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ORDINARY ORIGINAL CIVIL JURISDICTION
IN ITS COMMERCIAL DIVISION
COMM. ARBITRATION APPLICATION NO.113 OF 2023
Bhupinder Singh Balwant Singh .. Applicant
…
Mr.Rajeev K. Pandey with Mr.Madhur Rai and Mr.Sachin
Kanse i/b PRS legal for the Applicant.
Dr.Abhinav Chandrachud i/b Mr.Viral Kothari and
Mr.J.J.Sampat for the Respondents. ...
JUDGMENT
1. An arbitration clause contained in the Memorandum of Understanding (MOU) dated 12/09/2018 and another arbitration clause in the Agreement for sale, executed between the parties on 13/02/2019, forms the basis for the applicant/purchaser to approach this Court, by fling an application under sub-section (6) of Section 11 of the Arbitration and Conciliation Act, 1996 (for short, “The Act of 1996”), for appointment of a sole Arbitrator to adjudicate the dispute that has arisen with the respondent, out of the two documents executed between them. M.M.Salgaonkar It is the case of the applicant that he entered into an Agreement for Sale for purchase of a property for consideration of Rs.5,15,00,000/- and made advance payment of Rs.4,40,00,000/- and the balance amount of Rs.75,00,000/- was agreed to be paid at the time of handing over of the possession, within fve months from the date of execution of Agreement. The respondents appointed a power of attorney authorising her to transfer the property. But, when the respondents restrained the petitioner from taking vacant possession of the property and when the petitioner gained the knowledge that the respondents signed another MOU with the third party, he invoked arbitration and, since, there was failure to appoint the Arbitrator, within the period stipulated, he has approached this Court, seeking appointment of an Arbitrator. The arbitration clause in the MOU reads thus:- “18. Any dispute between the Sellers and the Purchasers relating to the interpretation of any of the terms and conditions of this agreement shall be referred to sole arbitrator, to be appointed by the Purchaser and such arbitration shall take place in accordance with the provisions of the Arbitration and Conciliation Act, 1956 and award passed by such sole Arbitrator shall be fnal and binding upon all parties.” The arbitration clause in the Agreement for Sale, someway similar, is to the following effect:- “20. Any dispute between the TRANSFERORS and the TRANSFEREE relating to the interpretation of any of the terms and conditions of this agreement shall be referred to sole arbitrator, to be appointed by the TRANSFEREE and such arbitration shall take place in accordance with the provisions of the Arbitration and conciliation Act, 1996 and award passed by such sole Arbitrator shall be fnal and binding upon all parties.”
2. The learned counsel Dr.Abhinav Chandrachud appearing for the respondents would raise a preliminary objection in respect of the two clauses contained in both the documents and he has advanced his argument, by stating that since the clause confer a right upon one party to appoint the Arbitrator i.e. it confer a unilateral right upon a party i.e. the purchaser/ transferee, to appoint an Arbitrator, who shall conduct the arbitration, so as to resolve the disputes between the parties, in the wake of the settled position of law to the effect that the unilateral appointment of an Arbitrator is void, the said clause according to the learned counsel, is not legal and create no binding agreement. He would submit that if the clause is even permitted to be read down by denuding the sole party of it’s right to appoint the Arbitrator, it would amount to re-writing of the clause and in no case, it is permissible. By inviting my attention to Section 11 of the Act of 1996, it is the submission of the learned counsel that, no doubt, parties are free to agree for a procedure for appointing the Arbitrator or Arbitrators and when it contemplate an arbitration by three Arbitrators, if a party fails to appoint an Arbitrator within 30 days from the receipt of request from the other party or if the two appointed Arbitrators fail to agree on the third Arbitrator, then the Court shall, upon the request of the party, make such an appointment. As far as the sole Arbitrator is concerned, he would submit that sub-section (5) clearly stipulate that if the parties fail to agree upon the Arbitrator within 30 days from the receipt of the request by one party from the other, in such a case, High Court can make such an appointment. It is his specifc submission, by relying upon sub-section (6) of Section 11, that it is only in case of the contingencies contemplated in the said clause, where