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Arbitration clause in an invalid agreement may still apply

Arbitration clause in an invalid agreement may still apply

23.7.2013 13:51
Autor: Josef Bedeč, KSB

A covenant determining the dispute resolution procedure is called an agreement if it is a separate document or a clause if it is part of another agreement (such as a works contract or a sales contract). But what happens if an arbitrator resolving a dispute comes to the conclusion that the main agreement is invalid? Does that mean that the arbitration clause is invalid too?

Section 267, subsection 3 of the Commercial Code states that in this case a dispute resolution arrangement may be deemed invalid only if the grounds for the invalidity of the main agreement also apply to it. Hence, the exact grounds for the main agreement’s invalidity and whether such grounds also apply to the arbitration clause must always be considered, which means that an arbitration clause may still apply even if the rest of the agreement is deemed invalid.

The provisions above were also considered by the Supreme Court. In one ruling, the court confirmed the opinion that although contractual practice is more inclined to establish an arbitration agreement as part of the text of a main agreement, the fact remains that it could always be concluded as a separate agreement in a separate document and even at a different time than the main agreement. As such, the validity of the covenants regarding a dispute resolution, even if only in the form of an arbitration clause, must always be assessed as an entirely separate agreement that has simply been included in the text of another agreement. Thus, the validity of an arbitration clause may not depend on the validity of the main agreement and must always be assessed separately.

In practice, the grounds for deeming an agreement invalid may be, for example, the fact that an unauthorized person signed the agreement. This would undoubtedly render the arbitration clause in the agreement invalid as well and the authority to resolve the dispute would in this case be a regular court, not an arbitrator.

However, if an agreement is deemed invalid because, for example, provisions regarding the subject of works or sale are uncertain or vague, this would not per se invalidate the arbitration clause. In this case, any potential disputes could be considered and resolved by an arbitrator, as envisaged by the arbitration clause. 

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