It is elementary that international arbitration is consensual: without an agreement to arbitrate, of some sort, there can be no arbitration.1 At the same time, the terms of the parties’ arbitration agreement play a central role in defining the character of any arbitration, including the arbitral proceedings, and in producing a valid, enforceable arbitral award. For these reasons, it is essential to understand clearly the nature and effects of international arbitration agreements. Although often brief, and superficially simple, these agreements raise complex legal issues. This chapter provides an introduction to five issues that are central to the enforcement and interpretation of international arbitration agreements.
First, the chapter considers the presumptive validity of international arbitration agreements under the New York Convention and modern national arbitration statutes. Second, the chapter examines the separability presumption, which provides that arbitration clauses are presumptively “separable” from the underlying commercial agreements in which they appear. Third, the chapter considers the competence and respective roles of arbitral tribunals and national courts in enforcing and interpreting international arbitration agreements. Fourth, the chapter explores the choice-of-law issues raised by international arbitration agreements. Finally, the chapter examines the effects, both positive and negative, of international arbitration agreements.
A. PRESUMPTIVE VALIDITY OF INTERNATIONAL ARBITRATION AGREEMENTS
One of the primary objectives of the New York, Inter-American and European Conventions was to overturn historic mistrust of arbitration in some jurisdictions and render international arbitration agreements more readily enforceable.2 In furtherance of these objectives, Article II of the New York Convention, Article 1 of the Inter-American Convention and Articles IV and V of the European Convention all provide that international arbitration agreements are presumptively valid and enforceable. As discussed below, this basic rule is subject to an exclusive and limited number of bases for invalidity, where agreements are “null and void,” “inoperative,” or “incapable of being performed.”3
At the same time, virtually all developed states (and many other nations) have enacted arbitration legislation which parallels the New York Convention’s rule that international arbitration agreements are presumptively enforceable. Like Article II of the Convention, this legislation typically provides that arbitration agreements are valid and enforceable, subject only to defined grounds for challenging the validity of such agreements.4 Leading examples of such legislation include Article 8 of the UNCITRAL Model Law and §2 of the FAA.
JUDGMENT OF 10 JULY 1843, CIE L’ALLIANCE v. PRUNIER
1843 Dalloz (I) 343 (French Cour de cassation civ.)
Whereas, the jurisdiction of French courts is recognized under general principles of law; there is no exception to this principle of public policy other than the one regarding corporations, and cases where arbitration was agreed to on a voluntary basis;
Whereas the premium insurance policy, dated 28 September 1837, between l’Alliance and Prunier did not create any commercial relations between them, so that, Article 51 of the Commercial Code, regarding mandatory arbitration, cannot be applied in the present case;
Whereas Article 332 of the Commercial Code,5 granting parties the right to submit their dispute to arbitrators, also could not be applied in this case, because it only applies to marine insurance; those insurance policies, deemed to constitute commercial transactions pursuant to Article 663 of the Commercial Code, are subject to a specific and special legislation, whose rules could not be extended by the judge, without obviously constituting an abuse of judicial powers, to terrestrial fire insurances, which constitute a purely non-commercial transaction for the insured party;
Whereas voluntary arbitrations are governed by the unique title of Book 3 of the Civil Procedure Code [including Articles 1003 (“All persons may enter arbitration agreements for the enforcement of rights of which they have free disposal.”) and 1006 (“In order to be valid, the arbitration agreement shall designate the subject of the dispute and the arbitrators’ names.”), discussed below];
Whereas by agreeing to Article 15 of the September 28 insurance policy, l’Alliance and Prunier have provided that any dispute regarding fire damages, experts’ operations and assessments, and the execution of the insurance policy, would be submitted to three arbitrators in Paris for a final and binding decision; but they have not named said three arbitrators, as required by Article 1006 of the Civil Procedure Code;
Whereas Article 1003 of the Civil Procedure Code, which allows any person to enforce its freely disposable rights through arbitration, shall not be separately relied on, as proclaiming a general principle exempt from any condition; on the contrary, this article shall The materials excerpted below explore the presumptive validity of international arbitration agreements under leading international and national instruments. They also address historic and lingering hostility to the arbitral process, which was (and, to an extent, still is) reflected in various rules of substantive invalidity of arbitration agreements.
be interpreted in conjunction with subsequent articles, especially Article 1006; thus an arbitration agreement cannot be valid or, what amounts to the same, be validly entered into when the subject matter of the dispute and the names of the arbitrators are not set out therein; the distinction between an arbitration agreement and a compromise is not established by any provision of the law, and this distinction cannot be admitted without failing to understand the true spirit of the Civil Procedure Code regarding arbitrations; …
Whereas the common practice of inserting into fire insurance policies a provision similar to article 15 of the 28 September 1837 insurance policy shall not prevail over Article 1006 of the Civil Procedure Code, whose provisions must be satisfied for an agreement to be valid…;
Whereas if one considered as valid a simple arbitration agreement or arbitration clause in the case of fire insurances, one would have to acknowledge and recognize its validity in every contract where it would have been agreed that disputes regarding non-performance or performance issues would be submitted to unnamed arbitrators; this disposition will become routine and standard; the exception would become the rule, and one would be deprived of the guarantees offered by courts;
Whereas the requirement for compulsory designation of the arbitrators by name at the time the arbitration agreement is entered into is aimed at avoiding disputes regarding the composition of arbitral tribunal, and especially protecting citizens against their own lack of reflection, that could lead them to agree to future arbitrations while lacking sufficient prudence and without being sufficiently thorough as to their understanding of future circumstances, without being sure that the arbitrators who volunteered to hear the case would be able to deal with the matter and be trustworthy; in the present case, the importance and necessity of the provisions of Article 1006 are clearly underlined by the way the insurers want their clients to agree to resolve any dispute; l’Alliance, headquartered in Paris, and whose operations extend all over the French territory, wants, by means of article 15 of the policy, to compel its insured clients, wherever their domicile may be, whatever the extent of the damages suffered, into establishing a sovereign arbitral tribunal that would judge them in Paris, a place where a vast majority of the insured parties do not have any ongoing business and no acquaintances, located far from the place where the claim would have arisen, and where the prejudice caused could only be ascertained and assessed;
Whereas as a consequence, by establishing that the arbitration agreement contained in the 28 September 1837 policy was null and void for it failed to name the arbitrators, the challenged decision [did] not breach any law.… The Court … dismisses the appeal.
DECISION 24 OF THE ANDEAN COMMISSION CONCERNING TREATMENT OF FOREIGN CAPITAL
Article 51, 10 I.L.M. 152 (1971)
[No agreement concerning foreign investment shall contain provisions] which withdraw possible … controversies from the national jurisdiction of the recipient country….
SAUDI ARABIAN ARBITRATION LAW, 2012
It is permissible for governmental authorities to agree on arbitration only after the approval of the Prime Minister, unless there is a special provision of law that allows it.
ARKANSAS CODE, 2010
(a) A written agreement to submit any existing controversy to arbitration arising between the parties bound by the terms of the writing is valid, enforceable, and irrevocable, save upon such grounds as exist at law or in equity for the revocation of any contract.
(b)(1) A written provision to submit to arbitration any controversy thereafter arising between the parties bound by the terms of the writing is valid, enforceable, and irrevocable, save upon such grounds as exist at law or in equity for the revocation of any contract.
(2) This subsection shall have no application to personal injury or tort matters, employer-employee disputes, nor to any insured or beneficiary under any insurance policy or annuity contract.
BRAZILIAN LAW NO. 9,307 OF 23 SEPTEMBER 1996
Articles 3, 7
3. The interested parties may submit the settlement of their disputes to an arbitral tribunal by virtue of an arbitration agreement, which may be in the form of either an arbitration clause or a submission to arbitration (acte de compromis).
7. If there is an arbitration clause but resistance as to the commencement of the arbitral proceedings, the interested party may request the Court to summon the other party to appear in Court so that the submission to arbitration may be drafted; the Judge shall order a special hearing for this purpose.
7(1). The plaintiff shall specify, in detail, the subject matter of the arbitration, attaching to its motion the document containing the arbitration clause.
7(2). If the parties attend the hearing, the Judge shall first try to conciliate their dispute. If he does not succeed, the Judge shall try to persuade them to sign, by mutual agreement, the submission to arbitration.
7(3). If the parties disagree on the terms of the submission to arbitration, the Judge, after hearing the defendant, shall decide on the contents thereof, either at the same hearing or within ten days, in accordance with the provisions of the arbitration clause, and taking account of the provisions of Articles 10 and 21(2) of this Law.
7(4). If the arbitration clause fails to provide for the appointment of arbitrators, the Judge, after hearing the parties, shall rule thereon, being allowed to appoint a sole arbitrator to decide the dispute.
7(5). If the plaintiff, without good cause, fails to attend the hearing designated for the drafting of the submission to arbitration, the case will be terminated without judgment on the merits.
7(6). If the defendant fails to attend the hearing, the Judge shall have the authority, after hearing the plaintiff, to establish the contents of the submission to arbitration, and to appoint a sole arbitrator.
7(7). The judgment granting the motion shall have the force of a submission to arbitration.
LEDEE v. CERAMICHE RAGNO
684 F.2d 184 (1st Cir. 1982)
COFFIN, Chief Judge…. The defendants-appellees are Italian corporations that make and market ceramic tiles. The plaintiffs-appellants are two Puerto Rico corporations and an individual citizen of the Commonwealth. In 1964 the parties entered into a distributorship agreement giving the appellants exclusive rights to sell and distribute the appellees’ ceramic tiles in the Antilles. The agreement … contained the following paragraph 9:
“Any dispute related to the interpretation and application of this contract will be submitted to an Arbiter selected by the President of the Tribunal of Modena, [Italy,] who will judge as last resort and without procedural formalities.”
In March, 1981, the appellants brought suit in the Superior Court of Puerto Rico, alleging that the appellees had breached the contract by unjustifiably terminating their distributorship. The complaint sought damages in accord with the provisions of the Puerto Rico Dealers Act, 292 10 L.P.R.A. §§278 et seq. The appellees removed the case to the U.S. District Court for the District of Puerto Rico. The district court ordered arbitration in accord with paragraph 9 and dismissed the complaint. This appeal ensued.
Appellants contend first that, under the laws of the Commonwealth of Puerto Rico, paragraph 9 is void and unenforceable. They invoke the general principle that contracting parties may not agree to clauses or conditions “in contravention of law, morals, or public order.” 31 L.P.R.A. §3372. And to show that paragraph 9 is contrary to the public order, they direct our attention to the Dealers Act. The Dealers Act was enacted to help protect Puerto Rico distributors from the allegedly exploitative practices of certain foreign suppliers.6 Substantively, it prohibited termination of dealership contracts except “for just cause.” 10 L.P.R.A. §278a. Moreover, it declared that its provisions were of a public order and that the dealers’ rights under it could not be waived….[It] reads:
“Any stipulation that obligates a dealer to adjust, arbitrate or litigate any controversy that comes up regarding his dealer’s contract outside of Puerto Rico, or under foreign law or rule of law, shall be likewise considered as violating the public policy set forth by this chapter and is therefore null and void.” 10 L.P.R.A. §278b-2.
Appellants continue their argument by suggesting that, given the arbitration clause’s unenforceability under Puerto Rico Law, the federal district court could not enforce it. They observe that Chapter One of the [FAA] is limited, in that it makes arbitration clauses enforceable “save upon such grounds as exist at law or in equity for the revocation of any contract.” 9 U.S.C. §2. They contend that the Dealers Act provides grounds “at law or in equity” for revocation of paragraph 9. We need not, however, consider to what extent the phrase “grounds as exist at law or in equity” incorporates Commonwealth law.… In particular, we need not consider whether the phrase incorporates the Dealers Act. The simple reason is that the district court did not purport to exercise authority under Chapter One of the [FAA]; rather, it acted under Chapter Two of the Act, 9 U.S.C. §201 et seq., which implemented the [New York] Convention. If [an arbitration agreement falls within the Convention, as in this case, then a U.S. court] must order arbitration unless it finds the agreement “null and void, inoperative or incapable of being performed.” Convention, Article II(3).
Appellants argue that the Dealers Act renders paragraph 9 of the contract “null and void, inoperative or incapable of being performed.” They contend that the “null and void” clause was intended to incorporate the Dealers Act as an expression of Puerto Rico public policy. We disagree. Such an expansive interpretation of the clause would be antithetical to the goals of the Convention. In Scherk v. Alberto-Culver Co., 417 U.S. 506, 517 n.10 (1974), the Supreme Court observed:
“The goal of the Convention, and the principal purpose underlying American adoption and implementation of it, was to encourage the recognition and enforcement of commercial arbitration agreements in international contracts and to unify the standards by which agreements to arbitrate are observed and arbitral awards are enforced in the signatory countries.”
The parochial interests of the Commonwealth, or of any state, cannot be the measure of how the “null and void” clause is interpreted. Indeed, by acceding to and implementing the treaty, the federal government has insisted that not even the parochial interests of the nation may be the measure of interpretation. Rather, the clause must be interpreted to encompass only those situations—such as fraud, mistake, duress, and waiver—that can be applied neutrally on an international scale. I.T.A.D. Associates, Inc. v. Podar Bros., 636 F.2d 75 (4th Cir. 1981).7 Nothing in the record suggests that the arbitration agreement was “null and void, inoperative or incapable of being performed” within the terms of Article II(3) of the Convention..
JUDGMENT OF 20 DECEMBER 1993, MUNICIPALITÉ DE KHOMS EL MERGEB v. SOCIETE DALICO
1994 Rev. arb. 116 (French Cour de cassation)
[The municipal council of Khoms El Mergeb (near Tripoli, Libya) entered into a contract dated June 15, 1981, (“Contract”) with Dalico Contractors, a Danish company (“Dalico”). The Contract granted Dalico responsibility to conduct sewage disposal work. The Contract referred to standard conditions, “amplified and amended in the annex,” as an integral part of the agreement, in addition to documents contained in the tender offers. Article 32 of the standard conditions (which were also signed on June 15, 1981), provided not only for the application of Libyan law to the Contract but also for the exclusive jurisdiction of the Libyan courts.
Disputes arose between the parties. Despite the forum selection clause, Dalico initiated an ICC arbitration in Paris pursuant to an arbitration clause in one of the tender offer documents, and specified in the annex under the standard conditions as modifying Article 32 (referred to above). The municipal council objected to the ICC proceedings, claiming that the document referred to as the annex under the standard conditions was not signed and was invalid under Libyan law, which it argued applied the contract under Article 32. The arbitral tribunal rejected this claim in an award, which the municipal council challenged in French courts. The Paris Cour d’appel dismissed the action to annul the award in which the arbitrators upheld the existence and validity of the arbitration clause. The Cour de cassation affirmed.]
But whereas according to a substantive rule of international arbitration law, an arbitration clause is legally independent from the main contract in which it is directly contained or referred to, and its existence and efficiency are assessed according to the parties’ common intent, and without necessarily referring to a national provision, provided that mandatory provisions of French law and international public policy are not violated; that in the present case, the Cour d’appel correctly explained its decision by establishing the existence of the arbitration clause regardless of the Libyan laws [that apply to] the contract, and upheld, by analysis and interpretation of the exhibits, that the object of the invoked annex was to substitute the original arbitration clause for the clause giving jurisdiction to the Libyan courts, and the integration of this clause within the entire contractual [provisions] proved that, although the document was not signed, it was the parties’ common intent to be subject to the clause at issue….
JUDGMENT OF 7 SEPTEMBER 2005, HOTELS.COM v. ZUZ TOURISM LTD
XXXI Y.B. Comm. Arb. 791 (2006) (Israeli S.Ct.)
Zuz Tourism Ltd had entered into an exclusive distributorship agreement with hotels.com providing for arbitration in Texas under [AAA] rules. Upon discovering that hotels.com allegedly breached this agreement by engaging another Israeli representative, Hotels Online Ltd, which was not a party to any arbitration agreement, Zuz sued both hotels.com and Hotels Online Ltd in the Jerusalem District Court. In response, hotels.com applied for a stay of proceedings on the basis of the existence of an arbitration clause in the agreement and subsequently filed a request for arbitration with the AAA. The District Court, applying domestic rules, decided that it would not grant a stay, notwithstanding the arbitration clause, because of the injustice that would be caused to Zuz if it had to seek its remedies against hotels.com and Hotels Online Ltd in two different jurisdictions. [The District Court’s judgment was appealed to the Israeli Supreme Court.]
It is a general rule that the agreement to hand over a certain matter to arbitration cannot dislodge the court’s subject matter jurisdiction over the matter.… However, when a suit is brought before the court on a matter regarding which an arbitration agreement has been entered into, the court is authorized to stay the proceedings. In this manner the breach of the arbitration agreement is avoided. The main provision of the law that resolves the question of staying proceedings is §5 of the [Israeli] Arbitration Law.
“5(a) When an action is brought in court in a dispute which it had been agreed to refer to arbitration, and a party to the action who is a party to the arbitration agreement applies for a stay of proceedings in the action, the court shall stay the proceedings between the parties to the agreement, provided that the applicant has been and still is prepared to do everything required for the institution and continuation of the arbitration…. (c) The court may refrain from staying proceedings if it sees a special reason why the dispute should not be dealt with by arbitration.”
We can see that when the conditions specified in the section are met, the court will as a rule stay the proceedings between the parties to the arbitration agreement, unless it finds that there exists a special reason that the dispute not be settled in arbitration….
An additional provision concerned with staying proceedings as a result of the existence of any arbitration clause can be found in §6 of the Arbitration Law:
“6. When an action is brought in court in a dispute which it had been agreed to refer to arbitration, and an international convention to which Israel is a party applies to the arbitration, and such convention lays down provisions for a stay of proceedings, the court shall exercise its power under §5 in accordance with and subject to the those provisions.”
It is apparent from the phrasing of the above-mentioned section that it is not applicable in every case a stay of proceedings is requested based on the existence of an arbitration clause. Its application is limited just to those cases where the arbitration is subject to an international convention to which Israel is party and which includes provisions regarding the stay of proceedings. In these cases, the section instructs that the court’s discretion on the question of staying proceedings specified in §5 shall be used in accordance with the Convention’s provisions and subject thereto. Therefore, §6 of the Law refers to the provisions of the conventions regarding the stay of proceedings and even gives them priority over the provisions of §5 of the Arbitration Law.
In the case before us there is no dispute between the parties that the [New York Convention] applies to the arbitration clause…. [T]he relevant provision in our case is Art. II of the Convention…. From the way Art. II(3) has been phrased, it emerges that the court is required to refer the parties to the process of arbitration, unless one of the three exception exists: the arbitration agreement is null and void, inoperative or incapable of being performed.” We are prepared to assume … that the District Court was correct in finding that there are both procedural and substantive needs for adding Hotels Online to Zuz’s suit. If the only relevant provision of the law was the one in §5 of the Law, then on the above basis and based on Israeli precedents in cases involving a third party causing breach of an exclusive distribution arrangement, it would appear that the conclusion that there were no grounds to stay the proceedings against hotels.com would have been inescapable. However, in the matter before us the provision of §6 of the Law and Art. II(3) of the Convention apply. As a result, in accordance with §6 of the Law the court is required to determine the question of staying proceedings in accordance with the provisions of the Convention. The question that arises in … our case, therefore, is the following: whether in cases to which §6 of the Law and Art. II(3) of the Convention apply, the court is authorized to avoid staying proceedings when a defendant who is not party to the arbitration agreement is added on.
