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Arbitration Agreement and Doctrine of Separability

Info: 5319 words (21 pages) Essay
Published: 8th Aug 2019

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Jurisdiction / Tag(s): US LawIndian law

Arbitration is a form of alternative dispute resolution (ADR), which is a legal technique settling the disputes outside courts, wherein the parties to a dispute refer it to one or more persons, by whose decision they agree to be bound. The persons to whom the dispute is referred to are called the arbitrator or arbitral tribunal. The basic concept of arbitration is that the parties must repose trust and faith in a person or a committee for deciding and must agree to accept such decision.

Arbitration is a settlement technique in which a third party reviews the case and imposes a decision that is legally binding for both sides. Other forms of ADR include mediation and non-binding resolution by experts. It is more helpful, however, simply to classify arbitration as a form of binding dispute resolution, equivalent to litigation in the courts, and entirely distinct from the other forms of dispute resolution, such as negotiation, mediation, or determinations by experts, which are usually non-binding.

Arbitration is most commonly used for the resolution of commercial disputes, particularly in the context of international commercial transactions. In the recent past and at present Arbitration is the most sought after mode of settling disputes between in view of the increased number of pending cases and the time consuming processes of the courts. The main characteristics of Arbitration are

a) Arbitration is consensual

b) The parties choose the arbitrator(s)

c) Arbitration is neutral

d) Arbitration is a confidential procedure

e) The decision of the arbitral tribunal is final and easy to enforce.

The Indian Government has passed the Arbitration Act, 1940 which was later replaced by the Arbitration and Conciliation Act, 1996.


An Arbitration agreement means an agreement by the parties to submit to arbitration the disputes which may have arisen or which may arise between them in respect of a defined legal relationship, may it be contractual or not.

Section 2 (a) of the Arbitration Act, 1940 (now repealed) defines an arbitration agreement as

“arbitration agreement” means a written agreement to submit present future differences to arbitration, whether an arbitrator is named therein or not. An arbitration agreement according to the 1940 Act should be a written document with the consensus of the parties and reference to a dispute. This definition, after the 1940 Act was repealed,and was replaced by Section 7 in the 1990 Act.

S 7 of Arbitration and conciliation act 1996 deals with Arbitration Agreement

It goes like this,

Arbitration Agreement –

(1) In this Part, arbitration agreement means an agreement by the parties to submit to arbitration all or certain disputes which have arisen or which may arise between them in respect of a defined legal relationship, whether contractual or not.

(2) An arbitration agreement may be in the form of an arbitration clause in a contract or in the form of a separate agreement.

(3) An arbitration agreement shall be in writing.

(4) An arbitration agreement is in writing if it is contained in-

(a) A document signed by the parties;

(b) An exchange of letters, telex, telegrams or other means of telecommunication which provide a record of the agreement; or

(c) An exchange of statements of claim and defence in which the existence of the agreement is alleged by one party and not denied by the other.

(5) There reference in a contract to a document containing an arbitration clause constitutes an arbitration agreement if the contract is in writing and the reference is such as to make that arbitration clause part of the contract.

This section is modelled on UNCITRAL Model Law. In simple words an arbitration agreement is an agreement between the parties to refer their disputes to the arbitral tribunal. To constitute an arbitration agreement, first of all there should be an agreement, that is, ad idem. An arbitration agreement like all other contracts must satisfy all the essential requirements of section 10 of the Indian Contract Act, 1872 i.e., the parties to the arbitration agreement must be competent to enter into a contract and the agreement should be made by the free consent of the parties.

Furthermore, the parties should have the intention of entering into a legally binding obligation. However, if the arbitration agreement does not fulfil the requirements of section 10 of the Indian Contract Act, the arbitration agreement becomes void and any award given to either of the parties will not be enforceable.



S 7 clearly specifies that the Arbitration Agreement should be in writing. This we see in S7 (3), it says that an Arbitration Agreement shall be in writing An oral agreement to submi9t a dispute to Arbitration is not binding .If the Agreement is in writing it will bind, even if some of its details are filed in by oral understanding .The court ruled thus in the case of Banarasi Das v Cane Commr [1] .

