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Doctrine Of Seperability In Realm Of International Commercial Arbitration

In recent years, arbitration has become vital to the resolution of commercial disputes. For reasons detailed immediately below, the increasingly rapid climb within the use of commercial arbitration is nearly bound to continue. Several developments in commercial usage and judicial administration also as within the law itself have combined to spur the utilization of arbitration. A dramatic increase within the cost and delay inherent in litigation has led to an enquiry for alternatives.

Also, since modern commercial contracts often cannot specify all terms of the agreement, the parties frequently prefer to rely on arbitration to keep the transaction, which is usually a part of an unbroken relationship, running smoothly.

In spite of its virtues, arbitration is a vulnerable remedy. Its use depends both on the agreement of the parties to undergo it, sometimes even the clearest arbitration clauses often were vulnerable to legal attack by signatories who alleged fraud within the inducement of the contract, a scarcity of mutuality, the assertion of a frivolous claim within the arbitration, or an unfulfilled condition precedent to arbitration. so long as repudiating parties were ready to lock the article into its container agreement, they might strike down the clause by successfully attacking the general transaction. As a dilatory tactic, the mere allegation was sufficient to disturb arbitration.

This article intends to discuss on the principle of separability which came as a tool of protecting the article from the illegality of the container contract. On doing that the article will give positive and negative implications of the doctrine consistent with how it had been perceived in several jurisdictions and lastly the opinion of the author.

Separability doctrine

The doctrine of separability, or autonomy, of the arbitration clause, provides that an arbitration clause embedded in a contract is considered separate from the main contract. Arbitration clause and the main contract comprise two separate sets of contractual relations. Where a dispute arises concerning the initial validity or continued existence of the main contract, the arbitration clause, being independent, continues to be valid and binding on the parties even if the main contract is void.

Separability in different jurisdictions

The separability principle had been received with different attitudes in different jurisdictions especially Europe and the United States of America (USA). The provisions of substantive and procedural arbitration law of the United States, Germany, England and France are found in the statutory and case law of these countries.

Separability doctrine in France

Arbitration is favoured in France and is the most dynamic area of French contract law. International arbitration is afforded great deference under French law, and France occupies a prominent position in international arbitration. The highly favourable status of arbitration law in France reflects a choice by French judges to limit their control over international arbitration, and reflects the intention of the French Parliament to encourage settlement of disputes in international trade.

Article 1447 of the Civil Procedure Code of France expressly affirms the principle of separability in this core sense. French courts deal with challenges to arbitral jurisdiction in the same way, regardless of whether they are directed at the main contract or at its arbitration clause in particular. Allowing courts to determine initially the existence or validity of the agreement to arbitrate is viewed in France as no less harmful to the autonomy of the arbitration agreement as allowing courts to determine initially the existence or validity of the main contract. French courts embrace the doctrine of separability in the way it is most widely understood internationally.

Separability doctrine in the USA

The evolution of international commercial arbitration in the U.S. has been sped up by the landmark decision Prima Paint Corp. v. Flood & Conklin Mfg. Co.[1] in which the doctrine of separability was recognized for the first time. In that, the decision was held that arbitration clauses are separable form the contract in which they are embedded, and that was no claim is made that fraud was directed to the arbitration clause itself, a broad arbitration a clause will be held to encompass arbitration of the claim that the contract itself was induced by fraud.

However, the Prima Paint doctrine was later interpreted in a restricted way. In the decision Three Valleys Municipal Water District v. E.F. Hutton & Co.[2] it was held that the applicability of the separability doctrine was:
limited to challenges seeking to avoid or rescind a contract - not to challenges going to the very existence of a contract that a party claims never to have agreed to a party who contests the making of a contract containing an arbitration provision cannot be compelled to arbitrate the threshold issue of the existence of an agreement to arbitrate. Only a court can make that decision.

The distinction between void and voidable contracts in relation to the autonomy of the arbitration agreement was later dismissed by the decision Buckeye Check Cashing Inc. v John Cardegna,[3] in this case, involving the alleged illegality of the main contract, it was held that unless the challenge is to the arbitration clause itself, the issue of the contract's validity is considered by the arbitrator in the first instance.

Separability doctrine in Germany

German the law carves out an important role for national courts in threshold determinations of arbitral jurisdiction. Under its Kompetenz-Kompetenz model, courts may examine the existence of a valid and enforceable agreement to arbitrate applicable to the case at hand, not only on the occasion of a jurisdictional objection to a court proceeding, but also in the immediate aftermath of a request for arbitration, though prior to the constitution of a tribunal.

