The Doctrine of Separability in International Commercial Arbitration - Research Paper Example

The Doctrine of Separability in International Commercial Arbitration Name: Course: Tutor: Date: Table of contents Introduction An arbitration agreement is one of the key features of international commercial arbitration as it is the agreement where the parties agree to have disputes emanating from or related to their contract subjected to arbitration. For this reason, arbitration agreements are contractual in nature. In the international commercial perspective, arbitration is oftentimes preferred to litigation largely because of the narrow scope of jurisdiction and enforceability of court verdicts.1 In addition, problems associated with enforceability of arbitration awards represent a significant factor as to why many of the parties involved in international commercial agreements will prefer a jurisdiction which is a state that is a party to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards when selecting the procedural law to be applied in the arbitration process.2 The New York Convention is however silent with regard to any limitations or rules to be imposed on the court’s determination of the issues to be determined, validity or extent of the arbitration agreement. Instead, it leaves the matter to the discretion of national legal systems, which has resulted in a discrepancy of approaches and created a situation that is unwelcome for judicial review in some jurisdictions. The doctrine of separability however offers a remedy to the discrepancy mentioned above as it provides an opportunity for the arbitration agreement to be separated from the main contract between parties, thus facilitating disputes to be settled through international arbitration even when courts deem the relevant contracts to be null. In view of this, this paper discusses the doctrine of separability and how it applies in international commercial arbitration. The doctrine of separability Separability is defined as the arbitration clause or agreement in a contract that is considered to be separate from the main contract of which it comprises, and therefore, survives the termination of the contract.3 This implies that the arbitration agreement has the capacity to survive the nullity, repudiation, termination, or novation of the key contract.4 The principle of separability did not initially gain significant popularity in some of the national arbitration laws of the western world. For instance, during the development of the common law, arbitration became unpopular in English courts until the enactment of the Arbitration Act in 1889.5 Nonetheless, common law scholars have been reluctant to accept it and have identified it as the doctrine of separability or severability.6 As time elapsed however, the doctrine has gained significant popularity in English law. For instance, a key judgment was made in 1992 by Mr. Justice Steyn of the Commercial Court.7 The judge brought into perspective the doctrine of the ‘separability of the arbitration clause’ in Harben Assoc. v. Kanson Gen. Inse (1992).8 According to Dezalay and Garth, the basic tenet of the doctrine is that it allows international commercial contracts to be referred to arbitration even when it is argued that the entire contract is invalid for one reason or another.9 As pointed out above, the doctrine of separability of the arbitration clause, which is also referred to as autonomy of the arbitration clause,10 stipulates that an arbitration clause contained in a contract is regarded separate from the main contract. Thus as Rosen notes, the arbitration clause and the main contract constitute two distinct sets of contractual relations.11 Therefore, when a dispute arises concerning the initial legitimacy or continued existence of the main contract, the arbitration clause, which is regarded to be independent, continues to be valid and binding on the concerned parties even if the main contract is null.12 In current international arbitration practice, separability is distinguished as a means of providing autonomy to the parties involved in a contract. The widespread acceptance of the practice is fundamentally attributed to several factors such as being identified as the world’s most important institutional arbitration rules, its practically unanimous acceptance in arbitration legislation, its adoption in contemporary decisions of international courts, and its recognition in arbitration case law.13 Noticeably, if the substantive contract is considered to be null, terminated or void, this does not straightforwardly extend to the effect of the relevance of the arbitration clause. This is because in a way similar to the jurisdiction agreement, an arbitration clause bestows authority to the tribunal to determine the state of the main contract and its implications.14 The doctrine of separability does not distuinguish between an arbitration agreement that is found in the main contract and the one which is separate to the main contract, as the arbitration agreement is regarded to be a distinct clause that is not subject to the main contract. Thus, the optimum requirement for a tribunal to determine the validity of the main contract is to have a valid arbitration agreement or clause.15 The concept of separability also offers the efficiency of a single decision-making process which is strengthened by the logical conjecture