The Doctrine of Separability in International Commercial Arbitration

The Doctrine of Separability in International Commercial Arbitration Agreement Definition Acceptability and Applicability of Doctrine Rationale for Doctrine Applicable Law Criticisms of Doctrine

Arbitration Agreement Two types of arbitration agreement An arbitration clause in a main contract or an arbitration agreement When an agreement to arbitrate exists as a clause in a main contract, questions as to its validity may be raised if the main contract is invalid, illegal, terminated or rescinded for some reason or there is a question as to its validity and its legality.

Definition The doctrine of separability provides that an arbitration clause is separable or severable from a main contract or from the underlying commercial agreement. First established in England in Heyman v Darwins Ltd (Heyman), [1942] AC 356 (HL), where it was decided that an accepted repudiation or frustration, while it might bring the contract to an end and discharge the parties from further performance of their primary obligations, does not affect the enforceability of an arbitration clause.

Acceptability and applicability of the doctrine of Separability The Doctrine of Separability is widely accepted in most jurisdictions i. e France, London, Italy, Germany, Nigeria, Switzerland. Nigeria - U. B. A PLC v Triedent Consulting Limited (2013) 4 CLRN 119. England - S. 7 of the English Arbitration act, 1996 “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)”

Recognition of Doctrine in International Arbitral Institution Rules Art. 23. 1 of the LCIA Rules (in almost identical terms to sec. 7): “. . . an arbitration clause which forms or was intended to form part of another agreement shall be treated as an arbitration agreement independent of that other agreement. A decision by the Arbitral Tribunal that such other agreement is non-existent of ineffective shall not entail ipso jure the non-existence, invalidity or ineffectiveness of the arbitration clause. ”

Rationales for doctrine Parties express agreement Harbour Assurance Co (UK) Ltd. V Kansa General International Insurance Co. Ltd [1993] 1 Llpyds Rep 455 “First there is the imperative of giving effect to the wishes of the parties unless there are compelling reasons of principle why it is not possible to do so…. . Secondly, if the arbitration clause is not held to survive the invalidity of the contract, a party is afforded the opportunity to evade his obligation to arbitrate by the simple expedient of alleging that the contract is void. In such cases courts of law then inevitable become involved in deciding the substance of a dispute. Moreover, in international transactions where the neutrality of the arbitral process is highly prized, the collapse of this consensual method of dispute resolution compels a party to resort to national courts where in the real world the badge of neutrality is sometimes perceived to be absent. For parties the perceived differences of the neutral arbitral process is often a vital condition in the process of negotiation of the contract. If the perception is absent, it will often present a formidable hurdle to the conclusion of the transaction. A full recognition of the separability principle tends to facilitate international trade”

National law See Art. 178(3) Swiss Law on Private International Law, Section 6 of the English Arbitration Act 1996 Needs of International Legal System Necessary in order to prevent challenges to the existence, validity or continued effect of an underlying contract from derailing the arbitral process An Arbitral Tribunal competent to consider challenges to its own jurisdiction? Parties to arbitration agreement intend to require arbitration of any dispute not otherwise settled, including disputes over the validity of the contract or treaty, without the separability doctrine, it would always be open to a party to an agreement containing an arbitration clause to vitiate its arbitration obligation to by the simple expedient of declaring the agreement void from the underlying commercial agreements in which they appear.

Implications of the Doctrine of Separability The invalidity of the parties’ underlying contract does not necessarily invalidate their arbitration agreement The invalidity of the parties arbitration agreement does not necessarily affect the underlying contract The doctrine implies the arbitrator’s power to consider his jurisdiction The law governing the arbitration clause may be different from the law governing the main contract The arbitration clause may survive termination or expiry of the underlying agreement – provided claims arise from conduct during term of agreement

The invalidity of the parties’ underlying contract may not deprive an arbitral tribunal of validity

Applicable Law The autonomous nature of an arbitration clause could potentially result in a difference between the law which applies to the parties’ arbitration agreement and the law applicable to the substance of the parties’ underlying contract The application of this doctrine has resulted in the courts undertaking the exercise of interpretation and frequently having to use their discretion to determine which law governs the arbitration clause.

It is common for parties to make an express choice of law to govern their contract but unusual for them to make an express choice of law to govern the arbitration agreement contained within it and where they have not done so, the natural inference is that they have intended the proper law chosen to govern the substantive contract, to also govern the agreement to arbitrate. Occasionally, however, the laws of different countries may affect an arbitration agreement and may result in another law, other than the law of the substantive contract, governing the agreement to arbitrate.

Possible Alternatives for the law Governing an Arbitration Agreement The law expressly or impliedly chosen by the parties The law of the arbitral seat (lex fori) The law governing the parties’ underlying contract The law of the forum in which judicial enforcement of the agreement is sought

Determination of Applicable Law in International Commercial Arbitration The Choice of Law applicable to international arbitration agreement is determined by reference to International Arbitral Institution Rules and Case Law – Sulemerica EWCA Civ 638 AT [9] 2012 Three Step Approach in determining applicable law Sulemerica “The tribunal needs to first determine if there was an express choice but if there was no express choice, they need to determine the implied choice based on the parties intentions and if this still cannot be determined, the tribunal will decide which law has the closest and most real connection to the arbitration. “

Arbitral Institution Rule - Article 28(2) UNCITRAL Model Law “Failing any designation by the parties, the arbitral tribunal shall apply the law determined by the conflict of laws rules which it considers applicable”

Determining the law most closely connected To identify the law most closely connected to the arbitration agreement itself it means to give priority to connecting factors which apply specifically to that agreement (e. g. the chosen arbitration rules and the seat or the language of the arbitration).

Criticisms of Doctrine If a party denies that it executed or assented to the underlying contract, how can the separability doctrine aid in argument that the arbitration clause, contained in that contract, is nonetheless valid and binding on that party? Creates Uncertainty and confusion in the law which conflicts with the aim of arbitration to provide efficiency

Conclusion Doctrine of Separability is a practical necessity There is still a need for certainty in determining the applicable law to the arbitration agreement Parties are advised to clearly state in their arbitration clauses, the law applicable to the arbitration agreement

Redfern and Hunter on International Arbitration, 5 th Edition, at page 117 “Indeed, it would be entirely self-defeating if a breach of that contract or a claim that the contract was voidable was sufficient to terminate the arbitration clause as well; this is one of the situations in which the arbitration clause is most needed. ”