Article Posted By: Neha UpadhyayPosted on : 9/26/2015 12:00:00 AM
Doctrine of Separability
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Arbitration is a settlement technique in which a third party reviews the case and imposes a decision that is legally binding for both sides. It is a form of alternative dispute resolution(ADR), which is a legal technique settling the disputes outside courts, wherein the parties to a dispute refer it to one or more persons, by whose decision they agree to be bound. The persons to whom the dispute is referred to are called the arbitrator or arbitral tribunal. It is mostly used for the resolution of commercial disputes, particularly in the context of international commercial transactions. Arbitration in India as an essential limb of the dispute resolution system has its genesis rooted in the ancient era, when during the Harappa civilization trade links were established with other parts of the then known world.[1] The main characteristics of Arbitration are
a) Arbitration is consensual
b) The parties choose the arbitrator(s)
c) Arbitration is neutral
d) Arbitration is a confidential procedure
e) The decision of the arbitral tribunal is final and easy to enforce.
ARBITRATION AGREEMENT
An arbitration agreement is an agreement between the parties to refer their disputes to the arbitral tribunal. To constitute an arbitration agreement, first of all there should be an agreement, that is, ad idem.[2] An arbitration agreement like all other contract must satisfy all the essential requirements of section 10 of the Contract Act, 1872 i.e., the parties to the arbitration agreement must be competent to enter into a contract and the agreement should be made by the free consent of the parties.
Furthermore, the parties should have the intention of entering into a legally binding obligation. However, if the arbitration agreement does not fulfill the requirements of section 10 of the Indian contract Act, the arbitration agreement becomes void and any award given to either of the parties will not be enforceable.
DOCTRINE OF SEPERABILITY
The rule stems from the case of Harbour Assurance v Kansa General International Insurance. The practical effect of the rule is that unenforceability of the underlying agreement does not automatically render an arbitration agreement contained within it unenforceable. It follows that, in order to render an agreement to arbitrate unenforceable, the arbitration agreement itself must be directly impeached. In other words, there must be independent factors that specifically invalidate or render void the arbitration clause. The “seperability doctrine” was articulated comprehensively by the United States Supreme Court in Prima paint Corp v. Flood & Conklin Manufacturing Co. where the Court ruled that arbitration clauses can be ‘separable’ from the contracts in which they are included. In this case the parties entered into an agreement containing an arbitration clause, which read in part : “ Any controversy or claim arising out of or relating to this Agreement, or the breach thereof, shall be settled by arbitration in the City of New York, in accordance with the rules then obtaining of the American Arbitration Association”,
This doctrine gives us the arbitration agreement is to be treated separate from the main contractual responsibility. It clearly indicates that main contract have no nexus with the arbitration clause. This principle is considered to be one of the principles governing international commercial arbitration and has been accepts by the English courts. In some senses, the arbitration clause has been always been separable or at least separate since the earliest arbitration legislation. In England, this really means the 1698 Arbitration Act. The Act allowed arbitration clauses to be made rules of court if the parties had agreed to this. The breach of other contract terms could not at the time is made punishable by contempt of court.[3]
The use of this concept is that even if a contract is terminated, the arbitration agreement survives. Otherwise, the arbitration agreement would lose its purpose, if the breach of contract or claim making the contract voidable would terminate the arbitration clause as well. This is the time where the arbitration clause is most needed.[4] The arbitration agreement, if part of the underlying contract, will derive its existence from the underlying contract. The offer, acceptance, consideration and the capacity of the parties to make the underling contract are used to justify the validity of the arbitration agreement. However, no separate consideration is needed nor is a specific offer or acceptance relating to the arbitration agreement required. The principle of seperability means that the underlying contract containing the arbitration clause may be void but the arbitration agreement may survive.
The UNCITRAL Model law on International Commercial Arbitration incorporates the doctrine of Separability in Article 16(1). The Indian law of Arbitration,[5] which is based on the UNCITRAL Model Law, also explicitly adopts this approach in Section 16(1) (b). The section reads as follow:
16. 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.
Modern laws on arbitration confirm the concept. The United States Supreme Court in the recent judgment in Buckeye Check Cashing, Inc vs. Cardegna[6] acknowledged that the Separability rule permits a court “to enforce an arbitration agreement in a contract that the arbitrator later finds to be void”.