that the parties involved in the contract did not aim to have the inconvenience of having disputes coming out of their transaction being heard in different jurisdictions. The approach mentioned here was adopted by Allsop J in the ruling regarding Comandate Marine Corp v Pan Australian Shipping Pty Ltd.16 In this case, the judge stated that the doctrine of separability is principally applicable when the parties in the contract originate from diverse nations and legal systems because it offers party autonomy.17 Justification of the doctrine of separability Since the arbitration agreement is separated from the terms of the substantive contract, there is a possibility that it may continue to exist even when for all other purposes the contract itself has come to an end. In addition, the arbitration clause may bring about the separate existence not only when the contract has come to a conclusion (that is after it has been successfully executed) but also when it has been terminated prematurely, due to an unanticipated event such as force majeure (a superior force) or illegality.18 Because the arbitration clause is the framework upon which the arbitration process itself is founded, it is worthwhile that it should have the capacity to exist separately. It is obvious that most claims are brought to arbitration following the end of contract. This implies that it would be incongruous if the arbitration clause was considered to have been terminated along with the contract of which it constituted a part.19 Certainly it at this juncture that it is most required as the alternative method of determining the settlement of the dispute between the parties. Hence, as Savellano opines, the “essence of doctrine is that the validity of the arbitration clause is not dependent upon the main contract and vice versa.”20 Therefore, the invalidity of the substantive contract does not automatically lead to the invalidity of the arbitration agreement. According to Rosen, the doctrine of separability has been justified based on four theoretical grounds, namely: that it conforms to the intentions of the parties, that it extends the integrity of the arbitral process, that there is a legal presupposition of the existence of two agreements, and that courts typically review only the arbitral award, rather than the merits of the dispute.21 Three of these issues are addressed below: Conforming to the intention of the parties The doctrine of separability bases itself on ordinary interpretation of the contract. Even though the parties do not expressly concur that the arbitrators have the authority to investigate and make a ruling on the dispute as regards the validity of the main contract, they have the implied intent of submitting the dispute arising out of or pertaining to the contract.22 Extending the integrity of the arbitral process The doctrine of separability protects the arbitration process from unwarranted judicial intervention and frivolous challenges by a party that is keen on delaying the arbitration process. As Gerese argues, were it not for the separability doctrine, it is obvious that a recalcitrant party to a dispute would delay the arbitration process by challenging the main contract containing the arbitration clause and appealing for the court’s intervention in the process for the purpose of settling the dispute on the legitimacy of the main contract.23 Legal presupposition of the existence of two agreements So far it has been discussed that the separability doctrine creates two separate agreements: the arbitration clause (which is procedural) and the substantive contract. The arbitration clause is procedural because it provides for the mechanism through which a dispute occurring at a later date can be settled. The substantive contract on the other hand refers to the rights and obligations of the parties in regard to the subject matter of the agreement. Thus, a contractual agreement that has an arbitration clause automatically leads to the existence of two separate agreements.24 The doctrine of separability also sheds light as regards ‘who decides’ in the matters relating to a contract. For instance, when parties enter a substantive contract and include in it a broadly worded arbitration clause, a court will treat them as having formed two separate contracts.25 This means that if one party challenges the validity of the details of the contract, a court is required to send the issue to the arbitrators to deal with the arbitration clause as long as nothing in the claim seeks to question the validity of the arbitration clause directly.26 Implications of doctrine of separability in international commercial arbitration As was mentioned above, the wide approval of the doctrine of separability has played an incredible role in the autonomous and efficient operation of the arbitration process by protecting the tribunal from gratuitous intervention by the court as well as challenges lodged in bad faith to thwart the proceeding. To begin with, if a party challenges the validity of the substantive contract containing the arbitration clause, the arbitrators can proceed to rule on the relevance of the main contract without the need to barge in for the sake judicial assistance.27 Because the doctrine of separability stipulates that the arbitrators’ decision to invalidate the substantive contract does not affect the validity of the arbitration agreement, the