Revisiting The Doctrine Of Separability

What is the Doctrine of Separability?

1. The doctrine of separability is a well-established legal doctrine that treats an arbitration clause in a contract as a separate self-contained agreement, independent of the other terms of the contract. In Singapore, the doctrine of separability is statutorily enshrined in both the International Arbitration Act 1994 (incorporating the UNCITRAL Model Law on International Commercial Arbitration) and the Arbitration Act 2001.
2. The doctrine of separability facilitates another well-established legal doctrine of Kompetenz-Kompetenz, i.e., that an arbitral tribunal has the power to hear arguments and decide the extent of its competence or jurisdiction to hear the issues that have been put in front of it by the parties.
3. Thus, an arbitration clause contained in the main contract is severable (as a separate arbitration agreement) and has a life of its own. If appropriately worded, it confers jurisdiction on an arbitral tribunal to rule that the underlying contract is void ab initio, and decide the consequences of the contract’s invalidity and unenforceability.

Limits to the Doctrine of Separability

4. The doctrine of separability does not guarantee the survival of an arbitration agreement in the face of attacks against the main contract. It is necessary to consider whether a challenge to the validity of the main contract is also an attack on the arbitration agreement. This is ultimately a question of fact and law.
5. For example, a challenge against the main contract on the ground that the terms in the main contract remained to be agreed would not necessarily undermine the arbitration agreement for purposes of obtaining a stay of court proceedings in favour of arbitration (see the unreported case of Brunel International South East Asia Pte Ltd v Kraig Edward Fogle in HC/RAS 34/2020). But an arbitral tribunal and/or the supervisory court could come to the view that as the agreement was subject to contract and never entered into, this also means that the arbitration agreement is ineffectual as the parties never agreed to arbitrate their dispute (see for e.g.. BCY v BCZ [2017] 3 SLR 357; [2016] SGHC 249).
6. Similarly, the doctrine of separability would not shield the arbitration clause from a challenge that the main contract was invalid for lack of authority or was procured by forgery.
7. A timely reminder of this limitation was provided in the relatively recent Singapore Court of Appeal decision of Founder Group (Hong Kong) Ltd (in liquidation) v Singapore JHC Co Pte Ltd [2023] 2 SLR 554, albeit in the context of a challenge to a winding up application.
8. The brief facts are:

1. The liquidators of the appellant company (“FGHK”) had discovered that a sum of more than USD 47 million was due and owing from the respondent (“JHC”).
2. The liquidators of FGHK then sought the winding up of JHC after JHC failed to satisfy a statutory demand for the alleged debt.
3.  JHC resisted the winding up application on the basis that the alleged debt was not due and payable, amongst other things. In particular, JHC argued that the underlying contracts from which the alleged debt arose were null and void under their governing law (Chinese law). This was alleged to be because the payment obligation was never intended to be enforced. In other words, the contracts were sham transactions.
4. But JHC further argued that the dispute over JHC’s liability fell within the scope of the arbitration agreements contained in the underlying contracts.

9. As the case involved a winding up application against JHC by reason of an unpaid debt, and which debt JHC disputed, the appropriate test to be applied was the test set out in AnAn Group (Singapore) Pte Ltd v VTB Bank (Public Joint Stock Co) [2020] 1 SLR 1158 (“AnAn”). In AnAn, the Singapore Court of Appeal held that in a winding up application premised on a debt subject to arbitration the creditor would not have the standing to bring the application if:

1. There was an arbitration agreement between the parties that appeared prima facie to be valid;
2. The dispute raised by the respondent company appeared prima facie to fall within the scope of the arbitration agreement; and
3. The respondent company was not abusing the court’s process by raising the dispute. (collectively, the “AnAn requirements”)

10. On the facts, the Singapore Court of Appeal held that it would be an abuse of process (and thereby offend the third limb of the AnAn requirements) by JHC, on the one hand arguing that the contracts were null and void, and on the other hand seeking to rely on the arbitration clause contained within them.
11. In this regard the Singapore Court of Appeal gave short shrift to JHC’s argument raised in the hearing of the appeal that the arbitration agreements remained intact because it was only the payment obligation that was not meant to be enforced. The Singapore Court of Appeal held that JHC did not make such a distinction at first instance, and that:

“JHC could not and did not offer an[y] explanation as to how the arbitration agreements nevertheless survived on its case, nor did it set out the circumstances under which the [c]ontracts were entered into, from which it might be inferred that the parties had intended to be bound by the arbitration agreements but not by the payment obligation”.