Telex and Fax

An agreement by telex has been held to be an agreement in writing. A tacit acceptance of a written quotation which contained an arbitration clause is sufficient to comply with the requirements of an agreement in writing.

Exchange of Letters

In the case of Ganga pollution control unit, U.P. Jal Nigam v Civil Judge [2] , a letter was sent by one party to the other suggesting settlement of disputes, if any, through arbitration. The other party accepted the same. This exchange of letters was held to have constituted an Arbitration agreement.


In Rukminibai v Collector, Jabalpur [3] , the Supreme Court laid down that an arbitration clause is not required to be stated in any particular form .If the intention of the parties to refer the dispute to arbitration can be clearly ascertained from the terms of the agreement, it is immaterial whether or not the expression arbitration or arbitrator has been used. Nor is it necessary that it should be contained in the same contract document. An arbitration clause may be incorporated into an existing contract by specific reference to it.

An Arbitration agreement may be in the form of a separate contract or in the form of a clause in a normal contract. Section 16 (1) of the Arbitration and Conciliation Act, 1996 provides that an arbitration clause which forms part of a contract shall be treated as an agreement independent of the other terms of the contract and that a decision by the arbitral tribunal that the contract in null and void shall not ipso facto entail the invalidity of the arbitration clause. Nevertheless, if a contract is illegal and void, an arbitration clause which is one of the terms thereof is also illegal

The Supreme Court stated the essential elements of an Arbitration agreement to be as follows,

a) The existence of a present possibility or of a future difference.

b) The intention of the parties to settle such difference by a private tribunal.

c) The agreement in writing to be bound by the decision of the tribunal and that the parties must be ad idem.

Nature of disputes

Disputes which can be referred to Arbitration are:

a) Present or future disputes which are,

b) In respect of a defined legal relationship whether contractual or not.

Present or future disputes

All matters of a civil nature with a few exceptions, whether they relate to present or future disputes, may form the subject of reference but not a dispute arising from and founded on an illegal transaction. Though the existence of a dispute is essential to the validity of a reference to arbitration, an arbitration agreement may provide for a present or a future dispute. If the agreement relates to a present dispute it will generally amount to a reference but if it has been entered into merely to provide for any future dispute it is an arbitration clause.

Defined legal relationship

S. 7 (1) of the arbitration and conciliation act, 1996 requires that the disputes must be in respect of a defined legal relationship whether contractual or not. It follows that the dispute must be of a legal nature. Matters of moral or spiritual relations are not fit subjects for arbitration. If a contract is not enforceable for want of legal relationship, the question of arbitration in respect of such a contract would not arise. The word defined would signify the known categories of legal relationships and also upcoming categories. If the matter or transaction is outside the known categories of relation under which legal rights or liabilities are likely to be created, it would not be an arbitrable matter.

Cases of Special Jurisdiction

Where the law has given jurisdiction to determine certain matters to specified tribunals only, such matters cannot be referred to Arbitrations, e.g.:

a) Insolvency proceedings

b) Probate proceedings

c) Suit under s 92 CPC

d) Proceedings for appointment of guardian

e) Matrimonial causes—-except settlement of terms of separation or divorce

f) Industrial disputes

g) Title o immovable property in a foreign country.

h) Claim for recovery of octroy duty


The expressions arbitration agreement and reference have been seperately defined. Explaining the purpose and effect of this scheme the Supreme Court observed ,”the expression ( reference) obviously refers to an actual reference made jointly by the parties after disputes have arisen between them for adjudication to named Arbitrator or Arbitrators, while the expression Arbitration Agreement is wider as it combines two concepts

a) A bare agreement between the parties that disputes arising between them should be decided over or resolved through Arbitration and

b) An actual reference of a particular dispute for adjudication to named Arbitrator. The term Arbitration Agreement covers both the concepts (a) and (b).

