Ercüment Erdem Att. Fatih Işık

The Separability Of An Arbitration Clause From The Underlying Contrat

July 2013

Introduction

Arbitration is an alternative dispute resolution method based on the consent of the parties, which is often preferred to domestic judicial systems for the settlement of disputes arising from international commercial relationships. A dispute may be brought to arbitration where the parties have voluntarily entered into an arbitration agreement. Thus, as long as the subject matter of the dispute is arbitrable, the parties may decide to settle the dispute through arbitration.

An arbitration agreement may be concluded as a separate agreement, or as a clause within a contract between two parties. Arbitration agreements concluded within a contract are defined as “arbitration clauses”. In practice, almost all arbitration agreements are concluded in the form of arbitration clauses.

Although the arbitration clause is a part of the underlying contract, they are essentially independent from each other. This is referred to as the “separability”, “severability” or “autonomy” of the arbitration clause. This article will focus on this notion, known as the “separability” of the arbitration clause.

Principle 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.

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.

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.

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 juridically 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 analyzed; 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 analyzed 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.

Conclusion

The arbitration agreement is accepted as a distinct agreement, separate from the underlying agreement – a concept defined as the separability principle. This principle prevents the validity of one agreement from being affected by the other one; it effectively establishes the full autonomy of an arbitration agreement and the integrity of the arbitral process. Nonetheless, the two may be assessed together. However, it is important to consider, because of the separability of the arbitration agreement, whether the choice of law stipulated by the parties in the main contract is applicable to the arbitration agreement. Thus, dispute resolution and choice of law clauses should be drafted with the utmost caution and care.