Separability and Choice of Law in Arbitration Agreements

The law governing an arbitration agreement determines its validity, interpretation, and scope, and can differ from the law governing the main contract, a consequence of separability codified in Section 16 of the Arbitration and Conciliation Act, 1996. The UK Supreme Court in Enka Insaat ve Sanayi A.S. v. OOO Insurance Company Chubb [2020] UKSC 38 held that, absent an express choice, the law with the closest connection to the arbitration agreement governs, usually the seat's law. Indian courts have generally applied the seat's law as the curial law governing the agreement's validity. This article explains how the governing law is identified and why it affects limitation, capacity, and scope.

The Doctrine of Separability

Separability is the principle that an arbitration agreement is legally independent from the main contract in which it appears. If the main contract is void, voidable, or terminated, the arbitration clause survives as a separate agreement capable of supporting a valid reference to arbitration. This principle is codified in Section 16 of the Arbitration and Conciliation Act 1996 and is recognised in virtually all major arbitration jurisdictions.

The practical consequence is that a party cannot defeat an arbitration clause simply by arguing that the main contract is invalid. The invalidity of the main contract must be established through arbitration, not used as a reason to avoid it. There is one important exception: if the very act or event that renders the main contract void also specifically affects the arbitration clause, the clause may fall with the contract.

Which Law Governs the Arbitration Agreement?

The governing law of the arbitration agreement determines its validity, interpretation, and scope. This is a separate question from the governing law of the main contract. Three possible laws can govern an arbitration agreement: the law expressly chosen by the parties to govern the arbitration agreement, the law of the seat of arbitration, and the law governing the main contract.

The English Approach: Enka v Chubb

The UK Supreme Court addressed this directly in Enka Insaat ve Sanayi A.S. v. OOO Insurance Company Chubb [2020] UKSC 38. The court held that where parties have not chosen a law specifically to govern the arbitration agreement, the law with the closest and most real connection should govern. In most cases, this will be the law of the seat, but if the law of the main contract is different and there is a sufficiently strong indication that it should govern the arbitration agreement too, the main contract law may apply. The case has been criticised for producing uncertainty, but it is the leading English authority.

The Indian Approach

Indian courts have generally applied the law of the seat as the curial law governing arbitral procedure, following BALCO. The law governing the validity of the arbitration agreement in Indian cases often aligns with the law of the main contract, particularly in domestic arbitrations. In international commercial arbitrations, where the seat is outside India, Indian courts have had to determine whether the foreign law of the seat also governs the validity of the arbitration agreement, or whether Indian law applies as the law of the contract. This analysis has produced nuanced decisions that continue to evolve.

Why This Matters in Practice

Limitation Periods

The governing law of the arbitration agreement affects limitation periods for commencing arbitration. Under Indian law, the limitation period for commencing arbitration is generally three years from the date the cause of action arose. Under English law, the position differs depending on the circumstances. If the parties have chosen different laws for their contract and their arbitration, they may face different limitation analyses depending on which law the tribunal applies.

Capacity and Formal Validity

Questions about whether the arbitration agreement was validly concluded, whether the parties had capacity to agree to arbitration, and whether the required formalities were observed are all governed by the law of the arbitration agreement. A clause that is formally valid under the law of the seat may not satisfy the requirements of the law of the main contract, or vice versa.

Scope of the Arbitration Agreement

Whether a particular dispute falls within the scope of the arbitration agreement is also a matter for the law governing the arbitration agreement. Courts in different jurisdictions have taken different positions on how broadly or narrowly arbitration clauses should be construed. In India, the Supreme Court in Vidya Drolia v. Durga Trading Corporation (2021) 2 SCC 1 reaffirmed the pro-arbitration approach, holding that courts should adopt a narrow construction of non-arbitrability and resolve doubts in favour of arbitration.

Drafting to Avoid Uncertainty

The single most effective way to avoid disputes about governing law is to state it expressly. A well-drafted arbitration clause should specify: the seat of arbitration, the number of arbitrators, the institutional rules (if any), and the law governing the arbitration agreement. A clause that says "this arbitration agreement shall be governed by English law" removes any doubt about which legal system governs the clause, regardless of what law governs the main contract.

Frequently Asked Questions

Does separability mean the arbitration clause always survives?

Not always. Separability means the arbitration clause is not automatically invalidated when the main contract is attacked. But if the specific ground of invalidity applies equally and directly to the arbitration clause itself (for example, where the clause was inserted by fraud that also infected the arbitration agreement), the clause may also fall.

Can the law of the arbitration agreement differ from the seat?

Yes. Parties can expressly choose a different law to govern the arbitration agreement from the law of the seat. This is unusual in practice but perfectly permissible. The more common situation is that the law of the seat and the law of the arbitration agreement coincide, either because the parties chose them to be the same or because courts default to the seat law.

How do Indian courts determine which law governs an arbitration agreement in international cases?

