Separability Principle of Arbitration Clause and Joinder of Third Parties to Defeat an Arbitration Agreement
Separability Principle of Arbitration Clause and Joinder of Third Parties to Defeat an Arbitration Agreement
Parties to a contract may decide to have an alternative dispute resolution clause in the contract rather than litigating through courts in the event of a dispute. There are three major dispute resolution mechanisms to wit; Negotiations, Mediation and Arbitration. Due to lack of extensive legal framework for negotiations and mediation in Kenya, parties contracting in Kenya will often prefer arbitration.
Arbitration in Kenya is regulated by Arbitration Act Chapter 49 of the Laws of Kenya and Arbitration Rule, 1997.
To have a dispute referred for arbitration, there must be an arbitration agreement. Section 4 of the Arbitration Act provides that the agreement could either be a clause in the contract or a separate agreement. Most importantly, the agreement must be in writing. Under Section 4(3) of the Act, the arbitration Agreement can be deemed to be in writing if there is;
- an exchange of letters, telex, telegram, facsimile, electronic mail or other means of telecommunications which provide a record of the agreement; or
- an exchange of statements of claim and defense in which the existence of an agreement is alleged by one party and not denied by the other party.
Despite the existence of an arbitration agreement a party to the agreement, in event of a dispute, may move to court and file a suit with regard to issues that were intended to be dealt with through the arbitration agreement.
When such suit a is filed, the party who intends to have the dispute referred to arbitration may move court under Section 6 of the Arbitration Act to have the suit stayed and the dispute referred to arbitration for resolution. The principles applicable for grant of stay and referral to arbitration will be dealt with in a future article.
Times are many when the person who files the suit opposes the stay and referral to arbitration on various grounds which may include; the contract was terminated and therefore the arbitration agreement was terminated and that the party seeking to have the dispute referred to arbitration breached the contract as a whole (repudiated). This when the principle of separability of the arbitration clauses comes in.
The Principle of Separability
The principle of separability of the arbitration agreement is codified in Kenya under Section 17(a) of the Arbitration Act. The Section provides as follows;
The arbitral tribunal may rule on its own jurisdiction, including ruling on any objections with respect to the existence or validity of the arbitration agreement, and for that purpose— an arbitration clause which forms part of a contract shall be treated as an agreement independent of the other terms of the contract.
This principle has been subject of various court decision by various judges in Kenya.
The codification of the principle was affirmed by High Court in the case of Nedermar Technology Bv Ltd V Kenya Anti-Corruption Commission & another [2006] eKLR where Nyamu J (as he then was) stated as follows;
Nearly all modern laws of arbitration recognize the principle of separability. In the case of the United States, its Supreme Court in the case cited by the applicant’s counsel, PRIMA PAINT (supra) recognized the principle of separability. In the case of Kenya s 17 of the Arbitration Act sets out the principle.
In the case of Blue Limited v Jaribu Credit Traders Ltd (2008) eKLR Kimaru J stated as follows regarding the principle of separability of the arbitration clause;
That principle recognizes the fact that where there is an arbitration clause in an agreement, such clause is considered as a separate and severable agreement between the parties who have agreed to resolve any dispute arising from the agreement by arbitration. A party to the agreement cannot raise issues relating to the validity or otherwise of the agreement to defeat the arbitration clause in the agreement.
In the case of Nedermar Technology Bv Ltd V Kenya Anti-Corruption Commission & another [2006] eKLR, the Court held that the principle of separability means;
that the arbitration clause in a contract is considered to be separate from the main contract of which it forms part, and as such, survives the termination of that contract.
In the case of Midland Finance & Securities Globetel Inc v Attorney General & another [2008] eKLR, the Court stated as follows with regard to separability of the arbitration agreement;
This means that the arbitration clause is regarded as constituting a separate and autonomous contract. It means that the validity of the arbitration clause does not depend on the validity of the contract as a whole. By surviving termination of the main contract, the clause constitutes the necessary agreement by the parties, that any disputes between them should be referred to arbitration.
This principle is an old one that has been observed for very long time by the courts of law in most parts of the world.
In England, the case of Heyman & Another vs Darwins Ltd [1942] 1 ALL ER 337. In that case, a party had attempted to urge that since the party who was trying to apply the arbitration clause had repudiated the contract which repudiation was accepted by the innocent party, the arbitration clause was repudiated together with the contract. The House of Lords rejected the argument and it was held;
Where there has been total breach of a contract by one of the party so as to relieve the other of his obligation under it, an arbitration clause, if its terms are wide enough, still remains effective. This is so even where the injured party has accepted the repudiation, and, in such circumstances, either party may rely on the clause.