In order to determine the matter, we must discuss two related subsidiary questions: the first, do the three exceptions included in Art. II(3) constitute a closed list, i.e., whether in every case where the above-mentioned three exceptions are not present the court is required to stay proceedings; and the second, does the presence of a defendant who is not a party to the arbitration agreement constitute one of the three exceptions in Art. II(3)…. In order to determine the extent of the court’s discretion based on §6 of the Law when combined with Art. II(3) of the Convention, we must turn to the language of these provisions.
Section 6 of the Law instructs that the court’s authority according to §5 of the Law—which is concerned with stay of proceedings—shall be used in accordance with and subject to the provisions of the convention applicable to the arbitration. Art. II(3) of the Convention states in mandatory language that the court ‘shall … refer’ the parties to arbitration, unless one of the exceptions listed in the section is present. It appears that the manner in which both provisions were drafted leads to a single conclusion: that if one of the three exceptions mentioned in Art. II(3) does not appear, the court is as a rule required to order a stay of the proceedings….
It appears based on the language of the two above-mentioned provisions that the situation of a defendant who is not a party to the arbitration agreement is not included within the three exceptions listed in Art. II(3) of the Convention. As shall be clarified below, I believe that the rationale behind §6 of the Arbitration Law and Section II(3) lead to a similar conclusion. One of the main purposes of the Convention is the efficient enforcement of international arbitration agreements by determining uniform standards pursuant to which such agreements are to be enforced.… [T]he concern expressed in this respect is that the courts of the acceding states will avoid sending local defendants to arbitral proceedings in a foreign state and will, therefore, shy away from respecting international arbitration agreements.… It appears that there is a real similarity in the manner in which Art. II(3) has been interpreted in many of the common law countries. The rule determined in this respect is that the section has a mandatory character. If one of the exceptions mentioned in the section is not established, the court is required to stay the proceedings and refer the parties to arbitration proceedings, without having any discretion in the matter….
In addition, alongside the rule that Art. II(3) is of a mandatory nature, it has been determined, in the common law system, that a situation in which one or more of the defendants are not party to the arbitration agreement is not included in the ambit of any of the three exceptions of Art. II(3). In other words, the existence of a party who is not a party to the arbitration agreement does not make the existing arbitration agreement between the other parties, whether in whole or in part, null and void, inoperative or an agreement incapable of being performed. Therefore, in such a situation the court must order the stay of proceedings in respect of those parties who are party to the arbitration agreement….
We can see that the interest of certainty and the concern that international arbitration agreements will not be respected in order to prefer the interests of local litigants, have led foreign courts to adopt an interpretive position that limits discretion in terms of staying proceedings following the existence of international arbitration agreements….
[N]ot staying proceedings in spite of the existence of any international arbitration agreement because one or another of the sides is not a party to the arbitration agreement may cause an additional difficulty.… [A]s a result of not staying the proceedings, [the proceedings] will not be split up insofar as the suit of the plaintiff against the defendant who is party to the arbitration agreement—which should have been heard in arbitration—as this claim will be settled together with his suit against the defendant who is not party to that agreement. However, this cannot prevent the defendant who is a party to the arbitration agreement to act in accordance with the agreement and file an action on precisely the same matter with the arbitration in the foreign jurisdiction. This is indeed what hotel.com did in the case before us. As a result, disputes between parties to the arbitration agreement will be split and heard before two different tribunals: one party’s claim will be heard by the Israeli courts, while the other party’s claim will be determined by the arbitrator abroad. Thus the outcome of avoiding the stay of proceedings was, in fact, to prevent the splitting of hearings on one plane, but caused a split on the other…. In order to prevent this new split, the Israeli courts will be required to issue a preventive order against the litigant who is a party to the arbitration agreement preventing him from continuing to conduct his dispute with the arbitration tribunal and forcing him to litigate as a claimant in the Israeli courts. This will cause a further substantial deviation from the contractual agreement between the parties to the arbitration agreement….
I believe that all the above-mentioned considerations lead to the conclusion that the court’s maneuverability on the basis of §6 of the Law together with Art. II(3) is significantly limited in comparison with the range of maneuver allowed by §5…. This result is consistent with the language of the Law and the language of the Convention. It is also consistent with one of the main purposes of Art. II(3): furthering legal certainty in relation to international arbitral agreements by balancing the concern that the courts of other jurisdictions will tend to prefer the interests of the local litigant and will therefore keep from honoring international arbitration agreements that dictate arbitration in a foreign state. I am prepared to assume that there may be exceptional cases in which the courts may avoid staying proceedings even if none of the three above-mentioned exceptions exist. However, these cases will be rare.
1. Historic unenforceability of arbitration agreements at common law. As discussed above, it is often said that arbitration agreements were historically disfavored at common law in both England and the United States. See supra pp. 16–19, 21–26. Joseph Story stated the historic common law position in the United States, inherited from England, as follows:
“Now we all know, that arbitrators, at the common law, possess no authority whatsoever, even to administer an oath, or to compel the attendance of witnesses. They cannot compel the production of documents, and papers and books of account, or insist upon a discovery of facts from the parties under oath. They are not ordinarily well enough acquainted with the principles of law or equity, to administer either effectually, in complicated cases; and hence it has often been said, that the judgment of arbitrators is but rusticum judicium. Ought then a court of equity to compel a resort to such a tribunal, by which, however honest and intelligent, it can in no case be clear that the real legal or equitable rights of the parties can be fully ascertained or perfectly protected? … [An arbitration agreement is not specifically enforceable because it] is essentially, in its very nature and character, an agreement which must rest in the good faith and honor of the parties, and like an agreement to paint a picture, or to carve a statue, or to write a book … must be left to the conscience of the parties, or to such remedy in damages for the breach thereof, as the law has provided.” Tobey v. County of Bristol, 23 F.Cas. 1313, 1321-23, (C.C.D. Mass. 1845).
Although Story’s analysis reflected a substantial mistrust for the arbitral process, arbitration was popular and effective in American commercial settings: “The use of commercial arbitration developed during the colonial and post-revolutionary periods in spite of this [judicial] hostility.” Benson, An Exploration of the Impact of Modern Arbitration Statutes on the Development of Arbitration in the United States, 11 J. L. Econ. & Org. 479, 483 (1995). It did so on the basis of non-legal commercial sanctions and enforcement mechanisms, including through membership in commercial guilds, societies, or religious groups, all of which proved sufficiently resilient to overcome judicial hostility. Ibid. Moreover, even with regard to judicial enforcement, courts in a number of American states rejected the common law notion that arbitration agreements were either unenforceable or revocable, and instead upheld them, while also enforcing arbitral awards with minimal judicial review. For example, an 1858 decision by the Supreme Court of Virginia held:
“The only ground on which [the arbitration agreement] can be said to be unlawful is, that in referring all disputes and difficulties arising under the contract to the engineer or inspector, it tends to oust the courts of law of their jurisdiction; and is therefore against the policy of the law and void…. I am certainly not disposed to extend the operation of a rule which appears to me to have been founded on very narrow grounds, directly contrary to the spirit of later times, which leaves parties at full liberty to refer their disputes at pleasure to public or private tribunals.” Condon v. Southside R.R. Co., 1858 WL 3945, at *6-7 (Va.).
Consider Story’s reasoning. Is it persuasive? Why should arbitration agreements be recognized as valid and enforced? What rationale does the Virginia Supreme Court adopt?
2. Historic unenforceability of arbitration agreements in some civil law jurisdictions. Arbitration agreements were also regarded with disfavor in a number of civil law jurisdictions during the 19th century.
(a) France. As discussed above, in the immediate aftermath of the French Revolution, arbitration was embraced in France as “the most reasonable means for the termination of disputes arising between citizens.” Law of 16-24 August 1790, Art. 1. See supra pp. 19–21. In due course, arbitration was elevated to constitutional status. French Constitution of Year I, 1793, Art. 86 (“The right of the citizens to have their disputes settled by arbitrators of their choice shall not be violated in any way whatsoever.”); French Constitution of Year III, 1795, Art. 210 (“The right to choose arbitrators in any dispute shall not be violated in any way whatsoever.”).
Despite this, the Napoleonic Code of Civil Procedure adopted a staunchly anti-arbitration attitude. Among other things, Article 1006 of the Code of Civil Procedure, quoted supra p. 178, was interpreted as providing that agreements to arbitrate future disputes were unenforceable. Consider the Cour de cassation’s decision in Prunier. What reasons does the Court provide for refusing to enforce agreements to submit future disputes to arbitration? Compare these to those advanced by Story.
Note the Cour de cassation’s comment that if parties were able validly to agree to arbitration, then arbitration agreements and arbitration would become commonplace. Why does that suggest that arbitration agreements should be unenforceable? If large numbers of French citizens want to resolve their disputes by arbitration, shouldn’t that argue for, not against, upholding the validity of agreements to arbitrate?
Consider the agreement to arbitrate at issue in Prunier. Note that the agreement was between an insurance company and an individual. Is it clear from the Prunier opinion whether the individual was a consumer? Note the Cour de cassation’s concerns about the procedural fairness of the arbitration agreement. How one-sided was the agreement? Note the obstacles to transportation and communication in mid-19th century France. Could the Prunier case have been decided on unconscionability grounds?
Note that not all agreements to arbitrate future disputes were invalid under Article 1006 of the French Civil Procedure Code. How does the Cour de cassation justify the requirement that an agreement to arbitrate name the arbitrators in advance? Is that persuasive? See infra p. 695.
(b) Germany. A deep mistrust for arbitration developed in Germany between the two World Wars, becoming especially pronounced after the rise of the National Socialists in 1933. According to the “Guidelines of the Reich Regarding Arbitral Tribunals,” published in December 1933, “from a state-political point of view a further spread of arbitration would shatter confidence in state jurisdiction and the State itself.” Richtlinien des Reiches über Schiedsgerichte, 95 Deutsche Justiz 52, 821 (1933). How is it that arbitration shatters confidence in the state? What vision of the state underlies this comment? Is a democratic state, guaranteeing its citizens substantial economic and political freedoms, threatened by arbitration? Compare the concerns about arbitration becoming commonplace in Prunier.
3. Historic hostility of some developing states to international arbitration. During the 20th century, some states treated international arbitration with antipathy. Numerous public pronouncements and academic commentaries condemned international arbitration as an unacceptable, unjustifiable infringement upon the sovereignty of developing (and other) states, which was to be vigorously resisted. Decision 24 of the Andean Commission reflects this attitude. Why were some developing states historically mistrustful of international arbitration? What are the benefits to a state from treating international arbitration agreements as unenforceable? What are the costs?
Consider Brazilian Law 9,307 of 23 September 1996. Note the distinction between an “arbitration agreement” and a “submission to arbitration.” Until the 1996 legislation, only “submissions to arbitration,” which were entered into after a dispute arose, were valid; pre-dispute arbitration clauses were not. Why would such an approach be adopted?
4. Abandonment of historic hostility of developing countries to international arbitration. The historic hostility of developing countries to international arbitration has substantially eroded over the past two decades. Prior to 1980, the New York Convention had not been ratified by (among others) Afghanistan, Algeria, Argentina, Bahrain, Bangladesh, Bolivia, Burkina Faso, Cameroon, China, Costa Rica, Guatemala, Guinea, Haiti, Indonesia, Kenya, Laos, Lebanon, Malaysia, Mali, Mauritania, Mozambique, Myanmar, Nepal, Pakistan, Panama, Paraguay, Peru, Saudi Arabia, Senegal, Turkey, Uruguay, Venezuela, Vietnam and Zimbabwe. Between 1980 and the present, all of these states acceded to the Convention. Similar numbers of states acceded to the ICSID Convention.
Consider again Brazilian Law 9,307. Note that it provides a mechanism for enforcing pre-dispute arbitration agreements. Despite the defects in the approach of Article 7 of Law 9,307, it is a step towards enforceability of arbitration agreements.
What explains the abandonment of hostility by developing states towards international arbitration? Consider briefly the structure and enforceability of international commercial arbitration agreements and awards. If a company based in a developing state wishes to avail itself of contractual (or other) rights against a foreign investor, in an enforceable fashion, is international arbitration a reasonably good remedy? What can a national of a developing state do with a judgment it obtains from its own courts against a foreign investor who badly performs a contract within the foreign country? What can a company based in a developing state do with an arbitral award it obtains against a foreign investor? What can a company from a foreign state do to resist an arbitral award made against it? Where will that award likely have to be enforced?
Do different considerations apply to accession to the ICSID Convention? To adoption of BITs with a state’s principal sources of foreign capital?
5. Presumptive validity of international arbitration agreements under New York Convention. Consider Article II of the New York Convention, excerpted at p. 1 of the Documentary Supplement. What exactly does Article II provide with respect to the validity of international arbitration agreements? Are such agreements always valid under Article II? If not, when are arbitration agreements valid? What does it mean for an arbitration agreement to be “null and void”? What exactly does Article II accomplish? Note the discussion of Article II in Hotels.com.
6. “Pro-enforcement” bias of Article II. Both Hotels.com and Ledee interpret Article II of the Convention to establish a strong presumption favoring the validity of international arbitration agreements. Other courts have endorsed the same pro-enforcement bias. See Rhone Mediterranee Compagnia Francese di Assicurazioni e Riassicurazioni v. Lauro, 712 F.2d 50, 53-54 (3d Cir. 1983) (“The policy of the Convention is best served by an approach which leads to upholding agreements to arbitrate.”).
For example, Ledee and other lower U.S. courts have said that the Convention prescribes weightier pro-enforcement policies than the domestic FAA. According to one court, “the liberal federal arbitration policy ‘applies with special force in the field of international commerce.’” David L. Threlkeld& Co. v. Metallgesellschaft Ltd, 923 F.2d 245, 248 (2d Cir. 1991) (quoting Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth Inc., 473 U.S. 614, 631 (1985)). See alsoPepsicoInc. v. Oficina Central de Asesoria y Ayuda Tecmica, CA, 945 F.Supp. 69 (S.D.N.Y. 1996) (“strong policy favoring prompt arbitration expressed in the U.N. Convention”); Samson Res. Co. v. Int’l Bus. Partners, Inc., 906 F.Supp. 624 (N.D. Okla. 1995) (“the policy favoring arbitration is ‘even stronger in the context of international business transactions’”) (quoting DavidL. Threlkeld & Co., 923 F.2d at 248). Note the similar approach of the court in Hotels.com.
What does it mean to say that the Convention is “pro-arbitration” or “pro-enforcement”? Consider the issues to which a “pro-arbitration” policy might apply: (a) doubts will be resolved in favor of the existence of an arbitration agreement; (b) doubts will be resolved in favor of the validity and legality of an arbitration agreement; and (c) doubts will be resolved in favor of interpreting the scope of an arbitration clause to cover borderline disputes. Is it appropriate for a “pro-arbitration” policy to be applied to any of these questions? To all? Would it not be more appropriate to enforce and interpret arbitration agreements “neutrally,” like other contracts, without any bias?
7. Presumptive validity of international arbitration agreements under contemporary arbitration statutes. Consider Article 8(1) of the UNCITRAL Model Law, Article 178 of the Swiss Law on Private International Law (“SLPIL”) and §2 of the FAA, excerpted at pp. 88, 157 & 103 of the Documentary Supplement. What does each provide regarding the validity of arbitration agreements? What are the differences between the three provisions? How does each compare with Article II of the New York Convention?
Are all arbitration agreements valid under Article 8, Article 178 and §2? What arbitration agreements are invalid?
8. Grounds for invalidity of international arbitration agreements. What are the possible grounds for challenging the validity of international arbitration agreements under the New York Convention and contemporary arbitration legislation? What are the usual bases for disputing the existence or validity of other types of contracts? Is there any reason that generally-applicable contract law rules should not provide the grounds for challenging the validity and existence of arbitration agreements? The substantive grounds for challenging the validity or existence of international commercial arbitration agreements are detailed below. See infra pp. 333–34, 375–510.
Consider the choice-of-law analyses in Ledee and Dalico. Note how the U.S. and French courts adopt choice-of-law rules that apply some form of international principles, which give effect to international arbitration agreements, rather than national law rules, which would deny effect to such agreements. Compare the similar approach of Article 178 of the SLPIL.
9. Representative examples of national laws disfavoring arbitration. Consider the Saudi legislation excerpted above, requiring government approval of arbitration agreements entered into by “Government Agencies.” Compare the Arkansas legislation. Are valid public policies served by these statutes? Is such legislation consistent with Article II of the New York Convention? Suppose a Contracting State invalidated all pre-dispute arbitration agreements? Required that prior government approval be obtained of all arbitration agreements? Would these requirements be consistent with Article II? What types of invalidity did Article II contemplate?
B. SEPARABILITY OF INTERNATIONAL ARBITRATION AGREEMENTS
In the international context, arbitration clauses are generally deemed to be presumptively “separable” or “severable” from the underlying contract within which they are found.8 The “separability presumption” is specifically provided for by national arbitration legislation or judicial decisions from virtually all jurisdictions around the world, and by leading institutional arbitration rules.9 The presumption is equally recognized in inter-state, as well as in commercial and investment, arbitration authorities.10
The separability presumption provides that an arbitration agreement, even though included in and related closely to an underlying commercial contract, is presumptively a separate and autonomous agreement. According to a leading international arbitral award: “it is now generally accepted, in the law and practice of international commercial arbitration, that an arbitration clause in a contract constitutes a separate and autonomous agreement between the parties, which is distinct from their substantive agreement.”11 The analytical rationale for the separability presumption is that the parties’ agreement to arbitrate consists of promises that are distinct and independent from the underlying contract: “the mutual promises to arbitrate [generally] form the quid pro quo of one another and constitute a separable and enforceable part of the agreement.”12
For reasons explored below, the separability presumption is generally (and correctly) seen as having vital consequences for the arbitral process: “Acceptance of [the] autonomy of the international arbitration clause is a conceptual cornerstone of international arbitration.”13 Among other things, the separability presumption is understood as implying the continued validity of an arbitration clause (notwithstanding defects in the parties’ underlying contract), and as permitting the application of different substantive laws to the parties’ arbitration agreement and underlying contract.14 The following materials introduce the separability presumption and explore the role that it plays in the arbitral process.
FRANK, Circuit Judge. The libel alleged that appellant (respondent) had, through its authorized representatives, agreed to a charter party with appellee (libellant). Appellant’s answer in effect denied that anyone authorized to act for it has so agreed. After a trial, the district court made the following [factual findings]:
“1. Libellant, Kulukundis Shipping Co. SA, employed Blidberg Rothchild Co. Inc. as a broker and the respondent, Amtorg Trading Corporation employed Potter & Gordon, Inc. as its broker in the negotiations for the chartering of the ship ‘Mount Helmos’ for a trip to Japan… … Rothchild, of the firm of Blidberg Rothchild Co. Inc., and Gordon, acting on behalf of Potter & Gordon, Inc., agreed upon a charter and closed by Gordon executing and delivering to Rothchild a fixture Slip which is the usual trade practice, indicating the conclusion of charter negotiations in the trade of ship brokerage. All the material terms of the bargain are set forth in a fixture slip excepting demurrage, dispatch, and the date of the commencement of the charter term which all had been agreed on but were omitted by an oversight. A number of the terms, including the War Risks Clause of 1937, were fixed by the incorporation of a reference to an earlier charter of the steamer ‘Norbryn.’ Gordon acted with authority.
“2. Thereafter, respondent refused to sign the charter but instead repudiated it.”
[The district court reached the following conclusion:] “1. Respondent has breached a valid contract and is liable in damages to the libellant.” Pursuant to the foregoing, the court entered an order that appellee recover from appellant the damages sustained, and referred to a named commissioner the ascertainment of the damages….
[The respondent relied upon an arbitration clause in the charter.] The arbitration clause reads as follows:
KULUKUNDIS SHIPPING CO., SA v. AMTORG TRADING CORP.
