This article is written by Shristi Roongta of Amity Law School, Kolkata. This article discusses the meaning of the doctrine of separability in arbitration along with other important aspects such as need, laws, and judicial pronouncements.
This article has been published by Sneha Mahawar.
Table of Contents
Introduction
When a dispute arises between two parties, they choose to go for arbitration, as agreed and mentioned in their agreement. While entering into an agreement, there are certain clauses and conditions by which the parties agree to be bound. In case of termination of an agreement, the clauses come to an end either by mutual consent or due to breach of a condition. However, there are certain clauses that survive even after the termination of the agreement. Herein the doctrine of separability comes into play, it lays out that an arbitration clause or an arbitration agreement is a separate and autonomous clause and survives the termination, breach and invalidity of the contract. However, why this doctrine is important and how it affects the contract will be discussed in the latter part of the article.
What is doctrine of separability
As mentioned earlier, the doctrine of separability states that an arbitration clause/agreement is separable from the main contract and therefore survives the termination of a contract. It is one of the conceptual and practical foundations of international arbitration. The main aim of this doctrine is to ensure that in case a party claims that there has been a breach of a condition and the contract will be terminated, then, despite this termination of the contract, the arbitration clause survives to determine the mode of settlement. Judge Stephen Schwebel of the International Court of Justice said, “The very concept of and phrase ‘arbitration agreement’ itself imports the existence of a separate or at any rate separatable agreement, which is or can be divorced from the body of the principal agreement if need be”.
Emergence of doctrine of separability
The doctrine originated in France. The judgment of Gosset laid the foundation of this doctrine. Later, the US Supreme Court also recognised the doctrine in the case of Prima Paint Corp. v. Flood & Conklin Mfg. Co. (1967), since this judgment various courts, legislatures and institutionalised arbitration centres had started recognising the separability of arbitration clauses.
Several arbitral institutions and legislatures recognise the concept of the doctrine. The English Arbitration Act, 1698 which is the first arbitration legislature, treated the arbitration clause as separable from the main contract. The first arbitral institution which is the International Chamber of Commerce also recognised it. The UNCITRAL Model law also reflects this doctrine under Article 16 which incorporated the doctrine as ‘an arbitration clause which forms part of a contract shall be treated as an agreement independent of the other terms of the contract’. Article 23(2) of the LCIA Rules of arbitration also deals with the same concept.
Is the doctrine of separability and doctrine of severability the same
The doctrine of severability as stated by Article 13 of the Indian Constitution means when a provision of a statute offends or goes beyond the constitutional limits i.e., beyond the limits of Fundamental Rights then only such provision shall be declared void or unconstitutional and not the whole statute. In other words, the provision is separate from the statute and the statute cannot be held invalid for the inconsistency of a particular provision.
Therefore, it is clear that the doctrine of separability and the doctrine of severability has similarities. As it is mentioned earlier, the doctrine of separability means the arbitration clause is separate from the main contract.
Coming to the differences, both the doctrines propound a similar meaning i.e., the clause or the provision is separate from the main contract or statute. However, in the case of the doctrine of severability, if the provision is inconsistent with the fundamental right then it shall be considered void/constitutional whereas in the doctrine of separability if the contract terminates, the arbitration clause survives.
Rules and laws
Various other rules of different nations recognise the concept of the doctrine of separability. Such as:
- Section 7 of the Arbitration Act, 1996 (of England).
- Section 16 of the Indian Arbitration and Conciliation Act, 1996.
- Article 178 of Switzerland’s Federal Code on Private International Law.
Recognition in the Indian law
The Indian arbitration law recognises the doctrine as in Section 7(1) of the Arbitration and Conciliation Act, 1996 (“the Act”) which defines the term arbitration agreement and clause (2) of Section 7 specifies that “an arbitration agreement may be in the form of an arbitration clause in a contract on in the form of a separate agreement”. As stated earlier, Section 16 of the Act deals with the notion of the doctrine of separability. After a combined reading of both the above-mentioned sections, it is clear that the arbitration clause/agreement is separate from the main contract and both of these forms independent contracts.
Need of this doctrine
Since the emergence of this doctrine, it has become a significant part of arbitration. The doctrine of separability aids the arbitral tribunal to function when its jurisdiction is challenged. Let’s say a party in a dispute says that since the main contract is not valid which invalidates the arbitration clause or agreement as well, therefore, in this case, the arbitral tribunal pursuant to the clause in the main contract (which became invalid) also does not have jurisdiction to render an award. This will lead arbitration to a lethal end because that is a powerful argument. Further, if the arbitration clause is not different from the main contract then its legality could suffer the same illegality suffered by the main contract as the parties could avoid arbitration by simply pointing out doubts with respect to the validity of the main contract which ultimately will not meet the parties intention of solving disputes through an arbitration process.
Judicial pronouncements
The judiciary around the world have viewed and opined that the arbitration clause/agreement and a contract which the parties enter into are two different contracts. Some of the case laws are discussed below:
Smith Corey & Barrett v. Becker Gray & Co. (1916)
In this case, it was held that the parties are bound by the arbitration clause as the main contract which contained this clause was valid. However, if the contract was invalid then the arbitration clause would have no effect.