In the principle, all issues related to the arbitration agreement's existence, the validity, and scope are matters on which courts may rule under either Section 1032(1) or (2); all other threshold issues concerning the arbitration are reserved for the arbitrators. To that extent, German law embraces separability in its second as well as its first sense.

Separability doctrine in England

Today, the doctrine of separability appears to be favoured in England. The holding in Heyman v. Darwins, Ltd.[4] first established the doctrine of separability in England. Darwins, Ltd. (Darwins), an English steel manufacturer, appointed Heyman, whose business was based in New York, as its sole selling agent pursuant to a contract executed in 1938.

The contract contained a broadly-worded arbitration clause providing that any conflicts that arose with respect to the contract would be settled in arbitration. Heyman brought a court action against Darwins alleging breach of contract by repudiation. Darwins then moved for a stay of court proceedings, claiming that the dispute was arbitrable.

The House of Lords held that the arbitration clause was separable from the contract, and concluded that the arbitrator, not the court, was to decide whether future performance by the non-breaching party was excused. The breach of contract by one party and the excuse of future performance by the other fell within a broad arbitration clause providing for disputes arising under or in respect of or with regard to the contract.

Viscount Simon, Lord Chancellor, indicated in dicta, however, that an issue relating to the existence of the contract and an allegation of initial illegality were not within the scope of the arbitration agreement. The doctrine of separability has evolved substantially since the Heyman decision.

English courts thus favour the separability principle. The Court in Heyman established the doctrine of separability in England and the doctrine has subsequently been extended to cover cases concerning the initial validity of the main contract and most recently its initial illegality.

Separability doctrine in India

The Arbitration and Conciliation Act contains no specific provisions on separability. However, Indian law recognises the doctrine of separability and a valid arbitration clause is separable from the parent contract and constitutes an agreement by itself.

Separability doctrine under international arbitration instruments and model laws

The separability doctrine has been accommodated in different international arbitration instruments and model laws. This proves its acceptability in the sphere of international commercial disputes settlement. It has been covered in UNCITRAL Arbitration Rules, UNCITRAL Model Law, and ICC Arbitration Rules.

Separability doctrine under UNCITRAL Arbitration Rules

Under Article 21(2) clearly establishes the separability of the arbitration clause from the constitutive contract by stating in its second sentence:
For the purposes of Article 21, an arbitration clause which forms part of a contract and which provides for arbitration under these Rules shall be treated as an agreement independent of the other terms of the contract.

The last sentence of Article 21(2) provides that, A decision by the arbitral tribunal that the contract is null and void shall not entail ipso jure the invalidity of the arbitration clause. It is prudent so to draft the Rules, since there may be grounds of invalidity of the main contract, such as duress or undue influence, which may also apply to the arbitration agreement.

The UNCITRAL Arbitration Rules, in Art 21(2), recognizes the separability doctrine to the maximum possible extent in order to prevent the frustration of international commercial arbitration by simply contesting the validity of the main contract.[5]

Separability doctrine under UNCITRAL Model Law

While the UNCITRAL Rules were designed to be utilized in international commercial arbitral proceedings, the UNCITRAL Model Law on International Commercial Arbitration (Model Law) was developed to address the lack of harmonization between the arbitration laws of different nations and was intended as a model for the promulgation of a harmonized system of national arbitration laws.

Article 16 of the Model Law explicitly authorizes both separability and competence de la competence. One commentator has observed that the Model Law provides a link between the doctrines of separability and competence de la competence by providing at Article 16(1)

  1. first, that the arbitral tribunal may render a decision on its own competence, including a decision with respect to questions of the validity or existence of the arbitration agreement (competence de la competence), and
  2. second, that a decision by the arbitrator that the contract is null and void will not automatically invalidate the arbitration clause (separability).[6]

Separability doctrine under ICC Arbitration Rules

The ICC Rules explicitly authorize both the separability and competence de la comp6tence doctrines. ICC Rules provide for a two-step process in addressing jurisdictional questions. Where a party has raised a jurisdictional challenge to arbitration, the ICC Court of Arbitration (ICC Court) must first determine the prima facie existence of the arbitration agreement. If it is satisfied, the ICC Court may then decide that arbitration shall proceed and the arbitrator is thereby granted the competence to determine his own jurisdiction.