there is failure to follow the procedure agreed, then the request can be made for appointment of an Arbitrator, and which shall be granted. As per Dr.Chandrachud, the entire arbitration clause in the MOU and Agreement is liable to be rendered invalid, on account of a provision for unilateral appointment, which has been frowned upon by the Hon’ble Supreme Court as well as the High Courts, being affecting the independence and impartiality of the arbitration process and the clause not being capable of segregation, would render it void in entirety, and is not capable of being enforced. He would place reliance upon the decision of the Apex Court in the case of N.Peddanna Ogeti Balayya & Ors. Vs.Katta V., where the single Judge of the Apex Court propounded the separability of an agreement, while dealing with the decision of a Taxing Offcer. The background facts reveal upon an Agreement between the agent of the court and his client and when he was engaged by the latter, he would be paid his remuneration, a consolidated sum of Rs.300/- to which all out-of-pocket expenses would be added, but in that case, in the event the case being decided in favour of the client, he would have the beneft of tax cost. While dealing with the permissibility of such an arrangement and testing the soundness of the principle underlying it, Justice B.K.Mukherjea (As His Lordship was then), held as under:-
“9. The Taxing Offcer seems to be under an impression that the latter part of the agreement is not enforceable because it is not a bona fde arrangement and is circulated to aid gambling in litigation. If the agreement was to relieve the client of his costs in the event of the litigation not being successful, the Law of Maintenance might have some bearing on such agreement. The question of Champerty-again could arise if the Soliticitor is to be paid out of the proceeds of the litigation. Obviously, nothing like that has happened here. But assuming that the agreement is void and uneforceable for some reason or other, even then, the whole of it has got to be disregarded and the party and party costs are to be taxed, as if no such agreement existed. The Court is not competent to substitute a new contract for the parties and the frst part of the agreement cannot be taken to be the whole contract ignoring the second part altogether.” As a result, the order of the Taxing Offcer was set aside.
3. Dr.Chandrachud would place reliance on another decision of the Apex Court in the case of Shin Satellite Public Co. Ltd. Vs. Jain Studios Ltd.2, propounding on the applicability of the doctrine of severability, in arbitration agreement, without referring to the earlier decision and applying the blue pencil doctrine, and by invoking the principle of severability, but by not taking into consideration the earlier decision, in the case of N.Peddanna (supra). In the scenario, the submission of Dr.Chandrachud is, the subsequent decision is per incurium, as it has failed to consider the principle of law laid down in N.Peddanna (supra) and, hence, the decision in the case of Shin Satellite Public Co. Ltd. (supra) is not a good law. Shin Satellite Public Co. Ltd. (supra), according to Dr.Chandrachud, has again been relied upon in Elektron Lighting Systems Private Limited & Anr. Vs. Shah Investments Financial Developments & Consultants Private
Limited & Ors.3, but he would submit that the reliance upon a per incuriam decision, would not lend any credence to the legal principle fowing from it. The learned counsel would place reliance upon the decision of the Apex Court in the case of Perkins Eastman Architects DPC & Anr. Vs. HSCC (India) Llimited 4, to submit that the unilateral appointment of the Arbitrator is not sustainable in law and such an appointment is invalid. He would also rely upon the decision of the Apex Court in the case of Vidya Drolia & Ors. Vs. Durga Trading Corporation 5, and in particular paragraph 126 of the said decision as regards the principle of separation of the Arbitration Agreement from the underlying or container contract. In short, the submission advanced on behalf of the respondents is, an application for appointment of an Arbitrator under Section 11 can arise only out of an enforceable contract, which necessarily contemplate a valid contract and if the contract provide for an appointment of an Arbitrator, but if it contemplate unilateral appointment, which cannot be sustained in law, in that case since the agreement is not capable of severance, the arbitration clause itself would suffer from legal infrmity, as it is not permissible in law to have a unilateral appointment of an Arbitrator.