ARGUMENTS FOR THE SEPARABILITY DOCTRINE
The fundamental principle of arbitration law is that arbitrators have the power to rule on their own jurisdiction. It is apparent that the doctrine is in many ways a convenient and pragmatic fiction. If the arbitral tribunal decides that the clause is not a valid agreement to arbitrate then the basis for its authority disappears. Nevertheless, because of its obvious practical advantages, this doctrine is widely accepted both by arbitration rules and in national laws. [7] As those who drafted the model law observed in relation to the principle of separability;
“The main practical advantage of this principle is that it constitutes a serious bar, for a party who desires delay or wishes to repudiate his arbitration agreement, to subvert the arbitration clause by questioning in court the existence or validity of the arbitration agreement by way of questioning the validity of the main contract.” [8]
The main purpose of the separability doctrine is to maintain the competence of the arbitral tribunal, irrespective of the fate of the principal contract. The whole arbitration agreement would be frustrated if a party could prevent an arbitration agreement from coming into force by claiming that the commercial contract had not been validly concluded or was terminated either by performance or by some intervening event.
Justice Schwebel’s authoritative work on this doctrine gives four reasons which justifies the doctrine:
The first justification is the autonomy of the parties. If the parties agree to arbitrate then therefore they do not intend to have their claims decide by litigation, whether partly or as a whole.
The second justification is that if there were not separability of the arbitration agreement, then it would be easier for a party to delay the arbitration process by alleging the voidness of the contract. The benefits of arbitration would therefore be lost.
The third justification is that an agreement in a contract is no different from an “ad hoc” agreement. In this regard, an arbitration agreement is not affected by the frustration or termination of the principal contract in which the arbitration agreement is found.
The fourth justification was that without separability the courts would have to consider the whole dispute so as to determine whether there was a valid arbitration agreement and which would defeat the whole purpose of arbitration.[9]
ARGUMENT AGAINST THE SEPARABILITY DOCTRINE
One of the major arguments against Separability Doctrine is that it is incompatible with the contractual approach to arbitration law. [10] The separability doctrine should be repealed because no dispute should be sent to arbitration unless the parties have formed an enforceable contract requiring arbitration of that dispute. Prior to contracting, parties start with a right to litigate, rather than arbitrate, their disputes. The right to litigate, access to a court of law generally exists in the international, as well as the domestic, context but may be of less practical value internationally depending on the reliability of the court system with jurisdiction over the parties. The separability doctrine makes the right to litigate alienable under a lower standard of consent than is found in contract law. This doctrine separates arbitration law from an important part of contract law, the defenses to enforcement and thus fails to provide the right to litigate with the protection of those defenses.
CASE LAWS IN INDIA
The doctrine of separability has been expressly adopted by the Indian courts. In NIIT Institute of Information and Technology vs. West Star Constructions Pvt. Ltd,[11] a Division Bench of the Delhi High Court has held that, arbitration agreement contained in an unregistered lease deed or improperly stamped lease is severable and is a separate contract and even if the unregistered lease deed cannot be read in evidence or has to be impounded, the arbitration agreement would still be effective. The curt observed that after coming into force of Arbitration and Conciliation Act, 1996, the arbitration agreement has to be considered a separate and independent contract between the parties, even if it is a part of the lease deed, in view of section 16(1) (b) of the Arbitration and Conciliation Act, 1996.
The supreme Court of India, in National Agricultural Co-op. Marketing Federation India Ltd. V. Gains Trading Ltd,[12] observed that section 16 of the Indian Arbitration & Conciliation Act, 1996 makes it clear that while considering any objection with respect to existence or the validity of the arbitration agreement, an arbitration clause which forms part of the contract has to be treated independent of the other terms of the contract and a decision that the contract was null and void shall not be understood as invalidity of the arbitration clause.
Recently, in the Branch Manager, Magma Leasing And Finance Limited V. Potluri Madhavilata, the contract was terminated by one party on account of a breach committed by the other. The Supreme Court of India upholding the principle of severability held that termination of the contract due to breach will render the arbitration clause inoperative. Rather, it would survive to resolve disputes that might arise under the contract.
