Competence Justifications on Principle

The Arbitration and Conciliation Act of 1996 [hereinafter the Act] lauds in its preamble the contribution of the Model Law on International Commercial Arbitration adopted by United Nations Commission on International Trade Law (UNCITRAL) in the establishment of a legal framework for the fair and efficient settlement of international commercial disputes. The idea behind a separate dispute resolution mechanism for commercial ventures is premised on the inordinate delays and technicalities that plague judicial processes. International commercial arbitration allows for a separate and independent dispute settlement mechanism that attempts to provide efficiency to the dispute resolution process without compromising on the autonomy of the parties. The arbitration itself is premised on a contractual agreement between the parties concerned to settle possible disputes in such a manner. The parties are free to decide on the arbitrator(s) [1] , the procedure for arbitration [2] and the subjects that may be submitted to the tribunal [3] thus granting parties more freedom than that afforded by judicial processes. The award passed by such a tribunal is then given the status of a decree of a court in order to secure its enforcement; the viability of such a parallel private adjudication system was thus ensured.

One of the key features of an arbitration agreement is its separability from the primary contract when the agreement is in the form of clauses in the main contract between the parties. Separability dictates that the clauses forming the arbitration agreement, if incorporated within the primary contract, are to be considered as being distinct from the latter. Section 16 of the Act provides that the clause that forms the Arbitration agreement shall be treated as independent of the other terms of the contract; this is in consonance with Article 16 of the UNCITRAL Model Law. The Act specifically speaks of such independence in relation to a decision by an arbitration tribunal that the contract containing such clauses is void, where the mere fact of the invalidity of the primary contract is insufficient on its own to void the arbitration agreement. [4] The concept of separability is directly linked to the concept of competence-competence, or the power of an arbitral tribunal to decide upon its own jurisdiction. The autonomy granted to the arbitration clauses helps prevent parties from attempting to delay arbitral proceedings seeking to deny the authority of tribunals created by contract. The effectiveness of arbitration as an alternative dispute mechanism is strengthened by the recognition of such jurisdiction within the act itself.

The doctrine of separability has been subject to criticism on many grounds, intuitive and legalistic. There are many authors that reject the possibility of a legal fiction of a separate agreement being envisioned from an actual document that is rejected as being invalid. On the face of it, the invalidity of the parent entity should lead to the conclusion that any entities drawn from it are also automatically rendered invalid. There have been further objections to the tribunal’s power to rule on its own jurisdiction as this may amount to judging one’s own cause and therefore may be considered a violation of natural justice. [5] However, the separability doctrine has been applied by many countries in their own national arbitration laws [6] and justified on policy and on principle. [7] These include economic justifications such as the cut costs of pleading a case before two separate tribunals, efficiency in the implementation of the Arbitration and Conciliation Act and expeditious disposal of the dispute. [8] These are primarily grounds on policy and do not, on their own, counter the logic of the counters to separability. There are authors who have, however, sought to justify separability as a legal principle. [9] Such justifications serve to create more substantive arguments or the purpose of an academic discussion; policy justifications offer insights to the practicability and application of the rules and regulations.

In this essay, I intend to weigh the counters to the doctrines of separability and competence-competence against their justifications in order to arrive at a conclusion regarding their viability and see whether these are sufficient to explain their increasing acceptance by countries or whether the grounds of policy are necessary in order to ensure their acceptance. The essay shall deal with the counters, the justifications in addition to analysing certain cases that deal with the issue. I shall primarily work on Indian laws and cases, and since the Arbitration Act is based on the UNCITRAL Model Law, I shall use cases from other jurisdictions where similar clauses of separability and competence-competence are in force.

Research Questions

Do the concepts of competence-competence and separability go against contractual law?

Do the counters to these concepts hold sway against them enough to require justifications of policy to re-enforce their validation as applicable doctrines?

I: Critiques and Substantiations

The concept of separability in arbitration is not novel [10] , having been applied by the English courts in the case of Heyman v. Darwins [11] , where the court ruled a presumption in favour of the arbitral tribunal in the absence of specific negations in the contract of the power of the tribunal to decide its own jurisdiction. The linguistic distinction between the clause “matters under the contract” and “matters arising out of contract” was considered and the latter was ruled to be wide enough to include the validity or correct application of the arbitration agreement. Nonetheless, the enactment of laws in various jurisdictions in tandem with the idea of separability provides the epiphany of its general acceptance.