4. Dealing with the preliminary objection, Mr.Rajeev Panday would submit that at the stage of referring a dispute to the Arbitrator i.e. at the stage of sub-section (6) of Section 11, the Court is expected to only satisfy itself about the existence of an arbitration agreement i.e. the understanding between the parties to have their dispute, to be referred to a chosen mode of dispute resolution and if on invoking the arbitration, there is no response at the other end, then on an application fled under Section 11 seeking appointment of Arbitrator, the Court would exercise the power to appoint the Arbitrator, as prayed for. He would place reliance upon the decision of this Court in the case of PSP Projects Limited Vs. Bhiwandi Nizampur City Municipal Corporation (Arbitration Petition No.89 of 2021) as well as the decision in the case of Malvika Rajnikant Mehta & Ors. Vs. JESS Construction (Arbitration Application No.425 of 2019), where it is categorically held that when there is no dispute about existence of an arbitration agreement in the contract, then it is only in exceptional cases, where the claims are ex-facie time barred and it is manifest that there is no subsisting dispute when the Court may refuse to make the reference, otherwise the reference to arbitration is imperative.
5. In the light of the rival contentions advanced, in construing the clause referring the dispute to arbitration, I have given thoughtful consideration to the arguments advanced by Dr.Chandrachud. A valid arbitration agreement constitutes a heart of ‘Arbitration’. An arbitration agreement is an agreement between the parties to submit their existing or future disputes or differences to arbitration and there can be no dispute that a valid arbitration agreement is the foundation stone on which the entire edifce of the arbitral process is structured. In other words, a valid and binding agreement, for disputes to be resolved through the process of arbitration is sine-qua-non for referring the parties to arbitration. The agreement must in unequivocal terms indicate the intention of the parties to refer the disputes to an Arbitrator/Arbitral Tribunal. The intention of the parties must be gathered from the terms of the contract, conduct of the parties and correspondence exchanged, to ascertain the existence of a binding contract between the parties. If the documents on record show that the parties were ad idem and had actually reached upon an consensus upon all material terms, it will be construed as a binding contract. The arbitration agreements are to be construed upon the general principles of construction of statutes, statutory instruments and other contractual documents. Though the Act of 1989 does not prescribe any particular format or intend use of specifc wordings, the inference of the same, shall be inferred from the intention of the parties to appoint the Arbitrator and the Court would normally lean towards encouraging arbitrations and though at times, the clause is not particularly so worded, the Court would still refer the disputes to the arbitration, if it could gather intention of the parties from the clause. The Arbitration clause or an Arbitration agreement must disclose the determination and obligation on behalf of the parties to refer the disputes to arbitration and merely because the word “Arbitration” or “Arbitrator” is absent, will not denude the particular agreement and it’s effect as being read as an arbitration agreement nor can mere presence of these words, without the intention of the parties to refer their dispute to the arbitration, would be construed as an arbitration clause.
6. An arbitration agreement, which provide for unilateral option to either of the party i.e. a clause, which confer the exclusive right to appoint an Arbitrator, was frowned upon, subsequent to the Arbitration and Conciliation (Amendment) Act, 2015 and in Perkins Eastman Architects DPC & Anr. (supra), it is held that in a case where only one party has authority to appoint a sole Arbitrator, it’s choice will always have an element of exclusivity in determining or chartering a course of dispute resolution. If it is a person or party, who has an interest in the outcome or decision of the dispute, must not had the power to arbitrate and/or appoint a sole Arbitrator and, accordingly, the appointment of an Arbitrator, appointed by one of the party having exclusive right to appoint and appointed an independent Arbitrator, was set aside. The consistent position thereafter has been that there can be no unilateral appointment of an Arbitrator and an arbitration clause that gives an exclusive right to one party to choose the Arbitrator is not enforceable.
7. The question that arises for consideration before me is, whether inclusion of such a stipulation in a contract/an agreement, would render the entire agreement invalid and unenforceable, since a part of it cannot be enforced. A stipulation in the clause before me contained in the two documents confer a right upon the purchaser/a transferee to appoint the Arbitrator unilaterally and such a clause is defnitely inoperative and invalid in view of sub-section (5) of Section 12 and is void, as it would drastically hit the impartiality and independence of the Arbitrator, as one party may not have a say in the appointment of Arbitrator and such a unilateral appointment would always smack of bias and arbitrariness. For this reason, when only party gets upperhand to choose the Arbitrator, without consent of the other, such a clause is void and it cannot be enforced. Inclusion of such a clause in an agreement would result in thrusting of an Arbitrator appointed by the other party, though the essence of arbitration is party autonomy and a just procedure is contemplated for appointment of Arbitrator, but when there is a failure to adhere to the said procedure, in that case, it is the Court, which would be competent to exercise it’s powers upon the request by one of the party and appoint an Arbitrator, who shall be independent and impartial.