In the case of Enercon (India) Ltd., the Supreme Court has held that “The concept of separability of the arbitration clause/agreement from the underlying contract is a necessity to ensure that the intention of the parties to resolve the disputes by arbitration does not evaporate into thin air with every challenge to the legality, validity, finality or breach of the underlying contract. The Indian Arbitration Act, 1996, under Section 16 accepts the concept that the main contract and the arbitration agreement form two independent contracts. Commercial rights and obligations are contained in the underlying, substantive, or the main contract. It is followed by a second contract, which expresses the agreement and the intention of the parties to resolve the disputes relating to the underlying contract through arbitration. A remedy is elected by parties outside the normal civil court remedy. It is true that support of the National Courts would be required to ensure the success of arbitration, but this would not detract from the legitimacy or independence of the collateral arbitration agreement, even if it is contained in a contract, which is claimed to be void or voidable or unconcluded by one of the parties.”
EXCEPTIONS TO THE DOCTRINE OF SEPARABILITY
Some authority excludes the application of the doctrine in cases in which the principal contract is void ab initio.[13] The arbitration agreement constitute a contract independent from the commercial contract pursuant to the doctrine of separability, the arbitration clause can only be recognized as invalid if it itself suffers from any defects in will for e.g. mistake or fraud.
CONCLUSION
The concept of Separability of the arbitration clause is both interesting in theory and useful in practice. The separability doctrine is regarded as having important consequences for the arbitral process. International commercial arbitration has met widespread success as a method of international dispute resolution. The multitudes of changes that are occurring in the international plane testify to that fact. The popularity of the doctrine with the institutional rules suggests that in due course most national arbitration statutes will adopt the same approach. In general it is believed that the increased independence of international arbitration from the intervention of the national courts is a move in the right direction.
[1] International commercial arbitration and its Indian perspective by Harsh Sethi and Arpan Kr. Gupta.
Doctrine of Separability
Share this post
Arbitration is a settlement technique in which a third party reviews the case and imposes a decision that is legally binding for both sides. It is a form of alternative dispute resolution(ADR), which is a legal technique settling the disputes outside courts, wherein the parties to a dispute refer it to one or more persons, by whose decision they agree to be bound. The persons to whom the dispute is referred to are called the arbitrator or arbitral tribunal. It is mostly used for the resolution of commercial disputes, particularly in the context of international commercial transactions. Arbitration in India as an essential limb of the dispute resolution system has its genesis rooted in the ancient era, when during the Harappa civilization trade links were established with other parts of the then known world.[1] The main characteristics of Arbitration are
a) Arbitration is consensual
b) The parties choose the arbitrator(s)
c) Arbitration is neutral
d) Arbitration is a confidential procedure
e) The decision of the arbitral tribunal is final and easy to enforce.
ARBITRATION AGREEMENT
An arbitration agreement is an agreement between the parties to refer their disputes to the arbitral tribunal. To constitute an arbitration agreement, first of all there should be an agreement, that is, ad idem.[2] An arbitration agreement like all other contract must satisfy all the essential requirements of section 10 of the Contract Act, 1872 i.e., the parties to the arbitration agreement must be competent to enter into a contract and the agreement should be made by the free consent of the parties.
Furthermore, the parties should have the intention of entering into a legally binding obligation. However, if the arbitration agreement does not fulfill the requirements of section 10 of the Indian contract Act, the arbitration agreement becomes void and any award given to either of the parties will not be enforceable.