Separability and Competence-Competence are interdependent; the power granted to a tribunal to decide upon its own jurisdiction is automatically mitigated without the separability of the arbitration agreement. Where the primary contract is argued to be non-existent, the power of the arbitrator to rule anything at all becomes suspect without separability in operation protecting the clauses forming the arbitration agreement from such a decision. [12] Similarly, separability calls for the application of competence-competence, [13] is rendered useless without the invocation of competence-competence. A tribunal that does not have the jurisdiction to deal with issues concerning its formation would have no need for separability; the tribunal so created would be stripped of its power to look into the validity of the primary contract as this may amount to deciding its own jurisdiction. Such power would then need to be granted to another judicial authority, thereby competent to deal with the issue of the validity of the primary contract. This would effectively negate the establishment of a completely parallel process to adjudication through arbitration.

The existence of such a power is itself a point of dispute. Allowing a person to be a judge in his own cause constitutes a violation of natural justice; [14] the same could be applied to arbitrators who normally receive fees under the arbitration agreement. While it may be argued that the judiciary at every level is empowered to look into its jurisdiction over the case, arbitration tribunals are not created by the constitution and unlike the judiciary, the tribunal has some interest in the jurisdiction of the tribunal being valid. Section 16 of the Act was challenged as being ultra vires the constitution in Babar Ali v. Union of India [15] , where the court rejected the contention as the parties may seek judicial review of the same subsequent to the award being passed by the tribunal. This was further upheld in the cases of Lexicon Finance v. Union of India [16] and Konkan Railways v. Isco Track Sleepers [17] on those very grounds. Once eventual recourse to the judicial system is granted to prevent gross miscarriages of justice, the legislature is competent to have granted private tribunals such power. Since the assumption is that the parties are free to refrain from such arbitration agreements in the first place, free to choose arbitrators of their choice and to have the arbitration conducted in any manner they deem fit, the parties are free to refuse arbitration agreements as well. This justification also trumps counters to competence-competence based on the lack of legal training as a qualification for arbitrators. Arbitrators are chosen primarily for their understanding of the nuances of the commercial interests at play in the dispute and therefore, need not be competent to decide on technical matters of contractual law. [18] This does not preclude their capacity to render appropriate decisions. In appointing the arbitrators, the parties choose those they believe are capable of making just and fair awards. The entire argument therefore comes down to the freedom of contract available to the parties.

The intention of the parties to enter into an arbitration agreement is also put forward in certain theories [19] as the reason for the presumption in favour of the jurisdiction of the tribunal. The issue of the validity of the contract is often so closely linked to the substantive issues of the dispute that it becomes almost impossible for the arbitral tribunal not to inadvertently touch upon the issue of its own jurisdiction while dealing with the merits of the case before it. It provides therefore a practical aspect and a logical link in the law to the need for separability and competence-competence: the existence of the arbitration clause in the contract is indicative of the parties’ intention to submit disputes to arbitral tribunals; these disputes may require the tribunal to consider the validity of the contract and therefore, in order to cover for this possibility, separability and competence-competence are required. This however, comes under scrutiny in the next criticism to separability- the claim of lack of consent to the primary contract.

Parties claiming lack of consent to the primary contract may claim it on grounds of incapacity on the part of one party to provide consent of any sort as in case of minors, or on circumstances that vitiated free consent to the primary contract, such as fraud. The two have been distinguished as being based on status or conduct [20] – an overt act such as misrepresentation makes it a matter of conduct while the minority of a party makes it the status of the contracting party that comes into question. The argument is that in cases involving incapacity to provide free consent, the separability clause should not operate simply because the consent given to either the arbitration agreement or the primary contract is negated by the very impossibility of the party to provide such consent.

