Saturday, August 24, 2013

The Indian Fiona Trust?

In an important judgment, the Bombay High Court has examined in depth the doctrine of separability in the law of arbitration. The judgment and its implications will be analysed in further detail subsequently; for the convenience of readers, however, some important principles laid down are extracted below.

…[A]n arbitration agreement can and does survive a termination, repudiation or frustration of the contract. The law has evolved the doctrine of separability as the basis for enabling parties to arbitrate, independent of the status of their contract. Judges in the common law world – and we in India are no exception – have advanced the doctrine of separability to ensure that the sanctity of arbitration is not destroyed by disingenuous litigants.                                                                                                        

(Para 22)


… [S]ection 45 requires the Court to focus upon whether the arbitration agreement is null and void, inoperative or incapable of being performed. Parliament has carefully, in selecting the language of the statutory provision, required the Court to apply its mind to the subsistence and validity of the arbitration agreement and not to whether the main contract of which the arbitration agreement is but a collateral part is valid or continues to subsist. This must, with the evolution of the law on the subject, necessarily be so because an arbitration agreement is capable of surviving the invalidation or termination of the main contract between the parties. Undoubtedly, there may be cases where the arbitration agreement may perish with the main contract itself. For instance, where the main contract between the parties is held not to have been executed at all as for instance when a party to the agreement asserts that its signature on the contract is forged, it is but evident that the arbitration agreement would not exist, if the signature of the executant on the contract itself is found to be forged. But even in such a case, the reason why the arbitration agreement perishes is because, in the finding of the Court, the arbitration agreement itself is found not to have been executed by both the parties

                                                                                                                                                                                (Para 28)


… [T]he issue as to whether the arbitration agreement survives or perishes along with the main contract would depend upon the nature of the controversy and its effect upon the existence or survival of the contract itself… If the nature of the controversy is such that the main contract would itself be treated as non est in the sense that it never came into existence or was void , the arbitration clause cannot operate, for along with the original contract, the arbitration agreement is also void. Similarly, though the contract was validly executed, parties may put an end to it as if it had never existed and substitute a new contract solely governing their rights and liabilities thereunder. Even in such a case, since the original contract is extinguished or annihilated by another, the arbitration clause forming a part of the contract would perish with it… There may, however, be cases where it is the future performance of the contract that has come to an end. Such an eventuality may arise due to a number of circumstances, in which one or both the parties may be discharged from further performance. Termination of the contract by one party, repudiation of the contract by one party and its acceptance by the other and frustration of the contract are some of the circumstances… In all such cases, the contract is not put an end to for all purposes because there may be rights and obligations which had arisen earlier when it had not come to an end. The contract subsists for those purposes and the arbitration clause would operate for those purposes… The doctrine of separability requires, for the arbitration agreement to be null and void, inoperative or incapable of performance, a direct impeachment of the arbitration agreement and not simply a parasitical impeachment based on a challenge to the validity or enforceability of the main agreement. In other words, arguments for impeaching the arbitration agreement must be based on facts which are specific to the arbitration agreement. There may, of course, be facts which are specific to both the main agreement and the arbitration agreement, but there may well be facts which are specific to the main agreement, but not to the arbitration agreement. In the former case, the arbitration clause would perish with the main contract while in the latter case, it would not…

                                                                                                                                                                                (Para 31)


It is interesting to note that the Court recognizes that “there may be facts which are specific to both the main agreement and the arbitration agreement”, in which case the
arbitration clause would perish…” – only when the case is one which is based on “facts which are specific to the main agreement, but not the arbitration agreement” would the arbitration agreement not “perish”. Lord Hoffmann’s decision in Fiona Trust [2007] UKHL 40 was cited by the Court, where Lord Hoffmann had held:

… [an arbitration agreement] can be void or voidable only on grounds which relate directly to the arbitration agreement. Of course there may be cases in which the ground upon which the main agreement is invalid is identical with the ground upon which the arbitration agreement is invalid. For example, if the main agreement and the arbitration agreement are contained in the same document and one of the partners claims that he never agreed to anything in the document and that his signature was forged, that will be an attack on the validity of the arbitration agreement. But the ground of attack is not that the main agreement was invalid. It is that the signature to the arbitration agreement, is a “distinct agreement”, was forged.

Justice Chandrachud’s judgment for the Court, Mulheim Pipecoatings v. Welspun Fintrade – delivered on 16 August (Coram: DY Chandrachud and SC Gupte JJ) – is now available on the Bombay High Court website, and can be accessed here. We will discuss the issue further in the coming days.

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