8. The clause to which the parties are referring to is in three parts; the frst part being an agreement between the parties that any dispute arising between the seller and the purchaser relating to the interpretation of any of the terms and conditions of the agreement, shall be referred to an Arbitrator. The second part of the clause is the procedural aspect, as to how the Arbitrator shall be appointed and where the proceedings of arbitration shall be conducted. The third part of the clause is the binding effect given to the Award by assigning a fnality to it. The appointment of an Arbitrator, which is the procedural aspect, form one part of the entire clause and if argument of Dr.Chandrachud is to be accepted that because of the procedure prescribed being not legal and valid, then the entire arbitration clause must perish and, according to him, with an unenforceable part of the clause, since it is not capable of being severed, the arbitration clause itself does not survive. I am afraid, whether such a view would do justice to the parties, who have agreed for their differences to be resolved through process of an arbitration. As already noted by me, the clause in question has three components; dependent of each other, to give it a fnal shape of an Arbitration clause, the frst being the consensus to refer the dispute to the Arbitrator, that forms the core of the arbitration clause. The procedure for appointment is distinct from the agreement to refer to the dispute for arbitration and what is invalid is only the procedure, in appointing the Arbitrator, which may have a remedy and as can be seen from the decision of Their Lordship in the case of Perkins Eastman Architects DPC & Anr. (supra), a dispute resolution clause in form of clause 24 contemplated the mechanism for resolving the dispute and while determining the second issue, which arose as to whether a case is made for exercise of power by the Court to make an appointment of the Arbitrator, which contemplated the Chairman and the Managing Director of the respondent to make appointment of a sole Arbitrator, the clause categorically stipulated that no person other than the person appointed by such Chairman and Managing Director of the respondents would act as an Arbitrator, the Hon’ble Supreme Court referred to it’s earlier decision in the case of TRF Limited Vs. Energo Engg. Projects Ltd.6, where such an appointment was held to be hit by Section 12(5) of the Act of 1989 and in terms of the language employed in 7th schedule, the Managing Director of the Corporation was held to ineligible by operation of law to act as an Arbitrator. A further offshoot as to whether the Managing Director, after becoming ineligible by operation of law, is still eligible to nominate the Arbitrator is also pondered upon and it was held that in case, where the Managing Director is the named Arbitrator and power is conferred upon him, to nominate the one, who can be Arbitrator in his place, such an appointment cannot be allowed, as the nomination of the Arbitrator by an ineligible Arbitrator as alleged, as it would tantamount to carry on the proceedings of arbitration by himself. It was, therefore, held that as a Managing Director become ineligible by operation of law to act as an Arbitrator, he could not nominate another person to act as an Arbitrator and once the identity of the Managing Director as a sole Arbitrator is lost, the power to nominate someone else is also obliterated.
9. The Hon’ble Supreme Court, in the backdrop of the most essential features of the process of Arbitration, being the independence and impartiality of the person nominated, focusing upon the neutrality of the Arbitrator, was called upon to answer a further question, whether the power can be exercised by the Court under Section 11 of the Act of 1989, when the appointment of the Arbitrator has already been made by the respondents and whether the appointment should be left to raise a challenge at an appropriate stage and while answering the said question, it is held that unless the appointment of the Arbitrator is ex-facie valid and such appointment satisfes, the Court exercising jurisdiction under section 11(6) of the Arbitration Act, acceptance of such appointment as a fait accompli, to debar the jurisdiction under Section 11(6) cannot be countenanced in law. The Apex Court accepted the application fled under subsection (6) of Section 11 and annulled the effect of the letter of the respondent, which had appointed the Arbitrator unilaterally. Exercising the power under sub-section (6) of Section 11, the Arbitrator came to be appointed, subject to the mandatory declaration made under the amended Section 12 of the Act, with respect to independence and impartiality and the ability of the Arbitrator to devote suffcient time to complete the arbitration within the period prescribed under Section 29A. It can thus be seen that the clause, which provided for unilateral appointment of Arbitrator and which was acted upon, came to be annulled and the power under sub-section (6) of Section 11 came to be exercised for appointing the Arbitrator. Clearly this being the procedural aspect, did not and could not have rendered the entire arbitration clause contained in a contract invalid.