If that be so its stands to reason that only when the Arbitration agreement is of the former type, namely, a bare agreement ,a separate reference to arbitration with fresh assent of both the parties will be necessary and in the absence of such consensual reference resort to s 20 will be essential, but where the Arbitration Agreement conforms to the definition given in s 2 (1)b of 1996 act the party desiring arbitration can straight away approach the arbitrator and resort to s 8 of 1996 act, is unnecessary because consent to such actual reference to arbitration shall be deemed to be there as the second concept is included in the agreement signed by the parties. The fact that differences or disputes actually arose subsequently would be inconsequential because the arbitration agreement as defined in s 7 of 1996 act covers not merely present but future differences also.

In the case of Banwari Lal Kotiya v P.C. Aggarwal [4] there was a deal about shares between a stock exchange member and an outsider under which a sum of money had become due to the member. The parties signed the contract-notes on a prescribed form. The transaction was subject to the rules, regulations and bye-laws of the stock exchange, one of which provided for arbitration in such matters. The member appointed his arbitrator the other refuse to reciprocate. In such cases the rules provided for appointment for the Exchange. The latter accordingly appointed one. The other party participated in the proceedings under protest that he had not given his consent and, and therefore, the award would not be binding on him. The Supreme Court came to the conclusion that no fresh consent was necessary on his part. He had consented to the rules and regulations which contained elaborate machinery for submission. No fresh consent was necessary.


Arbitration agreement attributes—among the attributes which must be present, for an agreement to be considered as an arbitration agreement are:—

(i) The arbitration agreement must contemplate that the decision of the Tribunal will be binding on the parties to the agreement.

(ii) That the jurisdiction of the Tribunal to decide the rights of parties must derive either from the consent of the parties or from an order of the Court or from a statute the terms of which make it clear that the process is to be an arbitration,

(iii) The agreement must contemplate that substantive rights of the parties will be determined by the agreed Tribunal.

(iv) That the Tribunal will determine the rights of the parties in an impartial and judicial manner with the Tribunal owing an equal obligation of fairness towards both sides.

(v) That the agreement of the parties to refer their disputes to the decision of the Tribunal must be intended to be enforceable in law and

(vi) The agreement must contemplate that the Tribunal will make a decision upon a dispute which is clearly formulated at the time when a reference is made to the tribunal.

The other factors which are relevant include whether the agreement contemplates that the Tribunal will receive evidence from both sides and hear the contentions or at least give the parties an opportunity to put them forward; whether the working of the agreement is consistent or inconsistent with the view that the process was intended to be an arbitration, and whether the agreement requires the Tribunal to decide the dispute according to law. Therefore, our courts have laid emphasis on

(i) existence of disputes as against intention to avoid future disputes ;

(ii) the Tribunal or Forum so chosen is intended to act judicially after taking into account relevant evidence before it and the submissions made by the parties before it and

(iii) the decision is intended to find the parties.

Thus we can conclude the essential features of Arbitration Agreement From the above discussion, as

a. The parties should have the intention to enter into an arbitration agreement

b. The agreement should comply with all the conditions of a contract as per the Indian Contract Act, 1872.

c. The agreement should in reference to a dispute i.e., it should be for the reference of an existing or a future dispute to an arbitrator or a arbitral tribunal

d. The arbitration agreement should be in written


The “separability doctrine” was articulated comprehensively by the United States Supreme Court in Prima paint Corp v. Flood & Conklin Manufacturing Co. [5] where the Court ruled that arbitration clauses can be ‘separable’ from the contracts in which they are included. The plaintiff in Prima paint Corp brought an action to rescind a contract on the grounds that the contract has been fraudulently induced. The defendant moved to stay the court action, invoking the contract’s arbitration clause and contending that an arbitrator, and not a court, should decide whether the contract was valid. Agreeing with the defendant, the Supreme Court concluded that because the plaintiff was challenging the underlying contract generally rather than the arbitration clauses specifically, arbitration of plaintiff’s fraudulent inducement claims were required. The court was careful to distinguish this from a claim that the arbitration clause itself had been fraudulently induced. The doctrine would not apply in situations where parties claim that they never agreed to arbitrate, or they were fraudulently induced into signing an arbitration agreement.