126 F.2d 978 (2d Cir. 1942)
“24. Demurrage or dispatch is to be settled at loading and discharging ports separately, except as per Clause 9. Owners and Charterers agree, in case of any dispute or claim, to settle same by arbitration in New York. Also, in case of a dispute of any nature whatsoever, same is to be settled by arbitration in New York. In both cases arbitrators are to be commercial men.” …
Appellant admits—as it must—that the district court had jurisdiction to determine whether the parties had made an agreement to arbitrate. Appellant contends, however, that, once the court determined in this suit that there was such an arbitration agreement, the court lost all power over the suit beyond that of staying further proceedings until there had been an arbitration as agreed to; in that arbitration, argues appellant, the arbitrators will have jurisdiction to determine all issues except the existence of the arbitration clause. This jurisdiction, it is urged, is broad enough to permit an independent determination, by the arbitrator, that the contract itself is not valid or binding. Appellee asserts that the defendant had repudiated the charter-party, and that, therefore, the arbitration clause must be wholly disregarded….
[Two issues are presented]: (a) Does the arbitration provision here have the sweeping effect ascribed to it by appellant? (b) Is it, as appellee contends, wholly without efficacy because appellant asserted that there never was an agreement for a charter party?…
(a) Appellant … concedes that, in such a case as this, before sending any issue to arbitrators, the court must determine whether an arbitration provision exists. As the arbitration clause here is an integral part of the charter party, the court, in determining that the parties agreed to that clause, must necessarily first have found that the charter party exists.15 If the court here, having so found, were now to direct the arbitrators to consider that same issue, they would be traversing ground already covered in the court trial. There would thus result precisely that needless expenditure of time and money (the “costliness and delays of litigation”) which Congress sought to avoid in enacting the [FAA]. In the light of that fact, a reasonable interpretation of the Act compels a repudiation of appellant’s sweeping contention.
(b) If the issue of the existence of the charter party were left to the arbitrators and they found that it was never made, they would, unavoidably (unless they were insane), be obliged to conclude that the arbitration agreement had never been made. Such a conclusion would (1) negate the court’s prior contrary decision on a subject which … the Act commits to the court, and (2) would destroy the arbitrators’ authority to decide anything and thus make their decision a nullity.
(c) The [FAA] does not cover an arbitration agreement sufficiently broad to include a controversy as to the existence of the very contract which embodies the arbitration agreement. Section 2 of the Act describes only three types of agreement covered by the Act: One type is “an agreement … to submit to arbitration an existing controversy arising out of … a contract, transaction,” etc.; thus the parties here, after a dispute had arisen as to the existence of the charter party, might have made an agreement to submit to arbitration that “existing” controversy. But that is not this case. Section 2 also includes a “provision in … a contract evidencing a transaction … to settle by arbitration a controversy thereafter arising out of such contract or transaction….” Plainly such a provision does not include a provision in a contract to arbitrate the issue whether the minds of the parties ever met so as to bring about the very contract of which that arbitration clause is a part; a controversy relating to the denial that the parties ever made a contract is not a controversy arising out of that contract. Nor is it a controversy “arising out of a transaction evidenced by a contract,” for if no contract existed then there was no such transaction evidenced by a contract, therefore, no controversy arising out of that transaction. The third type of arbitration agreement described in §2 of the Act is a provision in a contract to settle by arbitration “a controversy thereafter arising out of … the refusal to perform the whole or any part thereof.” This is familiar language; it refers to a controversy, which parties to a contract may easily contemplate, arising when a party to the contract, without denying that he made it, refuses performance; it does not mean a controversy arising out of the denial by one of the parties that he ever made any contract whatsoever.
It is clear then that, even assuming arguendo, that a contract could be drawn containing an arbitration clause sufficiently broad to include a controversy as to whether the minds of the parties had ever met concerning the making of the very contract which embodies the arbitration clause, such a clause would not be within the [FAA]. Accordingly, it perhaps would not be immunized from the prestatutory rules inimical to arbitration, i.e., would not serve as the basis of a stay of the suit on the contract, leaving the parties to the arbitration called for by their agreement. Were the arbitration clause here sufficiently broad to call for arbitration of the dispute as to the existence of the charter party, it would, therefore, perhaps be arguable that it was entirely outside the Act, accordingly, irrelevant in the case before us; we need not consider that question, as we hold that the breadth of the arbitration clause is not so great and it is within the terms of §2 of the Act. We conclude that it would be improper to submit to the arbitrators the issue of the making of the charter party….
JUDGMENT OF 7 OCTOBER 1933, TOBLER v. JUSTIZKOMMISSION DES KANTONS SCHWYZ
DFT 59 I 177 (Swiss Fed. Trib.)
The appellant (“Tobler”) assigned his invention-patents to the respondent (“Blaser”) in a contract dated 13 April 1926. The contract contained the clause: “For the settlement of all disputes arising out of this contract the parties submit themselves to the judgment of an arbitrator, elected by common agreement, that is, the respective canton court president will be elected. Schwyz is expressly stipulated as seat of arbitration, where the arbitration proceedings are to be held.” … Tobler asserted claims to the patents and other rights in proceedings before the District Court Schwyz. The District Court Schwyz held that it lacked jurisdiction due to the arbitration clause.… [Blaser appealed and the Swiss Federal Tribunal dismissed:]…
[T]he arbitrator himself (and not the federal judge) shall decide on his competence if challenged by a party.… [D]ue to the external unity (contained in the same document) of the arbitration agreement with the underlying contract to which it refers, the arbitration agreement shares the legal nature of [the underlying contract]…. [T]herefore the dispute about the arbitration agreement’s binding nature (the competence of the arbitrator, insofar as dependent thereon) also appears as a dispute of substance and not as a dispute of procedure.… [T]he general subjugation to arbitration for the settlement of “disputes” arising from a contract, as agreed upon by the parties, also encompasses the dispute about the validity of the conclusion of this contract, that is [a dispute about] the existence of defects making the contract non-binding. The nullity of the underlying contract can therefore not result in the nullity of the arbitration agreement as well, but rather shall be only relevant for the substantive assessment of the claim by the arbitrator, [that is, only for] the claim’s consequences that the arbitrator shall decide….
Pursuant to the applicable jurisprudence of the Federal Court, the arbitration agreement is not a contract of substantive but of procedural content. Even if it [the arbitration agreement] is combined in one document with the underlying contract, governed by civil law, to which it refers and thereby appears as component of the latter, it is nevertheless not to be considered as a provision within [the underlying contract], but rather as an individual agreement of a special nature. Accordingly, the nullity of the main contract, assessed correctly, may not readily result in the nullity of the arbitration agreement without further considerations, but rather only under the condition that the grounds for nullity simultaneously affect the main contract and the arbitration agreement (as for example if one party signed the contract in the state of mental incapacity or was forced to sign). In the present case the objection that the contract dated 13 April 1926 is only a simulated transaction can only affect the main contract; [the same is true of other challenges to the underlying contract, because] they as well … only refer to defects that would adhere to the underlying contract (concerning assignment of patents). Furthermore, [there is no reason to reject the reasoning of] the District Court Schwyz … that the clause “for the settlement of all disputes arising out of this contract submit themselves to the judgment of an arbitrator…” encompasses the dispute about the validity of the main contract…. If even the dispute about the validity of the main contract is to be considered as within the competence of the arbitrator, then all the more this has to be assumed for the other objection of fraud, as it is raised by the applicant, that is, that the assignment of full entitlement to the patents in the contract dated 13 April 1926 concealed a mere trust relationship.
JUDGMENT OF 27 FEBRUARY 1970
6 Arb. Int’l 79 (German Bundesgerichtshof)
Under a contract made between 9 and 17 January 1952 the Plaintiff leased to the Defendant an area … for the mining of quartzite and other fire-proofing material. Under the contract the Defendant was (inter alia) to pay to the Plaintiff a “material levy” of DM 1.80 per tonne of quartzite rock and quartzite sand recovered. The contract contained the following clause: “The material levy shall be based on the standard wage of a quarry worker, shall rise and fall percentage-wise with the latter, but not below 1.80 DM per tonne.” The Defendant was also required to a certain extent to re-level the worked areas. On 26 May and 29 November 1955 respectively the parties signed an arbitration agreement, the beginning of which read: “Arbitration agreement to the contract of 9/17.1.1952 on the lease of land containing quartzite…. Differences of opinion or disputes arising from the above contract shall not be the subject of legal proceedings. Matters of dispute shall be decided by an arbitration procedure as defined in Article 1025 ff. of the Code of Civil Procedure.”16
When the Plaintiff in 1958 had doubts over the effectiveness of the material levy clause, he requested information on the matter from the Landeszentralbank M. The Landeszentralbank M. informed him that a value guarantee clause was involved which required approval pursuant to Paragraph 3 phrase 2 of the Currency Law.17 [Subsequently, a second Landeszentralbank rendered the same opinion.]…
After further discussions, the Plaintiff lodged a claim for the levelling and filling in of the leased areas. The Defendant pleaded the arbitration agreement and pleaded further that the Plaintiff had no claim to the levelling and filling in of the land because the lease was a nullity. The Regional Court allowed the Plaintiff’s claim. The Regional Appeal Court dismissed the Defendant’s appeal…. The Regional Appeal Court considered the arbitration agreement a nullity and stated in this connection: The term in the contract on the material levy represented a non-approvable value guarantee clause covered by Paragraph 3 phrase 2 of the Currency Law. With the refusal of approval by the Landeszentralbank the clause had become conclusively ineffective. Under Article 139 of the Civil Code this meant that the whole lease was a nullity. [Article 139 BGB (Burgerliches Gesetzbuch): “If part of a legal transaction is null, the whole of the transaction is null, unless it be assumed that it would also have been transacted without the invalid part.”] From this it followed, pursuant to Article 139 of the Civil Code, that the arbitration agreement was a nullity.
There were admittedly also so-called independent arbitration agreements, where the invalidity of the main contract did not involve the invalidity of the arbitration agreement. An independent arbitration agreement existed if the arbitral tribunal had to decide not only on claims arising from the existing main contract, but also on what were the main consequences of its invalidity. Arbitration agreements of this kind were the exception, however, because an independent arbitration agreement required “an unambiguous intention of the parties to this effect or other appropriate external circumstances.” Since nothing could be established to that effect, the rule would apply that a non-independent arbitration agreement existed which pursuant to Article 139 of the Civil Code was ineffective, as was the lease.
The [Appeal Court] based its decision on the nullity of the value guarantee clause. There are objections to this approach.
The material levy clause certainly comes under Paragraph 3 phrase 2 of the Currency Law because the amount of the levy is determined “automatically” by the standard wage of a quarry worker…. The validity of the arbitration agreement should not be assessed under Article 139 of the Civil Code. If, like the Appeal Court, we were to regard the arbitration agreement as part of a unified legal transaction consisting of main contract and arbitration agreement, we would have to pose the question crucial for the application of Article 139 of the Civil Code, whether the arbitration agreement would have been concluded without the main contract. Posing this question makes no sense; it would always be answered in the negative.
It is rather a question of whether the parties agreed that the arbitration tribunal should decide not only on claims arising from the valid main contract, but also on the validity of the main contract (and claims arising from any invalidity); if the parties have also referred to the arbitral tribunal the decision on the effectiveness of the main contract, the ineffectiveness of the main contract of course cannot affect the existence of the arbitration agreement. It is not correct that in the present case the arbitration would be redundant because the parties were in agreement on the ineffectiveness of the main contract (as the Regional Court decided) because it is the claims arising directly from that ineffectiveness which are at issue.
It is therefore a question of how the arbitration agreement is to be interpreted. The Appeal Court also takes this into account, as already stated; however its argument on Article 139 of the Civil Code is incorrect, albeit immaterial. The decision therefore depends on what is meant by “differences of opinion or disputes arising from the contract” and by “matters of dispute” in Paragraph 1 of the arbitration agreement, i.e., whether this includes only claims arising from a valid main contract or also disputes on the validity of the latter or on the consequences of invalidity….
The wording of Paragraph 1 of the arbitration agreement would allow both interpretations. Arbitration clauses with identical wording or identical content, such as Paragraph 1 of the arbitration agreement contains, are frequently agreed. If we accept that the interpretation of an arbitration agreement is basically a matter for the trial judge we must face the fact that judicial practice will give different interpretations to identically worded clauses which continually recur and can be regarded as typical agreements. This is unsatisfactory. Haphazard interpretations should be avoided and a rule of construction should be established which prescribes to the judge “in cases of doubt” the parties’ intention—either the restricted or the more comprehensive jurisdiction of the arbitral tribunal.
With continually recurring clauses … the task of the court of third and last instance is to facilitate … construction by such a rule. In the … case law of the Federal Supreme Court many such rules have been developed (For example: the intention of the parties will be regularly to subject an arbitration agreement to the same law as the main contract …). In reality the Appeal Court also resorted to such a rule of construction by designating as the norm the non independent arbitration agreement, which does not permit the arbitral tribunal to decide on the validity of the main contract, and by designating as the exception an arbitration agreement providing for a wider jurisdiction of the arbitral tribunal.
The Federal Supreme Court cannot agree with the position taken by the Appeal Court…. The Federal Supreme Court has not yet given a general ruling on the question whether in cases of doubt the narrower or wider construction of a clause as agreed here is to prevail. The Supreme Court has concerned itself with a similar clause, such as that on which Hamburg Friendly Arbitration is based. This clause states that the arbitration tribunal has to decide not only on quality questions, but also “on all matters of dispute arising from the transaction, in particular also on legal matters.” This clause does not differ materially from the clause under discussion. It might appear that because of the expression “all matters of dispute,” it is more comprehensive. This difference has no significance, however, for the question at issue here; neither the presence of the word “all” in the one clause nor its absence in the other clause can indicate whether the arbitral tribunal has to decide on the effectiveness of the main contract or not. The attaching of excessive importance to such wording is just as impractical as the distinction between the terms “from the contract” and “on the contract” considered by the Appeal Court.
The Hamburg Appeal Court has invariably interpreted the clause used in Hamburg Friendly Arbitration to mean that the arbitral tribunal is empowered to decide also on the validity of the main contract. The Supreme Court has approved this interpretation. This points to a rule of construction, according to which in cases of doubt the arbitral tribunal must be assumed to possess a more comprehensive jurisdiction. The Appeal Court discusses the established case law concerning Hamburg Friendly Arbitration, but just as with the established case law on other arbitration agreements contained in frequently used business terms, the Appeal Court attached no significance to it because “quasi-institutionalised arbitral tribunals or else established commercial usages” are there involved.
This means that also in these cases the jurisdiction of the arbitral tribunal is determined by the interpretation of the arbitration agreement contained in business terms. If in commercial dealings the agreement is interpreted as meaning a more comprehensive jurisdiction of the arbitral tribunal, this is nevertheless an indication that it is not in fact regarded the rule in commercial dealings to leave to the arbitral tribunal only the decision on claims from an effective contract. Since we are here concerned with the usual case, the question whether in cases of doubt such a limited jurisdiction is intended or not should be considered in the light of what reasonable parties in general regard as corresponding with their interests.… There is every reason to presume that reasonable parties will wish to have the relationships created by their contract and the claims arising therefrom, irrespective of whether their contract is effective or not, decided by the same tribunal and not by two different tribunals, i.e., the arbitral tribunal for the dispute on claims from a valid contract and the state tribunal for the dispute on the effectiveness of the contract and on the consequences of its ineffectiveness.
Experience shows that as soon as a dispute of any kind arises from a contract, objections are very often also raised against its validity. For example, if the interpretation of a contract is in dispute, one of the parties will soon come forward with the objection that the contract did not come into being because no valid meeting of the minds had been reached, or its declaration of intention was invalidated due to mistake; in such a case the same facts of the case usually have to be evaluated both for interpretation and for lack of intention. The fact that the assessment of these facts has to be entrusted to different tribunals according to one’s approach will scarcely occur to the contracting parties.
Above all, however, the parties to an arbitration agreement will as a rule wish to avoid the unpleasant consequences of separate jurisdiction. For if the arbitral tribunal is not allowed to decide also on the effectiveness of the main contract, the situation is as follows: either it must, as soon as this point is disputed in the arbitration procedure, refrain from further activity and refer the parties for clarification of this dispute to the ordinary court; if the latter confirms the effectiveness of the main contract, the parties will have to return to the arbitration tribunal and continue the dispute there. Or the arbitral tribunal can, if it finds the main contract to be effective continue its proceedings…); there is then the danger, however, that the state tribunal will find differently on the effectiveness of the main contract than the arbitral tribunal and the arbitral award will therefore be reversed. Both outcomes cannot be desirable to reasonable parties whose purpose in concluding an arbitration agreement is usually to accelerate a decision..
The Supreme Court arrives in the end to the conclusion that an arbitration clause such as the present one means in cases of doubt that the arbitral tribunal shall also decide on the question of the validity of the contract and on the claims arising in the event of nullity…. The plea that arbitration was agreed upon … is therefore successful.
ALL-UNION EXPORT-IMPORT ASSOCIATION SOJUZNEFTEEXPORT (MOSCOW) v. JOC OIL, LTD
Award in Foreign Trade Arb. Comm’n at USSR Chamber of Commerce & Industry, Moscow Arb. Case No. 109/1980 of 9 July 1984, XVIII Y.B. Comm. Arb. 92 (1993)
[Sojuznefteexport (the “Association” or “SNE”) was a foreign trade organization established under the laws of the former Union of Soviet Socialist Republics (“USSR”). In 1976, SNE entered into various agreements to sell quantities of oil to JOC Oil Limited (“JOC”), a Bermuda company. The purchase agreements incorporated SNE’s standard conditions, which contained the following arbitration clause:
“All disputes or differences which may arise out of this contract or in connection with it are to be settled, without recourse to the general Courts of law, in the Commission of the U.S.S.R. Chamber of Commerce and Industry in Moscow [“FTAC”], in conformity with the rules of procedure of the above Commission.”
JOC took delivery of 33 oil shipments (worth approximately $100 million) without paying for them. Following JOC’s non-payment, SNE initiated arbitration under the arbitration clause set forth above. JOC replied by claiming that the purchase agreement had not been executed by two authorized representatives of SNE and accordingly was void under Soviet law. JOC also alleged that, as a consequence, the arbitral tribunal lacked competence to adjudicate the dispute because the arbitration clause was void. SNE claimed that the sales agreement was not void and that, even if it were, the arbitration clause was separable, and the law applicable to that agreement did not require two signatures to be valid.]
1. The FTAC has confirmed the agreement of the parties as to the material law to be applied to the dispute between them. As this law, the parties have agreed upon Soviet law. The Commission has therefore decided the dispute being guided by the corresponding provisions of the Fundamentals of Civil Legislation of the USSR and of the Union Republics of 1961 and the Civil Code of the RSFSR of 1964….
2. According to Article 27 of the Civil Procedural Code of the RSFSR in cases contemplated by law of International Treaty, a dispute arising out of civil legal relationships, by agreement of the parties can be referred for resolution by an arbitration body, the Maritime Arbitration Commission or the FTAC at the Chamber of Commerce and Industry of the USSR. As stated in the statute on the FTAC, confirmed by the Decree of the Presidium of the Supreme Soviet of the USSR of the 16th April 1975, this Commission is a permanently functioning arbitration court and decides disputes arising from contractual and other civil legal relationships, arising between the subjects of law of different countries in relation to the implementation of foreign trade and of other international economic relationships. The FTAC considers disputes where there is a written agreement between the Parties to submit for its decision a dispute which has arisen or which may arise..
