• The Effect of the Principle of Separability on Determination of the Law Applicable to Arbitration Agreements
  • August 15, 2017
  • Introduction
    Due to the principle of autonomy / separability of an arbitration agreement from the underlying contract, the validity of the underlying contract and the arbitration agreement should be evaluated independent of each other1. However, it should be analyzed whether this autonomy effects the determination of the applicable law to both agreements. In other words, whether the principle of separability causes the laws that are applicable to the arbitration agreement and to underlying contract to be different2.
    This issue is particularly encountered when an arbitration clause is stipulated under the underlying contract. Under the international commercial agreements, the dispute resolution clause and the choice of law clause are stipulated together. At times, these two choices are regulated in the same sentence, sometimes in different sub-articles of the same article, and sometimes in subsequent articles. However, in such cases, it is unclear whether the choice of law refers also to the arbitration agreement. Consequently, it will be controversial whether the law determined to be applicable to the substance of the dispute should also be applied to the arbitration agreement.
    Such issue may raise different problems. Firstly, it can be considered whether it is possible to determine the law applicable to the underlying contract and law applicable to the arbitration agreement to be different from each other. In other words, can the parties determine the law applicable to the arbitration agreement in addition to the applicable law to the underlying contract? Later, it should be considered whether it is possible for the law that is determined to be applicable to the underlying contract by the parties or arbitrators or state courts can also apply to the arbitration agreement. If such solution is impossible, should this law be determined separately on the basis that the law applicable to the arbitration agreement is undetermined?
    Application of Law Applicable to the Underlying Contract and also to the Arbitration Agreement
    It can be considered that the applicable law determined by the parties without making a distinction between the underlying contract and arbitration agreement is not determined only for the underlying contract, but also for the arbitration agreement. Indeed, it is reasonable for an arbitration agreement to be subjected to the law determined by the parties -to be applied to the underlying contract- instead of being subject to a law that is not "chosen" by the parties. As a matter of fact, it can be accepted as a strong indication that the law determined by the parties to be applied to the underlying contract is also determined by them to be applied to the arbitration agreement. Accordingly, the acknowledgement of the principle of separability as an irreplaceable principle, and the idea of the underlying contract and the arbitration agreement to be subject to different laws, are criticized. Within this scope, there are arbitral awards and court decisions where the arbitration agreement is held subject to the law determined by the parties to be applied to the underlying contract.
    Determination of Applicable Law to the Arbitration Agreement Separately from the Underlying Contract
    According to another point of view, one of the consequences of separability of arbitration agreement from the underlying contract is that the laws applicable to both agreements should be determined, separately. The principle of separability results in the arbitration agreement to be held subject to a law different from the law regulating the underlying contract. According to this view, the applicable law to these two agreements should be determined, separately, as the arbitration agreement and the underlying contract are separate from each other; if that the applicable law to the underlying contract is determined, the arbitration agreement, which is not a main or secondary obligation arising from the underlying contract, should not be subjected to the law applicable to the underlying contract.
    Under this section, attention is drawn to two approaches. The first approach is the application of the law of the seat of arbitration to the arbitration agreement; the other one is the application of a state law, or international principles, directly to the arbitration agreement, such as is accepted in Swiss, Turkish and French laws, with some variation.
    Application of the Law of the Seat of Arbitration to the Arbitration Agreement
    In arbitral awards and court decisions which accept that different laws should be applied to the arbitration agreement and to underlying contracts, it is often seen that the validity of the arbitration agreement is determined according to the law of the seat of arbitration. There are different reasons for this approach. Firstly, according to the New York Convention, Art. V/1(a) and the Model Law, Art. 36/1, it is stated that the arbitration agreement is subject to the the law that the parties have determined or, failing any indication thereto, to the law of the country where the award was made. In addition, the most related law for the arbitration agreement is the law of the seat of arbitration. In some decisions, it is accepted that the parties implicitly determine the law applicable to the arbitration agreement through determining the seat of arbitration.
    The application of the law of the seat of arbitration to the arbitration agreement is supported both in doctrine and in decisions. However, the seat of arbitration is not always determined by the parties. In practice, the seat of arbitration can be determined by arbitration institutions or arbitral tribunals. Considering such, the law of the seat of arbitration should not be applied to the arbitration agreement where the seat of arbitration is undetermined by the parties.
    Application of the State Laws and International Principles to the Arbitration Agreement
    In some state laws, it is accepted that their national laws or internationally accepted principles, such as the principle of good faith, should be applied to the arbitration agreement. For instance, Swiss, Spanish, Iranian and Turkish laws refer the arbitration agreement to their national laws, while in France, arbitration agreements are held to be subject to supranational principles, without making reference to any national laws.
    Except for France, the laws of Switzerland, Spain, Iran and Turkey determine the applicable law to the arbitration agreement to be their national law. According to Art. 178/2 of the Swiss International Private Law, which regulates the applicable law to arbitration agreements, arbitration agreements are valid as per the law determined by the parties; if there is no indication thereto, the law applicable to the substance of the dispute, or Swiss law, will apply to the arbitration agreement. It is sufficient for the arbitration agreement to be valid as per any of these laws. Therefore, in the event of invalidity of the arbitration agreement under the law applicable to the underlying contract, it may be considered valid according to another law, as a reflection of the in favorem validatis approach of Swiss law.
    Similarly, according to Spanish Arbitration Act Art. 9/6, the validity of an arbitration agreement is subject to the law determined by the parties, and if there is no such indication, to the law applicable to the substance of the dispute and, lastly, to Spanish law.
    Under Turkish law, according to the Act on International Arbitration ("AIA") Art. 4/3, the law applicable to an arbitration agreement is clearly distinguished from the law applicable to the merits of the dispute. As per this article, the arbitration agreement is subject to the law determined by the parties to be applied to the arbitration agreement or, if there is no such determination, Turkish law will apply. Hence, if the underlying contract is subject to a law other than Turkish law, and the law applicable to the arbitration agreement is not separately determined, the arbitration agreement will not be effected by the law applying the underlying contract, and its validity will be directly subject to Turkish law.
    Likewise, AIA, Iranian Arbitration Act, Art. 33/1(b) regulates that the validity of an arbitration agreement is, firstly, subject to the law determined by the parties and, if there is no such determination, then Iranian law will directly apply to the arbitration agreement.
    Conclusion
    According to the principle of separability, the arbitration agreement and the underlying contract may be subject to different laws. However, if these two agreements are not clearly subject to different laws by the parties, applying two different laws on the basis of the principle of separability might contradict the will of the parties. In order to avoid this contradiction, in the event the law that is applicable to the underlying contract is determined by the parties, this law may apply to the arbitration agreement, as well. However, such solution cannot be accepted under Turkish law considering the clear provision of AIA, Art. 4/3.
    1 For separability of an arbitration agreement from the underlying contract, please see. Işık, Fatih, The Separability of an Arbitration Agreement from the Underlying Contract, Newsletter July, 2013, http://www.erdem-erdem.av.tr/publications/law-post... (Access date: 19 July 2017).
    2 For more information regarding the topics in this article, doctrine opinions and court decisions, please see Işık, Fatih, Milletlerarası Ticari Tahkimde Tahkim Anlaşması Yapma Yetkisi ve Bu Yetkiye Uygulanacak Hukuk (Authority to Conclude Arbitration Agreements and the Applicable Law in International Commercial Arbitration), On İki Levha, May, 2015, p. 83-97.