Party autonomy is the fuel that drives the machinery of international commercial arbitration. The increasing ability to find the mutual consent of contracting parties to submit their disagreements to binding dispute resolution is the vital driving force behind the growth of international arbitration into new and complex commercial fields. The modern growth of international arbitration has created two misleading assumptions regarding party autonomy. First, the evaluation of whether a contractual dispute is arbitrable is “typically” only concerned with evaluating whether the parties have drafted a separate and distinct “agreement to arbitrate” applicable to the overall contract. Second, international practice maintains an assumption that the severability doctrine can normally “separate” an invalid provision from tainting an otherwise valid “arbitration agreement.”
With Carr v. Gallaway Cook Allan, the Supreme Court of New Zealand challenged both assumptions. In that case, the parties contracted for “final and binding” arbitration with the possibility to appeal the subsequent award on “‘questions of law and fact’ (emphasis added).” This contractual right of appeal provision conflicted with New Zealand law because it only permitted appeals of arbitral awards on questions of law, and not fact. On appeal following the arbitration proceedings, the Supreme Court set aside the arbitral award. Looking outside the specific submission of disputes to arbitration clause, the Court found that the parties’ agreement to arbitrate included an invalid right of appeal provision. In refusing to apply the severability doctrine to the appellate review mechanism, the Court also determined that the invalid right of appeal provision could not be separated from the overall arbitration agreement because it went to the heart of the parties’ mutual agreement to arbitrate. In rendering its decision, the Supreme Court properly promoted party autonomy by expansively defining an arbitration agreement and limiting the application of the severability doctrine.
II. Background to Carr v. Gallaway Cook Allan
Carr v. Gallaway Cook Allan involved a failed business venture that ultimately led to a failed arbitral award. Ewen Robert Carr and Brookside Farm Trust Limited (“Appellants”) secured the services of Gallaway Cook Allan (“Respondent”), a law firm, to help secure the purchase of lucrative “farm and hotel assets” from a third party. The parties’ business agreement included a dispute resolution mechanism providing:
1.1 The dispute is submitted to the award and decision of the Honorable Robert Fisher QC as Arbitrator whose award shall be final and binding on the parties (subject to clause 1.2).
1.2 The parties undertake to carry out any award without delay subject only to such rights as they may possess under Articles 33 and 34 of the First Schedule to the Arbitration Act 1996 (judicial review), and clause 5 of the Second Schedule (appeals subject to leave) but amended so as to apply to “questions of law and fact” (emphasis added).
Unfortunately, Respondent was unable to secure the purchase of the commercial assets from the third party. Appellants then brought an arbitral dispute claiming that Respondent was negligent in handling the planned commercial transaction. The sole arbitrator rendered an award favoring the Respondent after a finding that Respondent’s negligence was not the cause of the commercial transaction’s failure.
On appeal, Appellants sought to set aside the arbitral award by contending the dispute resolution provision was invalid. Appellants claimed that the parties’ arbitration agreement was invalid because it included both the clause submitting the dispute before a sole arbitrator (cl. 1.1) as well as the invalid right of appeal mechanism (cl. 1.2). In response, Respondent argued that the arbitration agreement was valid because it implicated only the clause submitting the dispute to arbitration (cl. 1.1). Further, the invalid right of appeal mechanism (cl. 1.2) could be severed from the submission to arbitration clause (cl. 1.1).
III. Broad Definition of An Arbitration Agreement
The Supreme Court approached the issue of whether the parties had agreed to arbitrate their dispute by reaffirming the wide capacity of party autonomy to shape the arbitral process. The Court noted that New Zealand law grants parties broad authority to “modify the powers of an arbitral tribunal” as well as fashion “terms governing the privacy and confidentiality of the arbitral proceedings” in their “arbitration agreement.” Since party autonomy has such wide discretion to shape arbitral procedure, the Supreme Court determined that parties may also agree to vary the form of an agreement to arbitrate. Referencing New Zealand law, the Court emphasized that an “arbitration agreement may be in the form of an arbitration clause in a contract or in the form of a separate agreement.” An arbitration agreement has a “broad meaning that [can also] encompass procedural matters on which the parties can agree.”
The Supreme Court concluded that Appellants’ and Respondent’s agreement to arbitrate included both the clause submitting the dispute to arbitration (cl. 1.1) as well as the right of appeal clause (cl. 1.2). The Court reasoned that the parties’ “arbitration agreement” was not “confined to the contractual term submitting a dispute to arbitration,” but also included the “any procedural terms” to which “contractual asset to arbitration is made conditional.” In this way, the clause submitting disputes to arbitration and right of appeal provision were interconnected terms that together formed one single arbitration agreement.
The Supreme Court’s ruling correctly promoted party autonomy by recognizing flexibility in drafting arbitration agreements. Parties should be afforded the freedom to fashion additional procedural terms into an arbitration agreement according to their needs. Parties should not be constrained by a form requirement that an arbitral agreement be restricted to a single clause or procedure. The Supreme Court thus properly decided that arbitral agreements should not be constrained to a single, out-molded “take-it-or-leave-it” contractual term.