Indian courts apply a conflicts of law analysis. They look first at whether the parties expressly chose a law for the arbitration agreement, then at the law of the seat, and then at the law with the closest connection to the agreement. After BALCO, courts have been more willing to apply the law of the foreign seat to procedural matters. The substantive validity of the agreement may still be assessed under Indian law in some circumstances.

Does the governing law of the arbitration agreement affect who can be joined to the arbitration?

Yes, in some respects. Questions about whether a non-signatory can be bound by or joined to an arbitration agreement are typically analysed under the law governing that agreement, since they concern its validity and scope rather than the procedure of the reference. Different legal systems apply different tests for joining a non-signatory, so the outcome can depend on which law governs the arbitration agreement.

What did Vidya Drolia decide about the scope of arbitration agreements in India?

In Vidya Drolia v. Durga Trading Corporation (2021) 2 SCC 1, the Supreme Court of India held that courts should adopt a narrow view of what disputes are non-arbitrable and resolve doubts in favour of referring a matter to arbitration. The ruling reinforced a pro-arbitration approach to interpreting the scope of an arbitration agreement under the Arbitration and Conciliation Act, 1996.

Why did the English courts move away from automatically applying the law of the seat?

In Enka Insaat ve Sanayi A.S. v. OOO Insurance Company Chubb [2020] UKSC 38, the UK Supreme Court held that where the parties have expressly chosen a law to govern the main contract, that choice is generally presumed to extend to the arbitration agreement too, even if the seat is in a different country, unless there are strong indications the parties intended otherwise.

Does the doctrine of separability apply even if the arbitration clause itself is challenged directly?

Separability protects the arbitration clause from being invalidated merely because the main contract is attacked. It does not protect the clause where the specific defect alleged, such as fraud in the formation of the agreement, is directed at the arbitration clause itself and not only at the contract as a whole.

Is the limitation period for arbitration in India the same as for a civil suit?

The Limitation Act, 1963 applies to arbitration proceedings in India by virtue of Section 43 of the Arbitration and Conciliation Act, 1996, and the limitation period for most contractual claims is generally three years from the date the cause of action arose, the same period that would apply to a corresponding civil suit.

Can parties choose one law for the main contract and a different law for the arbitration agreement?

Yes. Parties are free to specify different governing laws for the main contract and the arbitration agreement, and an express choice for the arbitration agreement will be respected by both Indian and English courts. This is uncommon in practice, since most drafters do not turn their minds to the question separately, which is precisely why disputes over the implied governing law arise.

What is the difference between the seat and the venue of arbitration under Indian law?

The seat of arbitration determines the curial law governing the arbitral procedure and the courts with supervisory jurisdiction over the arbitration, while the venue is simply the physical location where hearings are held and can differ from the seat for convenience. Where a clause names only a venue without separately identifying a seat, courts examine the contract as a whole to decide whether that location was actually intended to function as the seat, an inquiry the Supreme Court addressed in the BALCO judgment on the seat of arbitration.

What did the Supreme Court hold in the BALCO judgment about the seat of arbitration?

In Bharat Aluminium Co. v. Kaiser Aluminium Technical Services Inc. [(2012) 9 SCC 552], a five-judge Constitution Bench of the Supreme Court held on 6 September 2012 that Part I of the Arbitration and Conciliation Act, 1996 applies only to arbitrations seated in India, overruling the earlier position in Bhatia International v. Bulk Trading S.A. [(2002) 4 SCC 105] that had allowed Indian courts to intervene in foreign-seated arbitrations. The judgment aligned Indian arbitration law with the territoriality principle used internationally and reduced unwarranted judicial interference in arbitrations seated outside India.

What happens if a contract is silent on both the seat of arbitration and the governing law of the arbitration agreement?

Where a contract is silent on both, courts undertake a two-stage inquiry: first identifying the law governing the arbitration agreement by looking at any express or implied choice and, failing that, the law with the closest and most real connection to the agreement, then separately determining the seat by examining the arbitration clause, the institutional rules chosen, and the surrounding circumstances. This uncertainty is precisely what well-drafted clauses are meant to avoid, since the outcome of this inquiry can differ between Indian and English courts on similar facts.

Who bears the burden of proving which law governs the arbitration agreement when the parties disagree?

The party asserting that a particular law governs the arbitration agreement, typically the party resisting or supporting a challenge to the tribunal's jurisdiction, bears the burden of establishing that law before the court or tribunal deciding the question. Because this is a threshold jurisdictional issue, it is usually addressed by the tribunal itself under the competence-competence principle recognised in Section 16 of the Arbitration and Conciliation Act, 1996, subject to limited court review, rather than left unresolved until the merits stage.

The above article is written by Vikrant D. Shetty who heads the international arbitration, commercial litigation, and real estate advisory practice at the Mumbai-based law firm - Vikrant D. Shetty & Associates, Advocates & Solicitors. The firm advises on arbitration agreement drafting, governing law analysis, and representation in proceedings under Indian and international arbitration rules.

Related reading: Choosing the Seat: Singapore, London or Paris for Asia-Pacific Disputes.

Disclaimer: This article is for general information only and does not constitute legal advice. Readers should obtain appropriate professional advice before acting on any information set out here.