DOCTRINE OF SEPERABILITY
The rule stems from the case of Harbour Assurance v Kansa General International Insurance. The practical effect of the rule is that unenforceability of the underlying agreement does not automatically render an arbitration agreement contained within it unenforceable. It follows that, in order to render an agreement to arbitrate unenforceable, the arbitration agreement itself must be directly impeached. In other words, there must be independent factors that specifically invalidate or render void the arbitration clause. The “seperability doctrine” was articulated comprehensively by the United States Supreme Court in Prima paint Corp v. Flood & Conklin Manufacturing Co. where the Court ruled that arbitration clauses can be ‘separable’ from the contracts in which they are included. In this case the parties entered into an agreement containing an arbitration clause, which read in part : “ Any controversy or claim arising out of or relating to this Agreement, or the breach thereof, shall be settled by arbitration in the City of New York, in accordance with the rules then obtaining of the American Arbitration Association”,
This doctrine gives us the arbitration agreement is to be treated separate from the main contractual responsibility. It clearly indicates that main contract have no nexus with the arbitration clause. This principle is considered to be one of the principles governing international commercial arbitration and has been accepts by the English courts. In some senses, the arbitration clause has been always been separable or at least separate since the earliest arbitration legislation. In England, this really means the 1698 Arbitration Act. The Act allowed arbitration clauses to be made rules of court if the parties had agreed to this. The breach of other contract terms could not at the time is made punishable by contempt of court.[3]
The use of this concept is that even if a contract is terminated, the arbitration agreement survives. Otherwise, the arbitration agreement would lose its purpose, if the breach of contract or claim making the contract voidable would terminate the arbitration clause as well. This is the time where the arbitration clause is most needed.[4] The arbitration agreement, if part of the underlying contract, will derive its existence from the underlying contract. The offer, acceptance, consideration and the capacity of the parties to make the underling contract are used to justify the validity of the arbitration agreement. However, no separate consideration is needed nor is a specific offer or acceptance relating to the arbitration agreement required. The principle of seperability means that the underlying contract containing the arbitration clause may be void but the arbitration agreement may survive.
The UNCITRAL Model law on International Commercial Arbitration incorporates the doctrine of Separability in Article 16(1). The Indian law of Arbitration,[5] which is based on the UNCITRAL Model Law, also explicitly adopts this approach in Section 16(1) (b). The section reads as follow:
16. 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.
Modern laws on arbitration confirm the concept. The United States Supreme Court in the recent judgment in Buckeye Check Cashing, Inc vs. Cardegna[6] acknowledged that the Separability rule permits a court “to enforce an arbitration agreement in a contract that the arbitrator later finds to be void”.
ARGUMENTS FOR THE SEPARABILITY DOCTRINE
The fundamental principle of arbitration law is that arbitrators have the power to rule on their own jurisdiction. It is apparent that the doctrine is in many ways a convenient and pragmatic fiction. If the arbitral tribunal decides that the clause is not a valid agreement to arbitrate then the basis for its authority disappears. Nevertheless, because of its obvious practical advantages, this doctrine is widely accepted both by arbitration rules and in national laws. [7] As those who drafted the model law observed in relation to the principle of separability;
“The main practical advantage of this principle is that it constitutes a serious bar, for a party who desires delay or wishes to repudiate his arbitration agreement, to subvert the arbitration clause by questioning in court the existence or validity of the arbitration agreement by way of questioning the validity of the main contract.” [8]
The main purpose of the separability doctrine is to maintain the competence of the arbitral tribunal, irrespective of the fate of the principal contract. The whole arbitration agreement would be frustrated if a party could prevent an arbitration agreement from coming into force by claiming that the commercial contract had not been validly concluded or was terminated either by performance or by some intervening event.
Justice Schwebel’s authoritative work on this doctrine gives four reasons which justifies the doctrine:
ARGUMENT AGAINST THE SEPARABILITY DOCTRINE
One of the major arguments against Separability Doctrine is that it is incompatible with the contractual approach to arbitration law. [10] The separability doctrine should be repealed because no dispute should be sent to arbitration unless the parties have formed an enforceable contract requiring arbitration of that dispute. Prior to contracting, parties start with a right to litigate, rather than arbitrate, their disputes. The right to litigate, access to a court of law generally exists in the international, as well as the domestic, context but may be of less practical value internationally depending on the reliability of the court system with jurisdiction over the parties. The separability doctrine makes the right to litigate alienable under a lower standard of consent than is found in contract law. This doctrine separates arbitration law from an important part of contract law, the defenses to enforcement and thus fails to provide the right to litigate with the protection of those defenses.