12. Indeed, the Singapore Court of Appeal noted that JHC did not even explain why it claimed that the contracts were not meant to be enforced, or why the contracts were entered into at all. The Singapore Court of Appeal further rejected JHC’s position that the debt had not been enforced for several years, as the fact that payment is not sought for a time does not mean that the sum in question is not intended to be payable at all.
13. It therefore followed that FGHK had standing as a creditor to bring the winding up application, and since JHC did not challenge the trial judge’s finding that JHC was unable to pay its debts based on its audited accounts, the Singapore Court of Appeal ordered JHC to be wound up.
14. Interestingly, the Singapore Court of Appeal suggested that the result may have been different if FGHK had commenced arbitration proceedings in respect of the debt and JHC had sought to avoid the arbitration by making the same allegations. However, since it was strictly unnecessary for the Singapore Court of Appeal to determine the limits of the doctrine of separability, the Singapore Court of Appeal declined to opine further.

Non-payment of Stamp Duty

15. In some jurisdictions, stamp duty is exigible on contracts. What happens if both parties agree that the main contract (including the arbitration agreement contained within) had been validly entered into, but one party seeks to resist arbitration/ enforcement on the basis that the contract had not been stamped?
16. Under the Indian Stamp Act of 1899, stamp duty must be paid to the Indian government on all contracts. It was on this basis that the Indian Supreme Court (by majority of 3:2) held in N N Global Mercantile (P) Ltd. v. Indo Unique Flame Ltd (2023) 7 SCC 1 (“NN Global”) that an unstamped or insufficiently stamped arbitration agreement was unenforceable.
17. However, in December 2023, a seven-judge bench of the Indian Supreme Court, in Re Interplay between arbitration agreements under the Arbitration and Conciliation Act, 1996 (Act) and the Indian Stamp Act, 1899 (Stamp Act) 2023 INSC 1066 (“Re Interplay”), overturned NN Global.
18. In Re Interplay, the Indian Supreme Court held that the Indian Stamp Act is only concerned with the admissibility of a document into evidence – the Indian Stamp Act does not render an unstamped contract void or unenforceable. The Indian Supreme Court was also fortified by the fact that the Indian Stamp Act itself contemplates that the non-stamping (or inadequate stamping) of a document is a defect which may be cured.
19. However, the Indian Supreme Court was also quick to point out that its decision on this issue does not mean that the non-stamping or inadequate stamping of a contract is irrelevant as the “arbitral tribunal continues to be bound by the provisions of the Stamp Act, including those relating to its impounding and admissibility”.
20. The decision in Re Interplay therefore gives effect to both the principle of minimal judicial intervention (propounded in the Indian Arbitration Act) and the principle of Kompetenz-Kompetenz. However, it remains for the arbitral tribunal to determine whether and how an arbitration pursuant to an unstamped contract should proceed. For example, would an ongoing arbitration be allowed to progress if (only) the arbitration agreement is subsequently stamped? Industry commentators suggest that it may be so. But given the confidential nature of arbitral awards, it may be some time before an established practice comes to light – and perhaps even longer before the courts opine on whether that practice is correct.

Conclusion

21. Practitioners and commercial parties would be well reminded that satellite litigation on jurisdiction is not uncommon in arbitration, either as part of a broader root-and-branch strategy, to ensure all issues are ventilated and resolved, or even as a dilatory tactic. Real consideration should be paid as to whether the agreements are in order, and/or if measures could be taken to rectify the validity of the arbitration clause/ agreement to avoid such satellite litigation.

This article is produced by our Singapore office, Bird & Bird ATMD LLP. It does not constitute legal advice and is intended to provide general information only. Information in this article is accurate as of 27 March 2024.