The court affirms the doctrine of severability under the Arbitration and Conciliation Act, allowing partial setting aside of awards
In a significant judgment, the Karnataka High Court has upheld the doctrine of severability within the realm of arbitration, allowing for a partial setting aside of an arbitral award in the case of Pinaka Infomatics Pvt Ltd v. Karnataka State Electronics Development Corporation Ltd. The Division Bench consisting of Chief Justice Vibhu Bakhru and Justice C.M. Poonacha ruled on April 23, 2026, that the decision of the lower Commercial Court to set aside the entire arbitral award was unjustified, as the award dealt with distinct and separable claims.
The case revolved around a dispute arising from an agreement dated April 19, 2010, between Pinaka Infomatics and the Karnataka State Electronics Development Corporation Ltd (KSEDCL) for providing IT infrastructure and related services to 24 Agricultural Produce Market Committees (APMCs) under the Karnataka Agricultural Marketing Act. Following the induction of National Commodities Derivatives Exchange (NCDEX) and Rashtriya e-Market Services Private Limited (ReMS), Pinaka Infomatics claimed breach of contract and sought arbitration for unpaid amounts and damages.
The arbitral tribunal awarded Pinaka Infomatics Rs.2,76,26,072/- for unpaid costs of hardware and manpower charges, along with interest and litigation costs. However, the tribunal only awarded Rs.25,00,000/- for business loss and loss of opportunity, rejecting Pinaka’s claim for Rs.10.55 crores. While the Commercial Court found no fault with the award concerning unpaid costs and interest, it set aside the entire award, deeming the damages awarded for business loss as unsupported by evidence and contrary to public policy.
The High Court, however, modified the lower court's decision, emphasizing that the claims were distinct and separable, and thus, setting aside the entire award based on the invalidity of one claim was not justified. The judgment underscored the court's inherent jurisdiction to sever invalid portions from valid ones under Section 34 of the Arbitration and Conciliation Act, 1996, aligning with precedents set by the Supreme Court in cases like JG Engineers Private Limited v. Union of India and Gayatri Balasamy v. Isg Novasoft Technologies Ltd.
In their oral judgment, the Bench cited the Supreme Court's observations on the limited power of modification versus partial setting aside, reiterating that the authority to sever invalid portions is crucial to ensuring fair and just outcomes without reopening entire arbitral proceedings unnecessarily.
The appeal by Pinaka Infomatics was thus partly allowed, with the High Court setting aside only the Rs.25,00,000/- awarded for damages/compensation, thereby upholding the remaining portions of the arbitral award for unpaid costs and interest.
Bottom line:-
Arbitration and Conciliation Act, 1996 - The court has the power to partially set aside an arbitral award, severing the invalid portions while upholding the valid and separable parts of the award.
Statutory provision(s): Arbitration and Conciliation Act, 1996, Sections 34 and 37