Heyman v. Darwins (1942)
In this case, the respondents, who were steel manufacturers, appointed the appellants as their selling agents. The appellants were to sell the products in the name of the respondents. They entered into a contract containing an arbitration clause which stated any disputes arising between the parties with relation to the contract or its provision shall be referred to arbitration.
The respondents alleged that the appellants had involved them in certain liabilities improperly and therefore they refused to pay the appellants their commission. In this regard, the appellants initiated a court action against the respondents. The respondents contended that the dispute should fall under the arbitration clause whereas the appellants contended otherwise.
It was held by the House of Lords that the contract entered by the parties was valid and binding. The only issue arisen between them was only related to whether either side had breached the contract or whether the incidents that arose led to the discharge of either party from the further performance of the contract. Lord Macmillan approved the doctrine and said that:
“I venture to think that not enough attention has been directed to the true nature and function of an arbitration clause in a contract. It is quite distinct from other clauses. The other clauses set out the obligations, which the parties undertake towards each other, but the arbitration clause does not impose on one of the parties, an obligation in favour of the other. It embodies the agreement of both parties that, if any dispute arises with regard to the obligations, which the one party has undertaken to the other, such dispute shall be settled by a tribunal of their own constitution…. It survives for the purpose of measuring the claims arising out of the breach, and the arbitration clause survives for determining the mode of their settlement. The purposes of the contract have failed, but the arbitration clause is not one of the purposes of the contract.”
Harbour Assurance v. Kansa General International Insurance (1993)
In this case, the plaintiffs, Harbour Assurance, are an insurance and reinsurance company and the defendants, Kansa Insurance, are Finnish insurance and reinsurance companies. The dispute that arose between them is mainly within the scope of the principle of separability of the arbitration clause in an integrated contract in written form. It was held by the Court of Appeal that if the arbitration clause is not impeached directly then an arbitration agreement will survive the invalidity of the contract.
View point of the Indian judiciary
National Agricultural Co-op Marketing Federation of India Ltd. v. Gains Trading Ltd. (2007)
In this case, the plaintiff (National Agricultural Ltd.) and the defendants (Gains Trading Ltd.) entered into an agreement, according to which the defendants had agreed to purchase a certain amount of the plaintiff’s products. It was alleged by the plaintiffs that the defendants failed to take the delivery of the cargo due to which the plaintiffs suffered losses that were to be paid by the defendants. However, the defendants refused to pay the same which led to the initiation of the court action. The contract contained an arbitration clause stating that the dispute arising, if any, shall be resolved through arbitration.
One of the issues that arose, in this case, was whether an arbitration clause would come to an end if the contract containing such clause is repudiated?
The Supreme Court held that an arbitration clause is a collateral term that is related to the dispute resolution and not the performance. The Court also observed that even if the contract is repudiated or comes to an end still the arbitration clause would survive for the resolution of the disputes which arise out of or in connection with the main contract. The Court then referred to Section 16 of the Act and opined that the arbitration clause has to be treated separate or independent of the main contract and that “the contract is null and void” shall not entail ipso jure the invalidity of the arbitration clause”.
M/s Magma Leasing & Finance Ltd. & Anr. v. Potluri Madhavilata & Anr. (2009)
The case dealt with a core question that whether the arbitration agreement survives for the purpose of resolution of disputes arising under or in connection with the contract, even if it has come to an end due to termination, because of the breach of contract? The brief facts of the case were: the appellants (Magma Ltd.) and the respondent (Potluri) entered into a hire purchase agreement for the purchase of a motor vehicle and the price was to be paid in installments. However, the respondent committed a default for which the appellants terminated the contract. As a result, the respondent filed a suit against them.
The Supreme Court held that even though the contract has come to an end due to termination, however, the arbitration clause survives for the purpose of resolution of the dispute.
Mulheim Pipecoatings GmbH v. Welspun Fintrade Ltd. (2013)
In this case, the Bombay High Court framed the rule of doctrine of separability and held that “for an arbitration agreement to be null and void, requires a direct impeachment of the arbitration agreement and not simply a parasitical impeachment based on a challenge to the validity or enforceability of the main agreement”.
Conclusion
It can be concluded that the arbitration clause is independent of the contract and survives termination or if the contract comes to an end. However, there are arguments against the applicability of this doctrine because it contradicts the arbitration law approach and also it takes away the right of approaching the courts. Nevertheless, even being in negative arguments, the doctrine is widely popular which can be perceived in the rules and the acts of different nations.
References
- https://www.barandbench.com/columns/doctrine-of-separability-and-determination-of-the-proper-law-of-the-arbitration-agreement#:~:text=The%20doctrine%20of%20separability%20isand%20invalidity%20of%20that%20contract
- https://deliverypdf.ssrn.com/delivery.php?ID=991004073021021074082004077102080091096025095076029067119003114024069087005002002072121042119015047112061082122078118001070009119066064011050065071030101113027030061058052118121015086114093020095100026064113098079026067094079120003093028016082075098&EXT=pdf&INDEX=TRUE
- https://www.mondaq.com/india/arbitration-dispute-resolution/939006/arbitration-the-principle-of-separability
- https://ijoslca.com/2020/07/30/overview-of-doctrine-of-separability-in-india/
- https://ink.library.smu.edu.sg/cgi/viewcontent.cgi?referer=&httpsredir=1&article=1574&context=sol_research
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