Doctrine of separability with context to an arbitration clause or an agreement

Image Source - https://rb.gy/i7vxrs

This article is written by Veena Pranathi who is pursuing a Certificate Course in Arbitration: Strategy, Procedure and Drafting from LawSikho.

Introduction and meaning

The word separability means capability of being separated or causing separation. As in a contract, separability is a legal doctrine that allows an arbitration clause or an agreement to be considered separately from the underlying contract in which it is contained.

An arbitration clause or an agreement shall not be considered invalid on a claim that, since the contract is null and void; the arbitration clause shall also be terminated. This kind of claim is not acceptable under this doctrine. The arbitration clause is entirely self-defeating. This doctrine protects the arbitration clause or an agreement in a contract. Thus it should be considered separate and valid. 

Arbitration clause

To understand this doctrine, one should know what an arbitration clause or an agreement mean. An arbitration clause is like an agreement where both the parties agree to resolve their dispute through arbitration. It contains all the necessary details like the seat and venue of arbitration, appointment of arbitrators etc.

Given below is a sample draft of an arbitration clause:

In the event of any dispute arising between the parties with the matters related to profit sharing or undue delay in completing the work or any other dispute related to the terms of this agreement or any matter arising out of or connected with the contract etc., shall be referred to as a dispute under the Arbitration Act, 1996 and when such a dispute arises between the parties an amicable settlement has to be reached through discussion or other methods like mediation or conciliation within thirty days of the dispute. If all the processes fail, then the dispute shall be settled in accordance with the Indian Arbitration and Conciliation Act, 1996 and any statutory modification or re-enactment thereof and will be referred to the arbitration of a single arbitrator mutually accepted by the parties who shall conduct the arbitration proceedings in an ad hoc manner. The seat and venue of the arbitration shall be in ____ and the language of the arbitration will be in ___.

An arbitration agreement is defined under section 7 of the Arbitration and Conciliation Act. 1996.

Importance of the arbitration clause

The arbitration agreement plays a crucial role in resolving the issues between the parties. It is like a foundation stone for arbitration. It shows that the parties agreed to resolve their dispute through arbitration. Arbitration does not take place without this agreement between the parties. Before entering into an agreement, both the parties must give their consent. Without consent, there can be no arbitration agreement. Thus the element ‘consent’ plays a vital role.  There is no arbitration without an arbitration agreement. 

Forms

Basically, there are two forms of agreements in arbitration. They are: 

  1. Existing dispute
  2. Future dispute
  • Existing dispute is also called as a submission to arbitration agreement or simply ‘submission agreement’.
  • The future dispute is most common form of arbitration. In this, the parties insert a provision in their contract stating that any dispute which arises out of the contract shall be resolved through arbitration and this is generally called as an arbitration clause.

Doctrine of separability with context to an arbitration clause or an agreement

Generally, when there is dispute related to the validity of a contract in which an arbitration clause exists, a claim arises that since the contract is voidable, the arbitration clause cannot be executed. In this scenario, a question arises as to who should decide this matter. That is, whether the arbitrator himself or a court of a competent jurisdiction?

Previously, the arbitration clause was considered as a part of the contract in which it contained and any dispute challenging the validity of the contract was determined by the courts and not the arbitrator. Later, in the modern view, the arbitration clause is considered separately from the main contract and if any party challenges the validity of the main contract, the dispute will be determined by the arbitrator and not by the competent court. This means the arbitrator shall resolve all the disputes arising out of the contract including the issues regarding the validity of the contract. But if the contract does not contain an arbitration clause, there can be no valid arbitration because the agreement to arbitrate will be contained in the arbitration clause itself. Hence, it should be considered separately and therefore, it will not be dependent on the validity of the main contract.

The UNCITRAL model law

The United Nations Commission on International Trade Law (UNCITRAL) model law on international commercial arbitration incorporated the doctrine of separability in Article 16(1). This article states that:

The arbitral tribunal has the power to rule on its own jurisdiction and to resolve the issues including any objections related to the validity of the agreement or disputes arising out of the Arbitration agreement. But when an arbitration clause is included in a contract, it shall be considered separate and shall be treated as an independent agreement.