The Rules … envisage different types of written agreements of the parties as to the submission of a dispute to the FTAC and do not require that this agreement be expressed in an independent document signed by the parties. The Rules also do not require fulfillment of those requirements which Soviet civil law, in accordance with articles 45 and 565 of the [Civil Code], require for the conclusion of a foreign trade transaction of which one party is a Soviet Organization. This provision of the Rules does not depart from Art. II(2) of the New York Convention in which it is stated that an agreement, establishing the arbitration procedure for hearing disputes, “shall include an arbitral clause in a contract or an arbitration agreement, signed by the parties or contained in an exchange of letters or telegrams.”.
All this allows the Commission to recognize the arbitration clause contained in the contract signed in the name of the Association “Sojuznefteexport” by the Chairman of the Association V.E. Merkulow and in the name of the firm “JOC Oil” by John Deuss as a written agreement satisfying the requirements of the law—the Statute on the FTAC and its Rules as to the form of concluding such an agreement.
So far as the dispute is concerned which arose during the proceedings concerning the inter-relationship of the contract which established the rights and duties of the parties arising out of the sale of oil and oil products (the material-legal contract) and the arbitration agreement (the arbitration clause), that is to say as to whether the agreement is independent (autonomous) in relation to the contract independently of the decision as to the question of the validity or invalidity of the contract, the FTAC has come to the following conclusion. In the Rules of the FTAC there are no direct references to the fact that an arbitration agreement (arbitration clause) is autonomous in relation to the contract. But the above analysis of the Statute of the FTAC and of its Rules which have defined the competence of the Commission, and also the practice of the Commission, allows the conclusion to be drawn that the independence of an arbitration clause is not subject to doubt. Thus, in the ruling of the FTAC on the 29th January 1974, taken on hearing a dispute between a Soviet and an Indian organization, the arbitration agreement is treated as a procedural contract and not as an element (condition) of a material-legal contract (Arbitration Practice of the FTAC, Moscow 1979, part VII, page 68). The subject of an arbitration agreement (clause) is distinguished from the subject of a material-legal contract (of the contract of purchase and sale). The subject of the agreement is the obligation of the parties to submit the examination of a dispute between a plaintiff and defendant to arbitration (the FTAC) at the place where it sits, that is to say in Moscow, having excluded by that very fact the possibility of the resolution of the dispute in a state court.
Predominant in the literature is the recognition of the autonomy of an arbitration agreement, its independence in relation to the contract. Such is the point of view of the overwhelming majority of Soviet authors who have expressed themselves on this subject. The opinion of Soviet scholars are not unanimous but the Arbitration Commission considers as correct the opinion of those scholars, and this opinion is dominant, who recognize the autonomy of an arbitration clause, since this opinion relies upon the propositions of Soviet law cited above, from which there flows its autonomy as an independent procedural agreement….
The principle of the independence of an arbitration clause (in relation to the contract, to which the said clause relates), is now predominant both in doctrine as well as in practice. In a developed form, this principle has received its expression in the  Arbitration Rules of UNCITRAL (Art. 21.2)….
Taking into account the cited facts and observations as to the nature of an arbitration agreement (clause), the Commission has come to the conclusion that, by virtue of its procedural content and independently of the form of its conclusion, it is autonomous in relation to the material-legal contract. An arbitration clause, included in a contract, means that there are regulated in it relationships different in legal nature, and that therefore the effect of the arbitration clause is separate from the effect of the remaining provisions of the foreign trade contract.
The requirements laid down for the recognition of the validity of the two contracts, which differ in their legal nature, need not coincide. Different also are the consequences of the recognition of these contracts as invalid. An arbitration agreement can be recognized as invalid only in the case where there are discovered in it defects in will (mistake, fraud and so on), the breach of the requirements of the law relating to the content and the form of an arbitration agreement which has been concluded. Such circumstances leading to the invalidity of an arbitration agreement do not exist and neither one of the parties stated its invalidity referring to such circumstances. [JOC Oil] considers the arbitration agreement as invalid for other reasons asserting that it is a component part of a contract which, in its opinion, as a whole (together with the arbitration clause) is invalid.
From this there follows the incorrectness in the objections relating to the fact that the New York Convention is applicable only to arbitration agreements on the basis of disputes arising out of specific contracts and therefore is inapplicable to contracts recognized as invalid. In Article II of the said Convention there is envisaged the enforcement of arbitral awards in relation to disputes which arise and can arise also in connection with other specific legal relationships, the object of which can be the subject of arbitration proceedings. This means, that since in connection with the invalidity of a contract, the applicable law envisages legal consequences, which are determined by a different non-contractual legal relationship but are connected with the invalid contract, the arbitrators have the right to examine the dispute and to rule upon it.
Proceeding from the above analysis of the Soviet material and procedural legislation applicable to the dispute in question, the Commission has recognized that an arbitration agreement (arbitration clause) is a procedural contract, independent from the material-legal contract and that therefore the question as to the validity or invalidity of this contract does not affect the agreement of the parties about the submission of the existing dispute to the jurisdiction of the FTAC. The Commission has come to the conclusion that the arbitration clause contained in the contract is valid and therefore in accordance with the right assigned to it has recognized itself as competent to hear the dispute as to its essence and to rule upon it.
3. The Commission has examined further the application of the representatives of the firm “JOC Oil” as to recognizing as invalid the contract of 17th November 1976 from which the dispute has arisen and has satisfied this application in view of the failure to observe the procedure for its signing (article 14 of the Fundamentals, article 45 of the [Civil Code]). [The tribunal concluded that the sales agreement was invalid because of failure to respect the two-signature rule for foreign trade organizations.]
4. On the question of the consequences of recognizing the contract of the 17th November 1976 as invalid, the representatives of the parties as pointed out in the deposition of the facts of the case, proceeded from a different approach to the question as to whether the recognition of the contract as invalid had any legal consequences and in the case of a positive answer to this question, as to what these consequences are.
In examining this question, the Commission established that according to article 14 of the Fundamentals (article 48 of the [Civil Code]) under an invalid transaction each of the parties is obligated to return to the other party everything received under the transaction and if it is impossible to return what has been received in kind, to reimburse its value in money if other consequences of the invalidity of the transaction are not set out in the law, that is to say bilateral (mutual) restitution must be effected.
The Arbitration Commission has confirmed further that, the recognition of the transaction as invalid does not mean that such a transaction does not give rise to any legal consequences, that it is nothing, legally amounting to a nullity, as asserted by the defendant on the main claim. As is evident from the content of article 48 of the [Civil Code], a court or arbitration tribunal in the event of a dispute must discuss the question of the consequences of the invalidity of a transaction and rule upon the same.
The assertion of the representatives of the Firm that the recognition of the contract as invalid must result in the refusal of the Arbitration Tribunal to hear the case on the basis that there has not arisen a legal relationship envisaged by the contract, is mistaken. It contradicts Soviet law applicable in this case, the practice of its application and the very concept of a transaction. In reality, a transaction, being a legal fact, is not always confined only to the expression of the will of the parties, directed to the achievement of a legal result, but gives rise, in the event of the breach of the requirements of the law, in relations to the content and form of the transaction, to other consequences envisaged by the law….
[The tribunal held that, although the underlying sales contract was void, Soviet principles of restitution applied. Under these principles, the tribunal concluded that “unilateral restitution” was required and awarded SNE the value of the oil shipped to JOC Oil, at prevailing oil prices at the time it was received by JOC Oil. It also awarded SNE all profits realized by JOC Oil from the sale of the oil (in an amount equal to market interest rates). This produced an award of approximately $200 million in SNE’s favor. The tribunal did not award SNE another $120 million, which it claimed in lost profits.
The award was made in the then-USSR, and JOC Oil did not seek annulment in the USSR. Thereafter, SNE sought to enforce the award in Bermuda. The first instance court denied recognition on various grounds, including that the tribunal lacked jurisdiction. The court held that “based on the Tribunal’s finding that the underlying contract was invalid ab initio, then under both Soviet and English law there never was any contract between the parties from the very onset; so that there never was an arbitration clause or agreement which could be submitted to arbitration.” Sojuznefteexport v. JOC Oil Co., 2 Mealey’s Int’l Arb. Rep. 400, 486 (1987) (Bermuda Sup. Ct. 1987). This judgment was reversed on appeal in a 2-1 majority decision. Sojuznefteexport v. JOC Oil Co., XV Y.B. Comm. Arb. 384 (Bermuda Ct. App. 1989). The dissenting judge said, in his opinion, that it was “quite ridiculous to suggest that this arbitration clause which formed part of that ‘non-existent’ contract would nevertheless, somehow, be deemed to have come into existence.”]
BUCKEYE CHECK CASHING, INC. v. CARDEGNA
546 U.S. 440 (2006)
JUSTICE SCALIA. We decide whether a court or an arbitrator should consider the claim that a contract containing an arbitration provision is void for illegality.
Respondents John Cardegna and Donna Reuter entered into various deferred-payment transactions with petitioner Buckeye Check Cashing (“Buckeye”), in which they received cash in exchange for a personal check in the amount of the cash plus a finance charge. For each separate transaction they signed a “Deferred Deposit and Disclosure Agreement” (“Agreement”), which included the following arbitration provisions:
“1. Arbitration Disclosure By signing this Agreement, you agree that if a dispute of any kind arises out of this Agreement or your application therefore or any instrument relating thereto, then either you or we or third-parties, involved can choose to have that dispute resolved by binding arbitration as set forth in Paragraph 2 below….
2. Arbitration Provisions Any claim, dispute, or controversy … arising from or relating to this Agreement … or the validity, enforceability, or scope of this Arbitration Provision or the entire Agreement (collectively “Claim”), shall be resolved, upon the election of you or us or said third-parties, by binding arbitration…. This arbitration agreement is made pursuant to a transaction involving interstate commerce, and shall be governed by the [FAA]. The arbitrator shall apply applicable substantive law constraint [sic] with the FAA and applicable statu[t]es of limitations and shall honor claims of privilege recognized by law….”
Respondents brought this putative class action in Florida state court, alleging that Buckeye charged usurious interest rates and that the Agreement violated various Florida lending and consumer-protection laws, rendering it criminal on its face. Buckeye moved to compel arbitration. The trial court denied the motion, holding that a court rather than an arbitrator should resolve a claim that a contract is illegal and void ab initio. [A Florida appellate court] reversed, holding that because respondents did not challenge the arbitration provision itself, but instead claimed that the entire contract was void, the agreement to arbitrate was enforceable, and the question of the contract’s legality should go to the arbitrator. Respondents appealed, and the Florida Supreme Court reversed, reasoning that to enforce an agreement to arbitrate in a contract challenged as unlawful “‘could breathe life into a contract that not only violates state law, but also is criminal in nature …”’ 894 So.2d 860 862 (2005). We granted certiorari [i.e., discretionary review].
To overcome judicial resistance to arbitration, Congress enacted the [FAA]. Section 2 embodies the national policy favoring arbitration and places arbitration agreements on equal footing with all other contracts:
“A written provision in … a contract … to settle by arbitration a controversy thereafter arising out of such contract … or an agreement in writing to submit to arbitration an existing controversy arising out of such a contract … shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.”
Challenges to the validity of arbitration agreements “upon such grounds as exist at law or in equity for the revocation of any contract” can be divided into two types. One type challenges specifically the validity of the agreement to arbitrate. See, e.g., Southland Corp. v. Keating, 465 U.S. 1, 4-5 (1984) (challenging the agreement to arbitrate as void under California law insofar as it purported to cover claims brought under the state Franchise Investment Law). The other challenges the contract as a whole, either on a ground that directly affects the entire agreement (e.g., the agreement was fraudulently induced), or on the ground that the illegality of one of the contract’s provisions renders the whole contract invalid.18 …
In Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395 (1967), we addressed the question of who—court or arbitrator—decides these two types of challenges. The issue in the case was “whether a claim of fraud in the inducement of the entire contract is to be resolved by the federal court, or whether the matter is to be referred to the arbitrators.” Guided by §4 of the FAA, we held that “if the claim is fraud in the inducement of the arbitration clause itself—an issue which goes to the making of the agreement to arbitrate—the federal court may proceed to adjudicate it. But the statutory language does not permit the federal court to consider claims of fraud in the inducement of the contract generally.” We rejected the view that the question of “severability” was one of state law, so that if state law held the arbitration provision not to be severable a challenge to the contract as a whole would be decided by the court.
Subsequently, in Southland Corp., we held that the FAA “create[d] a body of federal substantive law,” which was “applicable in state and federal court.” 465 U.S., at 12. We rejected the view that state law could bar enforcement of §2, even in the context of state-law claims brought in state court.
Prima Paint and Southland answer the question presented here by establishing three propositions. First, as a matter of substantive federal arbitration law, an arbitration provision is severable from the remainder of the contract. Second, unless the challenge is to the arbitration clause itself, the issue of the contract’s validity is considered by the arbitrator in the first instance. Third, this arbitration law applies in state as well as federal courts. The parties have not requested, and we do not undertake, reconsideration of those holdings. Applying them we conclude that because respondents challenge the Agreement, but not specifically its arbitration provisions, those provisions are enforceable apart from the remainder of the contract. The challenge should therefore be considered by an arbitrator, not a court.
In declining to apply Prima Paint’s rule of severability, the Florida Supreme Court relied on the distinction between void and voidable contracts. “Florida public policy and contract law,” it concluded, permit “no severable, or salvageable, parts of a contract found illegal and void under Florida law.” 894 So.2d, at 864. Prima Paint makes this conclusion irrelevant. That case rejected application of state severability rules to the arbitration agreement without discussing whether the challenge at issue would have rendered the contract void or voidable. See 388 U.S., at 400-404. Indeed, the opinion expressly disclaimed any need to decide what state-law remedy was available, (though Justice Black’s dissent asserted that state law rendered the contract void). Likewise in Southland, which arose in state court, we did not ask whether the several challenges made there—fraud, misrepresentation, breach of contract, breach of fiduciary duty, and violation of the California Franchise Investment Law—would render the contract void or voidable. We simply rejected the proposition that the enforceability of the arbitration agreement turned on the state legislature’s judgment concerning the forum for enforcement of the state-law cause of action. See 465 U.S. at 10. Here, we cannot accept the Florida Supreme Court’s conclusion that enforceability of the arbitration agreement should turn on “Florida public policy and contract law,” 894 So.2d at 864.
Respondents assert that Prima Paint’s rule of severability does not apply in state court. They argue that Prima Paint interpreted only §§3 and 4—two of the FAA’s procedural provisions, which appear to apply by their terms only in federal court—but not §2, the only provision that we have applied in state court. This does not accurately describe Prima Paint. Although §4, in particular, had much to do with Prima Paint’s understanding of the rule of severability, see 388 U.S., at 403-404, this rule ultimately arises out of §2, the FAA’s substantive command that arbitration agreements be treated like all other contracts. The rule of severability establishes how this equal-footing guarantee for “a written [arbitration] provision” is to be implemented. Respondents’ reading of Prima Paint as establishing nothing more than a federal-court rule of procedure also runs contrary to Southland’s understanding of the case. One of the bases for Southland’s application of §2 in state court was precisely Prima Paint’s “reli[ance] for [its] holding on Congress’ broad power to fashion substantive rules under the Commerce Clause.” 465 U.S. at 11; Prima Paint, at 407 (Black, J., dissenting) (“the Court here holds that the [FAA], as a matter of federal substantive law …” (emphasis added))….
Respondents point to the language of §2, which renders “valid, irrevocable, and enforceable” “a written provision in” or “an agreement in writing to submit to arbitration an existing controversy arising out of” a “contract.” Since, respondents argue, the only arbitration agreements to which §2 applies are those involving a “contract,” and since an agreement void ab intitio under state law is not a “contract,” there is no “written provision” in or “controversy arising out of” a “contract,” to which §2 can apply. This argument echoes Justice Black’s dissent in Prima Paint: “Sections 2 and 3 of the Act assume the existence of a valid contract. They merely provide for enforcement where such a valid contract exists.” We do not read “contract” so narrowly. The word appears four times in §2. Its last appearance is in the final clause, which allows a challenge to an arbitration provision “upon such grounds as exist at law or in equity for the revocation of any contract.” (Emphasis added.) There can be no doubt that “contract” as used this last time must include contracts that later prove to be void. Otherwise, the grounds for revocation would be limited to those that rendered a contract voidable—which would mean (implausibly) that an arbitration agreement could be challenged as voidable but not as void. Because the sentence’s final use of “contract” so obviously includes putative contracts, we will not read the same word earlier in the same sentence to have a more narrow meaning.19…
It is true, as respondents assert, that the Prima Paint rule permits a court to enforce an arbitration agreement in a contract that the arbitrator later finds to be void. But it is equally true that respondents’ approach permits a court to deny effect to an arbitration provision in a contract that the court later finds to be perfectly enforceable. Prima Paint resolved this conundrum—and resolved it in favor of the separate enforceability of arbitration provisions. We reaffirm today that, regardless of whether the challenge is brought in federal or state court, a challenge to the validity of the contract as a whole, and not specifically to the arbitration clause, must go to the arbitrator….
FIONA TRUST & HOLDING CO. v. PRIVALOV
 UKHL 40 (House of Lords)
LORD HOFFMANN. This appeal concerns the scope and effect of arbitration clauses in eight charterparties in Shelltime 4 form made between eight companies forming part of the Sovcomflot group of companies (which is owned by the Russian state) and eight charterers. It is alleged by the owners that the charters were procured by the bribery of senior officers of the Sovcomflot group by a Mr Nikitin, who controlled … the charterer companies.… [The owners] have purported to rescind the charters on this ground and the question is whether the issue of whether they were entitled to do so should be determined by arbitration or by a court. The owners have commenced court proceedings for a declaration that the charters have been validly rescinded and the charterers have applied for a stay under §9 of the Arbitration Act 1996. [The Court of Appeal granted the stay and this appeal followed.]
The case has been argued on the basis that there are two issues: first, whether, as a matter of construction, the arbitration clause is apt to cover the question of whether the contract was procured by bribery, secondly, whether it is possible for a party to be bound by submission to arbitration when he alleges that, but for the bribery, he would never have entered into the contract containing the arbitration clause.… I start by setting out the arbitration clause …:
“41(a) This charter shall be construed and the relations between the parties determined in accordance with the laws of England.
(b) Any dispute arising under this charter shall be decided by the English courts to whose jurisdiction the parties hereby agree.
(c) Notwithstanding the foregoing, but without prejudice to any party’s right to arrest or maintain the arrest of any maritime property, either party may, by giving written notice of election to the other party, elect to have any such dispute referred … to arbitration in London, one arbitrator to be nominated by Owners and the other by Charterers, and in case the arbitrators shall not agree to the decision of an umpire, whose decision shall be final and binding upon both parties. Arbitration shall take place in London in accordance with the London Maritime Association of Arbitrators, in accordance with the provisions of the Arbitration Act 1950, or any statutory modification or re-enactment thereof for the time being in force.
(i) A party shall lose its right to make such an election only if: (a) it receives from the other party a written notice of dispute which (1) states expressly that a dispute has arisen out of this charter; (2) specifies the nature of the dispute; and (3) refers expressly to this clause 41(c) And (b) it fails to give notice of election to have the dispute referred to arbitration not later than 30 days from the date of receipt of such notice of dispute …”
It will be observed that clause 41(b) is a jurisdiction clause in respect of “any dispute arising under this charter” which is then incorporated by reference (by the words “any such dispute”) in the arbitration clause in 41(c). So the first question is whether clause 41(b) refers the question of whether the charters were procured by bribery to the jurisdiction of the English court. If it does, then a party may elect under clause 41(c) to have that question referred to arbitration. But I shall for the sake of convenience discuss the clause as if it was a simple arbitration clause. The owners say that for two reasons it does not apply. The first is that, as a matter of construction, the question is not a dispute arising under the charter. The second is that the jurisdiction and arbitration clause is liable to be rescinded and therefore not binding upon them….
