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Separability of Arbitration Clauses in Insurance Contracts in Ireland

Do such clauses survive if the contract is rendered void ab initio?

The issue of whether an arbitration clause in an insurance contract survives notwithstanding the fact that the contract itself is void ab initio is one which has exercised the courts in Ireland, and indeed England and Wales, for some time. While the Supreme Court in Ireland in 1995 appeared to hold that such arbitration clauses cannot be relied upon where the underlying contract has been deemed void or invalid, subsequent High Court cases and legislation enacted in 2010 appear to have established to the contrary and embedded what is known as the doctrine of separability into Irish law.

Superwood judgment and the resulting uncertainty

In the decision of the Supreme Court in Superwood Holdings Plc v. Sun Alliance and London Insurance Plc, in 1995, Blayney J held that an arbitration clause as a term of a contract cannot subsequently be relied upon and enforced where the contract itself has been deemed void or invalid. In delivering the main judgment of the Court in this case, Denham J assumed the view that the repudiation of the contract on the part of the Respondents denied the Appellants the right to arbitrate on the issue justifying the repudiation. This decision relied on a number of previous authorities, both English and Irish, in coming to this view. Clearly, the assumption here was that if a contract had been rendered void ab initio, then the contract is deemed to never have existed and, in such circumstances, any provision thereof cannot be relied upon subsequent to the repudiation.

The Supreme Court ruling in Superwood on this point however has not been followed in subsequent High Court decisions. In Doyle v. Irish National Insurance Co plc Kelly J held that an arbitration clause in a contract is distinct from other clauses. Even in circumstances where there is a repudiation of the contract and the performance of any further obligations of each party may cease, the contract survives for the purpose of measuring the claims arising out of the breach and the arbitration clause survives for the purpose of determining the mode of their settlement. Kelly J further held that

“this principle applies equally in circumstances where one party seeks to avoid or rescind a contract on the ground of a misrepresentation or non-disclosure. The plaintiff’s contention that the arbitration clause was no longer valid was not well-founded as a matter of law.”

Kelly J did not reference Superwood in delivering his judgment and as a result, this judgment may be considered per incuriam (being a judgment proffered without recourse to a relevant precedent), and its precedential weight therefore impacted accordingly. Kelly J did follow a line of reasoning in certain English cases that an arbitration clause in a contract is distinct from the other clauses therein in that it does not contain obligations between the parties, but an agreement between the parties to refer any dispute in respect of such obligations to arbitration.

In any event, Kelly J’s ruling in Doyle would appear to be in direct conflict with the Superwood decision and of course as such, notwithstanding the potential application of the per incuriam label, should not take precedence over Superwood as a Supreme Court judgment. However, the reasoning of the court in Doyle was approved and applied by Clarke J in the High Court in the more recent case of Kelly v. Lennon. Once again, the decision in Superwood was not addressed by Clarke J in delivering his judgment. In approving the ruling in Doyle, Clarke J stated that

“it is clear from the review of the authorities conducted by Kelly J. in Doyle v. Irish National Insurance Company

[1998] 1 I.L.R.M. 502 that, in such circumstances an arbitration clause survives any contended termination of the contract. Indeed in Doyle the argument was that the insurance contract concerned was void with retrospective effect.”

The idea that an arbitration clause in an insurance contract survives notwithstanding the voiding of the underlying contract within which it is contained has become known as the doctrine of separability.

Austin Buckley, in his book ‘Insurance Law’ raises doubts as to the certainty that the courts will determine that an arbitration clause is independent of the contract in which it is contained and will survive in circumstances where the contract has been rendered void ab initio.
Buckley contends that

“the Supreme Court decision [in Superwood] should prevail over the subsequent High Court decision in Doyle and it cannot be assumed that the decision [in Doyle] provides an example of the willingness of the Irish courts to uphold an arbitration condition in circumstances where the underlying contract has been avoided”.

In seeking to explain the apparent conflict between Superwood and Doyle, Buckley suggests that Superwood was simply not opened to the Court in Doyle and, furthermore, that the Court in Doyle relied on a previous High Court decision in respect of which judgment was given prior to the implications of Blayney J’s judgment in Superwood being appreciated.

Buckley also refers to John Birds’ statements from ‘Birds’ Modern Insurance Law’, in support of his contention that the law in this regard is not as clear cut as would appear from Doyle and as suggested in recent years by many commentators.