If the arbitral tribunal decides that a contract in which the arbitration clause is contained is null and void, that decision shall not entail the invalidity of the Arbitration clause.

ICC Rules of Conciliation and Arbitration, 1975

Even the ICC rules give the provision for doctrine of separability under Article 8(4) under the heading ‘effect of the agreement to arbitrate’. This article states that:

Just because of a claim that a contract is null and void; the arbitrator shall not cease to have the jurisdiction to decide a certain matter through arbitration. Even though the contract itself is invalid, he shall continue to have jurisdiction to adjudicate the pleas and claims and to determine the rights of the parties.                       

The scope of this article is wide and far-reaching. For the purpose of ruling on its validity, it provided for the separability of arbitration agreement in a contract and it also empowered the arbitrators to determine the rights of the parties even after a determination that the main contract is inexistent or null and void.

Brief explanation of a case law relating to the doctrine of separability       

Buckeye Check Cashing, Inc. v. Cardegna

In this case, Buckeye Check Cashing, Inc. is the petitioner and John Cardegna and Donna Reuter is the respondent. The respondents entered into various deferred-payment transactions with the petitioner. They included an arbitration provision for each separate transaction and signed a “Deferred Deposit and Disclosure Agreement”.                                   

At a later date, the respondents filed a lawsuit against the petitioner in Florida State Court, alleging that the petitioner made illegal loans by lending money at an interest rate that is higher than the rate permitted by law in violation of various Florida statutes and thereby rendering the contract void. In response to this, the petitioner filed a motion to compel arbitration and asked for stay because of the arbitration provision mentioned in the agreement.       

The trial court denied the petitioner’s claim and ordered that the court should resolve this issue because the contract itself was null and void ab initio. The petitioner filed an appeal to the given order and the appellate court reversed the order given by the trial court and held that the issue has to be resolved by the arbitrator and not the trial court. The matter came up for review by the state Supreme Court and the petitioner was granted a writ of certiorari. 

Issue

Can the respondent avoid arbitration by arguing that the contract in which the arbitration clause contained is null and void?

Answer

No, the respondent cannot avoid arbitration on this ground.

Conclusion

The supreme court of United States examined that the respondents challenged validity of the contract but not specifically the arbitration provisions. Therefore the challenge has to be considered by the arbitrator and not the court. Here the doctrine of separability arose out of 9 U.S.C.S. Section 2.

Case laws relating to this doctrine

Few case laws relating to the doctrine of separability are given below:

  1. Beijing Jianlong Heavy Industry Group vs. Golden Ocean Group Limited & Ors
  2. Harbour Assurance Co (UK) Ltd vs. Kansa General International Assurance Co. Ltd. and Others ([1993] 3 All ER 897) 
  3. John B. Goodman Limited Partnership v. THF Construction
  4. Stewart v. Favors 

Criticism against the doctrine of separability

Some of the critics argued that this doctrine takes away the right of approaching the courts from the parties. One of the major arguments is that it is conflicting with the arbitration law regarding the contractual approach. They argued that right to litigate is the main concept in law, but this doctrine fails to provide this right because of some defenses arising out of this doctrine.

Arguments in favour of this doctrine

The main aim of this doctrine is to protect the arbitration clause. Any claim that the main contract containing the arbitration clause is null and void will have no impact on the clause. It does not encourage the parties to avoid arbitration on the ground that the contract containing the arbitration clause is void. This doctrine also empowers the arbitrators to resolve the disputes and have the powers to rule on their own jurisdiction.

Conclusion

This doctrine is an interesting concept. To be brief, this doctrine separates the arbitration clause from a contract and the clause acts independently regardless the validity of a contract.

However, some practitioners fail to apply it in its limited context. Some of them take an advantage from this doctrine properly and stall/delay in resolving the disputes and thus burdening the courts with petty cases. But if they use this doctrine wisely it will benefit the parties to a large extent without causing any inconvenience or unnecessary delay to the parties.

References


LawSikho has created a telegram group for exchanging legal knowledge, referrals and various opportunities. You can click on this link and join:

Follow us on Instagram and subscribe to our YouTube channel for more amazing legal content.

Diganth Raj Sehgal :