What is the Autonomy Principle in Arbitration Law?

Arbitration is fast gaining acceptance as a means of settling contractual disputes. This is especially true in international commercial transactions where there is some mistrust in the judicial systems of the countries to which the contracting parties are nationals. The parties often choose arbitration as a neutral forum to decide disputes between them. Thus, we see arbitral clauses in international commercial contracts stipulating that disputes shall be resolved under the rules of arbitration of the International Chamber of Commerce (ICC), the Hong Kong International Arbitration Centre (HKIA) or the Singapore International Arbitration Centre (SIAC).

Arbitration is, indeed, not unique to international transactions. Parties to domestic contracts choose arbitration for a variety of reasons. Among the reasons is the flexibility of arbitration because, unlike court proceedings, the parties can choose persons with the appropriate expertise to decide the dispute in question. Arbitrators are not also bound to the technical rules of procedure and are therefore in a position to decide disputes quickly and expeditiously. The perceived corruption and incompetence on the part of our judges are also reasons why arbitration is fast gaining acceptance among our businessmen. Presently, aside from the ad hoc arbitration sanctioned by The Arbitration Law (R.A. 876), we already have in place institutional arbitral bodies such as the Construction Industry Arbitration Commission (CIAC) and the Philippine Dispute Resolution Center, Inc. (PDRCI) which have their own rules on arbitration just like the ICC.

But what if the contract containing the arbitral clause is challenged as invalid? What if one of the contracting parties assert that he was induced by fraud to enter into the contract? What if one of the contracting parties assert that the other made willful misrepresentations without which he would not have entered into the contract? Will a dispute arising from said contract be referred to arbitration pursuant to the arbitral clause? Or, can the parties disregard the arbitral clause and let the courts decide the dispute since the contract is anyway alleged to be invalid?

This is where the autonomy or severability principle in arbitration law comes in. Under this principle, an arbitral clause contained in a contract is considered separate and distinct from the main contract. The legal significance of this principle is that even if a party challenges the contract as invalid, the alleged invalidity of the contract is still a question for the arbitrator, not the court, to decide. In other words, the alleged invalidity of the contract does not adversely affect the arbitral clause such that the contracting parties must still submit the validity of the contract to arbitration. A party cannot remove the validity of the contract from the jurisdiction of the arbitrator by the mere expedient of claiming that the contract containing the arbitral clause is invalid.

The autonomy principle is a rule laid down by jurisprudence in the United States. The leading case is no less than the US Supreme Court case of Prima Paint Corp vs. Flood & Conklin Mfg. Co., 388 US 395 (1967). There, Prima Paint Corp. (Prima) purchased the paint business of Flood & Conklin Mfg. Co. (F&C). At about the same time, Prima entered into a consulting agreement with F&C for the latter to provide consultancy services to Prima in respect of the paint business. Almost a year later, Prima claimed that F&C had fraudulently represented that it was solvent and able to perform its obligations, but it turned out that it was insolvent and indeed planned to file a bankruptcy petition shortly after executing the consulting agreement. F&C responded by serving a notice of intention to arbitrate, whereupon Prima filed a court case for rescission of the consulting agreement on the basis of the alleged fraudulent inducement and contemporaneously sought to enjoin F&C from proceeding with arbitration.

F&C moved to stay the court proceedings pursuant to section 3 of the Arbitration Act. Under said section, which is identical to Section 7 of our Arbitration Law, a federal court in which a suit is brought upon an issue referable to arbitration must stay the court action pending arbitration once it has decided that the issue is arbitrable under the agreement. The District Court granted F&C’s motion, holding that a charge of fraud in the inducement of a contract containing a broad arbitration clause was a question for arbitrators and not for the court. On appeal, the Court of Appeals upheld the District Court’s order. The US Supreme Court ruled that in passing upon an application for a stay of arbitration under section 3 of the Act, a federal court may not consider a claim of fraud in the inducement of the contract generally but "may consider only the issues relating to the making and performance of the agreement to arbitrate." The Supreme Court thus distinguished between the arbitral clause and the contract containing it. It ruled that if the claim is fraud in the inducement of the arbitration clause itself, an issue which goes to the "making" of the agreement to arbitrate[,] the federal court may proceed to adjudicate it." But, if the claim of fraud relates to the main contract, the question is for the arbitrator to decide pursuant to the arbitral clause contained in said contract subjecting "[a]ny controversy or claim arising out of or relating to this Agreement, or the breach thereof" to arbitration. In other words, a court of law must not remove from the arbitrator consideration of a substantive challenge to the contract unless there is an independent challenge to the making of the arbitration clause, which is considered separate and distinct from the underlying contract.

The Philippine Supreme Court has not, as of yet, adopted the autonomy principle as part of our jurisprudence on arbitration. There is, however, no cogent reason why our Supreme Court should not adopt the same rule, at least in the context of a fraud in inducement case. First, our Arbitration Law (R.A. 876) is almost a verbatim copy of the Arbitration Act that was interpreted by the US Supreme Court in the Prima case. Second, under our system of law, a contract that is induced by fraud is a voidable, not a void, contract. A voidable contract, including the arbitral clause contained therein, remains valid until annulled. Third, a contrary ruling would decimate arbitration as a means of dispute resolution mechanism. A party may easily avoid arbitration by the mere expedient of raising issues on the validity of the contract containing the arbitral clause. That, of course, will defeat the policy encouraging arbitration as a means of settling disputes. Last but not least, our Supreme Court has already made a statement in an arbitration case that a "provision to submit to arbitration a dispute … is itself a contract." (Del Monte Corporation-USA vs. Court of Appeals, G.R. No. 136154, Feb. 7, 2001). Adopting the autonomy or severability principle as part of our arbitration law will, to my mind, give meat to this statement of the Supreme Court.

(The author is a senior partner of the Abello Concepcion Regala & Cruz Law Offices [ACCRALAW] and teaches Arbitration Law at the Ateneo Law School. He may be contacted at 830-8000).