Essential things to know about Separability of arbitration agreement

Source: Michael Sumaila

Introduction

The doctrine of separability in commercial arbitration is the principle that arbitration clause is not merged with the contractual agreement. Separability principle makes the arbitration clause a stand-alone clause. It is an agreement in its own right in accordance with section 3 of the ADR Act (Act 798).

The doctrine originates from the Habour Assurance case and was later enshrined in the English Arbitration Act of 1996. The practical effect is that the unenforceability of the underlying agreement does not automatically render an arbitration agreement contained in the contract unenforceable. Thus, with no such doctrine, an arbitral tribunal will be prohibited from hearing any dispute which raises an objection to its jurisdiction.

Despite its immense role in the conceptual framework of the law of commercial arbitration (both domestic and international), the idea of separability of arbitration clause is still subjected to considerable misapprehensions.

In light of the above, this article seeks to propose 5(five) essentials things to make clear the understanding of the doctrine of separability in commercial arbitration.

1.0. Public policy

The question arising as to whether or not an arbitration clause or agreement can be separated from a void contract or an enforcement of an arbitral award of a void contract can depend on the nature of the public policy. Section 1 of Act 798 provides the scope of its application. It states as follows: -

This Act applies to matters other than those that relate to
(a) the national or public interest;
(b) the environment;
(c) the enforcement and interpretation of the Constitution; or
(d) any other matter that by law cannot be settled by an alternative dispute
resolution method.

With regard to matters of national or public interest, in arbitration, there is no exception to this rule. In Republic vs Yebbi & Avalifo , the Supreme Court speaking Acquah JSC held that a matter against public interest is inconsistent with the Constitution is illegal and therefore void. Further, in the English case of Beijing Jialong Heavy Industry Group vs Golden Ocean Group Limited & Ors, the court seized the occasion to address the issue of separability of arbitration agreement. It explained that the principle that whether or not arbitration agreement will be annulled depends on the public policy interest rule that invalidates the underlying contract. So, where a contract in which an arbitration agreement is embedded in it is aberrant with public policy, it may be declared null and void.

2.0. However, Supreme Court erred in the Balkan Energy case

Separability of an arbitration clause from the contract is a long-established principle. It is underpinned by article 12(2) of the UNCITRAL Model Law on International Commercial Arbitration. It provides as follows: -

”an arbitration clause which forms part of a contract and which provides for arbitration under the Rules shall be treated as an agreement independent of the other terms of the contract."

Separability principle makes the arbitration clause independent. It is an agreement on its own. Focus cannot be placed on the underlying contract that contains the arbitration agreement to invalidate it.
The Supreme Court of Ghana in Attorney-General vs Balkan Energy LLB held a contrary opinion on separability of an arbitration agreement. The apex court speaking through Date-Bah JSC held as follows: -

An international commercial arbitration is not by itself an autonomous transaction commercial in nature which pertains to or impacts on the wealth and resources of the country. An international commercial arbitration draws its life from the transaction it deals with. We therefore have difficulty in conceiving of it as a transaction separate and independent from the transaction that has generated the dispute it is required to solve.

It is respectfully submitted that the above statement is contrary to statute (Act 798) and the long-established principle in commercial arbitration, therefore, it is urged on the honorable court to seize any available opportunity to depart from it.

3.0. A party is bound to arbitrate if he voluntarily agrees

An arbitration agreement once made cannot be revoked by either party irrespective of the outcome of the main contract. However, both parties have the freedom to revoke the arbitration agreement. In this regard, consent to arbitration is a major factor to separate an arbitration agreement from a contract.

A careful reading of the case of Prima Paint Corp. vs Flood & Conklin Manufacturing Co, Plaintiff entered into a contract with Defendant for a consultancy services. Defendant represented to Plaintiff that it is solvent and capable of undertaking its contractual obligation, meanwhile it was not. So, Plaintiff sought the order of the court to struck out both the contractual agreement and the arbitration clause contained in the agreement. The court held that a person is bound to arbitrate if he has agreed to do so.

In the Ghanaian case of Savanna Pride Limited vs Hanergy Global Solar and Savanna Solar Limited , Kyei Baffour J (as he then was) held as follows: -

I proceed with the analysis that a provision in an agreement that calls for arbitration is separate and independent of the main agreement such that the arbitral clause is severable from the agreement between the parties. See section 3 of Act 798.

From the above dicta, consent is the essential element of arbitration agreement. Further, what constitutes a valid arbitration agreement is when the consent to arbitration is voluntary. Act 798 defines arbitration as voluntary submission of a dispute to one or more impartial persons for a final and binding determination. This refers to an agreement based on knowing and willing. This is a bit different from the concept of agreement in ordinary contract, which is sometimes inferred without knowledge or is involuntary.
In the case of Republic v High Court Commercial Division Accra; Ex Parte GHACEM Limited , the Supreme Court speaking Dotse JSC held as follows: -

As we have already observed in this Ruling, the Parties negotiated and entered into the agreement on their own volition and consent. The ADR Act, indeed, contains very useful provisions all aimed at illustrating the fact that arbitration agreements are voluntary decisions which are entered into by consenting parties or corporate entities.

Here, it can be inferred that the separability of an arbitration agreement can be enforced when there is a valid consent. In addition, the agreement to arbitrate must be in writing.

4.0. Arbitration agreement must be in writing

Arbitration means that the parties authorize a special panel, called arbitral tribunal, instead of the court, in the resolution of disputes. For this reason, in order for arbitration to be in question, the parties must make an arbitration agreement in writing. Section 3(3) of Act 798 provides that: -

An arbitration agreement shall be in writing and may be in the form provided in the Fifth Schedule to this Act.

Therefore, it is not possible to resort to arbitration unless there is a written agreement between parties stating that disputes will be resolved through arbitration. It is further submitted that the most important and indispensable element of the arbitration agreement is that the parties have agreed in writing that the dispute will be resolved through arbitration. In other words, anything contrary to what is in writing cannot be part of the arbitration which is different from the underlying contract that can be enforced whether the agreement is in writing or oral.

5.0. An illegal contract may affect the separation of an arbitration agreement

A void contract is a contract which never existed. On the other hand, a voidable contract is a contract yet to be declared void. A failure to comply with statute may render a contract void or non-existing. The question is whether or not the arbitral tribunal can determine issues of illegality with respect to the arbitration agreement.

In arbitration agreement, the parties willingly chose the arbitrators themselves. When a matter is before the court on a matter of illegality of a contract containing an arbitration, but the illegality does not affect the portion of the arbitration, the court is bound to stay execution and refer the matter to arbitration.
In the case of Savanna Pride Limited (supra), the court further explained as follows: -

That being so most progressive jurisdictions have taken the approach that when there is an allegation of fraud with regard to the main agreement, then the proper forum for determination of the dispute is arbitration. However, if the allegation of fraud is in respect of the arbitral provision such as an allegation that a party never intended to have any arbitral settlement of the dispute and such provision had been inserted on his blind side, then it is the duty of the court to determine such an issue.

In further reference to the remarkable decision of the House of Lords in the case of Premium Na Products Ltd v. Fili Shipping Co. Ltd , His Lordship noted as follows:

“… as long as the arbitration clause is a separate agreement in itself, it is separable from the main contract and a court may refuse reference to an arbitration only unless the allegation of fraud is against the arbitration provision itself.”

Conclusion

The article examined the notion of separability of arbitration agreement within the realm of contracts, bringing further clarity to the doctrine and advocating for the rejection of this antiquated and impractical idea. The article also assessed the significance of taking into account the fundamental issue of separability and the influence of court precedents in deepening the establishment of the concept.