Arbitration is consensual. It depends upon the intention of the parties as expressed in their agreement. Only the agreement can tell you what kind of disputes they intended to submit to arbitration. But the meaning which parties intended to express by the words which they used will be affected by the commercial background and the reader’s understanding of the purpose for which the agreement was made. Businessmen in particular are assumed to have entered into agreements to achieve some rational commercial purpose and an understanding of this purpose will influence the way in which one interprets their language.
In approaching the question of construction, it is therefore necessary to inquire into the purpose of the arbitration clause. As to this, I think there can be no doubt. The parties have entered into a relationship, an agreement or what is alleged to be an agreement or what appears on its face to be an agreement, which may give rise to disputes. They want those disputes decided by a tribunal which they have chosen, commonly on the grounds of such matters as its neutrality, expertise and privacy, the availability of legal services at the seat of the arbitration and the unobtrusive efficiency of its supervisory law. Particularly in the case of international contracts, they want a quick and efficient adjudication and do not want to take the risks of delay, in too many cases, partiality, in proceedings before a national jurisdiction.
If one accepts that this is the purpose of an arbitration clause, its construction must be influenced by whether the parties, as rational businessmen, were likely to have intended that only some of the questions arising out of their relationship were to be submitted to arbitration and others were to be decided by national courts. Could they have intended that the question of whether the contract was repudiated should be decided by arbitration but the question of whether it was induced by misrepresentation should be decided by a court? If, as appears to be generally accepted, there is no rational basis upon which businessmen would be likely to wish to have questions of the validity or enforceability of the contract decided by one tribunal and questions about its performance decided by another, one would need to find very clear language before deciding that they must have had such an intention.
A proper approach to construction therefore requires the court to give effect, so far as the language used by the parties will permit, to the commercial purpose of the arbitration clause. But the same policy of giving effect to the commercial purpose also drives the approach of the courts (and the legislature) to the second question raised in this appeal, namely, whether there is any conceptual reason why parties who have agreed to submit the question of the validity of the contract to arbitration should not be allowed to do so.
There was for some time a view that arbitrators could never have jurisdiction to decide whether a contract was valid. If the contract was invalid, so was the arbitration clause. In Overseas Union Ins. Ltd v. AA Mutual Int’l Ins. Co Ltd  2 Lloyd’s Rep 63, 66, Evans J said that this rule “owes as much to logic as it does to authority.” But the logic of the proposition was denied by the Court of Appeal in Harbour Assur. Co (UK) Ltd v. Kansa Gen. Int’l Ins. Co.  QB 70, and the question was put beyond doubt by §7 of the Arbitration Act 1996[, which provides]:
“Unless otherwise agreed by the parties, an arbitration agreement which forms or was intended to form part of another agreement (whether or not in writing) shall not be regarded as invalid, non-existent or ineffective because that other agreement is invalid, or did not come into existence or has become ineffective, and it shall for that purpose be treated as a distinct agreement.”
This section shows a recognition by Parliament that, for the reasons I have given in discussing the approach to construction, businessmen frequently do want the question of whether their contract was valid, or came into existence, or has become ineffective, submitted to arbitration and that the law should not place conceptual obstacles in their way.
With that background, I turn to the question of construction. Your Lordships were referred to a number of cases in which various forms of words in arbitration clauses have been considered. Some of them draw a distinction between disputes “arising under” and “arising out of” the agreement. In Heyman v. Darwins Ltd AC 356, 399, Lord Porter said that the former had a narrower meaning than the latter but in Union of India v. E B Aaby’s Rederi A/S (The Evje)  AC 797, 814 Viscount Dilhorne and Lord Salmon said that they could not see the difference between them….
I do not propose to analyse these and other such cases any further because in my opinion the distinctions which they make reflect no credit upon English commercial law. It may be a great disappointment to the judges who explained so carefully the effects of the various linguistic nuances if they could learn that the draftsman of so widely used a standard form as Shelltime 4 obviously regarded the expressions “arising under this charter” in clause 41(b) and “arisen out of this charter” in clause 41(c)(1)(a)(i) as mutually interchangeable. So I applaud the opinion expressed … in the Court of Appeal that the time has come to draw a line under the authorities to date and make a fresh start. I think that a fresh start is justified by the developments which have occurred in this branch of the law in recent years and in particular by the adoption of the principle of separability by Parliament in §7 of the 1996 Act. That section was obviously intended to enable the courts to give effect to the reasonable commercial expectations of the parties about the questions which they intended to be decided by arbitration. But §7 will not achieve its purpose if the courts adopt an approach to construction which is likely in many cases to defeat those expectations. The approach to construction therefore needs to be re-examined.
In my opinion the construction of an arbitration clause should start from the assumption that the parties, as rational businessmen, are likely to have intended any dispute arising out of the relationship into which they have entered or purported to enter to be decided by the same tribunal. The clause should be construed in accordance with this presumption unless the language makes it clear that certain questions were intended to be excluded from the arbitrator’s jurisdiction. As Longmore LJ remarked: “if any businessman did want to exclude disputes about the validity of a contract, it would be comparatively easy to say so.”
This appears to be the approach adopted in Germany: see the Bundesgerichtshof’s Decision of 27 February 1970 (1990):
“There is every reason to presume that reasonable parties will wish to have the relationships created by their contract and the claims arising therefrom, irrespective of whether their contract is effective or not, decided by the same tribunal and not by two different tribunals.”
If one adopts this approach, the language of clause 41 of Shelltime 4 contains nothing to exclude disputes about the validity of the contract, whether on the grounds that it was procured by fraud, bribery, misrepresentation or anything else. In my opinion it therefore applies to the present dispute.
The next question is whether, in view of the allegation of bribery, the clause is binding upon the owners. They say that if they are right about the bribery, they were entitled to rescind the whole contract, including the arbitration clause. The arbitrator therefore has no jurisdiction and the dispute should be decided by the court.
The principle of separability enacted in §7 means that the invalidity or rescission of the main contract does not necessarily entail the invalidity or rescission of the arbitration agreement. The arbitration agreement must be treated as a “distinct agreement” and can be void or voidable only on grounds which relate directly to the arbitration agreement. Of course there may be cases in which the ground upon which the main agreement is invalid is identical with the ground upon which the arbitration agreement is invalid. For example, if the main agreement and the arbitration agreement are contained in the same document and one of the parties claims that he never agreed to anything in the document and that his signature was forged, that will be an attack on the validity of the arbitration agreement. But the ground of attack is not that the main agreement was invalid. It is that the signature to the arbitration agreement, as a “distinct agreement,” was forged. Similarly, if a party alleges that someone who purported to sign as agent on his behalf had no authority whatever to conclude any agreement on his behalf, that is an attack on both the main agreement and the arbitration agreement.
On the other hand, if (as in this case) the allegation is that the agent exceeded his authority by entering into a main agreement in terms which were not authorised or for improper reasons, that is not necessarily an attack on the arbitration agreement. It would have to be shown that whatever the terms of the main agreement or the reasons for which the agent concluded it, he would have had no authority to enter into an arbitration agreement. Even if the allegation is that there was no concluded agreement (for example, that terms of the main agreement remained to be agreed) that is not necessarily an attack on the arbitration agreement. If the arbitration clause has been agreed, the parties will be presumed to have intended the question of whether there was a concluded main agreement to be decided by arbitration.
In the present case, it is alleged that the main agreement was in uncommercial terms which, together with other surrounding circumstances, give rise to the inference that an agent acting for the owners was bribed to consent to it. But that does not show that he was bribed to enter into the arbitration agreement. It would have been remarkable for him to enter into any charter without an arbitration agreement, whatever its other terms had been. [The owners argued] that but for the bribery, the owners would not have entered into any charter with the charterers and therefore would not have entered into an arbitration agreement. But that is in my opinion exactly the kind of argument which §7 was intended to prevent. It amounts to saying that because the main agreement and the arbitration agreement were bound up with each other, the invalidity of the main agreement should result in the invalidity of the arbitration agreement. The one should fall with the other because they would never have been separately concluded. But §7 in my opinion means that they must be treated as having been separately concluded and the arbitration agreement can be invalidated only on a ground which relates to the arbitration agreement and is not merely a consequence of the invalidity of the main agreement.
[The owners argued] that the approach to construction and separability adopted by the Court of Appeal infringed the owners’ right of access to a court for the resolution of their civil disputes, contrary to Article 6 of the European Convention on Human Rights. I do not think there is anything in this point. The European Convention was not intended to destroy arbitration. Arbitration is based upon agreement and the parties can by agreement waive the right to a court. If it appears upon a fair construction of the charter that they have agreed to the arbitration of a particular dispute, there is no infringement of their Convention right.
For these reasons, … I would hold that the charterers are entitled to a stay of the proceedings to rescind the charters and dismiss the appeal.
LORD HOPE OF CRAIGHEAD.… No contract of this kind is complete without a clause which identifies the law to be applied and the methods to be used for the determination of disputes. Its purpose is to avoid the expense and delay of having to argue about these matters later. It is the kind of clause to which ordinary businessmen readily give their agreement so long as its general meaning is clear. They are unlikely to trouble themselves too much about its precise language or to wish to explore the way it has been interpreted in the numerous authorities, not all of which speak with one voice. Of course, the court must do what it can to provide charterers and shipowners with legal certainty at the negotiation stage as to what they are agreeing to. But there is no conflict between that proposition and [a liberal approach to] interpretation of jurisdiction and arbitration clauses in international commercial contracts. The proposition that any jurisdiction or arbitration clause in an international commercial contract should be liberally construed promotes legal certainty. It serves to underline the golden rule that if the parties wish to have issues as to the validity of their contract decided by one tribunal and issues as to its meaning or performance decided by another, they must say so expressly. Otherwise they will be taken to have agreed on a single tribunal for the resolution of all such disputes….
The arbitration clause … indicates to the reader that he need not trouble himself with fussy distinctions as to what the words “arising under” and “arising out of” may mean. Taken overall, the wording indicates that arbitration may be chosen as a one-stop method of adjudication for the determination of all disputes. Disputes about validity, after all, are no less appropriate for determination by an arbitrator than any other kind of dispute that may arise. So I do not think that there is anything in the appellants’ point that it must be assumed that when the charters were entered into one party was entirely ignorant that they were induced by bribery. The purpose of the clause is to provide for the determination of disputes of all kinds, whether or not they were foreseen at the time when the contract was entered into.
Then there are consequences that would follow, if the appellants are right. It is not just that the parties would be deprived of the benefit of having all their disputes decided in one forum. The jurisdiction clause does not say where disputes about the validity of the contract are to be determined, if this is not to be in the forum which is expressly mentioned. The default position is that such claims would have to be brought in the jurisdiction where their opponents were incorporated, wherever and however unreliable that might be, while claims for breach of contract have to be brought in England.… If the parties have confidence in their chosen jurisdiction for one purpose, why should they not have confidence in it for the other? Why, having chosen their jurisdiction for one purpose, should they leave the question which court is to have jurisdiction for the other purpose unspoken, with all the risks that this may give rise to? For them, everything is to be gained by avoiding litigation in two different jurisdictions..
The Court of Appeal said that the time had come for a fresh start to be made, at any rate for cases arising in an international commercial context. It has indeed been clear for many years that the trend of recent authority has risked isolating the approach that English law takes to the wording of such clauses from that which is taken internationally. It makes sense in the context of international commerce for decisions about their effect to be informed by what has been decided elsewhere..
In AT&T Technologies Inc. v. Communications Workers of America, 475 U.S. 643 (1986), the U.S. Supreme Court said that, in the absence of any express provision excluding a particular grievance from arbitration, only the most forceful evidence of a purpose to exclude the claim from arbitration could prevail. In Threlkeld & Co., Inc. v. Metallgesell-schaft Ltd (London), 923 F.2d 245 (2d Cir. 1991), the court observed that federal arbitration policy required that any doubts concerning the scope of arbitral issues should be resolved in favour of arbitration and that arbitration clauses should be construed as broadly as possible. In Comandate Marine Corp. v. Pan Australia Shipping Pty Ltd  FCAFC 192 (Australian Fed. Ct.), the Federal Court of Australia said that a liberal approach to the words chosen by the parties was underpinned by the sensible commercial presumption that the parties did not intend the inconvenience of having possible disputes from their transaction being heard in two places, particularly when they were operating in a truly international market. This approach to the issue of construction is now firmly embedded as part of the law of international commerce. I agree with the Court of Appeal that it must now be accepted as part of our law too.
It is in the light of these observations that the issue of severability should be viewed also. Section 7 of the Arbitration Act 1996 reproduces in English law the principle that was laid down by §4 of the U.S. [FAA]. That section provides that, on being satisfied that the making of the agreement for arbitration or the failure to comply therewith is not in issue, the court shall make an order directing the parties to proceed to arbitration. Section 7 uses slightly different language, but it is to the same effect. The validity, existence or effectiveness of the arbitration agreement is not dependent upon the effectiveness, existence or validity of the underlying substantive contract unless the parties have agreed to this. The purpose of these provisions, as the U.S. Supreme Court observed in Prima Paint Corp. v. Flood & Conklin Mfg Co., 388 U.S. 395 (1967), is that the arbitration procedure, when selected by the parties to a contract, should be speedy and not subject to delay and obstruction in the courts. The statutory language, it said, did not permit the court to consider claims of fraud in the inducement of the contract generally. It could consider only issues relating to the making and performance of the agreement to arbitrate.
The appellants’ case is that, as there was no real consent to the charterparties because they were induced by bribery, there was no real consent to the arbitration clauses. They submit that a line does not have to be drawn between matters which might impeach the arbitration clause and those which affect the main contract. What is needed is an analysis of whether the matters that affect the main contract are also matters which affect the validity of the arbitration clause. As the respondents point out, this is a causation argument. The appellants say that no substantive distinction can be drawn between various situations where the complaint is made that there was no real consent to the transaction. It would be contrary to the policy of the law, which is to deter bribery, that acts of the person who is alleged to have been bribed should deprive the innocent party of access to a court for determination of the issue whether the contract was induced by bribery.
But, … this case is different from a dispute as to whether there was ever a contract at all. As everyone knows, an arbitral award possesses no binding force except that which is derived from the joint mandate of the contracting parties. Everything depends on their contract, and if there was no contract to go to arbitration at all an arbitrator’s award can have no validity. So, where the arbitration agreement is set out in the same document as the main contract, the issue whether there was an agreement at all may indeed affect all parts of it. Issues as to whether the entire agreement was procured by impersonation or by forgery, for example, are unlikely to be severable from the arbitration clause.
That is not this case, however. The appellants’ argument was not that there was no contract at all, but that they were entitled to rescind the contract including the arbitration agreement because the contract was induced by bribery. Allegations of that kind, if sound, may affect the validity of the main agreement. But they do not undermine the validity of the arbitration agreement as a distinct agreement. The doctrine of separability requires direct impeachment of the arbitration agreement before it can be set aside. This is an exacting test. The argument must be based on facts which are specific to the arbitration agreement. Allegations that are parasitical to a challenge to the validity to the main agreement will not do. That being the situation in this case, the agreement to go to arbitration must be given effect….
1. Historic authorities denying existence of separability presumption—Kulukundis. Consider the U.S. court’s decision in Kulukundis. What is its view of the separability presumption? Consider the court’s statement that: “As the arbitration clause here is an integral part of the charter party, the court, in determining that the parties agreed to that clause, must necessarily first have found that the charter party exists.” Although the court’s opinion arose in the context of a claim that no underlying contract (or arbitration agreement) was ever formed, note the breadth of its rationale. What does the court mean that the “arbitration clause here is an integral part of the charter party”? Suppose that the charter party was formed, but is invalid (for example, because of fraud, unconscionability, formal defects, impossibility)? Under the Kulukundis rationale, what does the invalidity of the underlying contract do to the arbitration clause? Recall that it is treated as “an integral part” of the underlying contract. Can you support the Kulukundis result with a different rationale?
Note that the Kulukundis decision considers both the scope of the parties’ arbitration agreement (did it purport to encompass disputes about the existence and validity of the underlying charter) and the treatment of such an arbitration agreement under the FAA. What did the Kulukundis court conclude regarding the scope of the arbitration clause? Compare the analyses of the scope of the arbitration clause in the Bundesgerichtshof’s Judgment of 27 February 1970 and the House of Lords’ decision in Fiona Trust.
2. Tobler’s approach to separability presumption. The Swiss Federal Tribunal’s opinion in Tobler is an early application of the separability presumption. In what sense does the Federal Tribunal treat the arbitration agreement as separable? What is the rationale adopted by the court for this result? What is meant by the concept of a “procedural” agreement? In what sense is an arbitration agreement a “procedural” agreement? In what sense isn’t it? How would the Tobler court have decided Kulukundis?
3. JOC Oil’s approach to separability presumption. The award in JOC Oil is a leading example of application of the separability presumption. What was the practical importance of the tribunal’s adoption of the separability presumption? Rephrase in your own words the tribunal’s statement of the separability presumption. Does it differ from that in Article 16 of the UNCITRAL Model Law, §§6 and 7 of the English Arbitration Act or Article 178(3) of the SLPIL, excerpted at pp. 90, 113 & 158 of the Documentary Supplement? Note that, following the JOC Oil award, the Arbitration Rules of the Arbitration Court of the USSR Chamber of Commerce and Industry were amended to provide “An arbitration clause shall be considered to have legal force irrespective of the validity of the contract of which it is a component part.” See Gardner, The Doctrine of Separability in Soviet Arbitration Law: An Analysis of Sojuznefteexport v. JOC Oil Co., 28 Colum. J. Transnat’l L. 301 (1990).
4. Buckeye’s approach to separability presumption. Buckeye, and the U.S. Supreme Court’s earlier decision in Prima Paint, are routinely cited for the proposition that, under the FAA, an arbitration clause is separable from the underlying contract that contains it. See infra pp. 278–80, 404–05, 416–20. Where precisely in Buckeye does the Court “adopt” the separability presumption? Consider carefully the language of §§2-4. Does anything in these provisions require application of the separability presumption? See also infra pp. 278–80; Granite Rock Co. v. Int’l Bhd of Teamsters, 130 S.Ct. 2847, 2857 (2010) (“courts must treat the arbitration clause as severable from the contract in which it appears”).
Compare the analysis of the separability doctrine in Buckeye with that in JOC Oil. Are there differences in the two analyses?
5. Fiona Trust’s approach to separability presumption. Consider the approach to the separability presumption in Fiona Trust. Does the House of Lords rely on the language of the English Arbitration Act, 1996, to justify the separability presumption? Or on something else? Compare the language of §§6 and 7 of the English Arbitration Act, 1996, with §§2-4 of the FAA, excerpted at pp. 113 & 103-04 of the Documentary Supplement. How do they differ? Compare also Articles 7, 8 and 16 of the UNCITRAL Model Law. What were the practical consequences of adopting the separability presumption in Fiona Trust? How would the House of Lords have decided Kulukundis?
6. German Bundesgerichtshof’s Judgment of 27 February 1970 approach to separability presumption. Consider the Judgment of 27 February 1970. What rationale does the Bundesgerichtshof adopt for the separability presumption? See also Judgment of 12 March 1998, XXIX Y.B. Comm. Arb. 663, 667 (2004) (Hanseatisches Oberland-esgericht Hamburg) (“nullity of the main contract, if there is such, does not affect the arbitration clause”). More recently, the Bundesgerichtshof has held that §1040(1) of the ZPO, adopting the Model Law, “codifies a basic principle of international arbitration.… The arbitration agreement is autonomous from the underlying contract.” Judgment of 27 November 2008, 2009 HmbSchRZ 5 (German Bundesgerichtshof).
