This article is written by Vidhur Malhotra, pursuing a Certificate Course in Arbitration: Strategy, Procedure and Drafting from LawSikho.
Arbitration is an alternate dispute resolution process that gives an option to the parties to resolve their dispute by submitting to one or more arbitrators who make a binding decision on the dispute. Through arbitration the parties can resolve their dispute without resorting to the court machinery. While it is certainly not a novel concept, arbitration did not gain serious traction, especially in India until the last few years. However, due to the backing it has gained not just from jurists but from the judiciary and legislatures, it has started to become the norm, rather than the exception.
The Arbitration agreement/clause in a contract is the medium through which parties approach the arbitral tribunal to resolve their dispute. An arbitration agreement forms the basis of the arbitration mechanism, since the mechanism isn’t statutory and cannot be invoked without an agreement.
In most commercial contracts between companies, an arbitration agreement/clause have now become a standard feature when the companies intend to resolve their disputes in a much faster, and confidential manner without getting into the court machinery.
Section 7 of the Arbitration and Conciliation Act 1996 states the definition of an arbitration agreement as “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.” Section 7 also states that it might not be a separate agreement and there may simply be an arbitration clause as a part of another contract or agreement.
Essential elements of an Arbitration agreement
- For an arbitration agreement to be valid, there must be a dispute that should’ve taken place. When the dispute is already settled, the parties cannot invoke an arbitration agreement to revoke the settlement.
- An arbitration agreement must always be in writing. An arbitration agreement will be considered as a written agreement when
- It has been signed by both parties and it is in the form of a document.
- It can be the exchange of the telex, the letters, the telegrams, or any other means of communication which provides the record of the exchange and the agreement for arbitration.
- There must be an exchange of statements between the parties that gives the statement of claim and defence in which the existence of the agreement of the arbitration is agreed by one of the parties and which is not defined by the other party.
- The intention of both the parties to refer their dispute to arbitration is extremely essential during the formation of the contract as the intention of the parties forms the basis of the arbitration agreement.
- The signature of the parties is the other essential element of the arbitration agreement.
The Hon’ble Supreme court in the case of K.K. Modi v. K.N. Modi and Ors. (1998) 3 SCC 573 held the following:
- The arbitration agreement must expressly state that the tribunal’s decision will be binding on all the parties.
- The tribunal’s jurisdiction over the parties rights should be determined by both the parties in a consensual manner or through a court order stating that the proceeding should be made through arbitration.
- The tribunal has the right to determine the rights of the parties by being fair and just.
- The agreement that the parties will refer to the tribunal must be enforceable by law.
- The agreement must state that any decision made by the tribunal on the dispute must be formulated prior to the time when the reference is made.
Doctrine of Severability : Background and Scope
The ‘Doctrine of severability’ is also known as the ‘autonomy of the arbitration clause’. It means that the arbitration clause in a contract is considered separate from the main contract of which it is a part of and hence on account of invalidity, breach or termination of the contract, the arbitration clause still survives. This doctrine in its essence states the independence of an arbitration clause from the underlying contract. It ensures that in the event that one party claims that there has been a complete breach of the contract by the other, the contract is not dissolved for all purposes and rather it survives for the purpose of measuring the claims arising out of the breach and in determining the mode of settlement.
The doctrine of severability in arbitration and the judicial application by the various courts have been different and it is fair to say that it has a tumultuous history. Prior to the enactment of the Arbitration and Conciliation Act, 1996 the Supreme court in cases like ‘Union of India vs Kishorilal Gupta and Bros’,1959 held that ‘an arbitration agreement was an integral part of the underlying contract and that it would cease to exist in the eventuality of the main contract perishing for either not being concluded or being void ab initio.’
The ‘principle of severability’ came into existence after the 1996 Act under Section 16 after which issues relating to this principle were determined by the courts.
Section 16(1) of the Arbitration and Conciliation Act,1996 talks about the concept of ‘severability’ and states, an arbitration clause which forms part of the larger contract shall be treated as an agreement independent of the other terms of the contract; and a decision by the arbitral tribunal that the contract is null and void shall not by operation of law entail the arbitration clause invalid.
Article 16(1) of the UNCITRAL Model law of 1985 on international commercial arbitration also talks about the doctrine of severability and 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. For that purpose, an arbitration clause which forms part of a contract shall be treated as an agreement independent of the other terms of the contract.
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.
Despite the doctrine’s restricted reach, different authorities have expanded it by arguing that the arbitration agreement is not regulated by the matrix contract’s proper law since it is a distinct agreement in general. However the Supreme Court in the case of “National Agricultural Coop. Mktg. Federation India Ltd. Vs. Gains Trading Ltd” have correctly documented this principle and stated that “an arbitration clause is a collateral clause in the contract, which relates to resolving disputes, and not with the specific performance of the contract. Even if the performance of the contract comes to an end on account of termination, frustration or breach of contract or by any other means, the arbitration agreement would survive the termination for the purpose of resolution of disputes arising under or in connection with the mother contract.”