10. Delhi High Court was confronted with the similar situation in the case of Ram Kripal Singh Construction Pvt. Ltd. Vs. NTPC[7] and Justice Anup Jairam Bhambhani dealt with the similar arguments in the following words:- “17.4. The procedure for appointment of an arbitrator is clearly distinct and separable from the agreement to refer disputes to arbitration, even if these are contained in the same arbitration clause. If therefore, by reason of amendment, re-statement or re-interpretation of the law, as has happened in the present case by insertion of section 12(5) in the A&C Act and the verdicts of the Supreme Court in TRF Ltd. and Perkins Eastman (supra), the procedure for appointment of arbitrator at the hands of one of the parties becomes legally invalid, void and unenforceable, that does not mean that the core agreement between the parties to refer their inter-se disputes to arbitration itself perishes. In the opinion of this court - this “my way or the highway” approach - is not tenable in law; and in such circumstances, that part of the arbitration agreement which has been rendered invalid, void and enforceable is to be severed or excised from the arbitration clause, while preserving the rest of the arbitration agreement;
17.5. Accordingly, this court is of the view, that there is a valid and subsisting arbitration agreement between the parties, though the procedure for appointment of the arbitrator at the hands of the CMD, NTPC is no longer valid, and must therefore be severed from the remaining arbitration clause;
17.6. The aforesaid view taken by this court is also in consonance with the extant legislative and judicial policy that arbitration agreements are not to be readily invalidated unless there is compelling basis to do so; and arbitration is to be encouraged as an alternative mode of disputes adjudication (cf. Chloro Controls India Pvt. Ltd vs. Severn Trent Purifcation Inc. and Ors. 25 ).”
11. The aforesaid judgment, according to Mr.Chandrachud, has focused on three aspects i.e. severability of the arbitration clause, encouraging arbitration as a mode for alternative resolution and the aspect of appointment of the Arbitrator, 7 2022 SCC OnLine 3743 being procedural in nature. According to him, this judgment has failed to consider the observations of the Hon’ble Supreme Court in the case of Vidya Drolia & Ors. (supra) and, in particular, paragraph 126 and I would reproduce paragraph 126, which reads thus:- “126. We would now examine the principles of separability and competence- competence. Clauses (a) and (b) to subsection (1) of Section 16 enact the principle of separation of the arbitration agreement from the underlying or container contract. Clause (a), by legal fction, gives an independent status to an arbitration clause as if it is a standalone agreement, even when it is only a clause and an integral part of the underlying or container contract. Clause (b) formulates a legal rule that a decision by the Arbitral Tribunal holding that the main contract is null and void shall not ipso jure entail invalidity of the arbitration clause. Successful challenge to the existence or invalidity or rescission of the main contract does not necessarily embrace an identical fnding as to the arbitration agreement, provided the court is satisfed that the arbitration clause had been agreed upon. The arbitration agreement can be avoided only on the ground which relates directly to the arbitration agreement. Notwithstanding the challenge to the underlying or container contract, the arbitration clause in the underlying or container contract survives for determining the disputes. The principle prevents boot-strapping as it is primarily for the Arbitral Tribunal and not for the court to decide issues of existence, validity and rescission of the underlying contract. Principle of separation authorises an Arbitral Tribunal to rule and decide on the existence, validity or rescission of the underlying contract without an earlier adjudication of the questions by the referral court.”