In the international context, arbitration clauses are generally deemed to be presumptively “separable” or “severable” from the underlying contract within which they are found. The “separability doctrine” is specifically provided for by leading institutional arbitration rules, and by national arbitration legislation or judicial decisions from many jurisdictions, including the United States and India.

The separability doctrine provides that an arbitration agreement, even though included in and related closely to an underlying commercial contract, is a separate and autonomous agreement. According to a leading international arbitral award, “The principle … of the autonomy or the independence of the arbitration clause … has been upheld by several decisions of international case law.” The analytical rationale for the separability doctrine is that the parties’ agreement to arbitrate consists of promises that are distinct and independent from the underlying contract: “the mutual promise to arbitrate form the quid pro quo of one another and constitute a separable and enforceable part of the agreement.”

The separability doctrine is regarded as having important consequences for the arbitral process: “Acceptance of autonomy of the international arbitration clause is a conceptual cornerstone of international arbitration.” Among other things, the separability doctrine is generally understood as implying the continued validity of an arbitration clause (notwithstanding defects in the parties’ underlying contract), and as permitting the application of different substantive laws to the parties’ arbitration agreement and underlying contract.

The UNCITRAL Model Law, the Swiss Law on Private International Law, the English Arbitration Act, 1996, the Indian Arbitration and Conciliation Act, 1996 and the Federal Arbitration Act (“FAA”), as well as provisions from the UNCITRAL, ICC, and LCIA arbitration rules introduce the separability doctrine.

A Soviet arbitral tribunal in All-Union Export-Import Association v. JOC Oil Ltd, by its award dealt rigorously with the separability doctrine and other related issues. Sojuznefteexport (the “Association” or “SNE”) was a foreign trade organization established under the laws of the former Union of Soviet Socialist Republics (“USSR”). In 1976, SNE entered into various agreements to sell quantities of oil to JOC Oil Limited (“JOC”), a Bermuda company. The purchase agreements incorporated SNE’s standard conditions, which contained the following arbitration clause:

“All disputes or differences which may arise out of this contract or in connection with it are to be settled, without recourse to the general Courts of law, in the Commission of the U.S.S.R. Chamber of Commerce and Industry in Moscow [“FTAC”], in conformity with the rules of procedure of the above Commission.”

JOC took delivery of 33 oil shipments (worth approximately $100 million) without paying for them. Following JOC’s non-payment, SNE initiated arbitration under the arbitration clause set forth above. JOC replied, in part, by claiming that the purchase agreement had not been executed by two authorized representatives of SNE and accordingly was void under Soviet law. JOC also alleged that, as a consequence, the arbitral tribunal lacked competence to adjudicate the dispute because the arbitration clause was void. SNE claimed that the sales agreement was not void and that, even if it were, the arbitration clause was separable and the law applicable to that agreement did not require two signatures to be valid.

As a result the arbitral tribunal held that “the Commission has recognized that an arbitration agreement (arbitration clause) is a procedural contract, independent from the material-legal contract and that therefore the question as to the validity or invalidity of this contract does not affect the agreement of the parties about the submission of the existing dispute to the jurisdiction of the FTAC. The Commission has come to the conclusion that the arbitration clause contained in the contract is valid and therefore in accordance with the right assigned to it has recognized itself as competent to hear the dispute as to its essence and to rule upon it. The arbitral tribunal further held that, although the underlying sales contract was void, Soviet principles of restitution applied. Under these principles, the tribunal awarded SNE the value of the oil shipped to JOC Oil, at the then-prevailing international oil prices. It also awarded SNE lost profits realized by JOC Oil (in an amount equal to market interest rates. This produced an award of approximately $200 million in SNE’s favour.

