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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Mihir Naniwadekar

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