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ARBITRATION AND DOCTRINE OF SEVERABILITY
Introduction
Arbitration is an alternative dispute resolution method based on the consent of the parties for the settlement of disputes arising from international commercial relationships. Thus the parties may resolve a dispute through arbitration if the subject matter is arbitrable.
An arbitration agreement may be in the form of a separate agreement or as a clause in the contract entered between the parties. Generally, almost all arbitration agreements are in the form of arbitration clauses.
Although the arbitration clause is a part of the underlying contract, it is independent of the other clauses in the contract. This is referred to as the "separability of the arbitration clause."
Need for the Doctrine
A party intending to escape its obligation to arbitrate could argue that since the main agreement is not valid, the arbitration clause forming part of the main agreement also becomes invalid.
Acceptance of this argument could lead to the end of arbitration. This means that the parties will have to opt for litigation, which is against the very idea upon which parties agreed to go for arbitration. This doctrine acts as a shield against this argument.
Principle of Severability
According to the separability principle, the invalidation of the underlying agreement will not affect the arbitration clause and similarly, the invalidity of the arbitration clause will not render the underlying agreement invalid. Thus it can be concluded that the requirements for the validity of the arbitration agreement differ from those required for the validity of the underlying main agreement. For example in Turkish law, a representative may conclude a share purchase agreement on behalf of the principal, and the representative does not require the specific authority to do so. But the same representative will need specific authority to conclude an arbitration agreement on behalf of the same principle.
Thus, even if the underlying agreement is pronounced invalid, the arbitration clause will remain valid and on the other hand, if the arbitration clause is invalid, the underlying contract will remain valid. The dispute arising from the underlying agreement will thus be resolved before national courts.
Keeping the above in mind, this principle does not necessarily require that the "fate" of these two agreements is always different. In some cases, certain reasons invalidating the underlying agreement may affect the validity of the arbitration agreement as well. For example, where either or both parties are found to lack the capacity under sec 11 of the Indian Contract Act, 1872 to have entered into the agreements, both agreements will be deemed invalid.
Conclusion
According to the doctrine of severability, the arbitration agreement is accepted as an agreement separate from the underlying agreement. This principle prevents the validity of one agreement from being impacted by the other one. However, the two may be assessed together. Thus, dispute resolution clauses should be drafted with the utmost caution and care.
- Meaning of arbitration
- Meaning of principle of severability
- Need of principle
