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Dispute resolution doesn’t always necessitate going to court. Alternative methods like mediation, arbitration, and negotiation offer diverse avenues for conflict resolution, often involving an impartial third party. In commercial contracts, arbitration clauses are particularly common.
Arbitration is a private, alternative dispute resolution method where parties agree to let an independent third party make a binding decision. This agreement can stem from either mutual consent or a court order. Even when arbitration is agreed upon, certain situations—such as a void contract—may lead a party to seek court intervention instead. This is where the doctrine of separability becomes significant.
The Doctrine of Separability asserts that an arbitration clause within a contract is a separate agreement from the main contract. This principle ensures that parties cannot evade arbitration by challenging the validity of the main contract. Thus, even if the main contract is deemed invalid or terminated, the arbitration agreement remains enforceable, compelling the parties to resolve disputes through arbitration.
Instances When the Doctrine of Separability May Be Challenged
While the doctrine of separability typically upholds arbitration agreements, there are instances where its application may be challenged, or the arbitration clause may not survive the contract.
Absence of Binding Contract
In DHL Project v. Gemini Ocean Shipping (the Newcastle Express) [2022] EWCA Civ 1555, the English Court of Appeal considered whether an arbitration agreement was binding when a pre-condition to the contract’s effectiveness was not satisfied. The Court distinguished between disputes concerning contract formation and contract validity. It held that in the absence of a binding agreement, the arbitration clause stood and fell with the main contract. Therefore, no contract existed to arbitrate.
Illegal Contracts or Contracts Against Public Policy
Courts may declare arbitration clauses void if the contract itself is illegal or against public policy. However, this is not always clear-cut, as courts may sometimes decide that an arbitrator is better suited to address the issue of illegality
Challenging the automatic say of proceedings
Parties to an agreement might feel disadvantaged by the potential outcomes of arbitration and prefer to have their disputes settled in court. These situations often arise from a breakdown of trust or confidence between the parties. Faced with an arbitration clause that limits their legal rights or avenues for recovery, a party may feel cornered into a process they believe to be unjust.
Often, arbitration clauses in complex commercial agreements include predetermined choices of arbitrators, a choice of forum indifferent to one party’s situation, or a limitation of liability clause that excludes potential remedies. Faced with an arbitration process they deem invalid or untrustworthy, a party might seek court intervention, initiating a challenging legal battle. However, courts typically uphold the principle that it is not their role to rewrite the parties’ agreement, even if one party feels disadvantaged.
In many jurisdictions, courts have a supervisory role in arbitration. In the UK and other Commonwealth jurisdictions, courts may also resist enforcing arbitration clauses under certain conditions. Before granting a stay of proceedings pending arbitration, courts assess whether the dispute falls within the arbitration clause’s scope and whether the prerequisites for a stay are met.
English courts have recognized that serious allegations of fraud or professional dishonesty may justify refusing a stay of proceedings. In cases such as Radford v. Hare and Turner v. Fenton, courts have ruled that allegations of fraud by the party resisting arbitration can trigger judicial discretion, allowing the case to be heard in open court instead.
Drafting and reviewing arbitration clauses with care is crucial. A clear, enforceable arbitration agreement aligned with the parties’ intentions is vital to avoid potential challenges later on. Legal representatives play a key role in ensuring that arbitration clauses are robust and reflect the parties’ expectations.
Judicial decisions highlight that successfully challenging arbitration depends on the specifics of the dispute and the wording of the arbitration clause or the governing legislation. Despite the complexities, with the right legal strategy and careful contract drafting, it is possible to navigate and challenge arbitration mechanisms effectively.
Immanuel P.O. Williams is an Associate at Glenn D. Godfrey & Co. LLP. You can reach him at immanuel@godfreylaw.bz or visit godfreylaw.net. This article is for general information and not legal advice.