurisdiction”. According to the counsel, the said provision is inconsistent with Section 28 of the Contract Act 1872 as also against public policy. (Para 12)
       It is no doubt true that a court of law will read the agreement as it is and cannot rewrite nor create a new one. It is also true that the contract must be read as a whole and it is not open to dissect it by taking out a part treating it to be contrary to law and by ordering enforcement of the rest if otherwise it is not permissible. But it is well-settled that if the contract is in several parts, some of which are legal and enforceable and some are unenforceable, lawful parts can be enforced provided they are severable. The learned counsel for the petitioner, in my opinion, rightly submitted that the court must consider the question keeping in view settled legal position and record a finding whether or not the agreement is severable. If the court holds the agreement severable, it should implement and enforce that part which is legal, valid and in consonance of law. In several cases, courts have held that partial invalidity in contract will not ipso facto make the whole contract void or unenforceable. Wherever a contract contains legal as well as illegal parts and objectionable parts can be severed, effect has been given to legal and valid parts striking out the offending parts. (Paras 17 to 19)
       In the present case, clause 23 relates to arbitration. It is in various parts. The first part mandates that, if there is a dispute between the parties, it shall be referred to and finally resolved by arbitration. It clarifies that the rules of UNCITRAL would apply to such arbitration. It then directs that the arbitration shall be held in Delhi and will be in English language. It stipulates that the costs of arbitration shall be shared by the parties equally. The offending and objectionable part, no doubt, expressly makes the arbitrator’s determination “final and binding between the parties” and declares that the parties have waived the rights of appeal or objection “in any jurisdiction”. The said objectionable part, in my opinion, however, is clearly severable as it is independent of the dispute being referred to and resolved by an arbitrator. Hence, even in the absence of any other clause, the part as to referring the dispute to arbitrator can be given effect to and enforced. By implementing that part, it cannot be said that the Court is doing something which is not contemplated by the parties or by `interpretative process’, the Court is re-writing the contract which is in the nature of `novatio’. The intention of the parties is explicitly clear and they have agreed that the dispute, if any, would be referred to an arbitrator. To that extent, therefore, the agreement is legal, lawful and the offending part as to the finality and restraint in approaching a Court of law can be separated and severed by using a `blue pencil’. (Para 26)
       The proper test for deciding validity or otherwise of an agreement or order is ‘substantial severability’ and not ‘textual divisibility’. It is the duty of the court to severe and separate trivial or technical part by retaining the main or substantial part and by giving effect to the latter if it is legal, lawful and otherwise enforceable. In such cases, the Court must consider the question whether the parties could have agreed on the valid terms of the agreement had they known that the other terms were invalid or unlawful. If the answer to the said question is in the affirmative, the doctrine of severability would apply and the valid terms of the agreement could be enforced, ignoring invalid terms. (Para 27)
       At this belated stage, now, the respondent cannot be permitted to take advantage of its own default. In my opinion, since there is failure on the part of the respondent in making an appointment of an arbitrator in accordance with the agreement, the prayer cannot be granted. For the foregoing reasons, the arbitration petition stands allowed and Hon’ble Mr. Justice M.L. Pendse (Retired) is accordingly appointed as Sole Arbitrator. (Paras 30 and 31)

Judgment

C.K. Thakker, J.—This Arbitration Petition is filed by the petitioner, Shin Satellite Public Co. Ltd. against the respondent, M/s Jain Studios Ltd. under sub-section (6) of Section 11 of the Arbitration and Conciliation Act, 1996 (hereinafter referred to as ‘the Act’). It is prayed in the application that Hon’ble Mr. Justice M.L. Pendse (Retired) be appointed as Sole Arbitrator, or in the alternative, any other retired Judge of a High Court may be appointed as an Arbitrator. The Hon’ble the Chief Justice of India has nominated me to exercise power under sub-section (6) of Section 11 of the Act and that is how the matter has been placed before me for passing an appropriate order.

2. It is the case of the petitioner that it is a Company registered under the laws of Thailand, having its principal office in Thailand. The petitioner carries on the satellite business and has got three satellites in the orbit, viz., Thaicom-1, Thaicom-2 and Thaicom-3. The petitioner, through above satellites, provides broadcasting and internet services to various Companies/firms in the world. The respondent is a Company duly registered under the Companies Act, 1956 having its registered office at New Delhi.

3. According to the petitioner, an agreement was entered into between the parties on August 10, 1999 for availing broadcasting services of the petitioner by the respondent. The agreement, inter alia, provided for supply of satellite services, payment of fees, etc. Clause 23 provided for arbitration in case of dispute arising from the interpretation or from any matter relating to the performance of the agreement or rights or obligations of the parties. Since the dispute arose between the parties, the petitioner, through advocate addressed a letter/notice to the respondent on September 9, 2004 demanding for arbitration under clause 23. The petitioner, in the said letter, stated that it had appointed Hon’ble Mr. Justice M.L. Pendse (Retired) as its arbitrator and called upon the respondent to appoint an arbitrator. The petitioner, however, received a letter dated 7th October, 2004 from the respondent’s advocate contending that the arbitration clause was not legal and valid and clause 23 of the Arbitration Agreement could not be termed as ‘Arbitration Clause’. According to the petitioner, thus, the respondent failed to appoint an arbitrator which compelled the petitioner-company to file present application under Section 11(6) of the Act. A prayer was, therefore, made to make an appointment of an arbitrator.

4. On March 17, 2005, notice was issued on the application. The learned counsel appeared on behalf of the respondent and waived service of notice. Time was sought to file counter-affidavit, which was granted.

5. A reply-affidavit was then filed by the respondent urging therein that the Arbitration Agreement was not legal and valid. It was contended that Clause 23 contained a condition that the arbitrator’s determination would be treated as ‘final and binding between the parties’ and the parties had waived ‘all rights of appeal or objection in any jurisdiction’. It was also submitted that the disputes were to be resolved by arbitration under the rules of United Nations Commission on International Trade Law (UNCITRAL). Whereas Agreement in question dated August 10, 1999 provided that the arbitration would be held in Delhi in accordance with Indian Law, under other two Agreements, the place of arbitration was fixed at Singapore and London respectively, and the governing law was English Law. It was, therefore, stated that in the present case also, arbitration may be held in London or in Singapore, where arbitration proceedings were going on between the parties.

6. The matter could not be heard finally as the question as to the nature of function to be performed by the Chief Justice or his nominee under sub-section (6) of Section 11 of the Act was referred to a seven-Judge Bench. In SBP & Company v. Patel Engineering Ltd., (2005) 8 SCC 618 the point

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2006 Supreme(SC) 84

Important pointPartial invalidity in contract will not ipso facto make the whole contract void or unenforceable. Wherever a contract contains legal as well as illegal parts and objectionable parts can be severed, effect has been given to legal and valid parts striking out the offending parts.

Cases Referred (1)

Important point
Partial invalidity in contract will not ipso facto make the whole contract void or unenforceable. Wherever a contract contains legal as well as illegal parts and objectionable parts can be severed, effect has been given to legal and valid parts striking out the offending parts.