The Jurisprudence of Separability of Arbitration Clauses & Allegation of Fraud to Prevent a Reference to Arbitration.
By James Gawuga Nkrumah
Introduction
Increasingly, arbitration is becoming the norm for dispute resolution and not really an alternative to litigation. Parties to commercial agreements continue to designate arbitration under dispute resolution clauses as their preferred mode for resolving disputes. Absent that, parties themselves are able to agree to arbitrate their disputes whenever they arise for the privacy, autonomy, efficiency, neutrality, expertise and party participation that arbitration assures.
Notwithstanding the prominence arbitration is gaining for dispute resolution, there are times a party may object to arbitrating a dispute on grounds of fraud, with the goal that a court of law should determine the matter. This paper examines the legal effect of arbitration clauses and the implications of an allegation of fraud relative to arbitral proceedings or a reference to arbitration.
Separability of Arbitration Clause
Parties to a commercial agreement may include a clause directing the parties to resort to arbitration in settlement of any disputes or differences that may arise. Such a designated clause is an arbitration clause or agreement.[1] The disputes which may arise may be about the validity, scope or interpretation of the agreement itself or the arbitration clause or any other dispute arising from the agreement.
A cardinal principle in dealing with an arbitration clause contained in a commercial agreement is that the arbitration clause is not merged with the agreement. It is a stand-alone clause. It is an agreement in its own right. Put differently, an arbitration clause, notwithstanding that it is contained in a main agreement, for instance, a Sale and Purchase Agreement, Factoring Agreement or Credit Facility Agreement is not subsumed in the Agreement – they are two distinct agreements. Crudely put, it is an agreement contained in an Agreement.
Severability Clauses
In well drafted commercial agreements, there are severability clauses. Some of these clauses read:
In the event that any provision of this Agreement shall be deemed invalid by a court or other competent authority, the other provisions of this Agreement, unaffected by the determination of the Court or other competent body, shall nevertheless remain in effect and shall be performed by the Party who bears the responsibility to discharge the content of those provisions.
The effect of such a provision is that the provisions set out in an agreement are separate; they are on their own and that when one provision is struck out by say a court for illegality for instance, the other provisions remain binding and enforceable. Commenting on the effects of including a severability clause in an agreement and the failure to do so, Peter Nash Swisher stated as follows:
Each major provision in a legal document should be numbered, with an appropriate heading to aid in clarification, to ensure document divisibility. In the absence of divisibility, the entire contract will usually fail if one part fails. Therefore, to avoid the possibility that a questionable provision might defeat the entire agreement, a careful legal draftsman will provide a severability clause which might read: If any provision of this Agreement shall be deemed invalid by a court of competent jurisdiction, the rest of this Agreement shall nevertheless remain in effect.[2]
On the absence of a severability provision in an agreement, Peter Nash Swisher stated that: “Alternatively, if the entire document is intended to stand or fall as an indivisible legal instrument, then a severability clause should not be utilized.”[3]
From this general concept of severability of the provisions of an agreement, it could be said that an arbitration agreement or clause contained in an agreement is equally severable from the other provisions. This would be the effect if, without more, a severability clause is included in the agreement that contains the arbitration clause. However in the absence of a severability clause, the principle of severability in respect of arbitration clauses becomes relevant. More specifically, the common principle of law is that an arbitration clause is severable from the agreement in which it is incorporated.[4] In other words, an arbitration clause in an agreement is a different agreement incorporated in the main agreement. This is generally known as the doctrine of separability.
Judicial Recognition of the Separability Doctrine
The doctrine of separability is the doctrine that treats an arbitration clause or agreement as entirely separate from an agreement which incorporates the former, that is the arbitration clause or agreement.[5] For this doctrine to be invoked, there must be an agreement, which has within it a clause or an agreement to arbitrate a dispute concerning or arising from that agreement.[6] Conversely, where there is no such incorporation, the separability doctrine cannot be invoked. This is because it is either the agreement to arbitrate is separately executed from the commercial agreement or the parties may agree to arbitrate when the dispute occurs. In either case, the question of whether or not the agreement to arbitrate forms part of the initial agreement would not arise.