In this regard, Birds asserts that in the insurance context, there are three instances where the arbitration clause cannot be relied upon:

(i) Where the existence of the contract is disputed;
(ii) Where the insurer alleges that the contract is void or illegal, for example, for lack of insurable interest as required by statute; and
(iii) Where it is alleged that the policy has been avoided ab initio for non-disclosure or misrepresentation.

Whilst the views of those who would suggest that arbitration clauses cannot or at least may not survive the voiding of the underlying contract cannot be dismissed, particularly given the peculiarity of the case law in this area, and also the relevant point made by Buckley to the effect that some of the English authorities cited by Morris J in Parkaran did not concern the avoidance of a policy ab initio, it would appear that any ambiguity in the law as it existed has effectively been cured by virtue of the Arbitration Act, 2010.

Arbitration Act, 2010 (“2010 Act”) and the restoration of clarity

Section 6 of the 2010 Act adopts the UNCITRAL Model Law on International Commercial Arbitration (“the Model Law”) into Irish law:

6. Subject to this Act, the Model Law shall have the force of law in the State and shall apply to arbitrations under arbitration agreements concerning—

(a) international commercial arbitrations, or
(b) arbitrations which are not international commercial arbitrations.

Article 16(1) of the Model Law treats an arbitration clause as independent from the other terms/clauses of a contract, thus enabling the survival of an arbitration clause even in circumstances where the contract has been terminated or deemed invalid.

Article 16. Competence of arbitral tribunal to rule on its jurisdiction:

(1) The arbitral tribunal may rule on its own jurisdiction, including any objections with respect to the existence or validity of the arbitration agreement. For that purpose, an arbitration clause which forms part of a contract shall be treated as an agreement independent of the other terms of the contract. A decision by the arbitral tribunal that the contract is null and void shall not entail ipso jure the invalidity of the arbitration clause.

Dr Ronan Feehily, in his recent paper entitled ‘The Contractual Certainty of Commercial Agreements to Mediate in Ireland’ , states that

“with regard to arbitration, it is well established in Ireland that where a contract is void ab initio, the arbitration clause can be severed from the main contract. Despite allegations that the underlying contract is void, the parties are presumed to have wanted their disputes to be resolved by arbitration and the underlying principle is that the agreement to arbitrate is collateral to the main agreement and therefore stands on its own. Article 16(1) of the U.N.C.I.T.R.A.L. Model Law on International Commercial Arbitration (Model Law) provides for severability of arbitration agreements. Section 6 of the Arbitration Act 2010 adopted the Model Law on arbitration into Irish law.”

As the 2010 Act applies to all arbitrations held in Ireland, both domestic and international, commenced on or after 8 June 2010, there can be little doubt but that the better view now is that the doctrine of separability applies to arbitration clauses in insurance contracts in this jurisdiction.

Indeed, the High Court acknowledged the doctrine of separability and its applicability in this jurisdiction under the 2010 Act in Barnmore Demolition & Civil Engineering Limited v. Alandale Logistics Limited & Ors with Feeney J holding that an arbitration agreement has a separate existence to the contract into which it is incorporated.

Conclusion

In conclusion, it is unfortunate that the Supreme Court ruling in Superwood has not been addressed and distinguished in subsequent cases before the Superior Courts. The subsequent High Court cases of Doyle and Kelly did not follow the Supreme Court ruling in Superwood and indeed, appear to be in direct conflict with Superwood as in delivering their respective judgments, both Kelly J and Clarke J held that an arbitration clause is capable of surviving even in circumstances where the contract itself has been deemed void ab initio. As a consequence, considerable uncertainty appeared to have been created in the law in this area.

However, it is submitted that this uncertainty has been rectified by virtue of the provisions of the 2010 Act which have adopted Article 16(1) of the UNCITRAL Model Law into the law of this jurisdiction. There can be little doubt that the doctrine of separability now applies to arbitration clauses in insurance contracts in Ireland. This reasoning is also in line with current public policy, which of course favours settling commercial disputes through arbitration as opposed to litigation before the courts wherever practicable. It is eminently sensible that the respective parties to an insurance contract would have the benefit of arbitrating a dispute in respect of the rendering void of that contract, prior to resorting to more expensive and time-consuming High Court litigation.

2018-11-13T10:47:31+00:00January 12th, 2017|Publications|

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Pat McInerney is a Partner in our corporate and commercial and litigation departments. Pat specialises in commercial litigation and dispute resolution, public administrative law, regulation and defamation. Pat practises in […]

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