The House of Lords went further to state;
The contract is not put out of existence, though all further performance of the obligations by each party in favour of each other may cease. It survives for the purposes of measuring the claims arising out of the breach, and arbitration clause survives for determining the mode of their settlement. The purpose of the contract have failed, but the arbitration clause is not one of the purpose of the contract.
In India, the position is similar and a termination of the contract or repudiation by one party does not defeat the arbitration clause. In the case of National Agricultural Coop. Marketing Federation India Ltd v Gains Trading Ltd Arbitration Petition No 15 of 2006 it was held as follows;
The Respondent contends that the contract was abrogated by mutual agreement: and the contract came to an end, the arbitration agreement which forms part of the contract, also came to an end. Such a contention has never been accepted in law. An arbitration clause is a collateral term in the contract, which relates to resolution of disputes and not performance. Even if the performance of the contract comes to an end on account of repudiation, frustration or breach of contract, the arbitration agreement survive for the purposes of resolution of the disputes arising under or in connection with the contract.
Therefore an arbitration clause is saved from the contract being void, illegal or otherwise invalid. The contract need have a salvatorian clause for the arbitration clause to be saved.
The position of the arbitration clause being separate from the contract is now well settled. A party who intends to defeat an arbitration clause cannot rely on termination of the main contract to defeat an arbitration clause. A party will also not be allowed to urge since there was repudiation of the contract, the arbitration clause was also repudiated.
The other way in which parties attempt to defeat an arbitration clause is by joining a third party who is a stranger to the arbitration agreement.
Third Parties and Arbitration
Sometimes, though rare, a party to an arbitration agreement in a contract will join into proceedings a third party who is a stranger to the arbitration agreement. When an application for stay and referral to arbitration is made, it is opposed on ground that the dispute involves a third party who is not a party to the agreement.
Joining a third party may convince the court to refuse stay and referral to arbitration. However, not in all cases the court will refuse stay and referral to arbitration merely because a third party has been joined. In Kenya, there is yet to be a decided case on the issue. However, in India and Australia, the position is that joining a third party will not defeat the arbitration clause.
In the case of Srivenkateswara Constructions vs The Union Of India AIR 1974 AP 278 the Supreme Court of India held as follows;
It often happens that in order to circumvent an arbitration clause a plaintiff adds some unnecessary parties to the suit and in such cases it has been held that the Court can grant stay of proceedings. In Cakop v. Asian Refractories Ltd., ((1969) 73 Cal WN 192) it was laid down that a party to an arbitration agreement cannot defeat the agreement between the parties merely be joining a third party in the suit against whom no relief is claimed. Following the said decision, a Bench of this Court, of which one of us (Krishnarao, J.) was a member in C. M. A. No. 467 of 1966, D/- 18-12-1969 (Andh Pra) held that thought the plaintiff added a prayer as against an unnecessary defendant who was not a party to the agreement it was nevertheless a case for granting stay. We have no doubt that his case comes within the last principle stated by us.
In the case of John Holland Pty Limited v Kellogg Brown & Root Pty Ltd [2015] NSWSC 451, the Supreme Court of Australia held as follows with regard to third parties joinder to defeat arbitration clause;
In principle, whether a dispute is arbitrable or not cannot depend on a plaintiff party to an arbitration agreement deciding to claim not only against the counterparty, but also a third party stranger.
In another case, Francis Travel Marketing Pty Ltd v Virgin Atlantic Airways Ltd (1996) 39 NSWLR 160 (Virgin case)
On the contrary, where a party to an arbitration agreement makes the same claim against both the other party to the arbitration agreement and a person who is not a party to the arbitration agreement — with the result that, so far as it involves the latter, the dispute cannot be referred to arbitration — it will generally be equally difficult to ascribe to the parties to the arbitration agreement an intention that in such an event the dispute should be fragmented and that the liability of the party to the arbitration agreement and that of the third party respectively should be determined in different forums.
From the above findings by the two courts in the India and Australia, it seems that merely joining a third party will not defeat an arbitration clause. For the arbitration clause to be defeated, the claim against the party to the arbitration agreement and the claim against the stranger to the arbitration agreement must be the same. Remote resemblance may not suffice.
Though there is no jurisprudence in Kenya on this issue, the above two authorities can be of persuasive nature for a court or a party faced with such a scenario.
