The Bombay High Court has clarified that arbitral awards in international commercial arbitrations may be partially set aside under Section 34 of the Arbitration and Conciliation Act, 1996, when distinct claims are legally separable. This judgment reinforces the principle that courts must not nullify entire awards due to errors in isolated portions, aligning with India’s pro-arbitration jurisprudence.
Background & Facts
The Dispute
Arenel (Private) Limited, a Zimbabwe-based food manufacturer, entered into a contract with M/s Aakash Packaging, an Indian firm, for the supply of packaging materials. Arenel paid for five invoices, but disputed the quality of materials supplied under invoices dated 10 September 2012, 20 December 2012, and the fifth invoice (AP/A004/2012-13) for which USD 43,500.25 was paid but allegedly never delivered. Arenel alleged the packaging emitted a strong chemical odour, contaminating its biscuits.
Procedural History
- 2012 - 2013: Dispute arose over defective packaging and non-delivery of fifth consignment; SGS India reports confirmed compliance with EU food safety standards, while SGS Germany reported off-flavours.
- 2019: Sole Arbitrator awarded Arenel USD 165,102.10 plus costs, including refund for all three disputed invoices and the fifth invoice.
- 2020: Aakash Packaging filed a Section 34 petition to set aside the Award.
- 2025: Single Judge of Bombay HC set aside the entire Award, holding it violated public policy by ignoring SGS India reports and relying on hearsay expert evidence.
- 2025: Arenel appealed under Section 37.
Relief Sought
Arenel sought restoration of the Award’s portion relating to USD 43,500.25 for non-supply of the fifth consignment, arguing it was a severable claim unrelated to the odour dispute. Aakash Packaging defended the Single Judge’s decision to set aside the entire Award.
The Legal Issue
The central question was whether Section 34 of the Arbitration and Conciliation Act, 1996 permits a court to set aside only the invalid portion of an arbitral award when it is legally and practically separable from the valid portion, and whether the Arbitrator’s reliance on hearsay evidence and rejection of objective lab reports constituted patent illegality.
Arguments Presented
For the Appellant (Arenel)
Arenel relied on Gayatri Balasamy v. ISG Novasoft Technologies Limited to argue that Section 34 implicitly empowers courts to sever and preserve valid portions of an award. It contended that the claim for USD 43,500.25 for non-supply was entirely distinct from the odour-based defect claims, involving no overlapping evidence or factual nexus. It further argued that the Arbitrator’s findings on odour were not patently illegal, and that the Single Judge erred in setting aside the entire award. It cited Ssangyong Engineering and Vijay Karia to emphasize that judicial interference must be minimal and confined to fundamental breaches of justice.
For the Respondent (Aakash Packaging)
Aakash Packaging contended that the Arbitrator’s Award was permeated by patent illegality: rejection of SGS India reports (admitted documents), reliance on hearsay expert testimony (CW-2), and reversal of burden of proof. It argued that the entire Award was tainted by these errors and could not be severed, as the valuation of the non-supply claim was intertwined with the overall breach finding. It relied on Malay Kumar Ganguly and Narbada Devi Gupta to assert that marked documents without cross-examination lack evidentiary value.
The Court's Analysis
The Court undertook a meticulous review of the Arbitrator’s reasoning and the Single Judge’s intervention. It held that while the Arbitrator erred in accepting CW-2’s hearsay testimony and rejecting the SGS India reports, the patent illegality did not infect the entire Award.
"The claim for USD 43,500.25 for non-supply of the fifth consignment is a distinct and severable cause of action, unrelated to the odour allegations. There is no factual or legal interdependence between the two.
The Court emphasized that Section 34 permits partial setting aside where the invalid portion is separable from the valid. It distinguished between judicial review of merits and review for fundamental illegality. The Arbitrator’s reliance on CW-2’s testimony was flawed, but the finding on non-supply rested on undisputed facts: payment was made, delivery was not proven, and Aakash did not deny receipt of payment.
The Court rejected Aakash’s argument that the SGS India reports were inadmissible merely because authors were not examined. It held that where documents are marked without objection and their contents are not disputed in pleadings, their evidentiary value must be assessed on substance, not form. However, this error did not taint the non-supply claim.
The Court further clarified that Section 34(2)(b)(ii) allows setting aside awards that shock the conscience of the court, but such intervention must be proportionate. The Single Judge’s blanket setting aside was disproportionate. The Court invoked the doctrine of omne majus continet in se minus - the greater power to set aside includes the lesser power to set aside in part.
The Verdict
Arenel succeeded in part. The Bombay High Court held that the award for USD 43,500.25 for non-supply of the fifth consignment was valid and severable, and must be restored. The remainder of the Award, relating to odour and defective packaging, was correctly set aside by the Single Judge. The appeal was partly allowed.
What This Means For Similar Cases
Partial Setting Aside Is Now Expressly Recognized
- Practitioners must now argue for partial setting aside under Section 34 when an award contains both valid and invalid components.
- Courts will examine whether the disputed portions are legally and factually separable - e.g., distinct invoices, unrelated breaches, or independent claims.
- A blanket setting aside will be viewed as disproportionate unless the entire award is pervasively tainted.
Documentary Evidence Must Be Assessed on Substance, Not Formalities
- Marking a document as an exhibit without objection creates a presumption of admissibility.
- Objections to the truth of contents must be raised during cross-examination; silence cannot be used to later invalidate the document.
- Lab reports from accredited institutions (like SGS) carry weight absent credible rebuttal.
Burden of Proof Cannot Be Reversed Without Legal Basis
- Arbitrators must apply the preponderance of probability standard - claimant bears the burden.
- Holding a respondent liable for failing to prove a negative (e.g., "prove the defect was not yours") constitutes patent illegality.
- Courts will intervene where the Arbitrator shifts the burden without statutory or evidentiary basis.
