The Arbitrator's Use Of The Severability Principle

Key Takeaways

The severability principle protects against the total voiding of a contract or law due to the unconstitutionality of a specific provision. 

Arbitration is treated as a separate agreement that is enforceable and performable without reference to the main contract.

The arbitrator's role in the theory of severability is to determine if a void or unenforceable provision should be severed from the contract while the remaining provisions remain in place.

Severability in arbitration is crucial for preserving the enforceability of valid contract terms while dissolving invalid or unenforceable ones, but it comes with limitations such as jurisdictional restrictions, the absence of a severability clause, the impact on the parties' intentions, and public policy concerns.

Introduction

The goal of the legal doctrine of severability, also known as the "severability clause" or "separability clause," is to keep a contract or statute enforceable even if some of its provisions are found to be invalid or unenforceable. The severability principle states that a court may uphold the entirety of a contract or piece of legislation while invalidating only a portion of it. It protects against the total voiding of a contract or law as a result of the unconstitutionality of a specific provision.

The principle of severability treats the arbitration agreement as a distinct and enforceable contract, separate from the main contract. This allows disputes arising from the main contract to be resolved through arbitration, granting the arbitral tribunal the authority to determine its own jurisdiction. By safeguarding the efficiency of arbitration as an alternative dispute resolution mechanism, this principle enables parties to resolve their disagreements without resorting to traditional court processes.

Provisions of Severability

The Indian Constitution states in Article 13(2) - "to the extent of such disparity be void." For example, if any post-constitutional law violates a fundamental right, the remaining portions of the law will still be regarded as valid once the offending provision has been removed.

These severability clauses are used to protect the remaining valid provisions of a contract, ensuring that other parties are not harmed when dealing with a severability issue. 

• These clauses can be used to ensure that a contract is still enforceable even in the event that legal requirements are not followed. 
• It states that even if a part of a provision is terminated, the remaining provisions will still be in force and provide direction on the parties' rights and obligations. 
• A severability clause may be applied in cases of non-compliance with statutes, unforeseen revisions to the law, or to a breach of contract.

The Arbitration and Conciliation Act, 1996

The domestic arbitration, international commercial arbitration, and the recognition and enforcement of foreign arbitral awards were all covered by this act, which went into effect on January 25th, 1996. In 2015 and 2019, with subsequent amendments aimed at reducing judicial interference in arbitration proceedings.Section 89 of the Code of Civil Procedure states that if both parties agree to it, they may choose to resolve a disagreement through arbitration. The arbitrator's decision must be regarded as a court order, and the parties are required to abide by it.

Disputes related to conjugal rights and matrimonial matters, industries, revenue matters, criminal proceedings, guardianship or wards, testament or will under the Succession Act, Indian Trust Act, trusteeship of charitable institutions, public charity, Restrictive Trade Practices Act and Monopolies, and issues related to Companies Act such as Insolvency, dissolution and winding up proceedings are not arbitrable in India.

Arbitration Law in the US

The provisions outlined in “Sections 1-16” of the Federal Arbitration Act govern arbitration clauses in contracts crossing state lines are recognized in both state and federal courts. Arbitral awards, enjoying protection under US law, are recognized in both state and federal courts, guaranteeing enforceability across the United States under the Federal Act. In a private dispute resolution process, the parties mutually agree to assign the decision-making authority to one or more individuals. The costs associated with arbitration, including the arbitrator's fees, are typically divided equally (50/50) between the parties involved in the arbitration proceedings.

Consensual in nature, arbitration can only be conducted if all parties consent to participate in the ADR procedure. The arbitrators and the neutral location for the arbitration hearing can both be chosen by the parties. Additionally, it operates in a private and confidential way, with the details of each arbitration ruling always being a secret. Due to this, a lot of people choose arbitration over litigation.

Application of the Doctrine in Arbitration

The individual arbitration agreement and the appropriate rules or regulations governing the procedure determine the role of the arbitrator in the theory of severability, taking into account the arguments and supporting documentation put forth by the parties and deciding whether a void or unenforceable provision should be severed from the contract while the remaining provisions are kept in place. Establishing which terms are declared legitimate and enforceable, applying the theory of severability, creating the award, and other key components of the arbitrator's role come under the doctrine of severability.

Penalty clauses, which are contractual terms that impose an excessive and punitive pecuniary consequence for a breach or failure to perform under the contract, are subject to the arbitration doctrine of severability. The arbitrator's job is to determine whether or not the contract's penalty clause should be enforced. 

1)The case of – Reliance Industries Ltd. & Ors. Vs Union of       India (SCC 31/04/2014)

The parties were unable to agree on the nomination of a third arbitrator, so a petition was filed under Section 11(6) of the Arbitration Act. The Supreme Court determined that a severability clause in a contract allows the court to uphold the legality of some clauses while invalidating others. The court also decided that the Respondent Union of India's concern was unfounded and appointed a third arbitrator on its own.

Additionally, Article 16(1) of the 1985 UNCITRAL Model Law on International Commercial Arbitration states that the arbitral tribunal has the authority to decide on its own jurisdiction and settle disputes, including any challenges to the agreement's legality or disagreements resulting from the arbitration agreement. Before sending a dispute to arbitration, judicial authorities are required by Sections 8 and 11 of the 1996 Act to investigate the arbitration agreement's legality. This implies that validity issues can be investigated before the matter is forwarded to arbitration.

2) The landmark judgment of – Buckeye Check Cashing, Inc vs Cardegna (546 US 440 / SC 2006)

The case of Buckeye Check Cashing v. Cardegna focused on the severability of arbitration clauses in contracts. The Supreme Court subsequently ruled that disputes regarding the general legality of the contract should not be handled concurrently with disputes regarding the legality of an arbitration clause. The FAA's severability rule was defined by the Court, and it was reaffirmed that arbitration agreements should be enforced in accordance with their terms even if the entirety of the agreement is contested or ruled to be unenforceable.

Relevant Drawbacks

The doctrine of severability in arbitration has certain limitations, including its potential impact on the parties' intentions and considerations related to public policy.

 It also assumes that provisions within a contract can be separated and enforced independently, but in some cases, provisions may be so closely intertwined that they cannot be easily severed. Jurisdiction-specific limitations may limit or alter the scope of severability. 

The lack of a severability clause may limit the arbitrator's discretion to sever provisions, and the invalidity of one provision could potentially invalidate the entire contract. Many practitioners have failed to implement the severability principle in its intended context. Several delayed dispute resolutions have resulted from the general use of this approach in numerous situations. 

Other significant criticisms of the principle put forth by different practitioners include the fact that it goes against the contractual approach to arbitration law and denies parties access to the courts. 

Conclusion

The principle of severability in arbitration is crucial for maintaining the enforceability of valid contract clauses while severing invalid or unenforceable ones. There are, however, particular constraints to take into account, including jurisdictional limitations, the lack of a severability clause, implications for the parties' initial intentions, and issues with public policy.To ascertain whether the concept can be used in a particular arbitration, arbitrators must carefully examine the relevant contractual articles, applicable legislation, and pertinent case precedents. Applying the concept in a limited setting is crucial for practitioners and judges in order to avoid prolonging the dispute resolution procedure