12. It is worth to note that the arbitration clause may be comprised in a contract in form of one of it’s essential clause as distinguished from the substantive contract, as it serve a limited purpose of referring the dispute between the parties, arising from the main contract to the process of arbitration. Nonetheless, it form part of the contract and it may exist and survive, independent of the main contract for the purpose of resolving the dispute that arise therefrom. By now, it is settled position of law that the arbitration clause in a contract is an independent clause and while exercising the power of appointing an Arbitrator, the Court is required to look into it’s existence as well as the validity of the arbitration agreement. In N.N.Global Mercantile Private Limited Vs.Indo Unique Flame Ltd. & Ors.8, the Five-Judge Bench has clearly propounded upon the arbitration agreement in the following words:- “We are inclined to hold that what Section 7(1) contemplates is an Arbitration Agreement. We are also inclined to think that what the Law-Giver has intended to convey is that under the Arbitration Agreement, the parties must submit disputes, which have arisen or which may arise between them. The disputes may have arisen or may arise in respect of a defned legal relationship. The defned legal relationship, in turn, can be either contractual or otherwise. Therefore, what can give rise to disputes can be a legal relationship, which is noncontractual. The legal relationship may arise out of the Statute, or in relation to a tort but an Arbitration Agreement must always mean an agreement. It is really a contract which is intended as an agreement enforceable by law. An Arbitration Agreement may be a Clause in an agreement providing for Arbitration or it may be a separate or standalone agreement. An Arbitration Agreement must be in writing. As to what all are comprehended within the requirement that the Arbitration Agreement must be in writing, is set out in Sections 7(4)(a) to 7(4)(c). It includes a document which is signed by the parties. We may also notice that an Arbitration Agreement will be treated as contained in writing, if there is exchange of statement of claims and defence, in which, the existence of the Agreement is alleged by a party and not denied by other. Finally, Section 7(5) contemplates an Arbitration Agreement by incorporation, namely, reference in a contract to a document containing an Arbitration Clause, would constitute an Arbitration Agreement, if the contract is in writing and the reference is such as to make Arbitration Clause part of the contract.”
13. In the case of Enercon (India) Limited & Ors. Vs. Enercon GMBH & Anr.9, which followed the decision in the case of Elektron Lighting Systems Private Limited (supra), while explaining doctrine of severability contained in Section 57 of the Contract Act, a three-Judge Bench held that question of severance arises only in the case of a composite agreement consisting of reciprocal promises and the decision in the case of Shin Satellite Public Co. Ltd. (supra), was relied upon and, the particular observations, deserve a reproduction; “In Shin Satelite Public Co. Ltd. v. Jain Studios Ltd., this Court has observed that the proper test for deciding validity or otherwise of an order or agreement is “substantial severability” and not “textual divisibility”. It was further held by this Court that: “27. ….It is the duty of the Court to sever and separate trivial and technical parts by retaining the main or substantial part and by giving effect to the latter if it is legal, lawful and otherwise enforceable.” The principle laid down in Shin Satellite Public Co. Ltd. (supra), has clearly surfaced through the decision of Justice C.K.Thakker (As His Lordship was then), while dealing with a clause in an agreement between the parties, which specifcally provided arbitration as a mode for settlement of disputes. Another clause in the said agreement provided for severability, by stipulating that if any provision is held invalid, illegal or unenforceable for any reason, including by judgment of, or interpretation of relevant law, by any court of competent jurisdiction, the continuation in full force and effect of the remainder of them, shall not be prejudiced.
The legal position as regards severance of illegal and void provision as encapsulated in Halsbury’s Law of England (4th Edn.Vol.9) p.297 was reproduced to the following effect. “430. Severance of illegal and void provisions.- A contract will rarely be totally illegal or void and certain parts of it may be entirely lawful in themselves. The question therefore arises whether the illegal or void parts may be separated or 'severed’ from the contract and the rest of the contract enforced without them. Nearly all the cases arise in the context of restraint of trade, but the following principles are applicable to contracts in general. First, as a general rule, severance is probably not possible where the objectionable parts of the contract involve illegality and not mere void promises. In one type of case, however, the courts have adopted what amounts almost to a principle of severance by holding that if a statute allows works to be done up to a fnancial limit without a licence but requires a licence above that limit, then, where works are done under a contract which does not specify an amount but which in the event exceeds the fnancial limit permitted without licence, the cost of the works up to that limit is recoverable. Secondly, where severance is allowed, it must be possible simply to strike out the offending parts but the court will not rewrite or rearrange the contract. Thirdly, even if the promises can be struck out as aforementioned, the court will not do this if to do so would alter entirely the scope and intention of the agreement. Fourthly, the contract, shorn of the offending parts, must retain the characteristics of a valid contract, so that if severance will remove the whole or main consideration given by one party the contract becomes unenforceable. Otherwise, the offending promise simply drops out and the other parts of the contract are enforceable."