Similarly, this principle has been enunciated uniformly across several jurisdictions. Lord MacMillan in Heyman v. Darwins Ltd has stated :
“an arbitration clause which forms part of a contract and which provides for arbitration under the rules shall be treated as an agreement independent of another term of the contract.”
To put it simply, the purpose of the doctrine of severability is aimed to safeguard an arbitral tribunal’s jurisdiction by enforcing the parties agreement to arbitrate and not treating the arbitration agreement distinctly from the main agreement in general, including determining the proper law of arbitration agreements.
Hence, in accordance with the judicial decisions and the reasoning stated, it is well settled that, illegality and invalidity of the main contract do not render the underlying arbitration clause void.
Application of severability principle to arbitral award
The Bombay High Court in the case of “RS Jiwani Vs. Ircon International Ltd” passed a judgement and held that an arbitral award is severable and if a part of it is illegal and incapable of being enforced the other of the award which is valid can still be enforced. This judgement of the Bombay High court provides the parties a new direction for enforcement of arbitral awards in India and also gives a boost in making India a pro-arbitration hub.
Facts of the Case
In “RS Jiwani Vs. Ircon International Ltd” the parties had entered into a sub-contracting agreement for constructing a rail over bridge through a tender floated by the respondent M/s Ircon International Pvt. Ltd. The Respondent alleged delay resulting into losses, leading to disputes between the parties. The Appellant invoked arbitration according to the relevant clause of the agreement. The appellant filed 32 claims before the arbitrator out of which 15 claims with interest were allowed and the remaining claims along with the respondents counter-claims were all rejected. The respondent being aggrieved filed a petition for setting aside the award under section 34 and 16(6) of the Arbitration and Conciliation Act, 1996. The petition was admitted and the learned Single judge found that 11 out of 15 claims approved by the learned Arbitrator were valid, and that the appellant was entitled to those claims but referring to the Division Bench judgment of the Bombay High Court in Mrs. Pushpa P. Mulchandani v. Admiral Radhakrishin Tahiliani, 2008 (7) LJ Soft, 161 the learned Single Judge set aside the entire award.
In Mrs. Pushpa P. Mulchandani v. Admiral Radhakrishin Tahiliani the Division Bench had held :
“Power to set aside only part of the award is conferred on court by section 34 of the Arbitration Act only in one contingency which is to be found in clause (iv) of sub-section (2) of section 42 of the Arbitration Act. In all other cases, if the Court finds that only a part of the award is affected by illegality which is pointed out to the court, the court cannot itself modify the award, but if a party to the petition applies to the court in exercise of its power under sub-section 4 of section 34, the court can direct the arbitral tribunal to resume the proceedings and take such action to eliminate the ground for setting aside the award. In such situation, the arbitral tribunal on resumption may be able to delete that part of the award which the Court finds to be invalid and illegal and make suitable modification in the award.”
The appellant being aggrieved by this decision of the learned single bench approach the Larger Bench which brought the question before the bench as to Whether the principle of severability can be applied to an arbitral award while determining a petition under section 34 of the Arbitration and Conciliation Act, 1996.
The larger bench expressed the dictum of law by the learned single judge in “Mrs. Pushpa P. Mulchandani v. Admiral Radhakrishin Tahiliani” is not correct position in law. The Larger Bench held that the court’s judicial discretion under section 34 of the Arbitration Act, 1996 includes the right to set aside an award in part or in whole, depending on the facts and circumstances of the case.
This decision clearly establishes the right legal position on the severability of an arbitration award. The decision guarantees that successful arbitration parties are not subjected to unfair hardship when losing parties seek to revoke arbitral awards in court. The court and the parties will save time as a result of this ruling, as the parties will not need to commence new arbitration or to appeal for any relief from the courts.
Advantages and disadvantages of separability principle in India
- The principle of severability offers the parties with the main fundamental principle of arbitration law which is the power to the arbitrators to rule on their own jurisdiction. This power of the arbitrators stems from the arbitration agreement and the main aim of this principle of severability is to protect the arbitration clause.
- The principle of severability does not allow the parties to escape arbitration by claiming that the arbitration clause of the contract is invalid.
- The separability doctrine allows arbitrators to examine jurisdictional challenges based on the dispute contract’s alleged ineffectiveness.
- Various practitioners have failed to apply the principle of severability in its limited context. The application of this principle in various instances have been done in a general manner leading to a pandora’s box of postponed dispute resolution.
- Other major arguments arise against the principle by various practitioners is that the principle of severability contradicts the contractual approach to arbitration law and it takes away the rights of the parties to approach the court.
- The severability principle distinguishes arbitration law from an integral aspect of contract law- the defences to enforcement and thus fails to provide the right to litigate with the protection of those defences.
The principle of severability in the modern arbitration and dispute resolution industry has brought great independence from the intervention of national courts which is a move in the right direction for a pro arbitration approach. It is important for various practitioners and the judiciary to apply the principle in a limited context and to try and prevent the delay in the dispute resolution process.
To summarise, the doctrine distinguishes an arbitration agreement from a contract and the clause operates independently of the contract validity.
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