REVISITING THE DOCTRINE OF SEPARABILITY – DELINEATING THE LIMITATIONS THEREOF – VIPS LAW BLOG
-Ishita Chandra
INTRODUCTION
The doctrine of separability is a well-established legal principle that treats an arbitration clause within a contract as an independent and self-contained agreement, separate from the other terms of the contract. Therefore, an arbitration clause within the main contract is considered severable and functions as a distinct arbitration agreement. This doctrine also supports another well-established legal principles such as Kompetenz-Kompetenz, which allows an arbitral tribunal to determine its own competence or jurisdiction to address the issues presented by the parties. While this doctrine has gained importance in recent times, it also becomes imperative to acknowledge the limitations of this doctrine and analyse the doctrine the light of such limitations.
UNDERSTANDING THE LIMITATIONS OF THE DOCTRINE VIA JUDICIAL PRECEDENTS
In the famous case of Heyman v Darwins, Lord Macmillan observed that in cases where a contract is deemed to have never existed, the agreement to arbitrate within it is likewise null, as the broader concept encompasses the narrower. Viscount Simon LC further noted that if one party asserts the contract’s voidness ab initio (such as – the object for entering into the contract is illegal or contract was entered into when the parties were minor), the arbitration clause is similarly void. This highlights a limitation of the separability doctrine, indicating that if the underlying contract is void from the outset, the arbitration agreement would also lack validity, rendering the separability doctrine ineffective in such instances.
More recently, in DHL Project v Gemini Ocean Shipping ( Newcastle Express case), the English Court of Appeal revisited the separability principle and narrowed its scope. In the Newcastle Express case, the Court of Appeal distinguished between contract formation and contract validity. While the separability principle pertains to contract validity, it does not extend to contract formation. Thus, if a contract containing an arbitration clause fails to materialize, the separability principle cannot sustain the arbitration agreement. Conversely, if a contract is formed but subsequently deemed invalid or deemed voidable at the option of one party (due to factors like mistake, misrepresentation, or duress), the arbitration agreement remains valid. The Court of Appeal emphasized that issues pertaining to contract formation typically invalidate the arbitration clause, whereas issues concerning contract validity do not necessarily do so. Scrutinizing the nature of each dispute is crucial to ascertain whether the main contract’s invalidity also nullifies the arbitration clause. The decisions in Harbour v Kansa and Fiona Trust v Privalov reinforce this differentiation between contract formation and validity.
Similarly, in Singapore, a consistent approach is evident, as exemplified in BCY v BCZ. The Singaporean Courts in BCY v BCZ clarified that the doctrine aims to prevent challenges to the main contract from automatically affecting the arbitration agreement’s validity. However, as noted in Sulamérica, separability does not completely detach the arbitration agreement from the substantive contract. Arbitration clauses are typically negotiated as part of the main contract and seldom negotiated independently. The court acknowledged that while the separability doctrine prevents parties from evading the obligation to arbitrate by simply denying the main contract’s existence, it does not imply that parties intended to enter into an arbitration agreement separate from the main contract. Such arbitration clauses are usually negotiated as integral components of the main contract.
In Toller v Law Accident Insurance Society, it was established that if an arbitrator determines the absence of a contract, he thereby affirms the nonexistence of the arbitration clause, thereby nullifying his jurisdiction. Similarly, in Ismail v. First York Holdings Inc., the Court of Appeal for Ontario concluded that if the main contract is void ab initio, the separability doctrine is inapplicable because the arbitration agreement cannot exist independently of the main contract.
CRITICAL ANALYSIS AND THE WAY FORWARD
A critical analysis of these cases suggests that, although the separability doctrine may appear to resolve all issues related to the validity of an arbitration agreement when the underlying contract is in question, its application is limited. It applies only when the contract’s formation is not disputed, but rather its validity is. The doctrine can be invoked as long as the arbitration agreement itself is not void from the outset or annulled.