I disagree with this proposition on two counts. First, the distinction between status and conduct as the basis for selectively applying separability cannot hold simply because where the contract has been obtained through overt coercion, the conduct of the parties leads to a lack of consent in the same manner as one of status- that the free consent of the party itself does not exist. Second, merely because the consent of the party is non-existent is no reason to reject separability. The lack of consent will have to be noted by the tribunal or adjudicating body and understood to apply to the arbitration clauses as well in such cases. [21] The separability doctrine will not prevent circumstances that existed at the time of the formation of contract from being considered in ruling on the validity of the arbitration agreement as well. It only bars the application of circumstances that were only relevant to the obtaining of consent for the substantive terms of the contract (that would have in no way affected the parties’ intention to submit disputes to arbitration) from being used by either of the parties in order to avoid arbitration itself. The power to declare the arbitration agreement invalid in the absence of free consent for the same without compromising on the power to retain the validity of the arbitration agreement where the facts merit such is ensured by Separability and justifies its applicability.

The most vehement of arguments against separability and competence-competence, however, is the one based on the maxim ex nihilo nil fit: that nothing can logically come out of nothing. [22] Where the primary contract has been ruled to be void, the clauses forming the contract en masse lose their legitimacy as enforceable contractual clauses. The premise is that separability intuitively fails due to its incompatibility with established contractual norms. However, contractual norms arise out of contractual law, an act of the legislature that is free to repeal the law if it so deems fit. Similarly, the legislature is competent to pass an act that works parallel to the original contract act as long as it does not come into direct conflict with any of the provisions of the first act. The doctrine of separability does not come into conflict with contract law merely because it carves out an exception in the form of a legal fiction that makes certain contractual clauses independent of the container contract. The culling out of an independent set of clauses from the container contract by operation of law creates the legal fiction of a separate contract which cannot by any stretch be referred to as ‘nothing’. It should therefore, be applied as such.

II: Retention of Separability and Competence-Competence

The repudiation of separability and competence-competence has been advocated by many jurists [23] in the field on various grounds including those cited above. To these are added certain policy justifications such as impracticality and inconsistency with the existing contractual principles established through legislation and case law (in common law jurisdictions). While it is true that the established contract law goes contrary to the nature of separability; there is, as mentioned earlier, no reason to negate these on this ground when the two are both laws created by the same competent authority. If an exception to contract law is required in the establishment of a parallel dispute settlement mechanism, the mere fact that it creates an exception is no reason not to create it. The argument becomes tautological in nature and therefore, easily repudiated. The substantive reasons for retaining the doctrines not only negate the arguments against them but also leave no room for the invocation of impracticality and undesirability as reasons for their repudiation.

Furthermore, when the policy grounds are brought in to the arguments, they far outweigh policy arguments against the doctrines. Separability and competence-competence ensure that the dispute settlement mechanism remains a parallel, autonomous and efficient system of handling commercial disputes The arbitration proceedings become singular and are allowed to run with minimal intervention from the courts of law; the parties’ autonomy is not compromised on in securing compliance with other substantive laws. Sufficient review options are in place to ensure that the parties are not faced with irredeemable injustice by the private nature of the tribunal. Separability and Competence-competence are both being increasingly applied in national arbitration laws and have substantial jurisprudence through cases that rule in favour of their application. [24] The exception to contractual jurisprudence has been sufficiently applied and established effectively.

Conclusion

Separability and Competence-competence have been applied systematically in laws on commercial arbitration in various countries. The incorporation of the doctrine in an increasing number of national arbitration laws implies a general acceptance of the logic behind its application. Where the legislatures have, with full knowledge of the circumstances and laws in existence, passed arbitration laws incorporating these doctrines, a general presumption of the law being valid and sound is invoked. Further, the legislature of a state is the most authoritative body to decide on policy matters, including those that justify the enactment of rules. The intention of the legislatures that have adopted these doctrines is clear and in no uncertain terms requires the legal fiction of a separate arbitration agreement to be applied and the dispute decided by the arbitrator accordingly.

The Arbitration Act of 1996 has been enacted in pursuance of the creation of unified arbitration laws through countries in order to create better mechanisms for international commercial dispute settlement. If the matter of jurisdiction, a preliminary objection in most suits, has to be shuttled away from the tribunal created to settle such disputes, it automatically makes the settlement mechanism inefficient and the process burdensome, particularly in the context of international business contracts. Adjudicatory processes ordinarily involve the scrutiny of preliminary grounds failing which the merits of the case cannot be looked into. The same should also logically be the steps followed in arbitration. In conclusion, the justifications on principle alone are sufficient to create the need for retaining the doctrines of separability and competence-competence within the arbitration laws.