ii

Table of Contents List of cases .................................................................................................................................................. iii

Abstract ........................................................................................................................................................ iv

1.0 Introduction ............................................................................................................................................ 1

2.0 Separability doctrine ............................................................................................................................... 1

3.0 Separability in different jurisdictions ...................................................................................................... 2

3.1 Separability doctrine in France ........................................................................................................... 2

3.2 Separability doctrine in USA ............................................................................................................... 2

3.3 Separability doctrine in Germany ....................................................................................................... 3

3.4 Separability doctrine in England ......................................................................................................... 4

3.5 Separability doctrine in Tanzania ........................................................................................................ 4

4.0 Separability doctrine under international arbitration instruments and model laws ............................. 5

4.1 Separability doctrine under UNCITRAL Arbitration Rules ................................................................... 5

4.2 Separability doctrine under UNCITRAL Model Law ............................................................................ 5

4.3 Separability doctrine under ICC Arbitration Rules .............................................................................. 6

5.0 Separability justifications ........................................................................................................................ 6

6.0 Separability criticism ............................................................................................................................... 7

6.1 Separability, autonomy or severability? ............................................................................................. 7

6.2 Assignment .......................................................................................................................................... 8

6.3 Illegality of the main contract: consequences on the arbitration agreement .................................... 9

Conclusion ................................................................................................................................................... 10

References .................................................................................................................................................. 11

iii

List of cases Bremer Vulkan Schiffbau and Maschinenfabrik V. South India Shipping Corporation Ltd (1981)

A.C 909, 982

Buckeye Check Cashing Inc. v John Cardegna 546 U.S 440 (2006)

Fiona Trust & Holding Corp. v Privalov [2007] UKHL 40G

G.K. Hotels and Resorts (Pty) v. Board of Trustees of the Local Authorities Provident Fund.

Misc Civil Cause No. 1 of 2008

Heyman v. Darwins, Ltd. [1942] App. Cas. 356 (HL)

Overseas Union Insurance Ltd v AA Mutual International Insurance Co Ltd [1988] 2 Lloyd’s

Rep 63, 67

Prima Paint Corp. v. Flood & Conklin Mfg. Co. 388 U.S 395 (1967)

Three Valleys Municipal Water District v. E.F. Hutton & Co. 988 U.S (1991)

iv

Abstract The doctrine of separability is often called the cornerstone of international commercial

arbitration. This doctrine serves to maximize the effectiveness of arbitration as an efficient

means of resolving international commercial disputes and to minimize the temptation and effect

of delay tactics. This principle arises from the autonomous nature of the arbitration agreement,

even when included as a clause within a broader container agreement.1

Separability provides that certain defects in the container agreement do not affect the arbitration

agreement within it, unless those defects relate specifically to the arbitration agreement. This

allows the tribunal to rule in an award on a variety of contract defenses without affecting its

jurisdiction under the arbitration agreement. This paper will shed some light on the positive and

negative implications of the applicability of the separability principle.

1 Graves, J.M and Davydan, Y. (2011), International Arbitration and International Commercial Law: Synergy, Convergence and Evolution. Touro Law Centre

1

1.0 Introduction In recent years, arbitration has become very important to the resolution of commercial disputes.

For reasons detailed immediately below, the increasingly rapid growth in the use of commercial

arbitration is almost certain to continue. Several developments in commercial usage and judicial

administration as well as in the law itself have combined to spur the use of arbitration. A

dramatic increase in the cost and delay inherent in litigation has led to a search for alternatives.

Also, since modern commercial contracts often cannot specify all terms of an agreement, the

parties frequently prefer to rely on arbitration to keep the transaction, which is often part of a

continuing relationship, running smoothly.

In spite of its virtues, arbitration is a vulnerable remedy. Its use depends both on the agreement

of the parties to submit to it, sometimes even the clearest arbitration clauses often were

susceptible to legal attack by signatories who alleged fraud in the inducement of the contract, a

lack of mutuality, the assertion of a frivolous claim in the arbitration, or an unfulfilled condition

precedent to arbitration. So long as repudiating parties were able to lock the arbitration clause

into its container agreement, they could strike down the clause by successfully attacking the

overall transaction. As a dilatory tactic, the mere allegation was sufficient to disturb arbitration.

This paper intends to discuss on the principle of separability which came as a tool of protecting

the arbitration clause from the illegality of the container contract. On doing that the paper will

give positive and negative implications of the doctrine according to how it was perceived in

different jurisdictions and lastly the opinion of the author.