Furthermore, the arbitration agreement, as part of the main contract, must meet the validity requirements of the agreement. If the validity of the arbitration agreement itself is in question, the separability doctrine cannot be applied. Establishing the presence of a legitimate arbitration agreement requires meeting two criteria:
1. The agreement should adequately address the dispute at hand.
2. The arbitration agreement must not be directly invalidated by the proposition used to dispute the contract’s validity.
The initial criterion underscores the parties’ liberty to delineate the extent of dispute resolution in their contract, while the second stems from the separability doctrine. The notions of existence and validity are intertwined, implying that an arbitration agreement is non-existent if it breaches legality or fails to adhere to essential legal criteria. A void agreement essentially lacks any binding force.
In the Vidya Drolia v. Durga Trading Corpn., the court distinguished between the mere “existence” and the legality of an arbitration agreement. This distinction is grounded in the clear definition of “existence”. However, it is also plausible, given legal principles and context, to argue that an agreement lacks “existence” if it lacks enforceability and binding authority. Having an arbitration agreement entails having a valid one, which the court can enforce by directing the parties to arbitration.
The term “existence” primarily pertains to the formation of the contract (whether there is an arbitration agreement) and does not touch upon enforceability (validity). A rigid interpretation contradicts the context, including the definition clause, leading to unfavourable outcomes. A rational interpretation of “existence” takes into account context, purpose, and relevant legal principles for a binding arbitration agreement. A written agreement holds no significance if parties cannot be compelled to adhere to its terms. Thus, a party cannot assert rights based on an unenforceable document. Consequently, an arbitration agreement exists only when it is valid and legally enforceable. A null and unenforceable agreement lacks the essential elements. The existence of an arbitration agreement implies that it meets the statutory requirements of both the Arbitration Act and the Contract Act and is enforceable by law.
In the case of palpable illegality (to use the expression adopted by Colman J. in Westacre Investments Inc. v Jugoimport-SPDR Holding Co. Ltd.), a court would declare that there was no arbitrable dispute, or refuse to grant a stay in favour of arbitration, on the ground that an arbitrator could not lawfully enforce the contract. As already indicated, there may be classes of contract — trading with the enemy was cited as a plausible example, and the robbers referring their dispute would be another — where the making of the contract will itself be an illegal act, and where the court would be driven nolens volens to hold that the arbitration clause was itself void.
The court should decline to enforce an arbitration agreement incorporated in a contract which is void ab initio, not for the sake of the defendant, nor for the sake of the plaintiff. The court is concerned to preserve the integrity of its process, and to see that it is not abused. The parties cannot override that concern by private agreement. They cannot by procuring an arbitration, conceal that they, or rather one of them, is seeking to enforce a contract which is void ab initio. Public policy will not allow it.
CONCLUSION
In conclusion, while the doctrine of separability provides that an arbitration agreement within a contract is independent of the other terms, this doctrine has its limitations. Judicial precedents indicate that if the main contract is void ab initio, the arbitration agreement is also invalid, as seen in cases like Heyman v Darwins and the Newcastle Express case. The distinction between contract formation and validity is crucial; the separability principle does not uphold an arbitration agreement if the contract itself was never formed. Additionally, the arbitration agreement must meet validity conditions to be enforceable, as articulated in Vidya Drolia v. Durga Trading Corpn. The courts are tasked with preserving the integrity of their processes and public policy, preventing enforcement of arbitration agreements in contracts void from the outset. Thus, while separability supports arbitration in disputes over contract validity, it cannot salvage arbitration agreements within contracts void ab initio due to want of majority, or other fundamental issues.
The opinion/thoughts/ideas or any view of the author expressed and published on the VIPS Law Blog is not endorsed by the institution and the institution shall not be held responsible or accountable for the opinion expressed by the author on the VIPS Law Blog.
[The author is a third year BALLB student at Dr B.R. Ambedkar National Law University, Sonepat]
