Doctrine Of Separability And Its Multi-Faceted Approach

In the realm of arbitration, there may come a situation when the main contract become invalid, consequently, resulting in the invalidity of the arbitration clause which was embedded in the main contract itself. If such argument would be accepted it will lead to the frustration of the arbitration proceedings. Therefore, to prevent this from happening, the doctrine of separability acts a shield against this argument.

The doctrine of separability, also known as the separability doctrine, is a fundamental concept in arbitration. It refers to the idea that an arbitration clause in a contract is considered to be a separate and distinct agreement from the main underlying contract in which it is embedded.

In practical terms, this means that even if one party challenges the validity or performance of the main contract, the arbitration clause itself remains valid and enforceable. Any invalidity of the main contract will not oust the jurisdiction of the arbitrator, derived from the arbitration clause.

It is important to delve a step further to examine its multifaceted approach by understanding the applicability of this doctrine to the contract, governing law of arbitration agreement and arbitral award.

Shielding the Arbitration Agreement in Case of Invalidity of Main Contract.

The doctrine of separability in arbitration refers to the principle that an arbitration clause is considered independent of the main contract in which it is embedded. This doctrine has evolved through various landmark judgments in India, establishing the independence of arbitration clause even in cases where the underlying contract is rendered invalid.

This doctrine was evolved in the landmark case of Heyman v. Darwins^[1], the House of Lords established the doctrine of separability, which was supported by Lord Macmillan. He emphasized that the nature as well as functions of an arbitration clause in a contract are distinct from other clauses of the contract. While other clauses outline the obligations between the parties, the arbitration clause does not create an obligation in favour of one party over the other. Instead, it represents the mutual agreement of both parties that any disputes arising from the contract's obligations will be resolved by an independent tribunal.

One of the landmark cases that evolved this doctrine in India was the National Agricultural Coop. Marketing Federation India Ltd. v. Gains Trading Ltd.^[2], wherein, the court recognized that an arbitration clause embedded in a contract is a separate agreement and would survive even if the performance of the main contract is terminated. This position is now statutorily recognized under Section 16 of the Arbitration and Conciliation Act 1996 (A&C Act).

Similarly, in Today Homes & Infrastructure (P) Ltd. v. Ludhiana Improvement Trust^[3], it was held that an arbitration clause remains valid even if the main contract is void.^[4]

The principle of autonomy and separability of arbitration agreements is widely endorsed by various arbitral institutions. The UNCITRAL Model Law, a key reference point for many arbitration systems, expressly incorporates the principle of separability in Article 16(1). Consistent with the UNCITRAL Model Law, the UNCITRAL Rules, particularly Article 23(1), also recognize the separability of arbitration clauses. It grants the arbitration agreement its own identity, allowing it to function autonomously from the rest of the contractual provisions.

Various arbitral institutions have adopted and adapted the UNCITRAL Rules, further solidifying the principle of separability. For example, both the Asia Pacific Centre for Arbitration and Mediation^[5] (APCAM) and the Indian Institute of Arbitration and Mediation^[6] (IIAM) have embraced the UNCITRAL Rules with certain modifications to recognize and uphold the separability doctrine.

Other notable institutions also promote the separability presumption, like London Court of International Arbitration (LCIA) Rules^[7], Singapore International Arbitration Centre (SIAC) Rules^[8], Hong Kong International Arbitration Centre (HKIAC) Rules^[9] and Dubai International Arbitration Centre (DIAC) Rules^[10], by emphasizing the independence of AAs from the main contract.

However, an exception to this doctrine was established in India Household and Healthcare v. LG Household and Healthcare^[11], wherein it was held that when allegations of fraud are raised, a different approach can be taken with respect to applying the doctrine of separability and upholding the arbitration clause. Fraud has the power to invalidate even the most solemn agreements. Therefore, an arbitration agreement is enforceable in law only when it is not tainted by fraud. Similarly, there have been instances where the courts have declined to invoke the separability doctrine where the object/purpose of forming the contract itself was illegal.^[12]

Moving a step further, the doctrine of separability is often used as an instrument to determine the governing law of an arbitration agreement. There have been some jurisdictions that advocate for the doctrine of separability to be applied while determining law of arbitration agreement, however, some hold a contrary view.

Applying doctrine of Separability to determine law of Arbitration Agreement

The ‘doctrine of separability’ is one of the foremost pillars of arbitration.^[13] Under the umbrella of doctrine of separability, the governing law of arbitration agreement may be determined by separating it from substantive law of the main contract.^[14] Thus, various clauses in a contract may be governed by different laws, even when all the clauses in a contract come under the same umbrella.

The genesis of determining the governing law of an arbitration agreement is derived from the separability doctrine by giving it a wider scope to engulf this question of determination as well. This results in the presumptive separability of the arbitration agreement from the underlying main contract for all purposes, including the determination of its governing law.^[15]

The separability doctrine does not draw a conclusion that the governing law is always separate from the substantive law of the underlying contract. However, the doctrine enunciates that there may be a situation where two different laws govern the arbitration agreement and the contract.

Even though the arbitration agreement forms part of the same contract, it maintains a distinct and separate identity when it comes to determining its governing law.^[16] The separability doctrine has a closely knit relation to the issue of determining law of arbitration agreement.^[17]

By making the arbitration agreement separate from the main contract by using the separability doctrine, some jurisdictions have arrived at the conclusion that the law of seat should extend to the governing law of the arbitration agreement.^[18] This means that the system of laws at the seat of arbitration will extend to govern the arbitration agreement as well. This makes the ecosystem of arbitration to be governed by a separate set of law of together, i.e. the law of the seat.

