Doctrine of Separability and determination of the proper law of an Arbitration agreement

The doctrine of separability is one of the conceptual and practical cornerstones of international arbitration. 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, breach and invalidity of that contract.

Separability thus ensures that when a party claims that there has been a total breach of the contract by the other, the contract is not destroyed for all purposes. Instead, it survives for the purpose of measuring the claims arising out of the breach and the arbitration clause survives for determining the mode of their settlement.

However, the true scope of the doctrine has sometimes been misunderstood and interpreted in a broader sense. This article critically examines the scope of the doctrine, which treats an arbitration agreement as a separate agreement only when the validity of the arbitration agreement is challenged based on the invalidity of the main agreement.

Need for the Doctrine

The doctrine became essential for arbitration to function when a tribunal faced a challenge concerning its jurisdiction. A party wishing to evade its obligation to arbitrate could argue that as a result of the main agreement being invalid, the arbitration clause forming part of the main agreement is also invalid. Further, parties argued that the arbitral tribunal set up pursuant to it has no jurisdiction to render an award.

Such an argument, if accepted, could lead the arbitration to a fatal end. As a result, the parties will be left with no choice but to litigate, which is against the express intention of the parties to resolve their dispute through arbitration. The doctrine was needed to act as a shield against this argument.

Analysis of the doctrine vis-a-vis determination of proper law of arbitration agreement

Despite the doctrine’s limited scope, various authorities have given it a broader purpose by arguing that the reason why the arbitration agreement is not governed by the proper law of the matrix contract is that it is a distinct agreement generally. According to Born, “the separability presumption means that an arbitration agreement can be governed by a different national law from that (or those) applicable to the parties’ underlying contract. The leading explanation for this result is the separability presumption, which postulates two separable agreements of differing characters, which can readily be governed by two different national (or other) legal regimes.” This view is supported by a few other authorities.

However, the author respectfully disagrees with this position. The doctrine of separability is limited to the validity of the arbitration agreement stemming from the invalidity of the main agreement. It is only to this extent this doctrine can be applied.

For example, when a party defends a challenge to the validity of an arbitration agreement, it does not argue that the arbitration agreement is always separate from the main agreement and therefore, the invalidity of the main agreement does not make the arbitration agreement invalid. Instead, the party, while defending the validity of the arbitration agreement, says that the invalidity is limited to the main contract and one may separate the parties' common intention to arbitrate from the other contractual promises merely to safeguard the arbitral tribunal’s jurisdiction.

In other words, the purpose of the doctrine of separability is to safeguard an arbitral tribunal's jurisdiction by enforcing the parties' agreement to arbitrate and not to treat the arbitration agreement distinct from the main agreement generally, including to determine the proper law of arbitration agreement.

This view is supported by the following arguments.

First, the Model Law recognises the doctrine only for the limited purpose as stated above. The doctrine is enshrined in Article 16, which provides that “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.”

Needless to say, that the arbitration agreement is independent of the other terms of the contract. However, this independence is limited to the arbitral tribunal's jurisdiction to consider challenges to its own jurisdiction. The author stresses upon the usage of the words "for that purpose" in the beginning of the second sentence of Article 16, which makes the purpose and intent of the separability doctrine clear.

Further the English Arbitration Act, being heavily influenced by the Model Law, also has a similar provision concerning the separability doctrine. Section 7 of the same states,

“Unless otherwise agreed by the parties, an arbitration agreement which forms or was intended to form part of another agreement (whether or not in writing) 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.”

Again, the doctrine is qualified with the words “for that purpose” and has limited the doctrine to the invalidating effect of the main agreement on the arbitration agreement. In the words of Lord Hoffmann, "this section was intended to enable the courts to give effect to the reasonable commercial expectations ofthe parties about the questions which they intended to be decided by arbitration."[13]

Second, the author’s view is also supported by the observations made in the Sulamérica case. It was 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.

Further, a search for an implied choice of proper law to govern the arbitration agreement is to lead to the conclusion that the parties intended the arbitration agreement to be governed by the same system of law as the substantive contract unless there are other factors present which point to a different conclusion.

The Sulamérica approach was also upheld by the Singapore High Court in BCY v BCZ. It was held that under the doctrine of separability, a party cannot avoid the obligation to submit a dispute to arbitration by merely denying the existence of the underlying contract. However, it does not mean that because of this doctrine, parties intended to enter into an arbitration agreement independent of the underlying contract.

Third, the view of the author is also supported by the fact that the arbitration agreement is not always distinct from the main agreement for all purposes, which was ruled in Ronly Holdings. The main agreement provided that no variation to ‘any clause of this Agreement’ would take effect unless reduced to writing. It was argued that the parties can amend the arbitration agreement orally as it is a ‘distinct agreement’ and the ‘no variation’ clause does not apply to it.

However, this argument was rejected by the court, which held that there is nothing in the intrinsic character of an arbitration agreement as having an attribute of separability which prevents it from being included in that phrase. The fact that in substance it may have that attribute of separability, does not prevent it being aptly described as a ‘clause of this agreement’ .

Fourth, applying the separability principle to determine the proper law of arbitration agreement goes against the foundation of arbitration i.e., party autonomy. The parties, while drafting the main agreement, may agree upon a particular national law to govern the contractual obligations and as well as the arbitration. For instance, parties choose the governing law of the main agreement as New York law, whereas the arbitration clause included in the main agreement does not express the choice of law, but the seat of arbitration was London.

Now applying the (broad) separability assumption, New York law cannot be taken as the implied choice of the arbitration agreement as it is separate from the main agreement. Such a view might be contrary to the intention of the parties considering the parties are not legally trained and do not have the knowledge of separability doctrine, let alone its broad or narrow application. Therefore, applying the separability doctrine might disregard the parties’ intention to govern the entire agreement (including the arbitration agreement) by New York law.

Conclusion

Unfortunately, the impact of this doctrine is so deep that the practitioners fail to apply it in its limited context. Arbitration practitioners and scholars often venture out from its limited context and apply it to generally separate the arbitration agreement from the carrier agreement. This has opened a Pandora’s box for habitual litigants to stall/delay the resolution of disputes. As a result of this, parties are burdened with mounting expenses, and the courts are also burdened with frivolous cases.

The author is an LL.M. Candidate in International Commercial Arbitration Law (ICAL), Stockholm University.