14. Chitty on Contract (29th Edn.Vol.1) has analysed the severability of a part of contract and it’s effect in the following words:- "16-188. Introductory.- Where all the terms of a contract are illegal or against public policy or where the whole contract is prohibited by statute, clearly no action can be brought by the guilty party on the contract; but sometimes, although parts of a contract are unenforceable for such reasons, other parts, were they to stand alone, would be unobjectionable. The question then arises whether the unobjectionable may be enforced and the objectionable disregarded or 'severed'. The same question arises in relation to bonds where the condition is partly against the law. 16-189. Partial statutory invalidity. It was laid down in some of the older cases that there is a distinction between a deed or condition which is void in part by statute and one which is void in part at common law. This distinction must now be understood to apply only to cases where the statute enacts that an agreement or deed made in violation of its provisions shall be wholly void. Unless that is so, then provided the good part is separable from and not dependent on the bad, that part only will be void which contravenes the provisions of the statute. The general rule is that 'where you cannot sever the illegal from the legal part of a covenant, the contract is altogether void; but, where you can sever them, whether the illegality be created by statute or by the common law, you may reject the bad part and retain the good. Thus, a covenant in a lease that the tenant should pay 'all parliamentary taxes', only included such as he might lawfully pay, and a separate covenant to pay the landlord's property tax, which it was illegal for a tenant to contract to pay, although void, did not affect the validity of the instrument. In some situations where there is a statutory requirement to obtain a licence for work above a stipulated fnancial limit but up to that limit no licence is required, the courts will enforce a contract up to that limit. There is some doubt whether this applies to a lump sum contract 'for a single and indivisible work'. Even in this situation if the cost element can be divided into its the latter legal and illegal components, the courts will enforce the former but not the latter.” By delving upon the aspect of severability, Justice Thakker (His Lordship as he was then), evolved a blue pencil doctrine, by clearly severing the part of an arbitration clause, making the Arbitrator’s determination fnal and binding between the parties and declaring that the parties have waived the rights of appeal or objection in any jurisdiction. Holding that the objectionable part is clearly severable and is independent of the dispute being referred to and resolved by an Arbitrator, it was held as under:- “26. In the present case, clause 23 relates to arbitration. It is in various parts. The frst part mandates that, if there is a dispute between the parties, it shall be referred to and fnally resolved by arbitration. It clarifes 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 "fnal 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 rewriting 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 fnality and restraint in approaching a Court of law can be separated and severed by using a 'blue pencil'.” Ultimately the intention of the parties was given effect to, even if part of the agreement was held to be unlawful by holding, that the lawful parts must be enforced and reference of the dispute to the Arbitrator, by no means, was liable to be declared as illegal or unlawful.
15. The decision in the case of N.Peddanna (supra), and particularly, the ratio which is sought to be propounded, cannot be disputed as it is not competent for a Court to substitute a new contract for the parties, but in the facts of the particular case, the frst part of the agreement could not have been considered to be the whole contract, ignoring the second part altogether, as the clause clearly contemplated the remuneration to be a consolidated sum of Rs.300/-, coupled with champerty, which is to be paid out of the proceeds of the litigation and on facts, it is specifcally held that nothing like that has happened, but assuming that the agreement is void and unenforceable for some other reason, even then, the whole of it has got to be disregarded and the party and party costs are to be taxed, as if no such agreement is existed. The decision of a Court is considered to be delivered in the facts placed before it and it is in the peculiar circumstances, the observations came to be made in the case of N.Peddanna (supra). The decision in the case of Shin Satellite Public Co. Ltd. (supra) is based upon the facts placed before the Court and it analysed the effect of severing the clause containing illegal and void provisions and upon its analysis, a decision is delivered, which is followed in the subsequent decisions of the Apex Court. Recently, in Texco Marketing Private Limited Vs. Tata AIG General Insurance Company Limited & Ors.10, once again the Apex Court invoked the ‘blue pencil doctrine’ to ascertain the effect and consequences of non-compliance of the mandatory obligations of the insurer under the policy and applied the ‘blue principle doctrine’, which permitted the offending words to be invalidated, as opposed to changing, adding or rearranging of the words and this doctrine is reiterated once again by by referring to P.Ramanatha Aiyar’s Advanced Law Lexicon, where it is formulated in the following words:- “11. In P. Ramanatha Aiyar's Advanced Law Lexicon, 3rd Edn. 2005 Vol. 1, pp. 553-54, it is stated:, 'Blue pencil doctrine (test).-A judicial standard for deciding whether to invalidate the whole contract or only the offending words. Under this standard, only the offending words are invalidated if it would be possible to delete them simply by running a blue pencil through them, as opposed to changing, adding, or rearranging words. (Black, 7th Edn., 1999) This doctrine holds that if courts can render an unreasonable restraint reasonable by scratching out the offensive portions of the covenant, they should do so and then enforce the remainder. Traditionally, the doctrine is applicable only if the covenant in question is applicable, so that the unreasonable portions may be separated. E.P.I of Cleveland Inc. v. Basler17, NE 2d at p. 556.”
