ILLEGAL JURISDICTION by Mare Oladapo

Mare Oladapo Oreoluwa The Alternative Dispute Resolution Society (ADR) University of Lagos. 17 November, 2016.

ILLEGAL JURISDICTION In the commercial world, Arbitration has been a growing mechanism for dispute resolution and is highly recognised by statutes and judicial precedents. Arbitration is used in mostly commercial and civil matters for private settlement of disputes. New questions have come up in recent times: What is the effect of illegality on arbitration? Does Illegality sweep away the arbitration clause in the agreement? With respect to the issue of illegality to an arbitration clause, questions are seen to be thrown on the issue of jurisdiction of an arbitral tribunal. Arbitral tribunals have been known to exercise jurisdiction over civil and commercial matters like contracts, however where these matters or contractual issues is tainted with illegality the issue of jurisdiction has been quite unclear as to whether it is the court or the tribunal’s jurisdiction that is to be invoked in resolving such matters. In Nigeria, The Arbitration and Conciliation Act 2004, section 12(1) provides that it is the duty of the arbitration tribunal to state whether it has jurisdiction including to any objection with respect to the validity of arbitration or arbitration agreement. This is backed up by section 30 Arbitration Act 1966 the tribunal may rule on whether there is a valid agreement; this ruling can only be challenged by an appeal. This therefore begs the question of the jurisdiction of the tribunal over illegal contracts, a tribunal’s jurisdiction depends on the validity of arbitration agreement that is constituted under and such arbitration clause must not be invalid or affected cause then the awards can be challenged. An Arbitration agreement or clause shall be treated independent of the contractual agreement and where the contract is held to be void by the arbitral tribunal the void contract does not affect the arbitration clause which means despite the contact being void it can still be arbitrated upon or taking to arbitration for a final and binding award on the extent of its contractual nullity. This emanates from Article 21 Arbitration and Conciliation Act 2004 and section 7 Arbitration Act 1966, which says the arbitral agreement shall be treated independent from the total agreement and if the contract is null and void it does not nullify the arbitration proceeding. This is referred to as the Doctrine of Separability or Severability. This is where the clause or agreement to arbitration is treated autonomous from the disputed contract and this is justified by reason of the fact that the court is to respect the choice of the parties on their preferred mode of settlement. This should not be tampered with by the court as the court cannot draw up another contract or ignore words or terms of the contract in the aim of dispute resolution. An exception however, is where the arbitration tribunal has purely no jurisdiction over such matters then there can be no progress further on the arbitral agreement. In English courts system, the law will not enforce any illegal contracts i.e. Contracts which are prohibited by law and backed up by sanctions. Courts in applying the doctrine of separability or severability will allow the arbitration tribunal preside over such illegal contract even when established that such contract is void, this is because the laws applicable to the contract distinctly and clearly differ from the laws applicable to the arbitration agreement. This is why one facet which is under a particular law cannot cover the whole agreement where there is an arbitration clause in that same agreement. This doctrine is born out of modernization and judicial activism, in Fiona Trust & Holding Corporation v. Yuri Privalov [2007] EWCA civ20, a company who procured chatterers through bribery and went into a favourable contract with them was sue, The question was whether the assertions of invalidity went to the validity of arbitration clause arguing that they would not have entered it if they knew that bribery formed the contract and such should be void ab inito. In Harbour Assurance co. (UK) v. Kansa General Internal Assurance co Ltd. [1992] 1lloyd Rep.81, the court held that a party to a contract containing an arbitration clause said to have been induced by fraud was bound to have the issue tried by arbitration. In Fionas case, the trial court argued that the arbitrators had no jurisdiction to preside over such illegal matters, but the court of appeal disagreed on the basis that illegality was stronger than mere bribery and therefore they can preside. Longmore LJ also concluded by holding the arbitration clause was a separate agreement unaffected by the claim of bribery.

The Doctrine of Separability is recognised under international conventions, law, rules and arbitral practices like Article 6(4) ICC Arbitration rules 1998, Article 15 International Arbitration Rules 2008(AAA), the doctrine has also been justified to reduce delay as the arbitration clause forms post-dispute role of such agreement, any disputes may arise which will be taken straight to court to nullify such clause and then after much contention be upheld by the court as a valid arbitrable matter. In NITEL v. Pentascope International BV Private Ltd (unreported), Adah J refused to grant a stay of proceedings on the grounds of illegality for the plaintiff’s claimed that the defendants were not registered under Companies and Allied Matters Act, and pursuant to CAMA Section 54 1990 the total agreement or transaction is illegal in the context of Nigeria. The court held that the arbitral tribunal has clear jurisdiction to decide the case. Soleimany v. Soleimany [1999] QB 785, the court of appeal held that where the subject matter is not arbitrable, this affects the agreement and the clause this is an exception to the doctrine. In Booz Allen & Hamilton v. SBI Home Finance Ltd & Ors. (2011) 5 SCC 532, the supreme court gave the six categories that cannot be arbitrated on and are only exclusive to a recognised court, Criminal Matters, Matrimonial dispute and judicial separations, Guardianship and Custody, Insolvency and winding up, Will and succession matters, Eviction of statutory tenants and Trust and Trust Deeds. Where the dispute is not under those matters, the arbitral tribunal can go ahead to determine the validity of the agreement and other award like damages and further specific actions to be taken. This article clarifies the modern point of law that a contract with arbitration clause is a binding concord which cannot be nullified by disputes arising out of the contractual agreement, this does not completely oust the jurisdiction of the court for in most cases, and it is the court that finally determines the question on appeal. The doctrine of Separability or severability of the arbitration clause from the underlying contract is well-established as part of international commercial arbitration law Article 23(1) of the UNCITRAL Arbitration Rules and Nigeria’s arbitration laws, it is paramount to note that even where the underlying contract is void and unenforceable on grounds of illegality, that by itself does not necessarily render the arbitration clause unenforceable for this is what the parties have expressly agreed to. MV Lupex v. Nigerian Overseas Chattering & Shipping. [2003] 15 NWLR (pt 844) 469.

Reference Andrew and Karen Tweedale, Arbitration and Commercial Dispute, 2007 Oxford University. Shaun Lee, Singarpore International Arbitration, WIPO Arbitration Workshop 2013. Emilia Onyema, Apongee Journal of Business, Property and Constitutional Law, Vol.1, Sepetember2009 R. Hew Dundas, Bribery and Separability, The International Journal of Arbitration; May 2007, Volume 73 Number 2, pg239.