DOCTRINE OF SEPARABILITY IN INDIA

Introduction

The concept of Separability of the arbitration clause is both interesting in theory and useful in practice. It means that the arbitration clause in a contract is considered to be separate from the main contract of which it forms part and, as such, survives the termination of the contract. Indeed, it would be entirely self-defeating if a breach of contract or a claim that the contract was voidable was sufficient to terminate the arbitration clause as well; this is one of the situation in which the arbitration clause is most needed[1].

In line with this approach, the UNCITRAL Model Law on International Commercial Arbitration incorporates the doctrine of Separability in Article- 16(1). The Indian law of Arbitration[2], which is based on the UNCITRAL Model Law, also explicitly adopts this approach in Section-16(1) (b)[3]. As per this doctrine, an arbitration clause which forms the part of the contract shall be treated as 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. The entry of this doctrine to India was due to the enactment of the new Act[4]. Modern laws on arbitration confirm the concept. The United States Supreme Court in the recent judgment in Buckeye Check Cashing, Inc. vs. Cardegna[5] acknowledged that the Separability rule permits a court “to enforce an arbitration agreement in a contract that the arbitrator later finds to be void”.

Similarly, the English High Court in Beijing Jianlong Heavy Industry Group vs. Golden Ocean Group Limited & Ors[6] recently addressed the issue of the Separability of arbitration agreements and the circumstances in which public policy factors invalidating the underlying contract may also impeach an arbitration clause. In its pro-arbitration conclusion, the court reinforced the strength of “powerful commercial factors” which weigh in favor of upholding an agreement to arbitrate.

The rule stems from the case of Harbour Assurance Co (UK) Ltd vs. Kansa General International Assurance Co. Ltd. and Others ([1993] 3 All ER 897) and was subsequently enshrined in section 7 of Act[7]. The practical effect of the rule is that unenforceability of the underlying agreement does not automatically render an arbitration agreement contained within it unenforceable. Without the rule, an arbitral tribunal would always be precluded from hearing any dispute which raised a question about the validity or existence of the contract containing the arbitration agreement. Beijing Jianlong illustrates the principle that whether or not the agreement will be struck down depends on the nature of the public policy rule that invalidates the underlying contract.

Case Laws

The Eleventh Circuit recently reiterated this application of the “separability doctrine” in the construction context in John B. Goodman Limited Partnership v. THF Construction^[8] The Goodman case involved a dispute between a property owner and a construction contractor relating to contracts (each of which contained an arbitration clause) for the construction of two assisted living facilities. The Court, however  found that,  this to be a challenge to “the performance of the contracts rather than their existence.” Finding “no question” about the owner’s assent to the contracts generally or the arbitration clauses specifically, the Court held that an arbitration panel, and not a court, should decide whether the construction contract was unenforceable under state law during 1096. Georgia state courts have adopted a view of the separability doctrine that is consistent with that held by the Eleventh Circuit. In Stewart v. Favors[9] , the Court held that where a party raises a clear and specific challenge to the enforceability of the arbitration provision in addition to challenging the underlying contract generally, the issue is properly decided by the Court. Alabama courts, however, have expressly limited the application of the separability doctrine to “voidable” contracts only. Alabama courts have held that contracts which are void ab initio are “challenges to the very existence of the contract” as opposed to “attempts to avoid or to rescind a contract” which are otherwise subject to arbitration[10].

Argument against the Separability Doctrine: One of the major arguments against Separability Doctrine is that it is incompatible with the contractual approach to arbitration law.^[11] The separability doctrine should be repealed because no dispute should be sent to arbitration unless the parties have formed an enforceable contract requiring arbitration of that dispute. Prior to contracting, parties start with a right to litigate, rather than arbitrate, their disputes. The right to litigate,  access to a court of law generally exists in the international, as well as the domestic, context but may be of less practical value internationally depending on the reliability of the court system(s) with jurisdiction over the parties. The separability doctrine makes the right to litigate alienable under a lower standard of consent than is found in contract law. It does so by removing from the right to litigate the protection provided by contract law’s defenses to enforcement. By contrast to the contractual approach, the separability doctrine holds that a party alienates its right to litigate when that party forms a contract containing an arbitration clause even if that contract is unenforceable. The separability doctrine separates arbitration law from an important part of contract law—the defenses to enforcement and thus fails to provide the right to litigate with the protection of those defenses.

Arguments for the Separability Doctrine: The fundamental principle of arbitration law is that arbitrators have the power to rule on their own jurisdiction. That principle is often presented as direct result of the separability doctrine. It is because of the autonomy of the arbitration agreement that any claim that the main contract is in some way void will have no direct impact on the arbitration agreement. The separability doctrine allows the examination by the arbitrators of jurisdictional challenges based on the alleged ineffectiveness of the dispute contract.

Conclusion

International commercial arbitration has met widespread success as a method of international dispute resolution. The multitude of changes that are occurring in the international  plane testify to that fact. The popularity of the doctrine with the institutional rules suggests that in due course most national arbitration statutes will adopt the same approach. In general it is believed that the increased independence of international arbitration from the intervention of the national courts is a move in the right direction.

Author: Deban Satyadarshi

You can direct your queries to author at deban.satyadarshi@gmail.com 

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[1] Law and Practice of International Arbitration, Alan Redfern and Martin Hunter, Fourth Edition, pp- 3-60

[2]  Indian Arbitration and Conciliation Act, 1996

[3]  P Manohar Reddy & Bros. v. Maharastra Krishna Valley  Development Corporation, AIR 2009 SC 1776

[4] Supra Note 2

[5] 546 US 460

[6] [2013]EWHC 1063(Comm)

[7] Supra Note 2

[8] Inc., 321 F.3d 1094 (11th Cir. 2003)

[9] 590 S.E.2d 186 (Ga. App. 2003)

[10] See Camaro Trading Co. v. Nissei Sangyo America, Ltd.^[10], (holding that a foreign corporation could not compel arbitration pursuant to an arbitration clause in a contract because the entire contract was unenforceable and invalid as a result of the foreign corporation’s failure to qualify to do business in Alabama); Alabama Catalog Sales v. Harris^[10], (finding that the trial court, rather than an arbitrator, was to decide whether contracts containing arbitration clauses were void and unenforceable under the Alabama Small Loans Act)

[11] ARBITRATION LAW’S SEPARABILITY DOCTRINE AFTER BUCKEYE CHECK CASHING, INC. V. CARDEGNA-Stephen J. Ware