The Doctrine of Separability and the Survival of the Arbitration Clause

A contract containing an arbitration clause contains two agreements. The first governs the substantive bargain; the second governs how disputes about that bargain are to be decided. Section 16(1) of the Arbitration and Conciliation Act, 1996 states the point in terms: the clause is to be treated as an agreement independent of the other terms, and a decision that the contract is null and void does not entail ipso jure the invalidity of the clause. Without that separation the doctrine of competence-competence could not work, since every plea that the contract was invalid would take away the tribunal's own authority to decide the plea.

1. The Provision

The provision reproduces Article 16(1) of the UNCITRAL Model Law. Clause (a) states separability and clause (b) states its principal consequence. The two ideas are distinct and should not be run together in an answer: separability is about the independence of the agreement, while competence-competence is about who decides. Separability is what makes competence-competence coherent.

The two agreements, what happens to the clause when the contract is attacked, and who decides

2. Why the Doctrine Exists

1. To prevent self-defeating objections. If the clause fell with every allegation that the contract was void, a party could escape arbitration by the simple expedient of alleging that the contract never bound him, and the tribunal could never reach the question.
2. To match the parties' intention. Parties who agree to arbitrate disputes arising out of a contract plainly intend the agreement to cover disputes about the contract's validity, performance and termination. Those are precisely the disputes most likely to arise.
3. To keep the forum stable. The purpose of the clause is to supply a forum for the wreckage of the contract. A clause that ceased to operate at the moment the contract ended would be useless at the moment of greatest need.

3. What the Clause Survives

The clause survives every event that brings the substantive contract to an end without destroying the agreement to arbitrate itself.

• Termination, whether by notice under the contract or by operation of law. The disputes arising out of the termination are the very disputes the clause was made for.
• Repudiation and breach. An accepted repudiation discharges the parties from further performance of the primary obligations; it does not discharge the machinery for resolving disputes about them.
• Frustration. Where performance becomes impossible, the question whether the contract is frustrated is itself referable under the clause.
• Expiry by efflux of time. A clause covering disputes arising out of or in connection with the contract extends to claims made after the term has ended.
• A plea that the contract is voidable, as for misrepresentation, coercion or undue influence, since the plea goes to the substantive bargain.
• A settlement or accord and satisfaction, where the dispute is whether the settlement was validly arrived at or has been performed; the tribunal decides that question under the clause.

4. What the Clause Does Not Survive

Separability is not immunity. The clause falls where the vice that attacks the contract attacks the agreement to arbitrate as well.

• No consensus at all. Where the parties never reached agreement, there is no contract and no clause.
• Want of capacity. A party who lacked capacity to contract lacked capacity to agree to arbitrate; this is a ground under Section 34(2)(a)(i).
• Forgery or impersonation. Where the signature on the document was forged, or the person signing was not who he purported to be, nothing binds either agreement.
• Fraud going to the agreement itself. Avitel Post Studioz Ltd. v. HSBC PI Holdings (Mauritius) Ltd., (2021) 4 SCC 713 confines this to the case where the arbitration clause itself cannot be said to exist, as distinct from fraud in the performance of the contract.
• Statutory bar. Where a statute makes the subject matter non-arbitrable, no agreement can confer jurisdiction, and the clause has nothing to operate on.

5. Separability and Competence-Competence

Section 16(5) and (6) complete the scheme. Where the tribunal rejects a plea that it lacks jurisdiction, it continues with the proceedings and makes an award, and the aggrieved party's remedy is an application under Section 34 after the award. Where the tribunal accepts the plea and holds that it has no jurisdiction, an appeal lies under Section 37(2)(a). The asymmetry is deliberate: a party who fails on jurisdiction cannot interrupt the arbitration to litigate the point.

6. A Note on the Position before 1996

The doctrine was not unknown before the present Act. In Union of India v. Kishorilal Gupta and Bros., AIR 1959 SC 1362, the Supreme Court examined whether an arbitration clause survived a settlement of the disputes under the contract, and drew a distinction between a contract discharged by breach, where the clause survives for the determination of the consequences, and a contract superseded by a new agreement, where it may not. The 1996 Act placed the doctrine on a statutory footing and made it independent of such distinctions, but the older learning remains useful in explaining why accord and satisfaction raises a question about the clause at all.

7. Related Topics and Provisions