The leading judicial decision on the separability doctrine is the case of Habour Assurance v. Kansa General International Insurance.[7] Briefly, in this case, the plaintiff initiated a suit for a declaration that certain reinsurance policies were void for illegality, thus it was not liable under them. The alleged illegality was that the defendants were not registered or approved to carry on insurance or reinsurance business under the Insurance Companies Acts. The illegality was denied, and the defendant sought a stay and reference to arbitration. The stay was granted. It was held that an arbitration clause in the insurance contract was separate from the contract itself. The resultant effects of the separation are as follows:
- “The invalidity of the main contract did not deprive the arbitrator of jurisdiction and
- The arbitrator had jurisdiction to decide the question of illegality of the main contract.”
The Place of Fraud in Arbitration
Notwithstanding that there is a clause in an agreement indicating a choice to arbitrate any difference or dispute concerning or arising from the agreement, a party may allege fraud in order to impeach the indicated arbitration. This is because it is possible for an arbitration clause to be ‘smuggled’ into an agreement on the blindside of a party. Thus, an arbitration agreement or clause in an agreement, it can successfully be set aside on grounds of fraud.
As earlier indicated, an arbitration clause or agreement contained in an agreement is entirely a different agreement on its own. The logical conclusion of this is that when an agreement is impeached on grounds of fraud, the arbitration clause can survive. The reverse is also true. Put differently, if for any reason, the agreement incorporating the arbitration clause or agreement becomes unenforceable, the unenforceability “does not automatically render an arbitration agreement … unenforceable”[8] and vice versa. This is a direct consequence of the separability principle.
The doctrine of separability of arbitration agreement or clause has received statutory endorsement in Ghana. The Alternative Dispute Resolution Act, 2010 (Act 798) provides that:
Unless otherwise agreed by the parties, an arbitration agreement which forms or is intended to form part of another agreement, 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 shall for that purpose be treated as a distinct agreement.[9]
From the foregoing, it is possible for fraud to be alleged but that allegation is unlikely to impeach an arbitration agreement contained in the wider agreement. In other words, though “fraud” as the legal maxim states “vitiates all things”, that allegation as regards an agreement may not necessarily vitiate arbitral proceedings or preclude a reference to arbitration.
To preclude a reference to arbitration by the Ghanaian courts, for instance, it was held in the case of Savannah Pride v. Hanergy Global[10] that the issue must be one that is not arbitrable. It is either the issue is one that relates to the environment, national or public interest, enforcement or interpretation of the 1992 Constitution or a matter that cannot be settled by any of the alternative dispute resolution (ADR) methods. For matters that are not settleable under any of the ADR methods, judicial opinion suggests that they may include “issues dealing with securities and exchange disputes, tax evasion, breach of a criminal provision of Ghana with an attendant incarceration or a fine that the criminal court alone has jurisdiction to determine and the like.”[11]
Accordingly, an allegation of fraud in respect of an agreement incorporating an arbitration agreement is not sufficient to preclude arbitration of a dispute or a reference to arbitration. Act 798 permits a party to an agreement to refer a matter to arbitration.[12] Also, a court may refer parties to an agreement to arbitration when it is satisfied with an application of a party to arbitrate[13] or it may do so subject to the consent of the parties to make such reference when in its opinion, the matter is aptly arbitrable.[14]
To invoke the court’s jurisdiction in order to arrest such a reference, the target of the fraud allegation must be the arbitration clause itself and not the wider agreement. This is mainly the resultant effect of the separability principle. In the Savannah Pride Case supra, the allegation was that a share sale and purchase agreement was procured by fraud due to misrepresentations in a financial statement, which influenced the purchasing of the shares. The plaintiff issued a writ for the annulment of the agreement. The defendants applied to the court for the case to be stayed and the dispute referred to arbitration pursuant to clause 14.2 of the share sale and purchase agreement. The plaintiff objected on grounds of fraud, alleging that the true financial position of the company was concealed.
