Separability of the Arbitration Clause

In one line

Separability, enacted in section 16(1)(a) and (b), treats an arbitration clause forming part of a contract as an agreement independent of the other terms, so that the clause survives the invalidity, termination or discharge of the contract that contains it.

The two clauses

16(1)(a): an arbitration clause which forms part of a contract SHALL BE TREATED AS AN AGREEMENT INDEPENDENT OF THE OTHER TERMS OF THE CONTRACT.

16(1)(b): a decision by the arbitral tribunal that the contract is NULL AND VOID SHALL NOT ENTAIL IPSO JURE THE INVALIDITY OF THE ARBITRATION CLAUSE.

The doctrine is sometimes called the "doctrine of separability" and sometimes the "autonomy of the arbitration clause", and the two names describe the same rule. It is a legal fiction adopted for a practical reason: without it, an arbitration clause could be destroyed by the mere allegation that the contract was void, and no tribunal could ever decide such an allegation.

Why the doctrine is necessary

Put the problem as a circle. A party says the contract is void. If the arbitration clause is merely a term of that contract, it is void too. If it is void, the tribunal has no authority. If the tribunal has no authority, it cannot decide whether the contract is void. So the question would always have to go to a court, and every respondent could escape arbitration by pleading invalidity.

Separability cuts the circle by treating the clause as a separate contract, so its validity is judged separately. The tribunal's authority survives long enough for it to decide the question it was asked.

What survives and what does not

The clause survives:

TERMINATION of the contract, whether by performance, by breach accepted as repudiation, or by notice;

DISCHARGE by frustration under section 56 of the Contract Act;

NOVATION, where the substituted contract does not carry its own inconsistent dispute clause;

And a holding that the contract is VOID for want of consideration or for illegality of the main obligation.

The clause does NOT survive where the vitiating factor attacks the ARBITRATION AGREEMENT ITSELF. If a party never signed, if the signature was forged, or if the fraud goes to the making of the arbitration clause rather than of the contract, separability gives no protection, because there is nothing to separate. That is the distinction A. Ayyasamy v. A. Paramasivam, (2016) 10 SCC 386 draws between simple fraud and fraud permeating the arbitration agreement itself.

The case. A. Ayyasamy v. A. Paramasivam, (2016) 10 SCC 386.

Facts. A partnership dispute contained allegations of fraud and the party resisting the reference argued that the allegations made the matter unfit for arbitration.