Separability of arbitration agreement: National Iranian Oil Company v Crescent Petroleum Company International Ltd

Is the separability of an arbitration agreement from the contract of which it is a part a matter for the law of the arbitration agreement or the law of the seat of the arbitration?

In his recent judgment in National Iranian Oil Company v Crescent Petroleum Company International Ltd [2016] EWHC 510 (Comm), Burton J held it was a matter for the law of the seat.

Sara Masters QC appeared for the claimant NIOC.

The dispute between NIOC and Crescent

NIOC and Crescent had signed a long-term gas supply and purchase contract (“the GSPC”), which required NIOC to supply gas to Crescent. The GSPC expressly provided that it was governed by Iranian law and it was common ground between the parties that the arbitration agreement in the GSPC was also subject to Iranian law.

Dispute arose under the GSPC and Crescent commenced arbitration.

NIOC (amongst other things) denied that the Tribunal had jurisdiction, arguing that since the GSPC had been procured by corruption it was void and, because Iranian law does not recognise the principle of separabilty, necessarily so too was the arbitration agreement which it contained.

Crescent denied that analysis was right: they said that even if the GSPC was procured by corruption (which they denied), the arbitration agreement was separable (because separability was a matter for English law as the law of the seat of the arbitration) and the arbitration agreement was therefore void only if it (as opposed to the wider GSPC) had been procured by corruption, which NIOC did not allege.

It was therefore important for Burton J, at a hearing of certain preliminary issues arising from NIOC’s s.67 Arbitration Act 1996 (the 1996 Act) challenge to the Tribunal’s award, to decide if separability was governed by Iranian law (as the law of the arbitration agreement) or English law (as the law of the seat).

Burton J’s decision

The judge held that separability was governed by English law.  His reasoning was as follows.

Since the arbitration was seated in England, s.7 of the 1996 Act which provides for the separability of arbitration agreements applied unless the parties had agreed otherwise. More specifically:

  • The starting point was s.2(1) of the 1996 Act which establishes that Part I of that act (including s.7) applies to arbitrations seated in England.
  • Section 2(1) of the 1996 Act is, however, subject to s. 4(2) which provides that the non-mandatory provisions of Part I (including s.7) apply only in the absence of an agreement otherwise by the parties. Section 4(5) clarifies that one way the parties can agree otherwise is by choosing (expressly, impliedly or as objectively determined by the Court) a law to govern a matter otherwise covered by a non-mandatory provision of the 1996 Act.

The judge held that in this case the parties had not made any other agreement about separability. In particular no agreement was made as a result of the parties’ choice of Iranian law to govern the GSPC because that was not a sufficiently specific choice of law in respect of the question of separability. The judge, relying upon C v D [2008] 1 Lloyd’s Rep 239, held that there needed to be a specific choice of law in respect of the question of separability, and that a choice of Iranian law to govern the parties’ arbitration agreement was not suitably specific.

Further, and in any event, (a) the arbitration agreement in the GSPC provided for the invalidity of the GSPC to be determined by arbitration and therefore itself provided for its separability from the rest of the GSPC and (b) at the least the arbitration agreement did not amount to an agreement disapplying s.7 of the 1996 Act.

Comments

Burton J’s decision is significant because it establishes that, contrary to the view held by commentators that questions of validity are for the law of the arbitration agreement (see e.g. Joseph Jurisdiction and Arbitration Agreements and their Enforcement, (3rd ed., 2015, at para 6.53), the issue of separability (which it has been held is an aspect of the question of validity, see Soujuznefteexport v JOC Oil Ltd [1989] Bda LR 11, 44-47) is for the law of the seat.

Moreover notably, while the separability of arbitration agreements is for the law of the seat, the separability of jurisdiction agreements is by contrast still a matter for the law governing the jurisdiction agreement: Astrazeneca v Albemark [2010] EWHC 1028 (Comm) [41]. NIOC was refused permission by Burton J to appeal his decision to the Court of Appeal, and it will be interesting to see how Burton J’s decision is considered and applied in subsequent cases.