7. Rationales for separability presumption. What is the basis for the presumption that an agreement to arbitrate is “separable” from the parties’ underlying contract—the parties’ intent, the nature of the agreement to arbitrate, the command of national law or the New York Convention, the needs of the international legal system, or something else?
(a) Parties’ express agreement as basis for separability presumption. One possible source for the separability presumption is the parties’ express agreement. This occurs most frequently where an arbitration clause incorporates institutional rules—like the UNCITRAL or ICC arbitration rules—which provide that an arbitration clause is separable from the parties’ underlying contract. Consider Article 23 of the UNCITRAL Rules, Article 6 of the ICC Rules and Article 23 of the LCIA Rules, excerpted at pp. 170, 184–85 & 269-70 of the Documentary Supplement. Do these provisions clearly adopt the separability presumption? Are there differences between the various statements of the doctrine in each set of rules? Explain any such differences.
(b) Parties’ implied agreement as basis for separability presumption. The separability presumption can also be justified on grounds of party intent even where institutional rules or the arbitration agreement itself do not expressly provide for such a result. Why would parties generally intend their arbitration clause to be “separable”? Consider the practical consequences of not accepting the separability presumption (including as described in Judgment of 27 February 1970 and Fiona Trust). What might happen if every challenge to the continuing validity of a commercial contract also resulted in a challenge to the validity of the parties’ associated arbitration agreement?
It is argued that: (a) parties to arbitration agreements generally “intend to require arbitration of any dispute not otherwise settled, including disputes over the validity of the contract or treaty”; (b) without the separability presumption, “it would always be open to a party to an agreement containing an arbitration clause to vitiate its arbitration obligation by the simple expedient of declaring the agreement void”; and (c) “the very concept and phrase ‘arbitration agreement’ itself imports the existence of a separate or at any rate separable agreement, which is or can be divorced from the body of the principal agreement if needs be.” S. Schwebel, International Arbitration: Three Salient Problems 3-6 (1987). Is this a persuasive basis for concluding that parties ordinarily intend their arbitration clause to be separable?
Consider the following explanation of the separability presumption in Harbour Assur. Co. (U.K.) v. Kansa Gen. Int’l Ins. Co. Ltd, 1 Lloyds Rep. 81, 92-93 (QB) (English High Ct. 1992):
First, there is the imperative of giving effect to the wishes of the parties unless there are compelling reasons of principle why it is not possible to do so…. Secondly, if the arbitration clause is not held to survive the invalidity of the contract, a party is afforded the opportunity to evade his obligation to arbitrate by the simple expedient of alleging that the contract is void. In such cases courts of law then inevitably become involved in deciding the substance of a dispute. Moreover, in international transactions where the neutrality of the arbitral process is highly prized, the collapse of this consensual method of dispute resolution compels a party to resort to national courts where in the real world the badge of neutrality is sometimes perceived to be absent. For parties the perceived effectiveness of the neutral arbitral process is often a vital condition in the process of negotiation of the contract. If that perception is absent, it will often present a formidable hurdle to the conclusion of the transaction. A full recognition of the separability principle tends to facilitate international trade.
Is this persuasive? Consider also the explanations in Judgment of 27 February 1970 and Fiona Trust.
(c) “Procedural” or “ancillary” character of arbitration agreement. Some authorities rely on the “procedural” character of the dispute resolution provisions of an arbitration agreement to justify its “separable” or “independent” nature. Consider the tribunal’s analysis in JOC Oil. What were the stated reasons, under Soviet law, for treating an arbitration agreement as separable? What does the arbitral tribunal mean by a “material-legal” contract and a “procedural” arbitration agreement?
Compare the differences in the nature of the obligations imposed by a foreign trade contract (e.g., to buy and sell oil) and an arbitration agreement (i.e., to resolve disputes by arbitration). Is it likely that the parties would have regarded these two sets of obligations as separable? Why? Consider again the analysis in Tobler. How does it characterize the nature of the agreement to arbitrate?
Compare the following reasoning in Westacre Inv. Inc. v. Jugoimp.-SDPR Holdings Co. Ltd,  4 All ER 570, 582:
These characteristics of an arbitration agreement which are in one sense independent of the underlying or substantive contract have often led to the characterisation of an arbitration agreement … as a ‘separate’ contract…. For an agreement to arbitrate within an underlying contract is in origin and function parasitic. It is ancillary to the underlying contract for its only function is to provide machinery to resolve disputes as to the primary and secondary obligations arising under that contract. The primary obligations under the agreement to arbitrate exist only for the purpose of informing the parties by means of an award what are their rights and obligations under the underlying contract.
Why, in fact, should arbitration clauses be regarded as “separable” or “independent” from the agreements in which they appear? What does it mean to treat an arbitration clause as “ancillary” to the underlying contract, providing only “machinery to resolve disputes”? Consider again the distinction between “material-legal” and “procedural” agreements in JOC Oil and Tobler. Are not the “procedural” or “dispute resolution” provisions of arbitration clauses intimately interrelated to the “substantive” terms of underlying agreements? What aspects of an arbitration clause suggest that parties would likely regard it as independent or separable from their underlying agreement?
(d) National law as basis for separability presumption. Article 16(1) of the UNCITRAL Model Law, §§6 and 7 of the English Arbitration Act, 1996 and Article 178(3) of the SLPIL provide that an arbitration clause is separable from the underlying contract in which it appears. Compare the language of each provision, excerpted at pp. 90, 113 & 158 of the Documentary Supplement. How do they differ? How does each provision characterize the consequences of the separability presumption?
Consider §§2-4 of the FAA, excerpted at pp. 103–04 of the Documentary Supplement. Do these provisions address the question whether an arbitration clause is a separable agreement? Consider the interpretation of the FAA adopted in Buckeye. What role does the FAA’s text have in the Court’s analysis? What role did statutory language have in JOC Oil? In the Judgment of 27 February 1970?
(e) Needs of international arbitral process as basis for separability presumption. Aside from reliance on particular institutional rules, arbitration agreements, or statutory provisions of national law, rationales for the separability presumption also rest on practical considerations. Thus, it is said, the separability presumption is necessary in order to prevent challenges to the existence, validity, or continued effect of an underlying contract from derailing the arbitral process. See the quotes above from Judge Schwebel and Harbour Assurance. Compare the contrary view in Kulukundis.
Why exactly is the separability presumption necessary in order to prevent challenges to the underlying contract from derailing the arbitral process? Would it not be possible, even absent the separability presumption, for an arbitrator to rule on claims that the contract containing the arbitration clause was invalid? If national law (or the international requirements of the New York Convention) permitted arbitrators to decide challenges to the validity or existence of the arbitration agreement, would the separability presumption be necessary to prevent jurisdictional challenges from derailing the arbitral process? (The subject of an arbitral tribunal’s competence to consider challenges to its own jurisdiction is discussed below. See infra pp. 218–87.)
8. Consequences of separability presumption. What are the practical consequences of concluding, like the arbitration statutes and other materials excerpted above, that an arbitration agreement is presumptively “separable” from the parties’ underlying contract? Consider the following possibilities, to which we return in subsequent sections.
(a) Nonexistence or invalidity of underlying contract does not necessarily invalidate arbitration agreement. One vitally-important consequence of the separability presumption is that a party’s challenge to the existence or validity of the underlying contract does not necessarily affect the existence or validity of the arbitration clause. Even if the underlying contract is nonexistent or invalid, the associated arbitration agreement may be valid: the two agreements (the underlying contract and the agreement to arbitrate) are different, “separable” (or “autonomous”) agreements.
Consider the analysis, from two rather different perspectives, of the Soviet tribunal in JOC Oil and the U.S. Supreme Court in Buckeye. Both the arbitral tribunal and the Court held that a claim that the parties’ underlying contract was invalid did not provide grounds for challenging the “separable” arbitration clause contained within the underlying contract. See infra pp. 355–75, 393–474. Compare the analyses in Tobler and the Judgment of 27 February 1970.
Consider how Articles 7, 8 and 16 of the UNCITRAL Model Law, excerpted at pp. 87–88 & 90 of the Documentary Supplement, address this issue. What effect, if any, does the invalidity of the parties’ underlying contract have on the validity of their arbitration clause under the Model Law? Is the answer clear? Compare §§6 and 7 of the English Arbitration Act, 1996, excerpted at p. 113 of the Documentary Supplement. How does it differ from the Model Law?
(b) Invalidity of arbitration agreement does not necessarily affect underlying contract. Conversely, where the arbitration clause is invalid or illegal, the separability presumption provides that this does not necessarily infect the validity of the underlying contract. The underlying contract can be valid and enforceable, in national courts, without regard to the invalidity of the arbitration clause. How could the arbitration clause be invalid if the underlying contract is valid? Suppose parties crossed out the article of the contract containing the arbitration clause? Suppose the arbitration clause was invalid because it was indefinite, unconscionable, or procured by duress, even though the underlying contract suffered no such defects?
(c) Law governing arbitration clause may be different from that governing underlying contract. An arbitration agreement can be governed by a different national law, or a different body of substantive legal rules, from that applicable to the parties’ underlying contract. See infra pp. 287–315. One explanation for this result is the separability presumption, which postulates two separate agreements, which can readily be governed by two different sets of laws.
Consider Article 178(2) of the SLPIL, excerpted at p. 158 of the Documentary Supplement. What does Article 178(2) provide with respect to the law governing an arbitration agreement? Consider also the award in JOC Oil. What substantive rules applied to the parties’ underlying foreign trade contract? To their arbitration agreement?
(d) Arbitration clause may survive termination or expiry of underlying contract. Parties not infrequently commence arbitral proceedings after their underlying contract has expired or been terminated. In most jurisdictions, there is no general obstacle to this, provided that the claims arise from conduct during the term of the agreement. See infra pp. 532–33. Although not always directly attributed to the separability presumption, that rule is one explanation for an arbitration clause’s survival after termination of the underlying agreement.
(e) Separability presumption arguably implies arbitrator’s power (“competence-competence”) to consider his or her own jurisdiction. Many arbitration statutes and institutional rules link the separability presumption with the principle that the arbitrator has jurisdiction to decide challenges to his or her own jurisdiction. This doctrine is often referred to as the “competence-competence” or “Kompetenz-Kompetenz” doctrine. See infra pp. 271–72.
Recall the discussions in Judgment of 27 February 1970, Fiona Trust, Schwebel and Harbour Assurance, about the importance of the separability presumption in preventing challenges to the underlying contract from derailing the arbitral process. See supra pp. 212–15. Is the separability presumption in fact necessary to prevent challenges to the existence or validity of the underlying contract from halting the arbitral process? Suppose national law provides that arbitrators may consider challenges to their own jurisdiction, including challenges to the validity of the arbitration agreement itself. Is the separability doctrine necessary, in these circumstances, to permit the arbitrators to consider challenges to the parties’ underlying contract?
Consider how the arbitration statutes excerpted above deal with arbitrators’ competence to consider challenges to their own jurisdiction. See UNCITRAL Model Law, Art. 16(1). See also 2012 ICC Rules, Art. 6; 2010 UNCITRAL Rules, Art. 23. Compare the approach of §§6 and 7 of the English Arbitration Act, 1996, excerpted at p. 113 of the Documentary Supplement. Does the English Arbitration Act link the separability of the arbitration agreement to the arbitrators’ competence-competence? Or only to the substantive validity of the arbitration agreement? Consider the House of Lords’ analysis in Fiona Trust. Does it adopt the same approach?
9. Criticism of rationales for separability presumption. Although the separability presumption is widely accepted, it is also subject to criticism. As Kulukundis and Buckeye illustrate, parties not infrequently deny the very existence of the underlying contract containing an arbitration clause. For example, suppose that a party denies that it executed or otherwise assented to the underlying contract. How can the separability presumption aid in arguments that the arbitration clause, contained in that contract, is nonetheless valid and binding on that party? If a party claims that there simply never was an underlying contract—of any sort—doesn’t this challenge necessarily also apply to the arbitration clause contained in the contract?
Consider the analysis in JOC Oil. The arbitrators concluded that the parties’ underlying foreign trade contract was invalid because it failed to satisfy a “two-signature” requirement. Nonetheless, the tribunal also held that the parties’ arbitration clause was valid. How did the tribunal justify this conclusion? Note also the analysis in Tobler.
Compare the reasoning in Kulukundis. Compare also:
“[I]f an agreement contains an obligation to arbitrate disputes arising under it, but the agreement is invalid or no longer in force, the obligation to arbitrate disappears with the agreement of which it is a part. If the agreement was never entered into at all, its arbitration clause never came into force. If the agreement was not validly entered into, then, prima facie, it is invalid as a whole, as must be all of its parts, including its arbitration clause.” S. Schwebel, International Arbitration: Three Salient Problems 1 (1987).
Why is this not irrefutable? Surely, if the parties’ alleged contract was never agreed to, then none of it—arbitration clause included—is binding on the “parties.” Before finally making up your mind, wait until you have examined the materials below, see infra pp. 355–75.
10. Relevance of foreign and international decisions. Consider the authorities relied upon in Fiona Trust. What is the relevance, in interpreting the English Arbitration Act, of German and U.S. decisions? What does the opinion say? Should other national courts also consider “foreign” judicial decisions in interpreting national arbitration legislation, and the New York Convention, as applied to international arbitration issues?
11. Separability presumption in investment arbitration. Does the separability presumption apply to arbitration clauses in investment contracts? Consider: Plama Consortium Ltd v. Repub. of Bulgaria, Decision on Jurisdiction in ICSID Case No. ARB/03/24 of 8 February 2005, ¶212 (“the nowadays generally accepted principle of the separability (autonomy) of the arbitration clause”).
Recall the structure of BITs, supra pp. 43–44 & infra pp. 511–16, in which a host state makes a standing offer to arbitrate with specified classes of foreign investors. Aren’t the resulting arbitration agreements necessarily separable? Note that in many such cases, the host state and foreign investor will have no contractual relationship.
12. Separability presumption in inter-state arbitration. Does the separability presumption apply to arbitration clauses in treaties and other inter-state instruments? Is there any reason that the same considerations that apply in the context of international commercial arbitration agreements do not have equal force in the state-to-state context? Consider Article 73 of the 1907 Hague Convention. What does it suggest regarding the separability of arbitration agreements in the state-to-state context?
C. ALLOCATION OF COMPETENCE TO DECIDE DISPUTES OVER INTERPRETATION AND VALIDITY OF INTERNATIONAL ARBITRATION AGREEMENTS
A second issue concerning international arbitration agreements is the allocation of authority between arbitrators and national courts to decide disputes over the interpretation, validity and enforceability of arbitration agreements.20 That is, “who decides” disputes over the formation, validity, or interpretation of arbitration clauses? In particular, do arbitrators have the authority to consider and/or decide disputes over their own jurisdiction? If so, how is the authority to resolve jurisdictional disputes allocated between arbitrators and national courts, and what avenues of judicial review of arbitrators’ jurisdictional decisions are available? Excerpted below are materials addressing this subject.
SWEDISH ARBITRATION ACT
2. The arbitrators may rule on their own jurisdiction to decide the dispute. The aforesaid shall not prevent a court from determining such a question at the request of a party. The arbitrators may continue the arbitral proceedings pending the determination by the court.
Notwithstanding that the arbitrators have, in a decision during the proceedings, determined that they possess jurisdiction to resolve the dispute, such decision is not binding. The provisions of sections 34 and 36 shall apply in respect of an action to challenge an arbitration award which entails a decision in respect of jurisdiction.
34. An award which may not be challenged in accordance with §36 shall, following an application, be wholly or partially set aside upon motion of a party: (1) if it is not covered by a valid arbitration agreement between the parties.
KULUKUNDIS SHIPPING CO., SA v. AMTORG TRADING CORP.
126 F.2d 978 (2d Cir. 1942)
FINAL AWARD IN ICC CASE NO. 5294
XIV Y.B. Comm. Arb. 137 (1988)
KARRER, Arbitrator. [A Danish contractor entered into an agreement with an Egyptian sub-contractor (“Agreement”) for the construction of an abattoir. Disputes arose, and the Danish contractor commenced an ICC arbitration. The Egyptian subcontractor did not participate in the arbitral proceedings. Its Egyptian counsel sent various communications to the arbitrator, raising jurisdictional objections. The arbitrator made the following award.]
Since Zurich is the place of the arbitration, the procedure is governed by the ICC Rules and the Zurich Rules of Civil Procedure…. Since this arbitration was … commenced before 1 July 1985, it is still the former Zurich law (more particularly §§238-257 of the Zurich Rules of Civil Procedure as enacted on 13 June 1976) which governs. This is of practical importance mainly because of the necessity of a formally separate award on jurisdiction with a different type of appeal than against the award on the merits.
The decision on his own—disputed—jurisdiction is to be taken by the arbitrator himself. (§241 Zurich Rules of Civil Procedure and Article 8(3) ICC Rules.) [Section 241 of the Zurich Rules of Civil Procedure of 13 June 1976 reads: “The Court of Arbitration may rule on its own jurisdiction pursuant to Article III even when the validity of the arbitration agreement is contested.”]
The arbitration clause invoked by claimant is contained in Article 14 of the Agreement … and reads as follows: “Any disputes and deviations which cannot be solved amicably between the parties shall be resolved and settled by arbitration under the rules of conciliation and arbitration of the International Chamber of Commerce, Zurich, Switzerland, in accordance with Swiss law of the Canton of Zurich.” This clause could, in and of itself, give rise to a doubt inasmuch as it refers to the rules of conciliation and arbitration of the “International Chamber of Commerce, Zurich, Switzerland”: the International Chamber of Commerce has its seat in Paris and there is no International Chamber of Commerce in Zurich.
For a correct construction of the clause, its background must be considered. The Agreement … was intimately connected with the main contract between claimant and the Egyptian [employer] of 26 March 1983 …; the latter formed an “integral part” of the former … and was, therefore known to both parties. The main contract contains, as Annex F, also an arbitration clause (which runs to one and a half pages). It provides for arbitration in Zurich with application of Swiss laws, but by an ad hoc arbitral tribunal of three members, the election of which is carefully described. Article 14 of the Agreement … which is relevant differs clearly in providing for “arbitration under the Rules of Conciliation and Arbitration of the International Chamber of Commerce, Zurich”; i.e., for institutional, rather than ad hoc arbitration, but it also refers to Swiss law “of the Canton of Zurich.” The term “Rules of Conciliation and Arbitration” is generally used distinctively for the arbitration rules of the—only—International Chamber of Commerce (with seat in Paris), which is also widely known throughout the world for its arbitration organization. The rules of the local Zurich Chamber of Commerce are, on the other side, known as “rules of mediation and arbitration.” Under these circumstances it must be concluded that the true meaning of the clause applicable here in an arbitration in Zurich under the ICC Rules with Swiss/Zurich law applicable to the substance of the case. This construction is concordant with at least one decision of a Zurich court and with other ICC cases, where similar clauses had been construed to refer to arbitrations taking place in Zurich under the Rules of the ICC (in Paris). The organization of the present arbitration … conforms exactly to the clause.