The ICC Rules further provide that the arbitrator's jurisdiction will continue even where there is an allegation that the contract is null and void or nonexistent, and the arbitrator may proceed to adjudicate with respect to both the parties' rights and the merits of the dispute.

5.0 Separability justifications

The doctrine of separability has been justified on four theoretical grounds: that it conforms to the parties' intentions, that it furthers the integrity of the arbitral process, that there is a legal presumption of the existence of two agreements, and that courts usually review only the arbitral award, not the merits, of the dispute.

The four theoretical bases for the doctrine of separability provide:

  • That the parties generally intend any dispute arising out of or relating to an arbitration agreement to be settled by arbitration. They generally do not intend to exclude disputes concerning the validity of the container contract and the parties' intentions are controlling in arbitration agreements;
  • The effectiveness of arbitration would be compromised if, by merely alleging the invalidity of the underlying contract, a party could avoid its contractual obligation;
  • Two agreements exist as a matter of legal presumption-there are actually two agreements contained in a contract with an arbitration clause and the arbitral twin ... survives any birth defect or acquired disability of the principal agreement; and
  • The courts would be forced to rule upon the merits of a dispute, contrary to the usual practice (when national law governs an arbitration) of affording judicial review of the award.


Separability criticism

The problems and difficulties that could arise with reference to the separability the principle is twofold. The first is related to the term used, and the second to some critical flaws in the main contract that could affect the arbitration clause, e.g. the illegality of the main contract.

Separability, autonomy or severability?

Although many authors make reference to the separability or autonomy of the arbitration an agreement, it has been noticed that this terminology could lead to ambiguities and mistakes that would be solved using a slightly different word; severability. The reasons to reject the use of the term autonomy derive mainly from the fact that the arbitration agreement cannot actually be separated from the main contract because one cannot provide for arbitration in a vacuum.

This means that the arbitration clause cannot exist without the rest of the agreement, since it represents only one of its terms, even if its procedural nature makes it clearly different from the other terms in the agreement, which is commercial in nature.[7]

One of the most problematic aspects of the autonomy concept is that it could entail the idea that an arbitration clause is a separate agreement and, hence, that there are two separate agreements, one related to the commercial terms and the other to the agreement to arbitrate. If this were the case, however, that could lead to the conclusion that unless the arbitration clause is accepted separately, it is not binding.

Another the problematic aspect of the terminology, which will be examined in more detail later, is that should the arbitration agreement be considered fully autonomous from the contract of which it forms part of, it could not be transferred along with it. Hence, every time the main agreement is assigned or there is subrogation, the arbitration clause might not form part of the assignment or subrogation.

Clearly, this is not a satisfactory result, and this is the reason why it would be better to speak of severability rather than separability or autonomy. However, since autonomy and separability are expressions much more widely used in doctrine and jurisprudence, they will be utilized in this analysis, with the caveat that the meaning of these words is to be understood in a way more similar to that of severability, (Where something is severable if it is capable of being divided into legally independent rights or obligations) rather then something that really is completely autonomous or separate.

Assignment of the main contract: which consequences for the arbitration agreement?

One of the difficulties that could arise with regard to the application of the separability principle, and one that could threaten its very applicability, at least on a theoretical level, is related to the assignment of the main contract. Should the arbitration clause be deemed to be a completely separate agreement, one could infer that it does not follow from the fate of the main contract whether the arbitration agreement is assigned. Institutional rules and international conventions say nothing with regard to this possibility, and the different legal systems do not have a homogeneous view of the problem.

In the U.S. the trend is to consider that the assignment of the arbitration clause with the main contract requires the consent of the parties, and the same is the prevailing view in Italy (in which, unlike other civil law countries, the express consent of the assignee is deemed to be necessary in order to validly assign the arbitration agreement along with the main contract). The French approach is probably the most problematic on this point since, on the one hand, it holds that the arbitration clause is completely and fully autonomous and, on the other hand, its circulation (and therefore its assignment) is closely related to that of the main contract.[8]

In order to justify and reconcile these conflicting views, the French Cour de Cassation stated that:
an international arbitration agreement, legally independent of the main contract circulates with it regardless of the validity of the assignment of rights under the main contract.

After this decision, the degree of autonomy of the arbitration clause was at its greatest. The French Supreme Court reaffirmed not only the autonomy of the existence of the arbitration clause from the main contract, but also the independence of its circulation.