arbitrators can make a decision on the effects of the invalidity of the underlying contract without jeopardising their jurisdiction and the legitimacy of the award. The second point is that if the matter is before the court because of a motion to oblige arbitration, to stay arbitration or due to a suit in disregard of the arbitration clause, the court should forward the matter to arbitration in spite of a challenge against the substantive contract.28 This is expected to guarantee autonomy as well as proper functioning of the tribunal and effectuate the intent of the parties to submit any dispute arising from or associated with the contract to a neutral or more effective decision making body. Limits of the doctrine Although the separability doctrine promotes the autonomy of the arbitration clause, the arbitration clause cannot be termed as autonomous or independent from the parties’ underlying contract. According to Schwarz and Konrad, the parties cannot be presumed to want to arbitrate without making reference to a specific legal relationship, and in fact, an agreement to arbitrate in the abstract raises issues of validity itself.29 Therefore, if the doctrine of separability is viewed as a function of the substantive validity of the arbitration agreement, its limits become apparent, such that where the parties have not agreed to arbitrate in the first place, and the arbitration agreement itself has never been sensibly formed, the validity of the underling contract becomes immaterial.30 For the reasons given above, there are two qualifications that make the doctrine of separability generally accepted irrespective of the invalidity of the main contract. The first one is a case where the existence of the contract is contested. According to Lew, Mistelis and Kröll, if a question arises whether the parties have indeed ended contract containing an arbitration clause, the jurisdiction of the arbitrator is put in question.31 Additionally, if there is no contract at all, the legal basis of the arbitrator’s powers which are reflected in the arbitration clause found in the contract is ‘also missing.’ The second point is that qualification arises when the attack regarding the contract is not upon the principal agreement but upon the validity of the arbitration clause itself. For instance, one party can question whether the arbitration clause conformed to the requirements for conclusion of a valid arbitration agreement under the appropriate law of the agreement or whether the arbitration clause is characterised by fraud. The two points above thus make it clear that the effect of separability is limited to forestalling the fate of the substantive contract automatically affecting the arbitration agreement. Nevertheless, the agreement may be tainted by the same defects. According to Lew, Mistelis and Kröll, such occurrence is not common in cases involving termination or voidness but it applies in cases where a party alleges that a contract was never concluded or that the parties in the contract were still negotiating.32 The same is always likely to be true of the arbitration agreement. But even in such cases, the doctrine of separability requires that the question whether the parties agreed to the arbitration agreement has to be determined separately from whether the parties agreed on the main contract.33 Further evidence of application of the doctrine of separability in international commercial arbitration Despite its limits, the doctrine of separability has been embedded in most of the modern arbitration laws. As the doctrine relates to the jurisdiction of the arbiter, it is often treated in conjunction with the general power of the arbitrator’s rule on their jurisdiction. Article 2 of the Model Law 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 shall not entail ipso jure the invalidity of the arbitration clause.”34 The same conditions apply not only in other Model Law states but also in other nations that were initially reluctant to fully recognise the doctrine. The concept of separability is also provided for in the arbitration principles of major global institutions. For instance, the International Chamber of Commerce (ICC) Rules provide that “Unless otherwise agreed, the Arbitral Tribunal shall not cease to have jurisdiction by reason of any claim that the contract is null and void or allegation that it is non-existent provided that the Arbitral Tribunal upholds the validity of the arbitration agreement. The Arbitral Tribunal shall continue to determine the respective rights of the parties and to adjudicate upon their claims and pleas even though the contract itself may be non-existent or null and void.”35 Express provisions to the same effect are also found in Article 21(2) of the UNCITRAL Rules36 and this explains why the doctrine of separability has been has been adopted by most countries around the world. The next section presents separate examples showing how the doctrine of separability prevailed in two countries at different times. PIATCO v The Government of the Philippines In PIATCO v The Government of the Philippines, the dispute cropped up from a construction of the third terminal building of the Ninoy Aquino International Airport. The transactions between the parties resulted in the signing of various concession agreements, which included the 1997 concession contract, an amended and reintroduced concession agreement (ARCA). Under section 10.2 of the ARCA, there is an arbitration agreement that provides that all disputes, claims or controversies emanating from or relating to the construction of the project in question shall be determined by arbitration under the Rules of Arbitration of the ICC in Singapore. Yet when the project was almost complete, the Philippines Government informed PIATCO that the award of the project as well as the concession contracts to the latter were null and void. PIATCO responded by filing for arbitration before the ICC. But during the continuance of the arbitration before the tribunal, the Philippines Supreme Court in the case of Agan v PIATCO asserted that the ARCA that contained in the arbitration clause was null and void. Essentially, the Philippines Government wanted to deny the ICC jurisdiction over the case by asserting that the Supreme Court’s nullification of the ARCA expressly nullified the parties’ reference to the ICC arbitration clause contained in that agreement. However, Judge Judith Prakash of the Singapore High Court in a ruling on partial award of the Arbitral Tribunal rejected the argument, invoking the principle of separability or severability. The Singapore High Court maintained that the arbitration agreement survived in spite of the nullification of the substantive contract by the Philippines Supreme Court. Prima Paint Corp 1967 (the United States) It is important to mention that the ruling for this case was made long before the concept of separability was codified into the national arbitration laws of the United States. Further, the ruling was made despite the fact that the New York Convention itself des not mention the separability of arbitration agreements. In the case, the Supreme Court of the United States ruled that maritime contracts or other types of commercial contracts are separated from arbitration clauses as a matter of federal law.37 Thus, the main contract and the worded arbitration clause were treated as two separate agreements. The two cases above highlight the fact that even though the details of a contract can be challenged and even declared null and void, the existence of an arbitration clause in the agreement automatically separates the contract into two agreements, in which arbitration is possible as long as the arbitration clause gives the provisions. Conclusion The doctrine of separability stipulates that an arbitration clause embedded in a contractual agreement separates the agreement into two: the substantive contract and the procedural arbitration clause. The arbitration clause is deemed to be independent such that conclusion of the substantive contract does not automatically lead to an end to the arbitration agreement. This means that arbitration can proceed even after formal termination of the substantive contract. The optimum requirement for a tribunal to determine the validity of the main contract is to have a valid arbitration agreement or clause. The doctrine of separability is widely adopted in many international commercial contracts because that it conforms to the intentions of the parties, it extends the integrity of the arbitral process, it creates a legal presupposition of the existence of two agreements, and because courts typically review only the arbitral award, rather than the merits of the dispute. The doctrine has been adopted by many international institutions and is reflected in Article 2 of the model law, the ICC Rules, Article 21(2) of the UNCITRAL Rules and many other international pieces of legislation. This makes it possible for courts to refer parties in dispute to commercial arbitration even after their contracts have been declared null and avoid, concluded or terminated prematurely. The doctrine thus provides a forum to solve disputes amicably and avoid frivolous attempts by some parties to circumvent issues in contracts. References Barceló, J J, “Who Decides the Arbitrators’ Jurisdiction? Separability and Competence-Competence in Transnational Perspective,” Vanderbilt Journal of Transnational Law, Vol. 36:1115, 2003. Dezalay, Y & Garth, B G, Dealing in Virtue: International Commercial Arbitration and the Construction of a Transnational Legal Order, University of Chicago Press, 1998. Gerese, S E, “Comparative analysis of scope of jurisdiction of arbitrators under the Ethiopian civil code of 1960,” LL Short Thesis, Central European University, March 30, 2009. Lew J D M, Mistelis, L A & Kröll, S, Comparative international commercial arbitration, Kluwer Law International, The Hague, 2003. Rosen, JA “Arbitration Under Private International Law: The Doctrines of Separability and Competence de la Competence,” Fordham International Law Journal, Vol. 17, Issue 3, Article 6, 1993. Savellano, C J R, “Comparative international commercial arbitration,” UST Law Review, Vol. LI, AY, 2006-2007 Schwarz, F T & Konrad, C W, The Vienna rules: A commentary on international arbitration in Austria, Kluwer Law International, The Hague, 2009. Sklenyte, A, “International Arbitration: the Doctrine of Separability and Competence-Competence Principle,” The Aarhus School of Business. Sparka, F, Jurisdiction and Arbitration Clauses in Maritime Transport Documents: A Comparative Analysis, Springer, New York, 2010. Susler, O, “The jurisdiction of the arbitral tribunal: a transnational analysis of the negative effect of competence,” MqJBL (2009) Vol 6, 121. Read More