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Doctrine of Separability in Arbitration Agreement: An Overview

The doctrine of separability treats an agreement to arbitrate contained within a contract as an independent agreement that is deemed to be separable from the main contract.To put it simply, as per the doctrine of separability,where a dispute arises concerning the initial validity or continued existence of a contract, the arbitration clause embedded in the main contract is seen to be autonomous, and separate.

The doctrine preserves the validity and enforceability of the arbitration clause of a contract, even when the primary contract is found to be invalid and unenforceable, providing autonomy to the arbitration clause. The UNCITRAL Model law on International Commercial Arbitration, 1985,under Article 16[1], integrates the doctrine of separability as an arbitration clause which forms part of a contract shall be treated as an agreement independent of the other terms of the contract.

It states:
The arbitral tribunal may rule on its own jurisdiction, including any objections with respect to the existence or validity 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. A decision by the arbitral tribunal that the contract is null and void shall not entail ipso jure the invalidity of the arbitration clause.[2]

It provides that an arbitral tribunal's determination that a contract is void does not immediately render the arbitration provision unenforceable.The same principle is manifested in Section 7 of the Arbitration Act, 1996 of England, Singapore's approach to separability provisions and Section 16(1) of India's Arbitration and Conciliation Act, 1996, which are further discussed below.

United Kingdom
The United Kingdom views separability as reflecting the presumed intention of the parties that their preferred method of resolving dispute remain effective. Arbitration agreement is seen as distinct. Section 7 of the English Arbitration Act, 1996, deals with the Separability of Arbitration agreement.

The Doctrine was first recognised in England, through the landmark judgement in Heyman v. Darwins Ltd.,[3] which laid down the principle of separability of arbitration agreement, and was later incorporated in the Arbitration Act of 1996, based on UNCITRAL Model Law through legislation.

In Fiona Trust & Holding Corp v. Privalov,[4] the House of Lords held that:
Unless otherwise agreed by the parties an arbitration agreement which forms or was intendedto form part of another agreement … shall not be regarded as invalid, non-existent or ineffective because that other agreement is invalid, or did not come into existence or has become ineffective, and it shall for that purpose be treated as a distinct agreement.

The House of Lords stated that the arbitration agreement must be treated as a distinct agreement and can be void or voidable only on grounds which relate directly to the arbitration agreement; the invalidity or rescission of the main contract does not necessarily entail the invalidity or rescission of the arbitration agreement.

The primary agreement and the arbitration agreement may both be declared illegal for the same reason in rare situations. For example, if a signature on a contract including an arbitration clause is forged, the arbitration clause is null and void. This is because the signature to the arbitration agreement as a "separate agreement" was forged, not because the primary agreement is unlawful.

However, in other circumstances if an agent is accused of exceeding his power by entering into the primary agreement on conditions that were not authorised or for improper reasons, the arbitration agreement is not always under dispute.

The legitimacy of the arbitration agreement as a separate agreement is not jeopardised by the assertion that a party might cancel an agreement because it was persuaded by bribery. To conclude, it was held the principle of separability enacted in section 7 means that the invalidity or rescission of the main contract does notnecessarily entail the invalidity or rescission of the arbitration agreement. The arbitration agreement must be treated as a"distinct agreement" and can be void or voidable only on grounds which relate directly to the arbitration agreement.

The Sulamérica Cia Nacional de Seguros SA v EnesaEngenharia SA,[5] observed that the only purpose of the doctrine of separability is to give legal effect to the parties' intention of resolving disputes through arbitration and not to insulate the arbitration agreement from the substantive contract for all purposes.

Accordingly, it was held that an express choice of law governing the substantive contract is a strong indication of the parties' intention in relation to the agreement to arbitrate. The principle of separability of arbitration agreements from the contracts in which they sit which means that disputes arising out of the contract are submitted to arbitration even where the existence of the contract itself is challenged, was re-emphasised.

House of Lords re-emphasised the principle of separability of arbitration agreements from the contracts in which they sit which means that disputes arising out of the contract are submitted to arbitration even where the existence of the contract itself is challenged.

In Soleimany v. Soleimany,[6] the Court of Appeal reversed the High Court's decision to enforce an arbitral award (rendered by the Beth Din in England under Jewish law) which enforced a contract to smuggle carpets out of Iran. 'In our view, an enforcement judge, if there is prima facie evidence from one side that the award is based on an illegal contract, should enquire further to some extent.

The judge has to decide whether it is proper to give full faith and credit to the arbitrator's award. Only if he decides at the preliminary stage that he should not take that course does he need to embark on a more elaborate enquiry into the issue of illegality.'

The court declined to enforce an award relating to a dispute arising out of an illegal contract to smuggle carpet out of Iran holding that 'where the making of the contract will itself be an illegal act... the court would be driven nolensvolens to hold that the arbitration was itself void'. It was also specified that the enforcement court must see whether there is prima facie evidence that the award is based on an illegal contract.

To summarise, United Kingdom views separability as reflecting the presumed intention of the parties that their preferred method of resolving dispute remain effective. Arbitration agreement seen as distinct. In cases of void ab initio contracts, it should be seen if the arbitration agreement by itself is void ab initio.However, in case of illegal contracts, court will find arbitration agreement within it invalid.