However, there stands a contrary view^[19] that that the scope of purpose of the separability doctrine is a restricted to shielding the arbitration clause from in case of invalidity of main contract.^[20] Moreover, when the contract's underlying law is stated, it presumptively extends to the parties' arbitration agreement^[21] because an arbitration clause is merely one of several provisions in a contract and should be governed by the law of the main contract itself,^[22] thus, excluding the applicability of separability doctrine.

Securing the Arbitral Award under the umbrella of Separability Doctrine

The concept of severability in arbitration refers to the ability of a court to partially set aside an arbitral award while upholding the remainder of the award. In other words, if there are multiple claims in a dispute decided by an arbitrator, each claim may stand separate and distinct from the others, and the court can cast aside only limited part of the award that is affected by an infirmity. This allows for a more flexible and efficient approach to resolving disputes, rather than requiring the entire award to be set aside and the arbitration process to start from scratch.

If an arbitrator issues an award that includes several different claims, and one of those claims is found to be invalid or unenforceable, the court may apply the doctrine of severability and set aside that claim without affecting the rest of the award. The remaining claims can still be enforced and the parties can still be bound by the terms of the award.

The A&C Act provides for the grounds on which an arbitral award can be challenged in court under Section 34 of the A&C Act. The language of Section 34 does not explicitly preclude the court from partially setting aside an award, and courts have generally recognized the principle of severability in their judgments.

In the case of Union of India v. Alcon Builders and Engineers Pvt. Ltd.^[23], the Delhi High Court partially set aside an arbitral award based on the principle of separability and held that, the award was capable of being partly set aside solely on the aspect of pendente-lite interests and costs, and such partial setting aside of the award would not amount to modification. The Court noted that this approach was in line with the overarching principle of minimal judicial interference contemplated under the A&C Act. The Court placed reliance on Supreme Court’s ratio in JG Engineers Pvt. Ltd. v. Union of India^[24] where the Division Bench made observation that “the court will segregate the award on items which (do) not suffer from any infirmity and uphold the award to that extent.…”

Similarly, in National Highways Authority of India v. The Additional Commissioner^[25], the Bombay High Court considered whether the court is mandatorily required to wholly set aside the award even when convinced that the error has been committed only on specific issues, barring which the award would stand sustainable. The Court held that it was not mandatory to wholly set aside the award and distinguished the ratio in NHAI v. M Hakeem^[26] stating that the precedent was not directly relevant to the issue of whether an award can be set aside partly. The Court relied on the ratio of the Full Bench of Bombay High Court rendered in RS Jiwani v. Ircon International Ltd.^[27] which squarely dealt with the application of the doctrine of separability to an arbitral award and observed that if a partial challenge to the arbitral award is permissible under law, then the partial setting aside of an award should also be considered.

There may come a situation where one of the parties, would be in consonance with the major part of the award but would still be inclined to challenge a limited part of such award. In such cases, the court may deal with the award pursuant to section 34(1)(2) of the A&C Act.

In certain cases, the arbitrator may grant multiple claims in favour of the claimant, with one of them being time-barred while the others are within the limitation. While reviewing the challenge to such an award, the court may separate the time-barred claim from the other valid claims. Thus, insisting that the court is obligated to invalidate the entire award and restart the arbitration process would be redundant and against the interest of justice.

The principle of seperability is a part of the Indian arbitration regime and have applied it in various cases. The courts have held that the principle of severability is in line with the scheme and the objects sought to be achieved by the A&C Act of 1996.

Besides the conundrum of judicial precedents, it is important to peruse the language of section 34, a bare reading of which does not admit of any limitation to divest the Court of the power to ‘partially set aside’ an award on claims which are separate and distinct from each other. The court in doing so is neither correcting nor amending the findings on merits of the case, hence the question of ‘modification’ – even in its widest connotation does not arise.

The A&C Act's scheme does not seem to align with the idea of completely setting aside the award and requiring a successful party to repeat the entire arbitral process. Section 34 of the A&C Act is very similar to Article 34 of the Model Law. Both the Model Law and Indian Law aim to limit the court's jurisdiction to set aside an award. There is nothing in the A&C Act or the Model Law that prohibits the court from applying the principle of severability, as long as it is appropriate in the specific circumstances and in accordance with the law.^[28]

If each time an arbitral award is found partially inconsistent, and the solution is to invalidate the entire award, parties would face multiple rounds of litigation which contradicts the purpose of alternative dispute resolution mechanisms. Parties would be compelled to undergo numerous proceedings before the arbitrator, causing undue burden and hindering the efficient resolution of disputes. ^[29]

It is worth noting, however, that the doctrine of severability is not absolute, and there may be situations where the invalidity of one part or claim may affect the entire award. Cases where the invalid claim is so closely linked to the other claims that it is impossible to sever it without undermining the entire award, the court may be required to set aside the entire award.

Even though the primary role of separability doctrine is to safeguard the arbitration clause from an invalid contract, it cannot be the only function of it. The authors believe that the applicability of this doctrine should be taken in the widest connotation, and should be made applicable wherever necessary to secure the ends of justice.

The authors advocate for a flexible and expansive interpretation of the separability doctrine. They argue that its application should not be restricted solely to protecting the arbitration clause but should be employed wherever it can contribute to the fair and just resolution of disputes. This broader approach aligns with the fundamental goals of arbitration – providing an efficient, neutral, and effective means of resolving conflicts while safeguarding the interests of all parties involved.

The article has been authored by Ms. Iram Majid (Director, IIAM & Executive Director APCAM) and Mr. Mohd Suboor. Viiews are personal.