Defendant also appears to [argue] that the arbitration clause is deficient and violates Egyptian “ordre public” by not appointing the arbitrator itself. The exact argument … [appears] obliquely in a copy of a request by defendant to [an] Egyptian Court.… There, defendant claims that the arbitration clause in case is invalid because it does not comply with Article 502(3) of the Egyptian Code of Civil Procedure, which provides that arbitrators should be appointed … in the agreement on arbitration….21
It is undoubtedly true that, in the present case, the arbitration clause did not nominate the arbitrator directly but only provided for ICC arbitration, and that the arbitrator was—pursuant to the ICC Rules—nominated by the ICC. This does not, however, make the arbitration clause invalid. It is not governed by Egyptian law, but by the lex fori of the arbitrator.… It may be noted that also under Article 22 of the Egyptian Civil Code … the law applicable to the arbitral procedure will be the law of the place where the arbitration is held. [Article 22 of the Egyptian Civil Code reads: “Principles of competence of courts and all questions of procedure are governed by the law of the country in which the action is brought, or in which the proceedings are taken.”] Under the applicable procedural law (ICC Rules and Zurich Code of Civil Procedure in the 1976 version) it is self-evident that the agreement to arbitrate is binding even without nomination of the arbitrators by the parties in that agreement….
It should also be noted that on 26 April 1982 the Egyptian Cour de Cassation held that Article 502(3) of the Egyptian Code of Civil Procedure could not be used in the case of an agreement to arbitrate in England and that, furthermore, a foreign law which was different from Article 502(3) Egyptian Code of Civil Procedure would not violate public policy (and would therefore not be unenforceable in Egypt)….
Defendant’s [claim] that the arbitration clause is invalid for not confirming to Article 502(3) of the Egyptian Code of Civil Procedure is, therefore, unfounded….
[B]y telex of 20 November 1985, Mr [A], on behalf of the defendant, informed the arbitrator that defendant had introduced an action to declare the arbitration clause void introduced at the [Egyptian court] and requested a suspension of the arbitration until a decision of that litigation in Egypt. By telex of 29 January 1987, Mr [B], on behalf of defendant, referred to a Court Order by the [Egyptian Court] ordering the holding of all arbitration procedures until a decision in a further procedure in the same court. No order of any Egyptian Court was actually ever notified or submitted to the arbitrator either directly or by either of the parties. This is, however, immaterial. As the arbitrator pointed out already in his telex of 21 November 1985 to Mr [A] (with copy to the claimant), court proceedings in Egypt did and do not have any direct influence on the present arbitration proceedings, since Egyptian Courts would not have jurisdiction of either these proceedings or the arbitrator. They certainly do not have any influence on the arbitrator’s jurisdiction in the present case.
Based on the foregoing considerations, the result is that there is a valid arbitration agreement for ICC arbitration in Zurich and that, therefore, the arbitrator has jurisdiction….
JUDGMENT OF 7 DECEMBER 1994, V 2000 v. PROJECT XJ 220 LTD
1996 Rev. arb. 245 (Paris Cour d’appel), aff’d, Judgment of 21 May 1997, Renault v. V 2000, 1997 Rev. arb. 537 (French Cour de cassation)
[During the course of 1989, Project XJ 220 (“Project”), an English company, planned to produce and market a new automobile (Jaguar XJ Type 220 limited edition), provided that at least 220 purchases were agreed. Jaguar France, a French company, agreed to use its French distribution network to market the new automobile in France. In January 1990, the fortuitously-named Philippe Renault signed an offer to purchase, titled “Application Form,” in English for the benefit of Project, as well as a French translation made by Jaguar France of the terms and conditions applicable to the contract and appearing on the back of the application form. Renault committed himself to purchase a vehicle of the type XJ 220 at the price of roughly $500,000 on January 1, 1990, payable in three installments, with a price index adjustment. When Renault signed his application, he also paid roughly $100,000 by check, payable to the order of Jaguar France. On March 15, 1990, Renault was informed that his offer had been accepted and that the vehicle would be delivered within nine months. Renault later changed his mind and sought to cancel his order. He sued Project and Jaguar France before the Tribunal de Grande Instance of Paris to nullify the contract and obtain a refund of the amounts paid. Project and Jaguar France challenged the jurisdiction of that court by invoking the arbitration clause contained in Article 14 of the contract, which gave jurisdiction to an arbitrator appointed by the President of the Law Society in London in case of a dispute.
The first instance court dismissed the jurisdictional objection. It held that the Application Form was not binding because it was written in a foreign language, was almost illegible, and was neither signed nor initialed by Renault. It also held that the French translation of the Application Form was initialed by Renault and was a binding contract. Additionally, Renault had knowledge of Article 14, providing for arbitration in case of a dispute. However, the court also held that “the sale of the Jaguar XJ 220 vehicle does not involve the interests of international trade” and that “the arbitration clause of Article 14” was void. Project and Jaguar France appealed.]
Whereas under Article 1458 of the New Code of Civil Procedure (“NCCP”), applicable to both domestic arbitrations and international arbitration: “When a dispute referred to an arbitral tribunal in compliance with an arbitration agreement is brought before a state court, the latter must declare that it has no jurisdiction. If the arbitral tribunal is not yet seized, the court must also decline jurisdiction unless the arbitration agreement is manifestly null.”
Whereas Renault argues precisely that the arbitration clause contained in Article 14 of the “Application Form” is void: [i] because it is a domestic arbitration and it is not a merchant, [ii] because he has not accepted it, [iii] due to the insufficient description of the arbitral procedure, [iv] because the dispute is not capable of arbitration under French domestic law and international public law as it involves the public policy regulation protecting consumers.
[Whereas,] the first instance judge considered that it could not be an international arbitration because “the purchase from a foreign company through a French company, exclusive importer of this foreign brands, of goods produced abroad, but in a limited edition, albeit expensive, but isolated by an individual who does not sell after having transformed or not, but intend it for personal use does not constitute an economic activity in an international meaning”;
Considering that the resolution of the dispute indeed depends on the domestic or international nature of the arbitration;
Considering that the domestic or international nature of the arbitration derives exclusively from the nature of the economic transaction in question involving the interests of international trade, regardless of place of arbitration, the law applicable to the merits or the nationality of the parties to contract;
Considering in this case, that it is for the benefit of the English company Project that Renault signed an offer to purchase …; that this offer has been accepted by it; that it is this company which would have built a vehicle in the United Kingdom which would have been then imported into France; that it is also with it that Renault has directly corresponded thereafter; [that] it is [Project] which received or should have received the final settlement price either paid directly by the client (2nd and 3rd installments) or advanced for commercial reasons by the company Jaguar France on behalf of latter (1st installment);
Whereas it may therefore be concluded that regardless of the legal role played by the company Jaguar France in the completion of the transaction, the contract signed, which provided a transfer of goods and money across borders, has involved the interests of international trade within the meaning of Article 1492 of the new Code of Civil Procedure;
[Whereas,] in the international order, the arbitration clause is lawful as such, pursuant to the general principal of autonomy of the arbitration agreement, substantive rule which gives it an own effectiveness regardless of the law applicable to the contract in which it is stipulated or the parties to this contract, subject to the only exception of international public policy;
Considering therefore that the mixed nature of the contract in which it appears is not likely to make it clearly void;
Considering further that in international relations, the arbitrators are the only one entitled to rule on their own jurisdiction, on the validity and the extent of their nomination; that they have in particular jurisdiction to decide on their own jurisdiction regarding to the arbitrability of the dispute with regard to international public policy, being observed that it is not excluded merely because a mandatory provision is applicable to the disputed legal relations, and that they also have the power to apply the principles and rules belonging to this public policy and to sanction under the control of the annulment judge its non-respect such as the one resulting from a breach of good faith which should govern the relations between international trading partners;
Considering that it follows that neither the possible applicability to the case of consumer protection rules, nor the allegation of fraud put forward by Renault against his contracting party(ies) are likely in themselves to exclude arbitral jurisdiction;
Considering finally that it is undisputed that Renault initialed the French translation of the terms and conditions of Project on the back of the application form and in particular page 4 where the arbitration clause at issue is reproduced clearly and legibly; that he therefore cannot seriously claim to have completely ignored it and the arbitrators are the only one to decide on the question whether the initials of a document which is not the agreement itself constitutes the necessary consent to their nomination;
Considering further that § 1443 of the new Code of Civil Procedure, which provides the invalidity of an arbitration clause which does not provide a procedure for the nomination of arbitrators, does not apply to international arbitration;
Considering that the various grounds invoked by Mr. Philippe Renault to prevent the enforcement of the arbitration clause in its relations with Project are without force; that the said clause is not clearly void, but has on the contrary to be applied;…
Considering that Jaguar France, the rights of which were transferred to the company is V 2000, which Renault claims it is his contracting party, is directly interested in the dispute; that although it is not a signatory, it has been informed of the agreement at issue—which was translated on its initiative—and also of the existence of the arbitration clause which it claims itself to benefit;
But whereas in the law of international arbitration, the effects of the arbitration clause extends to the parties directly involved in the performance of the contract since their situation and their activities make assume the fact that they had knowledge of the existence and of the scope of the clause so that the arbitrator may decide on all economic and legal aspects of the dispute;
Considering that pursuant this rule, the appeal lodged by the company Jaguar France must be admitted;…
Says that this court has no jurisdiction to hear the dispute between Renault and Project and Jaguar France and refers the parties to another authority….
SHIN-ETSU CHEMICAL CO. LTD v. AKSH OPTIFIBRE LTD
XXXI Y.B. Comm. Arb. 747 (2006) (Indian S.Ct. 2005)
[On November 16 and 18, 2000, Shin-Etsu Chemical Co. (“Shin-Etsu”) and Aksh Optifibre Ltd (“Aksh”) entered into a sale agreement (“the agreement”) containing an arbitration clause providing for ICC arbitration in Tokyo, Japan. The clause also provided that the agreement was governed by the laws of Japan. Shin-Etsu terminated the agreement by letter dated December 31, 2002, and initiated arbitration proceedings in Japan. Aksh then initiated litigation in Indian courts seeking an injunction for cancellation of the agreement or a declaration that the agreement, including the arbitration clause, was void, inoperative and incapable of performance and could not be given effect. Shin-Etsu applied under §8 of the Indian Arbitration and Conciliation Act 1996 (“the Act”) for an order that Aksh submit to the ongoing arbitration in Japan. The Indian trial court allowed Shin-Etsu’s application and referred the parties to arbitration. Aksh challenged the order of the trial court, and the High Court set aside the decision of the trial court, holding that Art. 45 of the Act applied. Shin-Etsu appealed to the Supreme Court.]
Y.K. SABHARWAL, J., Dissenting. The interpretation of §45 of the Act falls for determination in this matter. Section 45 is as under:
“45. Power of judicial authority to refer parties to arbitration. Notwithstanding anything contained in Part I or in the Code of Civil Procedure, 1908 (5 of 1908), a judicial authority, when seized of an action in a manner in respect of which the parties have made an agreement referred to in §44, shall, at the request of one of the parties or any person claiming through or under him, refer the parties to arbitration, unless it finds that the said agreement is null and void, inoperative or incapable of being performed.”
The real question for consideration is as to the nature of adjudication that is contemplated by §45 when the objection about the agreement being “null and void, inoperative or incapable of being performed” is raised before a judicial authority. Should the judicial authority while exercising power under §45 decide the objection on a prima facie view of the matter and render a prima facie finding or a final finding on merits on affording parties such opportunity as the justice of the case may demand having regard to facts of the case?
The question is important and at the same time not free from difficulty. World over the opinion is divided. The courts in some of the countries have preferred the view that the adjudication should be prima facie so as to be raised again before the arbitral forum and others have preferred a final adjudication.
Under §45 of the Act, the judicial authority has to mandatorily refer the parties to arbitration, if conditions specified in the section are fulfilled and the agreement is not found to be null and void, inoperative or incapable of being performed.… The 1996 Act was enacted considering the international scenario as is evident from its preamble…:
“WHEREAS the United Nations Commission on International Trade Law (UNCITRAL) has adopted the UNCITRAL Model Law on International Commercial Arbitration in 1985;
AND WHEREAS the General Assembly of the United Nations has recommended that all countries give due consideration to the said Model Law, in view of the desirability of uniformity of the law of arbitral procedures and the specific needs of international commercial arbitration practice; …
AND WHEREAS the said Model Law … make significant contribution to the establishment of a unified legal framework for the fair and efficient settlement of disputes arising in international commercial relations;
AND WHEREAS it is expedient to make law respecting arbitration and conciliation, taking into account the aforesaid Model Law …”
[The dissenting Justice of the Indian Supreme Court referred to §8 of the Act, which provides for stays of litigation where an arbitration agreement provides for arbitration in India.] Under the Old Arbitration Act (§34 of the Arbitration Act, 1940), the court had discretion in the matter of grant of stay of legal proceedings where there was an arbitration agreement on being satisfied that the arbitration agreement exists factually and legally, and disputes between the parties are in regard to the matter agreed to be referred to arbitration. The court in exercise of its discretion could also decline an order of stay despite existence of the aforesaid conditions, depending upon the facts and circumstances of the case….
Section 8 of the Act is a departure from §34 of the old Act. Under [§8] the judicial authority has no discretion. It is mandatory for the judicial authority to refer the parties to arbitration on the existence of conditions stipulated in the section. Unlike §45, the judicial authority under §8 has not been conferred the power to refuse reference to arbitration on the ground of invalidity of the agreement. It is evident that the object is to avoid delay and accelerate reference to arbitration leaving the parties to raise objections, if any, to the validity of the arbitration agreement before the arbitral forum and/or post award under §34 of the Act….
Before this Court, learned counsel for the parties have rightly taken the stand that only §45 is applicable and §8 has no applicability. It is evident that there has been no adjudication of the application by the trial court in terms of §45 of the Act. The trial court has not gone into the question, prima facie or finally, as to the agreement being null and void, inoperative or incapable of being performed, which was the objection raised by the first respondent in reply to the application of the appellant. Thus, on the ingredients of §45, there was no adjudication. Therefore, the direction of the High Court for fresh adjudication of application of the appellant having regard to the provisions of §45 of the Act cannot be faulted. It is also necessary to issue directions for expeditious adjudication of the said application by the trial court but after first determining the scope of adjudication in exercise of power under §45.
[The] appellant … contends that the consideration by the judicial authority under §45 has to be on a prima facie view of the matter based on examination of the plaint and any documents attached thereto, reply to the application for reference and any documents attached thereto and the affidavits filed by the parties. The court, on a prima facie examination of the pleadings and documents, should come to the conclusion as to whether the arbitration agreement is null or void, inoperative or incapable of being performed. Learned counsel submits that final determination on merits in some cases may even require recording of evidence and proceedings may turn out to be a full-fledged trial thereby defeating the very purpose for the enactment of the Act. It is urged that the final determination can be made if such objections are raised before the arbitral forum and/or post-award by the court.
On the other hand, … the first respondent … contends that §45 of the Act should be interpreted so as to give full effect to the opening non-obstante clause and the wordings of §45 which are entirely different from §8 in their effect and operation. It is urged that §45 cannot be construed in a way that it becomes indistinguishable from §8. It is further submitted that under §45, if an issue is raised before the court regarding the legality or validity of the agreement, then the court must give a finding on the issue. The contention is that the court would make an order of reference to arbitration only if the arbitration agreement is legal and valid….
Section 45 uses the expression “shall” in respect of referring the parties to arbitration, unless judicial authority finds that the said agreement is null and void, inoperative or incapable of being performed. The term “shall” in its ordinary significance is mandatory.… The words “shall” and “unless” appearing in §45 mandate that before referring the parties to arbitration, the judicial authority should be satisfied that the arbitration agreement is not null and void, inoperative or incapable of being performed…. Section 45 is clear; there is no doubt, ambiguity or vagueness in it.
[The dissenting Justice noted that the language of §45 of the Act is substantially the same as that of Article II(3) of the New York Convention.] Clearly §45 casts an obligation upon the judicial authority when seized of the matter to record a finding as to the validity of the arbitration agreement as stipulated in the section and there is nothing to suggest either from the language of the section or otherwise that the finding to be recorded is to be only ex facie or prima facie.
It is true that §5 limits judicial intervention in the manner provided therein. It accelerates the arbitral process by curtailing chances of delay that may be caused in court proceedings. But, at the same time, it is also clear that though §§8 and 45 both deal with the power of judicial authority to refer parties to arbitration, in the former which deals with domestic arbitration, no provision has been made for examining at that stage the validity of the arbitration agreement whereas under §45 which deals with arbitrations to which the New York Convention applies, a specific provision has been made to examine the validity of the arbitration agreement in the manner provided in §45…. Unlike §8 which provides that the application shall be moved not later than when submitting the first statement of the substance of the dispute, under §45 there is no such limitation. The apparent reason is that insofar as domestic arbitration is concerned, the legislature intended to achieve speedy reference of disputes to the arbitral tribunal and left most of the matters to be raised before the arbitrators or post-award. In case of foreign arbitration, however, in its wisdom the legislature left the question relating to the validity of the arbitration agreement being examined by the court. One of the main reasons for the departure being the heavy expense involved in such arbitrations which may be unnecessary if the arbitration agreement is to be invalidated in the manner prescribed in §45. In view of the aforesaid, adopting liberal approach and restricting the determination by judicial authority about validity of agreement only from prima facie angle, would amount to adding words to §45 without there being any ambiguity or vagueness therein.
The traditional approach has been to allow a court, where a dispute has been brought despite an arbitration agreement, to fully rule on the existence and validity of the arbitration agreement. This approach would ensure that the parties are not proceeding on an invalid agreement as this would be a fruitless exercise involving much time and expenditure. In some countries, however, the traditional approach has changed. The liberal approach which seems to be gaining increasing popularity in many legal systems both statutorily as well as through judicial interpretation is to restrict the review of validity of the arbitration agreement at a prima facie level. For final review the parties may raise issue before the arbitral forum or post-award….
The Geneva Protocol (Art. IV(1), the New York Convention (Art. II(3)) as well as the UNCITRAL Model Law (Art. 8), like §45 of the Act, have similarly ambiguous phraseology capable of either interpretation. It is true that the courts in … Ontario and Hong Kong, both of which have based their law on the UNCITRAL Model Law (like India), have adopted a liberal approach to the issue…. It is clear from a plain reading of Hong Kong and English provisions that both confer discretion on the court, unlike §45 of the Act, which is mandatory. It is evident from the words “may” and “satisfied” used in the Hong Kong provision and also from the language used in §32 of the English Arbitration Act, 1996, that the intention in the said two jurisdictions was to confer on the court discretionary powers indicative of limited review from a prima facie point of view.… The American approach … favors a traditional approach of final review of the court. [See Comptek Telecomm v. IVD Corp., XXII Y.B. Comm. Arb. 905 and SMG Swedish Machine Group v. Swedish Machine Group, XVIII Y.B. Comm. Arb. 457 (N.D. Ill. 1970).]
It may be noted that both approaches have their own advantage and disadvantage. The approach whereby the court finally decides on merits on the issue of existence and validity of the arbitration agreement results in a certain degree of time and cost avoidance. It may prevent parties to wait for several months or in some cases years before knowing the final outcome of the dispute regarding jurisdiction. It will often take that long for the arbitrators and then the courts to reach their decisions. The same considerations of cost and time explain the position taken … under §32(2) of the 1996 English Arbitration Act provides that the parties may agree (or, if the parties fail to agree, the arbitral tribunal may agree) that it would be more efficient to have the question resolved immediately by the courts.
I am of the view that Indian Legislature has consciously adopted a conventional approach so as to save the huge expense involved in international commercial arbitration as compared to domestic arbitration. In view of the aforesaid discussion, I am of the view that under §45 of the Act, the determination has to be on merits, final and binding and not prima facie….
Turning to the present case, I direct that the application filed by the appellant before the trial court would be treated as an application under §45 of the Act. Having regard to the nature of controversy in the present case, parties would be given opportunity to file documents and affidavits by way of evidence. No oral evidence would be examined.… [C]onsidering that the application has been pending for nearly two years, I direct its disposal within a period of two months….