CASE LAWS IN INDIA
The doctrine of separability has been expressly adopted by the Indian courts. In NIIT Institute of Information and Technology vs. West Star Constructions Pvt. Ltd,[11] a Division Bench of the Delhi High Court has held that, arbitration agreement contained in an unregistered lease deed or improperly stamped lease is severable and is a separate contract and even if the unregistered lease deed cannot be read in evidence or has to be impounded, the arbitration agreement would still be effective. The curt observed that after coming into force of Arbitration and Conciliation Act, 1996, the arbitration agreement has to be considered a separate and independent contract between the parties, even if it is a part of the lease deed, in view of section 16(1) (b) of the Arbitration and Conciliation Act, 1996.
The supreme Court of India, in National Agricultural Co-op. Marketing Federation India Ltd. V. Gains Trading Ltd,[12] observed that section 16 of the Indian Arbitration & Conciliation Act, 1996 makes it clear that while considering any objection with respect to existence or the validity of the arbitration agreement, an arbitration clause which forms part of the contract has to be treated independent of the other terms of the contract and a decision that the contract was null and void shall not be understood as invalidity of the arbitration clause.
Recently, in the Branch Manager, Magma Leasing And Finance Limited V. Potluri Madhavilata, the contract was terminated by one party on account of a breach committed by the other. The Supreme Court of India upholding the principle of severability held that termination of the contract due to breach will render the arbitration clause inoperative. Rather, it would survive to resolve disputes that might arise under the contract.
In the case of Enercon (India) Ltd., the Supreme Court has held that “The concept of separability of the arbitration clause/agreement from the underlying contract is a necessity to ensure that the intention of the parties to resolve the disputes by arbitration does not evaporate into thin air with every challenge to the legality, validity, finality or breach of the underlying contract. The Indian Arbitration Act, 1996, under Section 16 accepts the concept that the main contract and the arbitration agreement form two independent contracts. Commercial rights and obligations are contained in the underlying, substantive, or the main contract. It is followed by a second contract, which expresses the agreement and the intention of the parties to resolve the disputes relating to the underlying contract through arbitration. A remedy is elected by parties outside the normal civil court remedy. It is true that support of the National Courts would be required to ensure the success of arbitration, but this would not detract from the legitimacy or independence of the collateral arbitration agreement, even if it is contained in a contract, which is claimed to be void or voidable or unconcluded by one of the parties.”
EXCEPTIONS TO THE DOCTRINE OF SEPARABILITY
Some authority excludes the application of the doctrine in cases in which the principal contract is void ab initio.[13] The arbitration agreement constitute a contract independent from the commercial contract pursuant to the doctrine of separability, the arbitration clause can only be recognized as invalid if it itself suffers from any defects in will for e.g. mistake or fraud.
CONCLUSION
The concept of Separability of the arbitration clause is both interesting in theory and useful in practice. The separability doctrine is regarded as having important consequences for the arbitral process. International commercial arbitration has met widespread success as a method of international dispute resolution. The multitudes of changes that are occurring in the international plane testify to that fact. The popularity of the doctrine with the institutional rules suggests that in due course most national arbitration statutes will adopt the same approach. In general it is believed that the increased independence of international arbitration from the intervention of the national courts is a move in the right direction.
[1] International commercial arbitration and its Indian perspective by Harsh Sethi and Arpan Kr. Gupta.
[2] http://www.lawteacher.net/free-law-essays/contract-law/arbitration-agreement-and-doctrine-of-separability-contract-law-essay.php
[3] http://www.biicl.org/files/4243_separabi_updated.doc
[4] Law and Practice of International Arbitration, Alan Redfern and Martin Hunter, Fourth Edition, pp- 3-60
[5] Indian Arbitration and Conciliation Act, 1996
[6] 546 US 460
[7] Law and Practice of International Arbitration, Allen Redfern and Martin Hunter, Fourth Edition, p. 251.
[8] International commercial arbitration and its Indian perspective by Harsh Sethi and Arpan Kr. Gupta.
[9] International commercial arbitration and its Indian perspective by Harsh Sethi and Arpan Kr. Gupta.
[10] arbitration law’s separability doctrine after buckeye check cashing, inc. v. cardegna-stephen j. ware
[11] Arb. P. No. 244/2008, Delhi High Court, p. 14.
[12] (2007) 5 SCC 692; AIR 2007 SC 2327
[13] International commercial arbitration and its Indian perspective by Harsh Sethi and Arpan Kr. Gupta.
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