Arbitral Award Cannot Be Set Aside In Entirety If Claims Are Separable: Karnataka High Court

The Karnataka High Court has held that an arbitral award comprising distinct and separable claims cannot be set aside in its entirety merely because one component is found invalid, as courts have the power to sever the invalid portion while sustaining the valid portion.

A Division Bench of Chief Justice Vibhu Bakhru and Justice C.M. Poonacha allowed the appeal filed by Pinaka Infomatics Private Limited and modified the order of the Commercial Court, Bengaluru, which had set aside the arbitral award in full. It stated:

“As noted herein before the Supreme Court also observed that the authority to sever the 'invalid' portion of an arbitral award from the 'valid' portion is inherent in the court's jurisdiction when setting aside an award.”

Pinaka Infomatics and Karnataka State Electronics Development Corporation Limited (KSEDCL) had entered into an agreement for providing IT infrastructure and services for implementation of an electronic tendering system across APMCs. Disputes arose relating to payments and alleged breach of contract, leading to arbitration.

The arbitral tribunal awarded Rs. 2.76 crore towards unpaid dues, Rs. 25 lakh as damages, along with interest and costs. KSEDCL challenged the award before the Commercial Court, Bengaluru. While the court did not find fault with most components of the award, it set aside the entire award on the ground that the damages component was vitiated by illegality. Pinaka Infomatics then approached the High Court.

The High Court noted that Pinaka's claims were distinct and separable. It held that setting aside the entire award merely because the damages component was affected by patent illegality was unjustified. It observed:

“In the circumstances, setting aside the entire impugned award on the basis that the award of damages was vitiated by patent illegality is unjustified.”

On damages, the Bench reiterated that where breach of contract is proved but losses cannot be precisely quantified, courts may award nominal damages.

Accordingly, the High Court set aside the award only to the extent of the damages component and upheld the remaining portions of the arbitral award, including ₹2.76 crore towards unpaid dues along with interest and costs.

For Appellant: Advocate Thomas Vellapally

For Respondent: Advocate Nishanth A.V