Assignment 2

Relevance of Arbitration in I ndia

The significant increase in the role of international trade in the
economic development of nations over the last few decades
has been accompanied by a considerable increase in the
number of commercial disputes as well. In India too, rapid
globalization of the economy and the resulting increase in
competition has led to an increase in commercial disputes. At
the same time, however, the rate of industrial growth,
modernization, and improvement of socio economic
circumstances has, in many instances, outpaced the rate of
growth of dispute resolution mechanisms. In many parts of
India, rapid development has meant increased caseloads for
already overburdened courts, further leading to notoriously
slow adjudication of commercial disputes. As a result,
alternative dispute resolution mechanisms, including
arbitration, have become more crucial for businesses
operating in India as well as those doing businesses with
Indian firms.

Doctrine of separability
In most disputes, the validity of the agreement is in question.
For instance, if a party claims non-performance of the
agreement by the other party, the latter will claim that the
agreement is invalid, if possible. However, in order to conduct
arbitration proceedings, the arbitration clause should remain
unaffected by the claim of invalidity. In this context, the
doctrine of separability has been introduced and accepted in
the practice of international commercial arbitration. The
separability of the arbitration clause from the underlying
agreement has been accepted as a principle which allows for
arbitration proceedings related to an agreement whose validity
is put into question.
Consequently, even if the underlying agreement is
pronounced invalid for any reason, the arbitration clause will
remain valid; on the other hand, if the arbitration clause is
invalid, the underlying contract will remain valid and the
dispute arising from the underlying agreement will be
resolved before national courts.
According to the separability principle, the invalidity of the
underlying agreement will not have an impact on the
arbitration clause; likewise, the invalidity of the arbitration
clause will not render the underlying agreement invalid. In
other words, the requirements for validity of the arbitration
agreement may differ from those sought for the validity of the
underlying agreement. For instance, in Turkish law, a
representative may conclude a share purchase agreement on
behalf of the principal and this does not necessitate that the
representative have specific authority to do so. However, the
same representative needs specific authority to conclude an
arbitration agreement on behalf of the same principal. In such
event, the provisions of the share purchase agreement
concluded by the representative will be valid, except for the
arbitration clause, due to lack of specific authority.
Indeed, the arbitration clause and the underlying agreement
are two different agreements despite the fact that both exist
within the same text. While the underlying agreement creates
a relationship of obligation between the parties, the arbitration
agreement solely addresses the settlement of disputes between
the parties.
Due to aforementioned reasons, the principle of separability
establishes that the arbitration agreement and the underlying
agreement have different qualities; the arbitration agreement
is juridical autonomous and shall not be affected when the
main contract is rendered invalid.
Nonetheless, this principle does not necessarily require that
the "fate" of these two agreements is always different. Certain
reasons invalidating the underlying agreement may affect the
validity of the arbitration agreement as well. For instance,
where either or both parties are found to lack the capacity to
have entered into the agreements, both agreements will be
deemed invalid. Similarly, the arbitration agreement will be
assigned to a third party if the underlying agreement is
assigned (provided that the assignee consents to arbitrate).
The effect of the separability of arbitration agreements upon
the choice of applicable law should also be analysed; i.e.
whether the law applicable to the underlying agreement will
be, automatically, different from the law applicable to the
arbitration agreement by reason of its separability. In other
words, is the choice of law applicable to the main contract
also applicable to the arbitration agreement?
This issue is especially important for arbitration clauses.
Choice of law and arbitration clauses are often stipulated in
international agreements; either as part of the same phrase, or
as two paragraphs of the same article, or as consecutive
articles. In such cases, it should be analysed on a case by case
basis whether or not the applicable law stated in the choice of
law clause shall apply to the arbitration agreement or not.
I n I ndia
The Indian Arbitration and Conciliation Act, 1996, being
reproduction of the UNCITRAL Model Law on Arbitration,
contains the doctrine of separability under Section 16. The
Indian courts have frequently relied upon the separability
presumption to reject jurisdictional challenges, but these
decisions cannot properly be considered final, substantive
application of the separability presumption. In National
Agricultural Coop. Mktg. Federation India Ltd. v. Gains
Trading Ltd, the Supreme Court held that an arbitration clause
is a collateral term in the contract, which relates to resolution
of disputes, and not performance. Even if the performance of
the contract comes to an end on account of repudiation,
frustration or breach of contract, the arbitration agreement
would survive for the purpose of resolution of disputes arising
under or in connection with the contract.


Limitations to the applicability of the doctrine of separability

On the basis of the analysis of the doctrine of separability in
the aforementioned jurisdictions, it is quite evident that the
courts in different countries have set forth certain limitations
and conditions under which the doctrine is applied. It is
pertinent to observe that if an agreement contains an
obligation to arbitrate disputes arising under it, but the
agreement is invalid or no longer in force, the obligation to
arbitrate disappears with the agreement of which it is a part. If
the agreement was never entered into at all, its arbitration
clause never came into force. If the agreement was not validly
entered into, then, prima facie, it is invalid as a whole, as must
be all of its parts, including its arbitration clause.

Conclusion

The doctrine of separability is a useful tool to maintain the
sanctity of the institution of arbitration, and the arbitrator
jurisdiction. It has been mainly applied in circumstances
wherein one of the parties has resorted to undue court
interference, merely by alleging certain defaults in the
underlying contract, and thereby frustrating the arbitration
proceedings. The courts have unanimously agreed that unless
expressly or by necessary implication, the parties have
excluded certain disputes from the ambit of arbitration, the
parties intend to resolve the dispute through arbitration, if the
contract contains a specific arbitration clause. In the same
sync, this doctrine has been invoked giving thereby, the
jurisdiction to the arbitrator to adjudicate upon the dispute, on
the basis of the arbitration clause. But at the same time, it
should be carefully borne in mind that it should not be
available in all situations of arbitration clause being part of the
contract.



NAME : ANKIT AGRAWAL
MBA 1 , ROLL NO : 14202151
KIIT School of Management