OVERVIEW OF DOCTRINE OF SEPARABILITY IN INDIA

Himanshu Vashistha and Kanchan, both 4th year students of Faculty of Law, Banaras Hindu University, Varanasi discusses the Doctrine of Separability with help of various judgments given by the honourable Courts.

Introduction

A dispute may bring to the arbitration where parties voluntarily entered into an arbitration agreement. The parties are opting for arbitration in the hope of autonomy, speedy and less formal dispute resolution process by arbitrators having specific technical knowledge, and maintaining good relations between them. Every arbitration agreement contains certain clauses and conditions, and while entering into an agreement, parties agree to be bound by these clauses. In case of the termination of the agreement either by mutual consent or due to breach of a condition, these clauses also come to an end. Nevertheless, there are certain clauses and terms which survive even after termination of the agreement, to measure the claims arising out of the breach and to determine the mode of their settlement. Thus, the Doctrine of Separability layout that an arbitration clause/agreement included in or closely related to the contract is a separate and autonomous clause and survives the termination, breach, and invalidity of that contract. 

Origin of Doctrine of Separability

The Doctrine of Separability was originated in France, in the Gosset^[1] Judgment and a few years later, the U.S. Supreme Court also acknowledged the separability of the arbitration clause in the Prima Paint Corp. v. Flood & Conklin Mfg. Co^[2], wherein the Court concluded that as the Plaintiff was challenging the underlying contract generally rather than the arbitration clause specifically, arbitration of Plaintiff’s fraudulent inducement claims was required. The Court was also careful to state that the doctrine would not apply in situations where parties claim that they never agreed for arbitration, or they were fraudulently induced into signing an arbitration agreement.Since then, the concept of separability of the arbitration clause from the contract has been widely taken on board by courts, legislatures, and institutionalized arbitration centers.

The International Chamber of Commerce is the first arbitral institution that recognised the separability of the arbitration agreement in 1955, under Art.13^[3] of ICC Rules of Arbitration, 1955. Further, the UNCITRAL Model Law on International Commercial Arbitration under Art.16^[4], incorporates 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.’ Furthermore, the United States Supreme Court in a recent judgment in Buckeye Check Cashing Inc. vs. Cardegna^[5] admits that the separability rule permits a court “to enforce an arbitration agreement in a contract that the arbitrator later finds to be void.”

In addition to the above authorities, way back in the year 1942, the House of Lords in Heyman & Anr. v. Darwins Ltd.^[6], Viscount Simon, L.C., capsulize the scope of an arbitration clause in a contract as, ‘An arbitration clause is a written submission, undertaken by the parties to the contract. If the issue is about the existence of a contract, that issue cannot go to arbitration under the clause. Similarly, if one of the parties contended that it is void ab initio (for example, the making of such a contract is illegal), the arbitration clause cannot operate, and the clause itself is void on this view.’

The statutory foundation of separability of an arbitration clause in India

Clause(1) of Section 7^[7] of the Arbitration and Conciliation Act, 1996^[6] defines the 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.” Clause (2) of the same section further specifies that “an arbitration agreement may be in the form of an arbitration clause in a contract or the form of a separate agreement.” In addition to this, Sub-clause (a) of Clause (1) of Section 16^[8] of the Arbitration and Conciliation Act, 1996 categorically states that “an arbitration clause which forms part of a contract shall be treated as an agreement independent of the other terms of the contract.” However, to ensure that there remains no misunderstanding, sub-clause (b) of clause (1) clear all doubts regarding separability of an arbitration agreement as, “a decision by the arbitral tribunal that the contract is null and void shall not entail ipso jure the invalidity of the arbitration clause.” Thus, a combined reading of both the aforesaid sections would substantiate that the main contract and the arbitration agreement form two independent contracts. Wherein Commercial rights and obligations are contained in the main contract accompanied by a second contract, which indicates the agreement and intention of parties to resolve the disputes relating to the main underlying contract through arbitration. It has been said that an arbitration agreement is an agreement within the agreement.

Judicial mapping of the doctrine of separability in India

However, even after enactment of the Arbitration and Conciliation Act, 1996, whether an arbitration agreement survives or perishes along with the main contract remains a point of discussion in a plethora of judgments by Indian Courts. It was contended that, since the contract between the parties abrogated by mutual consent, all the terms and conditions of the contract have come to an end, therefore the arbitration agreement, which forms part of the contract, also comes to an end and, the arbitration agreement cannot be enforced. Objections were raised, and the argument in support of separability of the arbitration clause was given, that over-riding principle for the Courts in the arbitration is to look whether there is an intention to arbitrate. The Court is not required to discover the presence of a concluded contract but only has to see the presence of a valid arbitration agreement. 