Singapore
Singapore follows a limited separability in arbitration agreements. There are no distinct statutory provisions, but this doctrine is drawn from Article 16 UNCITRAL model law. The separability doctrine in the country is seen as a tool for execution of parties intention or expectation that the arbitration clause should survive an agreement that has been invalidated by court. Here, the doctrine does not imply that arbitration agreement is independent of the main contract.

There are statutory provisions present in the country in the Singapore Arbitration Act 2001, Part VI states Jurisdiction of Arbitral Tribunal. These are provisions for separability of arbitration clause and competence of arbitral tribunal to rule its own jurisdiction. When the jurisdiction is challenged before an arbitral tribunal one of the most common grounds raised is that the contract which incorporates the arbitration was never concluded. Before it was a common practice to determine both the validity of arbitration agreement and existence of binding contract together.[7]

In the case of BCY and BCZ,[8] the defendant's case was a binding ICC arbitration agreement which was concluded before the conclusion of SPA. In such cases where arbitration clause was negotiated in the context of a contract such an approach was found problematic from the perspective of both parties as well as arbitrators.

There are decisions of the High Court of the country where the law governing the arbitration agreement was implied from the main contract. The court held that when the arbitration clause is a part of the main contract then it is reasonable to presume that the entire relationship is governed by uniform law if the intention differed they must have specified or entered into different agreements. Further clarity is provided by Article 16 of the UNCITRAL Model Law on International Commercial Arbitration.

In the recent years there have been judicial pronouncements which have provided clarity with respect to doctrine of separability of arbitration agreements. The court in the judgement of BNA v. BNB,[9] stated that the root cause behind evolution of the doctrine of separability is the desire to give effect to the arbitration agreement even if the substantive contract is ineffective.

Court refused to accept this as limitation of the doctrine following which it was held that it is legitimate to presume that the parties want the arbitration clause to survive. The only limitation the court stated was to only give 'reasonable effect' to this intention. The judgment further discusses the reason why doctrine of separability has a limited scope, being consistent with the ut res magis principle it is there just to give effect to the intention of the parties which is presumed that the arbitration clause should survive.

The court interpreted this doctrine and held that it has a limited scope it is broad enough to operate and uphold the arbitration clause, which is integrated in an agreement, but an operation of the substantive agreement could operate to nullify the parties manifest intention to arbitrate their disputes.

India
In India, the statutory provision is present in Chapter IV of Arbitration and Conciliation Act, 1996. There have been judicial pronouncements as cases upholding the Doctrine of Separability as well as on Illegal Contracts and Frauds. In the case of N.N Global Merchantile (P) Ltd. V. Indo Unique Flame Ltd.[10], the enforceability of Arbitration agreement embedded in Unstamped Contract was discussed.

It was held that separability of arbitration agreement from substantive contract in which it is embedded is well settled law. Invalidity, ineffectiveness or termination of substantive commercial contract does not effect the validity of the arbitration agreement. In the case of Today Homes & Infrastructure (P) Ltd. V. Ludhiana Improvement Trust[11], the two-judge bench held that arbitration clause is not invalidated even if the main agreement is declared void.

In the case of National Agricultural Coop. Marketing Federation India Ltd. v. Gains Trading Ltd.,[12] it was stated Even if the performance of the contract comes to an end on account of repudiation, frustration or breach of contract, the arbitration agreement would survive for the purpose of resolution of disputes arising under or in connection with the contract. Even in the case of fraud where the party appealed as the agreement was illegal the award arising is also void on appeal the High Court held the award as legal.[13]

Conclusion
Approach of all the countries is loosely based on Article 16 of the UNCITRAL Model law on International Commercial Arbitration, 1985. Arbitration agreement is seen as distinct. In cases of void ab initio contracts, it should be seen if the arbitration agreement by itself is void ab initio.

Singapore sees separability as a tool for execution of parties' intention or expectation that the arbitration clause should survive an invalidated contract. Arbitration agreement will survive invalidity, ineffectiveness, termination, repudiation, breach or frustration of contract. Arbitration clause to be treated as an independent agreement. All three, have certain exceptions that arise in special circumstances.

End-Notes:
  1. UNCITRAL Model Law on International Commercial Arbitration, Art.16(1), (1985).
  2. Id.
  3. 1942 AC 356
  4. [2007] UKHL 40
  5. [2012] WLR (D) 148
  6. [1999] Q.B. 785
  7. Hyundai Merchant Marine Company Ltd v Americas Bulk Transport Ltd (2013) EWHC 470 (Comm) at [35]-[36].
  8. (2016) SGHC 249
  9. [2019] SCGA 84
  10. N.N Global Merchantile (P) Ltd. V. Indo Unique Flame Ltd. 2021 SCC OnLine SC 13
  11. 2014) 5 SCC 68
  12. (2007) 5 SCC 692
  13. Khardah Company Ltd. v. Raymon& Co. (India) Private Ltd. (1963) 3 SCR 183
Written By: Tishya Pandey

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