2.0 Separability doctrine The doctrine of separability, or autonomy, of the arbitration clause provides that an arbitration

clause embedded in a contract is considered separate from the main contract. Arbitration clause

and the main contract comprise two separate sets of contractual relations. Where a dispute arises

concerning the initial validity or continued existence of the main contract, the arbitration clause,

2

being independent, continues to be valid and binding on the parties even if the main contract is

void.2

3.0 Separability in different jurisdictions The separability principle had been received with different attitudes in different jurisdictions

especially Europe and United States of America (USA). The provisions of substantive and

procedural arbitration law of the United States, Germany, England and France are found in the

statutory and case law of these countries.

3.1 Separability doctrine in France Arbitration is favored in France and is the most dynamic area of French contract law.

International arbitration is afforded great deference under French law, and France occupies a

prominent position in international arbitration. The highly favorable status of arbitration law in

France reflects a choice by French judges to limit their control over international arbitration, and

reflects the intention of the French Parliament to encourage settlement of disputes in

international trade.3

Article 1447 of the Civil Procedure Code of France expressly affirms the principle of separability

in this core sense. French courts deal with challenges to arbitral jurisdiction in the same way,

regardless of whether they are directed at the main contract or at its arbitration clause in

particular. Allowing courts to determine initially the existence or validity of the agreement to

arbitrate is viewed in France as no less harmful to the autonomy of the arbitration agreement as

allowing courts to determine initially the existence or validity of the main contract. French courts

embrace the doctrine of separability in the way it is most widely understood internationally.4

3.2 Separability doctrine in USA The evolution of international commercial arbitration in the U.S. has been sped up by the

landmark decision Prima Paint Corp. v. Flood & Conklin Mfg. Co.5 in which the doctrine of

separability was recognized for the first time. In that decision was held that “arbitration clauses

2 Rosen, J. A. (1993). Arbitration Under Private International Law: The Doctrines of Separability and Competence dela Competence. Fordham International Law Journal 17 (3) 6 at 11 3 Ibid at p 42 4 Bermann, G. A. (2012). The “Gateway” Problem in International Commercial Arbitration. Yale Journal of International Law 37 (1) at p 26 5 388 U.S 395 (1967)

3

are “separable” form the contract in which they are embedded, and that were no claim is made

that fraud was directed to the arbitration clause itself, a broad arbitration clause will be held to

encompass arbitration of the claim that the contract itself was induced by fraud”.

However, the Prima Paint doctrine was later interpreted in a restricted way. In the decision Three

Valleys Municipal Water District v. E.F. Hutton & Co.6 it was held that the applicability of the

separability doctrine was “limited to challenges seeking to avoid or rescind a contract - not to

challenges going to the very existence of a contract that a party claims never to have agreed to”

“a party who contests the making of a contract containing an arbitration provision cannot be

compelled to arbitrate the threshold issue of the existence of an agreement to arbitrate. Only a

court can make that decision”.

The distinction between void and voidable contracts in relation to the autonomy of the arbitration

agreement was later dismissed by the decision Buckeye Check Cashing Inc. v John Cardegna,7 in

this case, involving the alleged illegality of the main contract, it was held that “unless the

challenge is to the arbitration clause itself, the issue of the contract's validity is considered by the

arbitrator in the first instance”.

3.3 Separability doctrine in Germany German law carves out an important role for national courts in threshold determinations of

arbitral jurisdiction. Under its Kompetenz-Kompetenz model, courts may examine the existence

of a valid and enforceable agreement to arbitrate applicable to the case at hand, not only on the

occasion of a jurisdictional objection to a court proceeding, but also in the immediate aftermath

of a request for arbitration, though prior to constitution of a tribunal. The matters that a German

court may examine on these occasions go by the global name of Zulässigkeit, or “issues of

admissibility.8

In principle, all issues related to the arbitration agreement’s existence, validity, and scope are

matters on which courts may rule under either Section 1032(1) or (2); all other threshold issues

concerning the arbitration are reserved for the arbitrators. To that extent, German law embraces

separability in its second as well as its first sense.

6 988 U.S (1991) 7 546 U.S 440 (2006) 8 Supra note 3 at p 27

4

3.4 Separability doctrine in England Today, the doctrine of separability appears to be favored in England. The holding in Heyman v.

Darwins, Ltd.9 first established the doctrine of separability in England. Darwins, Ltd.

("Darwins"), an English steel manufacturer, appointed Heyman, whose business was based in

New York, as its sole selling agent pursuant to a contract executed in 1938. The contract

contained a broadly-worded arbitration clause providing that any conflicts that arose with respect

to the contract would be settled in arbitration. Heyman brought a court action against Darwins

alleging breach of contract by repudiation. Darwins then moved for a stay of court proceedings,

claiming that the dispute was arbitrable.