The relevant case-laws which pay the way for the doctrine of separability in India are as follows:

1. National Agricultural Co-op. Marketing Federation India Ltd. vs. Gains Trading Ltd.^[7]

In this case, it was held by Hon’ble Apex Court that an arbitration clause is a collateral term in the contract, which relates to resolution disputes, and not performance. Even if the performance of the contract comes to an end on account of repudiation, frustration, or breach of contract, the arbitration agreement will survive for resolution of disputes arising under or in connection with the contract.

2. P. Manohar Reddy and Bros. vs. Maharashtra Krishna Valley Dev. Corp. and Ors.^[9]

The Supreme Court ruled that an arbitration clause being a collateral term need not, in all situations, perish with coming to an end of the contract. It may survive.

3. Enercon (India) Ltd. & Ors. vs Enercon Gmbh & Anr.^[10]

In this case, the Supreme Court observed that arbitration is a remedy elected by parties outside the normal civil court remedy. Support of the National Courts would indeed be required to ensure the success of arbitration, but this would not detract from the legitimacy or independence of the collateral arbitration agreement, even if it is contained in a contract, which is claimed to be void or voidable or un-concluded by one of the parties.

4. Mulheim Pipe Coatings Gm bH vs. Welspun Fintrade Ltd.^[11]

The Bombay High Court held that the doctrine of separability requires, for the arbitration agreement to be null and void, inoperative or incapable of performance, a direct impeachment of the arbitration agreement and not simply a parasitical impeachment based on a challenge to the validity or enforceability of the main agreement. Another way of considering the matter is, whether it is the further performance of the contract that is brought to an end or it is the existence of the contract, which is brought to an end. In the former case, the arbitration clause would survive, whereas, in the latter, the arbitration clause would not survive.

Effect of Doctrine of Separability: 

The effect of the doctrine of separability has been explained in Russell on Arbitration14 as follows: “The doctrine of separability underlines the potential width of an arbitration agreement because it establishes that an arbitration agreement has a separate life from the matrix contract for which it provides the means of resolving disputes. This enables the arbitration agreement to survive breach or termination of the matrix contract of which it forms part. The consequence of this separate existence is that even if the matrix contract has been brought to an end, for example, by accepted repudiation or frustration, the arbitration agreement continues in being to deal with any disputes in respect of liabilities under the matrix contract arising before or after termination.”^[13]

Conclusion:

The Doctrine of Separability is imperative in maintaining the autonomy and integrity of the arbitration. Unless an arbitration clause is separated, a party to an arbitration agreement will manage to stay away, delay arbitration proceedings simply by challenging or committing a breach of the contract which contains the arbitration agreement within it. As a result, the parties will be left with no choice but to litigate, and such an argument, if accepted, could lead the arbitration to a fatal end. Hence, this doctrine helps to ensure arbitration’s continued effectiveness as a dispute resolution tool.

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Himanshu Vashistha and Kanchan, both are fourth year students from Faculty of Law, Banaras Hindu University, Varanasi.

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^[1]Etablissements Raymond Gosset v. Frère Carapelli.,French Int’l Arb. L. Rep. 545,(Cass.:1963).

^[2]Prima Paint Corp. v. Flood & Conklin Mfg. Co., 18 L.Ed 2d 1270, (U.S.: 1967).

^[3]ICC Rules of Arbitration, Art.13, (1955) https://www.acerislaw.com/wp-content/uploads/2018/08/1955-ICC-Arbitration-Rules.pdf.

^[4]UNCITRAL Model Law on International Commercial Arbitration, Art.16(1), (1985) https://www.uncitral.org/pdf/english/texts/arbitration/ml-arb/07-86998_Ebook.pdf.

^[5]Buckeye Check Cashing Inc. v. Cardegna., 163 L. Ed. 2d, 1038 (U.S.: 2006).

^[6]Heyman & Anr. v. Darwins Ltd., 72 LI.L. Rep. 65, (H.L.: 1942).

^[7]Arbitration and Conciliation Act S.7 (1996).

^[8]Arbitration and Conciliation Act S.16 (1996).

^[9]National Agricultural Co-op. Marketing Federation India Ltd. v. Gains Trading Ltd., 5 SCC 692, (SC: 2007).

^[10]P. Manohar Reddy and Bros. v. Maharashtra Krishna Valley Dev. Corp. and Ors., 2 SCC 494, (SC: 2009).

^[11]Enercon (India) Ltd. &Ors. v. Enercon Gmbh & Anr., 5 SCC 1, (SC: 2014).

^[12]Mulheim Pipe Coatings GmbH v. Welspun Fintrade Ltd., SCC Online Bom 1048, (Bom: 2013).

^[13]AMLEGALS, Drafting of an effective arbitration agreement, Mondaq.com (May 15, 2020, 3:31 PM), https://www.mondaq.com/india/arbitration-dispute-resolution/934184/drafting-of-an-effective-arbitration-agreement.

IMPORTANT – Opinions expressed in this article are the sole responsibility of the author and do not necessarily reflect the views of IJOSLCA.