Illegality of the main contract: consequences of the arbitration agreement

In some countries, difficulties with regard to the autonomy principle have arisen in relation to some serious flaws of the main contract; namely, its illegality. For a long time, it was held that the arbitral tribunal could never judge the validity of the contract. Wherever the contract was deemed invalid, so was the arbitration clause. In the Overseas Union Insurance Ltd v AA Mutual International Insurance Co Ltd,[9] it was said that this rule owes as much to logic as it does to authority.

This was the case which the House of Lords had to face in the 2007 case Fiona Trust & Holding Corp. v Privalov.[10] The case was related to a charter party contract, containing an arbitration agreement, which was later rescinded for alleged bribery.

Their Lordships, following the trend inaugurated in the Harbour's case, held that An arbitration clause that makes reference to any dispute arising under this charter is wide enough to cover any disputes relating to the existence or legality of the contract i.e. even disputes related to the illegality of the main agreement.

However, the House of Lords went on and clarified when an arbitration agreement could be held invalid: Of course there may be cases in which the ground upon which the main agreement is invalid is identical with the ground upon which the arbitration agreement is invalid.

For example, if the main agreement and the arbitration agreement is contained in the same document and one of the parties' claims that he never agreed to anything in the document and that his the signature was forged, that will be an attack on the validity of the arbitration agreement. But the ground of attack is not that the main agreement was invalid. It is that the signature to the arbitration agreement, as a distinct agreement, was forged. Similarly, if a party alleges that someone who purported to sign as an agent on his behalf had no authority whatever to conclude an agreement on his behalf, which is an attack on both the main agreement and the arbitration agreement

Conclusion
The article critically discussed the applicability of the separability doctrine, in doing so the author looked into how different jurisdiction in Europe and the USA apply the doctrine. Also how the doctrine has been incorporated into the international arbitration instruments. Under the separability doctrine, the arbitration clause is severed so that a question of the main contract's validity or existence may be brought to arbitration.

The separability doctrine, which espouses the autonomy of the arbitration agreement, creates a need for the arbitral tribunal to have the jurisdictional competence to rule not only on the main contract's validity but on the validity of the arbitration agreement. Under this analysis, the competence of the arbitral tribunal to rule on the jurisdictional challenge is a corollary to the doctrine of separability establishing the autonomous nature of the arbitration agreement.

References
Journal Articles:

  • Bermann, G. A. (2012). The Gateway Problem in International Commercial Arbitration. Yale Journal of International Law 37 (1)
  • Graves, J.M and Davydan, Y. (2011), International Arbitration and International Commercial Law: Synergy, Convergence and Evolution. Touro Law Centre
  • Rosen, J. A. (1993). Arbitration Under Private International Law: The Doctrines of Separability and Competence dela Competence. Fordham International Law Journal 17 (3) 6
  • Sanders, P. (1979). Unification of International Law: UNCITRAL's First Decade. The American Journal of Comparative Law (27) 2


Other Sources:

  • The Website of Law Teacher Essays, How should one define the Principles of Kompetenz Kompetenz? Retrieved from www.lawteacher.net/free-law-essays/commercial-law/how-should-one-define-law-essays.php on 25/04/2015 at 8:46 am

Legal Instruments:

  • The UNCITRAL Arbitration Rules 1976 as revised in 2010
  • The UNCITRAL Model Law on International Commercial Arbitration 1985 The ICC Arbitration Rules 1998

End-Notes:

  1. 388 U.S 395 (1967)
  2. 988 U.S (1991)
  3. 546 U.S 440 (2006)
  4. [1942] App. Cas. 356 (HL)
  5. Sanders, P. (1979). Unification of International Law: UNCITRAL's First Decade. The American Journal of Comparative Law (27) 2 at p 462-63
  6. Rosen, J. A. (1993). Arbitration Under Private International Law: The Doctrines of Separability and Competence de la Competence. Fordham International Law Journal 17 (3) 6 at 18
  7. The Website of Law Teacher Essays, How should one define the Principles of Kompetenz Kompetenz? Retrieved from www.lawteacher.net/free-law-essays/commercial-law/how-should-one-define-law-essays.php on 17/03/2020 at 8:46 am
  8. The Website of Law Teacher Essays, How should one define the Principles of Kompetenz Kompetenz? Retrieved from www.lawteacher.net/free-law-essays/commercial-law/how-should-one-define-law-essays.php on 18/03/2020 at 8:46 am
  9. [1988] 2 Lloyd's Rep 63, 67
  10. [2007] UKHL 40

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