The House of Lords held that the arbitration clause was separable from the contract, and

concluded that the arbitrator, not the court, was to decide whether future performance by the

non-breaching party was excused. The breach of contract by one party and the excuse of future

performance by the other fell within a broad arbitration clause providing for disputes arising

under or in respect of or with regard to the contract. Viscount Simon, Lord Chancellor, indicated

in dicta, however, that an issue relating to the existence of the contract and an allegation of initial

illegality were not within the scope of the arbitration agreement. The doctrine of separability has

evolved substantially since the Heyman decision.10

English courts thus favor the separability principle. The Court in Heyman established the

doctrine of separability in England and the doctrine has subsequently been extended to cover

cases concerning the initial validity of the main contract and most recently its initial illegality.

3.5 Separability doctrine in Tanzania In Tanzania the doctrine is still immature as it is not provided in any legislation, and it waited

until 2008 when Werema, J ventured into it in a case concerning the lease agreement which

included an agreement clause in it.11 Persuaded by the decisions of Prima Paint12 and South

Indian Shipping Corp13 cases, he was of the view that; “the arbitration clause in a contract of any

9 [1942] App. Cas. 356 (HL) 10 Supra note 3 at p 36 11 G.K. Hotels and Resorts (Pty) v. Board of Trustees of the Local Authorities Provident Fund. Misc Civil Cause No.1 of 2008 12 Supra 13 Bremer Vulkan Schiffbau and Maschinenfabrik V. South India Shipping Corporation Ltd (1981) A.C 909, 982

5

kind is a separable from the Agreement in which such a clause is in”.14 The words of the learned

judge show the position of the doctrine in Tanzania as in the other jurisdictions we saw above

and international instruments regulating arbitration.

4.0 Separability doctrine under international arbitration instruments

and model laws The separability doctrine has been accommodated in different international arbitration

instruments and model laws. This proves its acceptability in the sphere of international

commercial disputes settlement. It has been covered in UNCITRAL Arbitration Rules,

UNCITRAL Model Law, and ICC Arbitration Rules.

4.1 Separability doctrine under UNCITRAL Arbitration Rules Under Article 21(2) clearly establishes the separability of the arbitration clause from the

constitutive contract by stating in its second sentence: "For the purposes of Article 21, an

arbitration clause which forms part of a contract and which provides for arbitration under these

Rules shall be treated as an agreement independent of the other terms of the contract". The last

sentence of Article 21(2) provides that, “A decision by the arbitral tribunal that the contract is

null and void shall not entail ipso jure the invalidity of the arbitration clause.” It is prudent so to

draft the Rules, since there may be grounds of invalidity of the main contract, such as duress or

undue influence, which may also apply to the arbitration agreement.

The UNCITRAL Arbitration Rules, in Art 21(2), recognizes the separability doctrine to the

maximum possible extent in order to prevent frustration of international commercial arbitration

by simply contesting the validity of the main contract.15

4.2 Separability doctrine under UNCITRAL Model Law While the UNCITRAL Rules were designed to be utilized in international commercial arbitral

proceedings, the UNCITRAL Model Law on International Commercial Arbitration (Model Law)

was developed to address the lack of harmonization between the arbitration laws of different

nations and was intended as a model for the promulgation of a harmonized system of national

arbitration laws. Article 16 of the Model Law explicitly authorizes both separability and

14 Ibid at p 10 15 Sanders, P. (1979). Unification of International Law: UNCITRAL’s First Decade. The American Journal of Comparative Law (27) 2 at p 462-63

6

competence de la competence. One commentator has observed that the Model Law provides a

link between the doctrines of separability and competence de la competence by providing at

Article 16(1), first, that the arbitral tribunal may render a decision on its own competence,

including a decision with respect to questions of the validity or existence of the arbitration

agreement (competence de la competence), and second, that a decision by the arbitrator that the

contract is null and void will not automatically invalidate the arbitration clause (separability).16

4.3 Separability doctrine under ICC Arbitration Rules The ICC Rules explicitly authorize both the separability and competence de la comp6tence

doctrines. ICC Rules provide for a two-step process in addressing jurisdictional questions. Where

a party has raised a jurisdictional challenge to arbitration, the ICC Court of Arbitration (ICC

Court) must first determine the prima facie existence of the arbitration agreement.17 If it is

satisfied, the ICC Court may then decide that arbitration shall proceed and the arbitrator is

thereby granted the competence to determine his own jurisdiction. The ICC Rules further provide

that the arbitrator's jurisdiction will continue even where there is an allegation that the contract is

null and void or nonexistent, and the arbitrator may proceed to adjudicate with respect to both

the parties' rights and the merits of the dispute.18

5.0 Separability justifications The doctrine of separability has been justified on four theoretical grounds: that it conforms to the

parties' intentions, that it furthers the integrity of the arbitral process, that there is a legal

presumption of the existence of two agreements, and that courts usually review only the arbitral

award, not the merits, of the dispute.

