201107.21
Off
0

Enforceability of Arbitration clauses in an unenforceable contract

The doctrine of separability is a principle which recognises an arbitration clause/agreement contained in a main contract as being sovereign from the main contract and as such it is treated as being independent from the main contract. Therefore, the validity of the arbitration clause/agreement is in no way bound or tied to the main contract and vice versa. This principle helps to protect the integrity of the arbitration agreement to arbitrate and ensure that the parties’ intention to submit disputes to the arbitration process is not easily trounced. For instance, the illegality of a main contract would therefore not affect the jurisdiction of an arbitration tribunal/arbitrator that derived its jurisdiction from an arbitration agreement/clause in the main contract. This is because the arbitration clause itself would not be affected by such illegality as it deemed to be detached from the main contract based on the doctrine of separability.

Furthermore, the doctrine of kompetenz kompetenz empowers an arbitrator/tribunal to decide on its own jurisdiction. For example, where there is an issue regarding the jurisdiction of an arbitrator/tribunal to hear a matter, the doctrine of kompetenz kompetenz would grant such an arbitrator/tribunal the power to determine whether or not it indeed has jurisdiction to hear the matter.

In most cases, the court will seek to ascertain the intention of the parties to the arbitration clause/agreement.  The substantive validity of an arbitration agreement is the consent of the parties. Standard terms and conditions, related agreements, usage and practices would all be accepted as evidence of a party’s consent to arbitration. Ambiguity, insolvency, mistake and the lack of arbitrability (whether or not a matter is “arbitrable” or can be referred to arbitration) may however affect the validity of an arbitration agreement.

An effective arbitration agreement should clearly unequivocally demonstrate an agreement to arbitrate, the scope of the arbitration agreement and the finality of the award. It should explicitly disclose the parties express intentions to arbitrate instead of resorting to the national courts. It must also identify the scope of the dispute being subjected to arbitration and broad wordings are recommended to link possible disputes and the contract. Moreover, the agreement should indicate a finality to avoid unnecessary appeals against the award.

Arbitration agreements however may be ineffective where the said agreement cannot be upheld as a result of the arbitration clause referring the dispute to an arbitrator who is deceased or refuses to act. An arbitration clause may be ineffective arising from clerical error wherein the clause refers to an arbitration institution which does not exist or cannot be easily identified. A literal interpretation would rule these clauses as ineffective. However, where the institution referred to can be identified with a significant degree of certainty, such a clause would remain effective. For example, in the ICC Case No. 5103 (1988), it was held that a clause referring to the non-existent            “International Section of the Paris Chambers of Commerce” should be interpreted as a valid reference to the International Chambers of Commerce.

Furthermore, as stated earlier, the intention of the parties to arbitrate carries more weight than form of the arbitration agreement. Therefore, once it can be clearly established that the parties always intended having any dispute resolved through the arbitration process, the mere fact that an arbitration clause is only defective as a result of an arbitration institution being wrongly referred to, the courts would recognise such a clause as effective and uphold the same. This was the position taken by the Hong Kong High Court in Lucky-Goldstar International (H.K.) Limited v. Ng Moo Kee Engineering Limited [1993] 2 Hong Kong Law Reports (HKLR), 73, wherein the parties to the contract had included the following arbitration agreement in their contract: “Any dispute or difference arising out of this contract shall be arbitrated in a 3rd Country, under the rule of a 3rd Country and in accordance with the rules of procedure of the International Commercial Arbitration Association.” The institution named in the clause did not exist and there was an ambiguous reference to the seat of arbitration. This arbitration clause was nevertheless interpreted so as to render the clause effective. A similar decision was held in Laboratories Grossman v. Forest Laboratories 295 New York Supp. 2nd Series 756.

Taking into consideration, the aim of an arbitration clause and the principle surrounding the separability of arbitration agreements, Courts are often in favour of arbitration agreements. However, there are cases where an arbitration clause has not been drafted correctly and the resultant award was overturned. This was the position taken by the Ukraine Supreme Court on October 13 2010 in Аrсеlоrmittal Аmbalaj Сеligі Sanауі ve Тісаrеt Аnоnіm Sіrkеtі v. VKT ARDO LLC. Therefore, it is recommended that while arbitration agreements are indeed recognised as separate and distinct contracts to the main contracts, they have to be drafted correctly with an effective arbitration clause so as to ensure that it is upheld and reduce the possibility of any resultant award being challenged in further litigation, which would invariably negate the whole concept of the arbitration process, especially as arbitrators and arbitration tribunals derive their jurisdiction from the arbitration clause.

Chike Valentine Ezike (FCIArb) of Augustine Clement Solicitors