After the arbitral award was made against JOC Oil, Sojuznefte export sought to enforce it in Bermuda. The first instance court denied recognition on various grounds, including that the arbitral tribunal lacked jurisdiction. The court held that “based on the Tribunal’s finding that the underlying contract was invalid ab initio, then under both Soviet and English law there never was any contract between the parties from the very onset as such there never was an arbitration clause or agreement which could be submitted to arbitration.” This judgment was reversed on appeal.

Finally, the U.S. Supreme Court’s decision in Prima Paint Co. v. Conklin Mfg Co., is one of the cases of seminal treatment of the separability doctrine by a national court, Justice FORTAS said “This case presents the question whether the federal court or an arbitrator is to resolve a claim of “fraud in the inducement,” under a contract governed by the Federal Arbitration Act, 1925, where there is no evidence that the contracting parties intended to withhold that issue from arbitration….”. Flood & Conklin Manufacturing Company (“F&C”) entered into a Consulting Agreement with Prima Paint Corporation (“Prima Paint”); at about the same time, Prima Paint also purchased F&C’s paint business. The Consulting Agreement obligated F&C to assist Prima Paint’s exploitation of the paint business, and forbid it from competing with that business.

The agreement contained what the Court termed “a broad arbitration clause,” which provided:

“Any controversy or claim arising out of or relating to this Agreement, or the breach thereof, shall be settled by arbitration in the City of New York, in accordance with the rules then obtaining of the American Arbitration Association …” One week after the Consulting Agreement was executed, F&C filed a bankruptcy petition. Prima Paint thereafter withheld amounts payable under the agreement and notified F&C that it had breached the contract by fraudulently representing that it was solvent. F&C then served a notice of intention to arbitrate. Prima Paint responded by filing suit in federal district court, seeking to rescind the Consulting Agreement on grounds of fraudulent inducement. F&C moved to stay the judicial action pending arbitration.

The District Court granted F&C’s motion to stay the action pending arbitration, holding that a charge of fraud in the inducement of a contract containing an arbitration clause as broad as this one was a question for the arbitrators and not for the court. For this proposition it relied on Robert Lawrence Co. v. Devonshire Fabrics, Inc120. The Court of Appeals for the Second Circuit dismissed Prima Paint’s appeal. It held that the contract in question evidenced a transaction involving interstate commerce; that under the controlling Robert Lawrence Co. decision a claim of fraud in the inducement of the contract generally as opposed to the arbitration clause itself, is for the arbitrators and not for the courts and that this rule of “national substantive law” governs even in the face of a contrary state rule. We agree, albeit for somewhat different reasons, and affirm the decision of the District Court.

The case of Great Offshore Ltd. v. Iranian Offshore Engineering and Construction Company, decided by a single judge bench of the Supreme Court as recently as August 2008, is a very important shot in the arm for arbitration in India. The case involved a dispute between the two parties over the existence of an arbitration agreement. The contentions centred upon a series of mutual exchanges of faxes and letters, at the conclusion of which Great Offshore Ltd. (GOL) sent a Charter Party Agreement (CPA) to Iranian Offshore Engineering and Construction Company (IOE) on 22 August 2005. GOL subsequently contended that a faxed copy of the CPA with its signature was provided to it by IOE on 12 October, whereas IOE alleged that the document was forged.

In the meanwhile, IOE, in an email dated 14 September had stated that the CPA was ready and had even agreed to deliver it to GOL. However, in a subsequent letter on 23 September, it put in certain specific demands as a pre-condition to its signing the CPA. GOL contended that the pre-conditions were not acceptable. And in any event, it alleged that IOE had given its approval to the CPA through the 14 September email. Consequently, it requested IOE to dispatch the signed CPA as soon as possible and honour its commitments. IOE, in response, strongly denied any concluded contract between the parties and contended that the matter had not progressed beyond the negotiation stage. Therefore, on the ground that there was an arbitration agreement, GOL moved the Supreme Court for the appointment of a sole arbitrator under Section 11 of the Arbitration and Conciliation Act. As per its holding in the Patel Engineering Case, the Supreme Court limited its consideration to the judicial determination of the existence of an arbitration agreement. This hinged on the fact whether a valid contractual agreement existed between the parties. GOL raised a number of contentions. First, that the CPA was signed by both the parties.