16. By relying upon the observations in the case of Attwood Vs. Lamont [(1920) 3 KB 571 (CA)] the principle of ‘Severance of Contract’ was summarized as under:- “Severance of contract; "severance can be effected when the part severed can be removed by running a blue pencil through it without affording the remaining part" Thus, it has been categorically held that severance can be effected, by running a blue pencil through it, without affecting the remaining part. Once again, reliance is placed upon the the decision in the case of Shin Satellite Public Co. Ltd. (supra) in reference to sub-section (6) of Section 11 of the Act of 1996.
17. In the wake of the above discussion, I am unable to accede to the submission of Dr.Chandrachud that Clause No.18 contained in the MOU as well as Clause No.20 in the Agreement for Sale, cannot be given effect to as it confer unilateral power upon the purchaser and the transferee to appoint an Arbitrator. In the peculiar circumstances,since despite invocation of arbitration, the Respondent has failed to act and express consensus over the appointment of the Arbitrator or even propose a name of the Arbitrator for consideration by the petitioner, within a period of thirty days on receipt of the request, I deem it appropriate to exercise the power under subsection (6) of Section 11 and appoint the sole Arbitrator to resolve the disputes arising between them out of the MOU and Agreement for Sale and the appointment shall be subject to the following terms and conditions.
TERMS OF APPOINTMENT (a) Appointment of Arbitrator: Mr.Rohan Kelkar, an Advocate of this Court, is hereby appointed as a sole Arbitrator to decide the disputes and differences between the parties under the documents referred to above. (b) Communication to Arbitrator of this order:-
(i) A copy of this order will be communicated to the sole Arbitrator by the Advocates for the applicant/petitioner within one week from the date this order is uploaded.
(c) Disclosure: The Arbitrator, within a period of 15 days before entering the arbitration reference, shall forward a statement of disclosure as per the requirement of Section 11(8) read with Section 12(1) of the Arbitration and Conciliation Act, 1996, to the Prothonotary & Senior Master of this Court, to be placed on record of this application, with a copy to be forwarded to both the parties.
(d) Appearance before the Arbitrator:The parties shall appear before the sole Arbitrator within a period of two weeks from today and the Arbitrator shall fx up a frst date of hearing in the week commencing from 02/10/2023. The Arbitral Tribunal shall give all further directions with reference to the arbitration and also as to how it is to proceed. (e) Contact and communication information of the parties: Contact and communication particulars are to be provided by both sides to the sole Arbitrator. This information shall include a valid and functional E-mail address as well as mobile numbers of the parties, participating in the process as well as of the Advocates. (f) Section 16 application: The respondents are at liberty to raise all questions of jurisdiction within the meaning of section 16 of the Arbitration Act. All contentions are left open. (g) Fees: The sole Arbitrator shall be entitled to the fees prescribed under the Bombay High Court (Fee Payable to Arbitrators) Rules, 2018 and the arbitral costs and fees of the Arbitrator shall be borne by the parties in equal portion and shall be subject to the fnal Award that may be passed by the Tribunal. (h) Venue and seat of Arbitration: Parties agree that the venue and seat of the arbitration will be in Mumbai.
(i) Procedure: These directions are not in derogation of the powers of the Sole Arbitrator to decide and frame all matters of procedure in arbitration.
18. All contentions of both the sides are left open, to be raised by the respective parties before the Arbitral Tribunal, in accordance with law. ( SMT.
BHARATI DANGRE, J.)