The court held that:
where there is an allegation of fraud with regards to the main agreement, then the proper forum for the determination of the dispute is arbitration. However, if the allegation of fraud is in respect of the arbitration provision such as an allegation that a party never intended to have any arbitral settlement of the dispute and such provision had been inserted on his blind side, then it is the duty of the court to determine such an issue.[15]
In effect, provided that the arbitration clause or agreement and not the wider agreement which incorporated the former is the target for impeachment, the proper forum for determining whether or not the arbitration agreement or clause was procured by fraud is the court (and not the arbitral body). In other words, the court will have no jurisdiction unless “the arbitration agreement itself is directly [to be] impeached.”[16] For whether or not there is an agreement to arbitrate is a preliminary question to be determined by the court. Hence, the court will refuse an application for stay of proceedings and reference to arbitration if the allegation of fraud is against the agreement itself.[17] For whether or not there is an agreement to arbitrate is a preliminary question to be determined by the court.[18]
Finally, needless to say, a party who alleges that an arbitration clause was inserted by fraud must prove same. For the axiomatic legal maxim is that “he who alleges must prove” the allegation. An excuse of failing to read the agreement or observe the inclusion of an arbitration agreement would be unacceptable. The party’s signature to the main agreement would make the agreement to arbitrate binding on the defaulting party.[19]
Conclusion
Fraud, when proved, vitiates all things. A transaction or consent will come to naught if it is found that the transaction or consent was secured by fraud, particularly when fraud is proved. For arbitration, an allegation of fraud may be treated differently depending on whether the allegation is directed at the arbitration clause itself or the main agreement incorporating the arbitration agreement. If the allegation is that the agreement which has the arbitration agreement was procured by fraud, that is a matter determinable by arbitration. Conversely, to preclude a reference to arbitration, an allegation that the arbitration clause in a contract was procured by fraud has to be determined by the court. If proved, there would be no reference to arbitration as the arbitration clause would have been inserted without the consent of the other party or even if the consent was given, it would have been fraudulently obtained.
[1] Black’s Law Dictionary. 11th Edition. (See: S.2(2) of the Alternative Dispute Resolution Act, 2010 (Act 798).
[2] Peter Nash Swisher, Techniques of Legal Drafting: A Survival Manual, 15 U. Rich. L. Rev. 873 (1981), reprinted in 31 Law Review Digest 4 (1982).
[3] Ibid
[4] Henry J. Brown and Arthur L. Marriott Q.C. ADR Principles and Practice (Sweet & Maxwell Limited, 1999)
[5] Dennis Dominic Adjei and Barbara Frances Ackah-Yensu, Alternative Dispute Resolution – A Ghanaian Perspective. Buk Press, 2021, p. 134.
[6] Habour Assurance v. Kansa General International Insurance [1993] I Lloyd’s Rep 455.
[7] Ibid
[8] Dennis Dominic Adjei and Barbara Frances Ackah-Yensu, Alternative Dispute Resolution – A Ghanaian Perspective. Buk Press, 2021, p. 134.
[9] Section 3(1) of Alternative Dispute Resolution Act, 2010 (Act 798)
[10] [2018-2019] 2 GLR 626
[11] Savannah Pride v. Hanergy Global [2018-2019] 2 GLR 626
[12] S. 5 of Alternative Dispute Resolution Act, 2010 (Act 798)
[13] Ibid, s. 6
[14] Ibid, s. 7
[15] Savannah Pride v. Hanergy Global [2018-2019] 2 GLR 626 at 630
[16] Dennis Dominic Adjei and Barbara Frances Ackah-Yensu, Alternative Dispute Resolution – A Ghanaian Perspective. Buk Press, 2021, p. 134.
[17] Premium Nafta Products Ltd. v. Fili Shipping Co. Ltd. (2007) UKHL 40
[18] See s. 3 of the Evidence Act, 1975 (NRCD 323)
[19] Ewan Mckendrick, Contract Law: Text, Cases and Material. 3rd Edition. p. 319 & 320.