Second, this fact was not denied in the pleadings. Third, placing reliance on 14 September email, it contended IOE had signed the original CPA. Fourth was that this fact was not initially denied by IOE. IOE, in its counter, contended that the original copy was never sent back to GOL as the matter was pending negotiations. Further, it requested the Court to look at the ‘intent’ of the parties, rather than disputed documents. Thus, it asserted that as most of the material clauses in the contract were left unsettled, there was no ‘meeting of minds’ between the parties. The Court remarked that the matter turned on the question whether the faxed CPA with IOE’s signature was a ‘forged document’. It observed that as CPA appeared to be prima facie valid and IOE could not discharge its burden to prove forgery, the CPA was not forged. Therefore, it concluded that as the document was validly signed contractual agreement, IOE was bound by the same.

It buttressed its conclusions by relying on Section 7 of the Arbitration & Conciliation Act, 1996. Section 7 defines ‘arbitration agreement’. Section 7(3) states that the agreement should be in writing. Section 7(4) (a) states that an arbitration agreement is in writing if it is a document signed by both the parties. Section 7(4) (b) provides that an exchange of letters, telex or other means of telecommunications can amount to an agreement in writing, provided a record of such agreement is contained therein. Relying on these provisions, the Court concluded that there is no requirement of the document containing the contract to be original (in this case, the CPA; a faxed copy of the same was sent back to GOL while IOE had retained the original). It can be a copy of the original.

It also observed that there is no requirement of the document to be signed on every page. Interpreting Section 7(4) (b), it stated that ‘fax’ comes under the purview of ‘other means of telecommunication’ and signature of the parties is sufficient attestation of an agreement on record. Thus, the Supreme Court made light work of the objections raised by IOE on formalities and technicalities of the requirement of an arbitration agreement, and concluded that a valid arbitration clause was in existence.

This case is important mainly for the reason that by giving a wide scope to the language of Section 7, and bringing communication by fax within the ambit of Section 7, the Court has shown itself to be abreast of times, especially with regard to commercial transactions. There is an increasing awareness in the commercial world that transactions are no longer limited to paper and pen, and traditional laws must be evolved to take into accounts disputes that arise out of transactions that take place through electronic media. As recently as 2003, for instance, an advisory opinion has been written that seeks to include electronic media within the scope of the United Nations Convention on Contracts for the International Sale of Goods (CISG). Furthermore, it can also be said that in this judgment the Court has given primacy to substance over form, holding that if, in actuality, an arbitration agreement was concluded, it should not be rejected on mere technicalities. Thus, on both these grounds, the judgment of the Supreme Court can be praised as one that will improve the perception of India as a destination both for commerce, and for the use of arbitration.

The scope of this judgment is limited to arbitration agreements, which may or may not be part of the main contract between the parties, and therefore can be viewed at independent of the requirements to complete a contract under the ICA. Even in situations where the arbitration agreement is part of the main contract between the parties, there is an interesting issue relating to the doctrine of separability. In accordance with the doctrine of separability, the arbitration clause can be treated separate from the main contract and its existence and validity is to be established separately from the main contract. For example, there may be a situation where a standard form contract is being used, that contains the arbitration clause as well. Suppose further that the offeror chooses to revoke his offer with the simple phrase, “I revoke my offer to purchase x from you.” Under the doctrine of separability, while the original offer is certainly revoked, it can be argued that such revocation did not extend to the arbitration agreement as well. Carrying the doctrine of separability to its logical conclusion, the tests of validity of contracts and of arbitration agreements therefore need not be the same. So this judgment is important in upholding one particular way of the formation of arbitration agreements, as opposed to main contracts.

Hence what in effect needs to be done is clarity on the doctrine and its applicability under Indian conditions for a clearer picture of the Indian Arbitration scenario and more particularly the trade and commercial space in India.

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