The four theoretical bases for the doctrine of separability provide:

16 Rosen, J. A. (1993). Arbitration Under Private International Law: The Doctrines of Separability and Competence de la Competence. Fordham International Law Journal 17 (3) 6 at 18 17 See ICC Rules Article 8 provides that; Should one of the parties raise one or more pleas concerning the existence or validity of the agreement to arbitrate, and should the International Court of Arbitration be satisfied of the prima facie existence of such an agreement, the Court may, without prejudice to the admissibility or merits of the plea or pleas, decide that the arbitration shall proceed. In such a case any decision as to the arbitrator's jurisdiction shall be taken by the arbitrator himself. 18 Ibid at p 19

7

That the parties generally intend any dispute arising out of or relating to an arbitration

agreement to be settled by arbitration. They generally do not intend to exclude disputes

concerning the validity of the container contract, and the parties' intentions are

controlling in arbitration agreements;

The effectiveness of arbitration would be compromised if, by merely alleging the

invalidity of the underlying contract, a party could avoid its contractual obligation;

Two agreements exist as a matter of legal presumption-there are actually two

agreements contained in a contract with an arbitration clause and the arbitral twin ...

survives any birth defect or acquired disability of the principal agreement; and

The courts would be forced to rule upon the merits of a dispute, contrary to the usual

practice (when national law governs an arbitration) of affording judicial review of the

award.

6.0 Separability criticism The problems and difficulties that could arise with reference to the separability principle are

twofold. The first is related to the term used, and the second to some critical flaws in the main

contract that could affect the arbitration clause, e.g. the illegality of the main contract.

6.1 Separability, autonomy or severability? Although many authors make reference to the separability or autonomy of the arbitration

agreement, it has been noticed that this terminology could lead to ambiguities and mistakes that

would be solved using a slightly different word; severability. The reasons to reject the use of the

term “autonomy” derive mainly from the fact that the arbitration agreement cannot actually be

separated from the main contract because “one cannot provide for arbitration in a vacuum”. This

means that the arbitration clause cannot exist without the rest of the agreement, since it

represents only one of its terms, even if its procedural nature makes it clearly different from the

other terms in the agreement, which are commercial in nature.19

One of the most problematic aspects of the “autonomy” concept is that it could entail the idea

that an arbitration clause is a separate agreement and, hence, that there are two separate

19 The Website of Law Teacher Essays, How should one define the Principles of Kompetenz – Kompetenz? Retrieved from www.lawteacher.net/free-law-essays/commercial-law/how-should-one-define-law-essays.php on 25/04/2015 at 8:46 am

8

agreements, one related to the commercial terms and the other to the agreement to arbitrate. If

this were the case, however, that could lead to the conclusion that unless the arbitration clause is

accepted separately, it is not binding.20

Another problematic aspect of the terminology, which will be examined in more detail later, is

that should the arbitration agreement be considered fully autonomous from the contract of which

it forms part of, it could not be transferred along with it. Hence, every time the main agreement

is assigned or there is subrogation, the arbitration clause might not form part of the assignment or

subrogation.21

Clearly, this is not a satisfactory result, and this is the reason why it would be better to speak of

severability rather than separability or autonomy. However, since “autonomy” and “separability”

are expressions much more widely used in doctrine and jurisprudence, they will be utilized in

this analysis, with the caveat that the meaning of these words is to be understood in a way more

similar to that of severability, (Where something is ‘severable’ if it is capable of being divided

into legally independent rights or obligations) rather than something that really is completely

autonomous or separate.22

6.2 Assignment of the main contract: which consequences for the arbitration

agreement?

