Principle of Separability of Arbitration Agreement: International Perspective By: Rakshit Sharma

The Author, Rakshit Sharma, is a 3rd year, BBA.LLB (H), New Law College, Bhartiya Vidyapeeth University, Pune, He is currently interning with LatestLaws.com.

Introduction

Arbitration is the form of Alternative Dispute Resolution which is settlement technique followed to end a business dispute outside the court. The law states that for adopting the arbitration the disputed parties has to get into an agreement for resolution. An arbitration agreement can be as simple as a provision in a contract stating that by signing that contract you are agreeing to arbitration in the case of any future disputes. A conflict can be brought to arbitration where an arbitration agreement is mutually entered into by the parties. The court adopted a pro-arbitration approach and enforcing valid arbitration agreements.

According to section 2(a) of Arbitration Act, 1940 states an arbitration agreement means a written agreement to submit present or future differences to arbitration, whether an arbitrator is named therein or not.[1]

As defined in Section 7 of the Arbitration and Conciliation Act, 1996

Arbitration agreement —

(1) In this Part, “arbitration agreement” means an agreement by the parties to submit to arbitration all or certain disputes which have arisen or which may arise between them in respect of a defined legal relationship, whether contractual or not.

(2) An arbitration agreement may be in the form of an arbitration clause in a contract or in the form of a separate agreement.

(3) An arbitration agreement shall be in writing.

(4) An arbitration agreement is in writing if it is contained in—

(a) a document signed by the parties;

(b) an exchange of letters, telex, telegrams or other means of telecommunication which provide a record of the agreement; or

(c) an exchange of statements of claim and defence in which the existence of the agreement is alleged by one party and not denied by the other.

(5) The reference in a contract to a document containing an arbitration clause constitutes an arbitration agreement if the contract is in writing and the reference is such as to make that arbitration clause part of the contract.[2]

The arbitration arrangement can be entered into as a separate agreement, or as a clause of a two-party contract. Arbitration agreements signed under a contract are known as 'arbitration clauses. Although the arbitration clause is part of the underlying contract, it is practically separate. The concept of the separation of the arbitration clause is both theoretically interesting and practical. This means that the arbitration clause in the contract is considered to be separate from the main contract and survives the dismissal of the contract. An arbitration clause is essentially needed clause as when a contract becomes voidable it terminates arbitration clauses as well. Despite fact that the arbitration clause is part of the original contract, they are completely separate.

Doctrine of Separability of an arbitration agreement

Doctrine of separability states that an arbitration clause is a separate agreement in the underlying contract in which it appears. It clearly indicates that there is no nexus between arbitration clause and the underlying contract. However the existence of a contract is necessary for the terms of arbitration clause. The validity of an agreement is always questionable in most of the cases. In this context, the concept of separability in the application of international commercial arbitration was adopted and embraced.

Despite the fact that the underlying agreement and the arbitration clause are exists in same drafts, they both are separate agreements.  The primary aim of entering into an agreement is to create obligatory relation between the parties for its performance while an arbitration clause address disputes between the parties to be settled. The UNCITRAL Model Law on International Commercial Arbitration incorporates the doctrine of Separability in Article- 16(1) which states that an arbitration clause which forms part of a contract shall be treated as an agreement independent of the other terms of the contract. A decision by the arbitral tribunal that the contract is null and void shall not entail ipso jure the invalidity of the arbitration clause.[3]

India has adopted the same approach in Indian arbitration and conciliation act, in article 16 (1) (b) the section reads as follows:

Competence of arbitral tribunal to rule on its jurisdiction.—(1) The arbitral tribunal may rule on its own jurisdiction, including ruling on any objections with respect to the existence or validity of the arbitration agreement, and for that purpose,— (a) an arbitration clause which forms part of a contract shall be treated as an agreement independent of the other terms of the contract; and (b) a decision by the arbitral tribunal that the contract is null and void shall not entail ipso jure the invalidity of the arbitration clause. [4] 

The United States Supreme Court in verdict of Buckeye Check Cashing, Inc. vs. Cardegna embraced that the Separability Rule permits a court of law “to enforce an arbitration agreement in a contract that the arbitrator may later find to be void”.[5]

Similar dispute arbitrated in English High Court named Beijing Jianlong Heavy Industry Group vs. Golden Ocean Group Limited & Ors addressed the question before the arbitrators was whether the English rule of public policy that a contract would not be enforced if it provided for an illegal act to be performed in a foreign friendly country extended to the arbitration clause. An arbitration clause was a distinct undertaking and there was nothing in English public policy which precluded the enforcement of an arbitration clause even though the underlying issue was illegality.[6]

In Reliance Industries Ltd. & Anr v. Union of India the Supreme Court of India rejected jurisdiction to consider an application to set aside a UNCITRAL award in an arbitration gathering outside India, reaching the conclusion that the Parties' sole intention was that their dispute was not subject to the Indian Arbitration Rules.

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Case laws of doctrine of separability

In the formal cases if there is no legal existence of the original contract, the arbitration clause also cannot exist for the period of the original contract. In other words if the contract becomes void, an arbitration clause also perish along with the same. Arbitration itself must be unenforceable to make an agreement impeached. The doctrine of separability put forward by the Supreme Court of USA in Prima Paint Corp vs. Flood & Conklin manufacturing co. where it was held that the contract can be separate from the arbitration clause in which they are included. In other words there must be existence of independent factor to invalidate the arbitration clause.[9]

Supreme Court of India also observed the doctrine of separability in the case of National Agricultural Co-op Marketing Federation of India Ltd. v. Gains Trading ltd. while considering the validity of contract, arbitration clause should be treated independently from the main contract. Moreover is a contract becomes null or void, the arbitration clause shall not be understood in the same context as void.[10]

In Branch Manager, Magma Leasing and Finance limited v. Potluri Madhavilata the Supreme Court held that contract termination due to violation shall make the arbitration clause inoperative. It would rather survive to settle disputes which can occur under the contract.[11]

Argument against separability doctrine

One of the significant contentions against Separability Doctrine is that it is contrary with the legally binding way to deal with arbitration law. The doctrine of separability shall be eliminated as no dispute shall be referred to arbitration even if a contract allowing arbitration of the dispute has been entered into for the parties. The doctrine of separability allows a right of conflict unenforceable at a lower degree of consent than the contract law creates. This can be achieved by removing the protection provided by contract law for compliance from the right to litigate. Unlike a contracting approach, the doctrine on separability states that, although the contract is non-enforceable, a party alienates his right to litigate where he forms a contract which contains an arbitration clause. The doctrine of separability distinguishes arbitration law from an essential aspect of contract law — defenses to enforcement and does not offer the right to conflict with the protection of these defenses.

Argument in favor of separability doctrine

Arbitrators have the right to govern in their own jurisdiction as the fundamental principle of arbitrators' law. The principle is also viewed as direct consequence of the separability doctrine. Because of the discretion of the arbitration agreement, any reference to the non-compliance of the principal contract does not impact the arbitration agreement directly. The Doctrine of Separability requires arbitrators to investigate jurisdictional issues based on the perceived ineffectiveness of the dispute contract.[12]

Conclusion

The doctrine of separability establishes full autonomy for the arbitration clause and also prevents it from being affected by the underlying agreement. The doctrine's success with the institutional regulations indicates most national arbitration laws would follow the same policy in due course. However the dispute settlement laws should be drafted with utmost care and precaution.