Before concluding, this Court also deems it necessary to issue general directions for expeditious disposal of petitions/applications filed so as to challenge the validity of the arbitration agreement under §45. Ordinarily, such cases shall be decided on the basis of affidavits and other relevant documents and without oral evidence. There may, however, be few exceptional cases where it may become necessary to grant opportunity to the parties to lead oral evidence. In both eventualities, the judicial authority is required to decide the issue expeditiously within a fixed time-frame and not to treat such matters like regular civil suits. The object of arbitration including international commercial arbitration is expedition. The object of the Act would be defeated if international commercial disputes remain pending in court for months and years before even commencement of arbitration. Accordingly, I direct that any application that may be filed under §45 of the Act must be decided within three months of its filing. In rare and exceptional cases, the judicial authority may extend the time by another three months but by sending a report to the superior/Appellate Authority setting out the reasons for such extension….
B.N. SRIKRISHNA, J. I have had the benefit of carefully considering the erudite judgment delivered by my esteemed and learned Brother Sabharwal, J. Regretfully, I find myself in the unenviable position of having to disagree with the views expressed therein…. The core issue in this case is: Whether the finding of the court made under §45 of the Act that the arbitration agreement, falling within the definition of §44 of the Act, is or is not “null and void, inoperative or incapable of being performed” should be a final expression of the view of the court or should it be a prima facie view formed without a full-fledged trial?
The contrast in language between §§8 and 45 of the Act has been rightly noticed by my learned Brother. Section 8, which leaves no discretion in the court in the matter of referring parties to arbitration, does not apply to the present case, as we are concerned with Part II of the Act. On the other hand, §45 which is directly applicable to the present case, empowers the court to refuse a reference to arbitration if it “finds” that the arbitration agreement is “null and void, inoperative or incapable of being performed.” …
[N]o one can doubt that Part II of the 1996 Act is intended to opt for the international arbitration regime to meet the challenges of international trade and commerce, nor can it be doubted that §45 offers a greater discretion to the court for judicial intervention at the pre-reference stage. Despite all this, the question would still remain as to whether the discretion available for the court for interference, even under §45 of the Act, should be exercised on a prima facie view of the nature of the arbitral agreement or should it be on a final finding?
True, that there is nothing in §45 which suggests that the finding as to the nature of the arbitral agreement has to be ex facie or prima facie. In my view, however, this is an inescapable inference from an ex visceribus interpretation of the statute….
There are distinct advantages in veering to the view that §45 does not require a final determinative finding by the court. First, under the Rules of Arbitration of the [ICC], as in the present case, invariably the arbitral tribunal is vested with the power to rule upon its own jurisdiction. Even if the court takes the view that the arbitral agreement is not vitiated or that it is not invalid, inoperative or unenforceable, based upon purely prima facie view, nothing prevents the arbitrator from trying the issue fully and rendering a final decision thereupon. If the arbitrator finds the agreement valid, there is no problem as the arbitration will proceed and the award will be made. However, if the arbitrator finds the agreement invalid, inoperative or void, this means that the party who wanted to proceed for arbitration was given an opportunity of proceeding to arbitration, and the arbitrator after fully trying the issue has found that there is no scope for arbitration….
Treating the finding under §45 as final results in a paradoxical situation. A final decision rendered by the competent court on the nature of the arbitral agreement may have to be ignored by the arbitral tribunal, which would be entitled to decide the issue afresh on the material presented to it. It may also lead to another curious result, that the competent court in the jurisdiction where the arbitration proceeds (Japan, as in the present case) would have to reckon with the fully binding effect of a finding made under §45 by a competent court in India arrived at by following a summary procedure without admitting all relevant evidence….
[In cases where the arbitration agreement is governed by non-Indian law,] it would not only be unfeasible to prove foreign law exclusively through affidavits, but it would also entail enormous expenditure of time and money. [This is] exemplified in the U.S. case of SMG Swedish Machine Group v. Swedish Machine Group, [XVIII Y.B. Comm. Arb. 457 (1993) (N.D. Ill. 1991)]. In this case, it was held by the U.S. court that the validity or existence of the arbitration agreement would have to be conclusively determined by the court itself at the pre-award stage. The law applicable to the arbitration agreement was Swedish law and therefore the validity of the agreement had to be determined in accordance with this law. The court reviewed the Swedish law opinions submitted by both parties, but found them poorly documented. When parties submitted new opinions, these were found to be mutually contradictory. Finally, the court had to conduct a hearing where parties could provide proof of their true intentions as to the issues. Thus, similar difficulties, delays and costs may be encountered by the trial court in the present case if it has to give a final finding (after conducting a full-fledged trial) on the validity of the arbitration agreement at the pre-reference stage under §45.
On the other hand, if one were to take the view that the finding under §45 is only a prima facie view, then all these difficulties could be obviated. Neither the arbitral tribunal, nor the court enforcing the arbitral award may consider itself bound by the prima facie view expressed under §45 of the Act. The difficulty of having to conclusively prove the applicable foreign law at a trial would also be obviated….
The importance of carrying forward the objectives underlying the Model Law can hardly be gainsaid. There is evident dearth of guiding Indian precedent which might be useful in interpreting §45 of the Act. Hence, it becomes necessary to seek light from foreign judgments interpreting corresponding provisions that have been modelled on the Model Law. Now, for a survey of such foreign precedents.
It has rightly been noticed in the judgment of Brother Sabharwal, J. that different countries have approached the issue depending on their substantive and processual laws. It has been notice that the situation under the French Code of Civil Procedure favours a prima facie view, since under the Statute if the dispute is not before an arbitral tribunal, the French courts must decline jurisdiction unless the arbitration agreement is “patently void.” Similarly, Art. 7 of the Swiss Private International Law Statute stipulates that the courts decline jurisdiction … “b. unless the court finds that the arbitral agreement is null and void, inoperative or incapable of being performed.” This has been interpreted by the Swiss Federal Tribunal as restricting the court’s review at the start of the proceedings to a prima facie verification of the existence and effectiveness of the arbitration clause. [Fondation M. v. Banque X, 1996 Bull. ASA 527 (Swiss Fed. Trib. 1996)]….
[I]n at least two common law jurisdictions, Ontario and Hong Kong, both of which have based their law on the Model Law (like India), the courts have adopted a “liberal approach” to the issue, namely that of prima facie view as to the existence and non-vitiation of the arbitral agreement before making a reference…. There is no doubt that in Pacific Int’l Lines (Pte) Ltd v. Tsinlien Metals and Minerals Co. Ltd, [XVIII Y.B. Comm. Arb. 180 (1993),] the High Court of Hong Kong was concerned precisely with the issue as to whether there was a valid arbitration agreement within the meaning of Art. 7 of the Model Law. The Court was of the view that there was a “plainly arguable” case to support the proposition that there was an arbitration agreement that complied with Art. 7 of the Model Law. The Court observed:
“It follows, therefore, that if I am satisfied that there is a plainly arguable case to support the proposition and there was an arbitration agreement which complies with Art. 7 of the Model Law, I should proceed to appoint the arbitrator in the full knowledge that the defendants will not be precluded from raising the point before the arbitrator and having the matter reconsidered by the court consequent upon that preliminary ruling.” …
[Citing Rio Algom Ltd v. Sami Steel Ltd, the Indian Supreme Court said that] the Ontario Court has clearly held that the court in the matter of interpretation of the existence and non-vitiation of the arbitral agreement has only a prima facie jurisdiction and is not required to render a final decision at that stage….
The suggestions made by learned Brother Sabharwal, J. to mollify some of the obvious drawbacks of the approach that he adopts, also need closer scrutiny. He has suggested a trial by affidavits as well as a fixed time-frame to reduce the possible delays ensuring from a protracted trial at the pre-reference stage. In my view, any attempt to mollify the significant adverse consequences of the determinative approach by enabling the court to render a final judgment only on the basis of affidavits, albeit within a fixed time-frame, may prove counter-productive.
There are several instances where affidavit evidence cannot aid in making a final determinative finding on the issue. For instance, where a defence taken is that the signature of a party was forged or that the agreement itself is entirely fabricated, I cannot conceive of the issue being satisfactorily determined fully and finally merely on the basis of affidavits without oral evidence. Correspondingly, if courts at the preliminary stage were to admit oral evidence, simply because forgery or the like is pleaded, the consequences are still troublesome. In fact, if the view postulated by learned Brother Sabharwal, J. were to prevail, then all international commercial arbitrations can be defeated by a totally bogus defence that the agreement is forged or fabricated. If such a defence were to be allowed, it would necessarily require a full-fledged trial (with oral evidence) at the pre-reference stage with all its consequential delay and expense. On the other hand, if only a prima facie view were to be taken, then the issue could still be examined in-depth after a full trial either before the arbitral tribunal or at any rate under §48(1)(a) when the enforceability of the ensuing award is questioned….
I fully agree with my learned Brother’s view that the object of dispute resolution through arbitration, including international commercial arbitration, is expedition and that the object of the Act would be defeated if proceedings remain pending in court even after commencing of the arbitration. It is precisely for this reason that I am inclined to the view that at the pre-reference stage contemplated by §45, the court is required to take only a prima facie view for making the reference, leaving the parties to a full trial either before the arbitral tribunal or before the court at the post-award stage….
[A]s I have pointed out, adopting a final and determinative approach under §45 may not only prolong proceedings at the initial stage but also correspondingly increases costs and uncertainty for all the parties concerned. Finally, having regard to the structure of the Act, consequences arising from particular interpretations, judgments in other jurisdictions, as well as the opinion of learned authors on the subject, I am of the view that, the correct approach to be adopted under §45 at the pre-reference stage, is one of a prima facie finding by the trial court as to the validity or otherwise of the arbitration agreement….
BUCKEYE CHECK CASHING, INC. v. CARDEGNA
546 U.S. 440 (2006)
FIRST OPTIONS OF CHICAGO, INC. v. KAPLAN
514 U.S. 938 (1995)
JUSTICE BREYER. In this case we consider a question about how courts should review certain matters under the [FAA, including] how a district court should review an arbitrator’s decision that the parties agreed to arbitrate a dispute….
The case concerns several related disputes between, on one side, First Options of Chicago, Inc., …, on the other side, three parties: Manuel Kaplan; his wife Carol Kaplan; and his wholly owned investment company, MK Investments, Inc. (MKI), whose trading account First Options cleared. The disputes center around a “workout” agreement, embodied in four separate documents, which governs the “working out” of debts to First Options that MKI and the Kaplans incurred.… In 1989, after entering into the agreement, MKI lost an additional $1.5 million. First Options then took control of, and liquidated, certain MKI assets; demanded immediate payment of the entire MKI debt; and insisted that the Kaplans personally pay any deficiency. When its demands went unsatisfied, First Options sought arbitration….
MKI, having signed the only workout document (out of four) that contained an arbitration clause, accepted arbitration. The Kaplans, however, who had not personally signed that document, denied that their disagreement with First Options was arbitrable and filed written objections to that effect with the arbitration panel. The arbitrators decided that they had the power to rule on the merits of the parties’ dispute, and did so in favor of First Options. The Kaplans then asked the Federal District Court to vacate the arbitration award, and First Options requested its confirmation. The court confirmed the award…. [O]n appeal the Court of Appeals for the Third Circuit agreed with the Kaplans that their dispute was not arbitrable; and it reversed the District Court’s confirmation of the award against them. The Court of Appeals said that courts “should independently decide whether an arbitration panel has jurisdiction over the merits of any particular dispute.” 19 F.3d at 1509 (emphasis added). First Options asked us to decide whether this is so (i.e., whether courts, in “reviewing the arbitrators’ decision on arbitrability,” should “apply a de novo standard of review or the more deferential standard applied to arbitrators’ decisions on the merits”) when the objecting party submitted the issue to the arbitrators for decision.
The … question—the standard of review applied to an arbitrator’s decision about arbitrability—is a narrow one. To understand just how narrow, consider three types of disagreement present in this case. First, the Kaplans and First Options disagree about whether the Kaplans are personally liable for MKI’s debt to First Options. That disagreement makes up the merits of the dispute. Second, they disagree about whether they agreed to arbitrate the merits. That disagreement is about the arbitrability of the dispute. Third, they disagree about who should have the primary power to decide the second matter. Does that power belong primarily to the arbitrators (because the court reviews their arbitrability decision deferentially) or to the court (because the court makes up its mind about arbitrability independently)? We consider here only this third question.
Although the question is a narrow one, it has a certain practical importance. That is because a party who has not agreed to arbitrate will normally have a right to a court’s decision about the merits of its dispute (say, as here, its obligation under a contract). But, where the party has agreed to arbitrate, he or she, in effect, has relinquished much of that right’s practical value. The party still can ask a court to review the arbitrator’s decision, but the court will set that decision aside only in very unusual circumstances. See, e.g., 9 U.S.C. §10 (award procured by corruption, fraud, or undue means; arbitrator exceeded his powers); Wilko v. Swan, 346 U.S. 427, 436-437 (1953) (parties bound by arbitrator’s decision not in “manifest disregard” of the law), overruled on other grounds, Rodriguez de Quijas v. Shearson/Am. Express, Inc., 490 U.S. 477 (1989). Hence, who—court or arbitrator—has the primary authority to decide whether a party has agreed to arbitrate can make a critical difference to a party resisting arbitration.
We believe the answer to the “who” question (i.e., the standard-of-review question) is fairly simple. Just as the arbitrability of the merits of a dispute depends upon whether the parties agreed to arbitrate that dispute, see, e.g., Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614, 626 (1985), so the question “who has the primary power to decide arbitrability” turns upon what the parties agreed about that matter. Did the parties agree to submit the arbitrability question itself to arbitration? If so, then the court’s standard in reviewing the arbitrator’s decision about that matter should not differ from the standard courts apply when they review any other matter that parties have agreed to arbitrate. AT&T Technologies, Inc. v. Communications Workers, 475 U.S. 643, 649 (1986) (parties may agree to arbitrate arbitrability); Steelworkers v. Warrior & Gulf Nav. Co., 363 U.S. 574, 583, n.7 (1960) (same). That is to say, the court should give considerable leeway to the arbitrator, setting aside his or her decision only in certain narrow circumstances. See, e.g., 9 U.S.C. §10. If, on the other hand, the parties did not agree to submit the arbitrability question itself to arbitration, then the court should decide that question just as it would decide any other question that the parties did not submit to arbitration, namely independently. These two answers flow inexorably from the fact that arbitration is simply a matter of contract between the parties; it is a way to resolve those disputes—but only those disputes—that the parties have agreed to submit to arbitration.
We agree with First Options, therefore, that a court must defer to an arbitrator’s arbitrability decision when the parties submitted that matter to arbitration. Nevertheless, that conclusion does not help First Options win this case. That is because a fair and complete answer to the standard-of-review question requires a word about how a court should decide whether the parties have agreed to submit the arbitrability issue to arbitration., that word makes clear that the Kaplans did not agree to arbitrate arbitrability here.
When deciding whether the parties agreed to arbitrate a certain matter (including arbitrability), courts generally (though with a qualification we discuss below) should apply ordinary state-law principles that govern the formation of contracts. The relevant state law here, for example, would require the court to see whether the parties objectively revealed an intent to submit the arbitrability issue to arbitration. See, e.g., Estate of Jesmer v. Rohlev, 609 N.E.2d 816, 820 (Ill. 1993) (law of state whose law governs the workout agreement); Burkett v. Allstate Ins., Co., 534 A.2d 819, 823-824 (Pa. 1987) (law of the state where the Kaplans objected to arbitrability).
This Court, however, has (as we just said) added an important qualification, applicable when courts decide whether a party has agreed that arbitrators should decide arbitrability: Courts should not assume that the parties agreed to arbitrate arbitrability unless there is “clea[r] and unmistakabl[e]” evidence that they did so. AT&T Technologies, 475 U.S. at 649; Warrior & Gulf, 363 U.S. at 583, n.7. In this manner the law treats silence or ambiguity about the question “who (primarily) should decide arbitrability” differently from the way it treats silence or ambiguity about the question “whether a particular merits-related dispute is arbitrable because it is within the scope of a valid arbitration agreement”—for in respect to this latter question the law reverses the presumption. See Mitsubishi, 473 U.S. at 626 (“[A]ny doubts concerning the scope of arbitrable issues should be resolved in favor of arbitration”).
But this difference in treatment is understandable. The latter question arises when the parties have a contract that provides for arbitration of some issues…. [G]iven the law’s permissive policies in respect to arbitration, one can understand why the law would insist upon clarity before concluding that the parties did not want to arbitrate a related matter. On the other hand, the former question—the “who (primarily) should decide arbitrability” question—is rather arcane. A party often might not focus upon that question or upon the significance of having arbitrators decide the scope of their own powers. And, given the principle that a party can be forced to arbitrate only those issues it specifically has agreed to submit to arbitration, one can understand why courts might hesitate to interpret silence or ambiguity on the “who should decide arbitrability” point as giving the arbitrators that power, for doing so might too often force unwilling parties to arbitrate a matter they reasonably would have thought a judge, not an arbitrator, would decide.
On the record before us, First Options cannot show that the Kaplans clearly agreed to have the arbitrators decide (i.e., to arbitrate) the question of arbitrability. First Options relies on the Kaplans’ filing with the arbitrators a written memorandum objecting to the arbitrators’ jurisdiction. But merely arguing the arbitrability issue to an arbitrator does not indicate a clear willingness to arbitrate that issue, i.e., a willingness to be effectively bound by the arbitrator’s decision on that point. To the contrary, insofar as the Kaplans were forcefully objecting to the arbitrators deciding their dispute with First Options, one naturally would think that they did not want the arbitrators to have binding authority over them. This conclusion draws added support from (1) an obvious explanation for the Kaplans’ presence before the arbitrators (i.e., that MKI, Mr. Kaplan’s wholly owned firm, was arbitrating workout agreement matters); and (2) Third Circuit law that suggested [at the time] that the Kaplans might argue arbitrability to the arbitrators without losing their right to independent court review. Teamsters v. Western Penn. Motor Carriers Ass’n, 574 F.2d 783 (1978).
First Options makes several counterarguments: (1) that the Kaplans had other ways to get an independent court decision on the question of arbitrability without arguing the issue to the arbitrators (e.g., by trying to enjoin the arbitration, or by refusing to participate in the arbitration, and then defending against a court petition First Options would have brought to compel arbitration, see 9 U.S.C. §4); (2) that permitting parties to argue arbitrability to an arbitrator without being bound by the result would cause delay and waste in the resolution of disputes; and (3) that the [FAA] therefore requires a presumption that the Kaplans agreed to be bound by the arbitrators’ decision, not the contrary. The first of these points, however, while true, simply does not say anything about whether the Kaplans intended to be bound by the arbitrators’ decision. The second point, too, is inconclusive, for factual circumstances vary too greatly to permit a confident conclusion about whether allowing the arbitrator to make an initial (but independently reviewable) arbitrability determination would, in general, slow down the dispute resolution process., the third point is legally erroneous, for there is no strong arbitration-related policy favoring First Options in respect to its particular argument here. After all, the basic objective in this area is not to resolve disputes in the quickest manner possible, no matter what the parties’ wishes, but to ensure that commercial arbitration agreements, like other contracts, “‘are enforced according to their terms,’” Mastrobuono, 514 U.S. at 1213, and according to the intentions of the parties, Mitsubishi Motors, 473 U.S. at 626. That policy favors the Kaplan, not First Options.
We conclude that, because the Kaplans did not clearly agree to submit the question of arbitrability to arbitration, the Court of Appeals was correct in finding that the arbitrability of the Kaplan/First Options dispute was subject to independent review by the courts….
BG GROUP PLC v. REPUBLIC OF ARGENTINA