One of the difficulties that could arise with regard to the application of the separability principle,

and one that could threaten its very applicability, at least on a theoretical level, is related to the

assignment of the main contract. Should the arbitration clause be deemed to be a completely

separate agreement, one could infer that it does not follow from the fate of the main contract

whether the arbitration agreement is assigned. Institutional rules and international conventions

say nothing with regard to this possibility, and the different legal systems do not have a

homogeneous view of the problem.23

In the U.S. the trend is to consider that the assignment of the arbitration clause with the main

contract requires the consent of the parties, and the same is the prevailing view in Italy (in which,

20 Ibid at p 5 21 Ibid 22 Ibid 23 Supra note 16 at p 6

9

unlike other civil law countries, the express consent of the assignee is deemed to be necessary in

order to validly assign the arbitration agreement along with the main contract). The French

approach is probably the most problematic on this point, since on the one hand it holds that the

arbitration clause is completely and fully autonomous and, on the other hand, its circulation (and

therefore its assignment) is closely related to that of the main contract.24

In order to justify and reconcile these conflicting views, the French Cour de Cassation, stated

that “an international arbitration agreement, legally independent of the main contract, circulates

with it regardless of the validity of the assignment of rights under the main contract”. After this

decision, the degree of autonomy of the arbitration clause was at its greatest. The French

Supreme Court reaffirmed not only the autonomy of the existence of the arbitration clause from

the main contract, but also the independence of its circulation.

6.3 Illegality of the main contract: consequences on the arbitration agreement In some countries, difficulties with regard to the autonomy principle have arisen in relation to

some serious flaws of the main contract; namely, its illegality. For a long time it was held that

the arbitral tribunal could never judge the validity of the contract. Wherever the contract was

deemed invalid, so was the arbitration clause. In Overseas Union Insurance Ltd v AA Mutual

International Insurance Co Ltd,25 it was said that this rule "owes as much to logic as it does to

authority".

This was the case which the House of Lords had to face in the 2007 case Fiona Trust & Holding

Corp. v Privalov.26 The case was related to a charter party contract, containing an arbitration

agreement, which was later rescinded for alleged bribery. Their Lordships, following the trend

inaugurated in the Harbour’s case, held that “An arbitration clause that makes reference to “any

dispute arising under this charter” is wide enough to cover any disputes relating to the existence

or legality of the contract” i.e. even disputes related to the illegality of the main agreement.27

24 The Website of Law Teacher Essays, How should one define the Principles of Kompetenz – Kompetenz? Retrieved from www.lawteacher.net/free-law-essays/commercial-law/how-should-one-define-law-essays.php on 25/04/2015 at 8:46 am 25 [1988] 2 Lloyd’s Rep 63, 67 26 [2007] UKHL 40 27 Supra note 21 at p 5

10

However, the House of Lords went on and clarified when an arbitration agreement could be held

invalid: “Of course there may be cases in which the ground upon which the main agreement is

invalid is identical with the ground upon which the arbitration agreement is invalid. For example,

if the main agreement and the arbitration agreement are contained in the same document and one

of the parties’ claims that he never agreed to anything in the document and that his signature was

forged, that will be an attack on the validity of the arbitration agreement. But the ground of

attack is not that the main agreement was invalid. It is that the signature to the arbitration

agreement, as a "distinct agreement", was forged. Similarly, if a party alleges that someone who

purported to sign as agent on his behalf had no authority whatever to conclude any agreement on

his behalf, which is an attack on both the main agreement and the arbitration agreement”

Conclusion This paper critically discussed the applicability of the separability doctrine, in doing so the

author looked into how different jurisdiction in Europe and USA apply the doctrine. Also how

the doctrine has been incorporated into the international arbitration instruments. Under the

separability doctrine, the arbitration clause is severed so that a question of the main contract's

validity or existence may be brought to arbitration. The separability doctrine, which espouses the

autonomy of the arbitration agreement, creates a need for the arbitral tribunal to have the

jurisdictional competence to rule not only on the main contract's validity but on the validity of

the arbitration agreement. Under this analysis, the competence of the arbitral tribunal to rule on

jurisdictional challenges is a corollary to the doctrine of separability establishing the autonomous

nature of the arbitration agreement.

11

References Journal Articles

Bermann, G. A. (2012). The “Gateway” Problem in International Commercial Arbitration. Yale

Journal of International Law 37 (1)

Graves, J.M and Davydan, Y. (2011), International Arbitration and International Commercial

Law: Synergy, Convergence and Evolution. Touro Law Centre

Rosen, J. A. (1993). Arbitration Under Private International Law: The Doctrines of Separability

and Competence dela Competence. Fordham International Law Journal 17 (3) 6

Sanders, P. (1979). Unification of International Law: UNCITRAL’s First Decade. The American

Journal of Comparative Law (27) 2

Other Sources

The Website of Law Teacher Essays, How should one define the Principles of Kompetenz – Kompetenz?

Retrieved from www.lawteacher.net/free-law-essays/commercial-law/how-should-one-define-law-

essays.php on 25/04/2015 at 8:46 am

Legal Instruments

The UNCITRAL Arbitration Rules 1976 as revised in 2010

The UNCITRAL Model Law on International Commercial Arbitration 1985

The ICC Arbitration Rules 1998