IV. Limiting the Severability Doctrine
Having construed the definition of an arbitration agreement broadly, the Supreme Court then addressed the issue of whether an invalid provision could be severed from the arbitration agreement and the remainder enforced. The Court determined that the appellate review mechanism (cl. 1.2) was invalid because New Zealand law only provides “a right of appeal against an arbitral award on a question of fact,” but not a question of law, and “[c]ontracting parties cannot, by agreement, create a right of appeal to a court where no statutory authori[z]ation exists.” Accordingly, the Court was tasked with deciding whether this invalid right of appeal provision could be severed from the otherwise enforceable arbitration agreement. If not, the whole arbitration agreement would have to be rendered unenforceable.
To determine whether the severability doctrine was applicable to the appellate review mechanism, the Supreme Court surveyed case law from New Zealand, Australia, and the United States. According to New Zealand’s Privy Council, the test of whether invalid provisions “are severable [from valid provisions] is whether [the invalid provisions] are in substance so connected with the [valid provisions] as to form an indivisible whole which cannot be taken to pieces without altering its nature.” Along these lines, the High Court of Australia refused to sever an invalid term from the arbitration agreement because the “invalid promise [was] so material and important a provision in the whole bargain that there should be inferred an intention not to make a contract which would operate without it.” On the other hand, the United States Court of Appeals for the Ninth Circuit severed an invalid appellate review mechanism in a contract because there was “no evidence” that the right of appeal provision was “critical to the entire [arbitration] agreement.”
Taking these cases together, the Supreme Court determined that “[s]everance cannot be permitted to alter the nature of a contract.” While the severability doctrine may sever non-essential provisions from an arbitration agreement, “severance may not destroy the main purpose and substance of what has been agreed.” The Court concluded that the right of appeal clause (cl. 1.2) was inseverable from the clause submitting the dispute to arbitration (cl. 1.1). The end of the clause submitting disputes to arbitration (cl. 1.1) explicitly referenced the fact that the arbitral award was subject to the appellate review mechanism (cl. 1.2). Beyond that, the “italici[z]ation of the words ‘questions of law and fact’ followed by the notation ‘(emphasis added)’ made clear, objectively, that the scope of the appeal right did go to heart of [the parties’] agreement to submit their dispute to arbitration.” The right of appeal provision was “central to the agreement of the parties” and could not be severed to save the arbitration agreement.
The Supreme Court’s properly promoted party autonomy by restraining the application of the severability doctrine to a central, albeit invalid, provision of an arbitration agreement. Severability should not be exercised in a way that alters the contractual relationship governing the consent to arbitrate. Consent to arbitrate remains under the singular domain of party autonomy. Deference to party autonomy requires that terms central to the agreement to arbitrate must always be respected, even at the cost of invalidating the whole arbitration clause. When central terms of an arbitration agreement exceed the boundaries of mandatory law, arbitral tribunals and national courts must regulate the bounds by rendering the whole arbitration agreement unenforceable. By limiting the application of the severability doctrine, the Supreme Court ensured that the legal relationship between the parties would be preserved whether or not the arbitration agreement was enforced or rendered unenforceable.
After deciding not to enforce the invalid arbitration agreement, the Supreme Court exercised its discretion and set aside the underlying arbitral award because the sole arbitrator lacked jurisdiction and “a valid arbitration agreement to underpin [the] award.” In the end, this decision stands as an instructive lesson for parties and practitioners that pursue arbitration specifically in New Zealand, and generally in UNCITRAL Model Law jurisdictions. Parties should draft terms central to their consent to arbitrate clearly and explicitly so that those critical terms will be given sufficient weight in deciding whether the dispute is arbitrable. Practitioners should ensure that the central terms comprising the consent to arbitrate do not contravene mandatory law in order to prevent the arbitration agreement from being rendered unenforceable. Ultimately, the Supreme Court decision shows that party autonomy prevails in determining consent to arbitration. It is up to parties and practitioners to ensure that the consent is properly manifested in a contract.
James Ng is a Class of 2015 LL.M. student in International Business Regulation, Litigation, and Arbitration at New York University School of Law. He received his J.D. from the Benjamin N. Cardozo School of Law and received a B.A. from Boston College. The author can be contacted at email@example.com.
 See Peter Ashford, Handbook on International Commercial Arbitration 5 (2009).
 See Gary B. Born, International Arbitration and Forum Selection Agreements: Drafting and Enforcing 128 (2010).
 Carr v. Gallaway Cook Allan  NZSC 75 (SC).
 New Zealand Arbitration Act 1996, Second Schedule, cl. 5. In the relevant provisions, the New Zealand Arbitration Act 1996 includes an adoption of the UNCITRAL Model Law as well as an appellate review provision for arbitral awards on questions of law to the High Court of New Zealand.
 Carr (SC) para. 84.
 Id. at para. 8.
 Id. at para. 6.
 New Zealand Arbitration Act 1996, § 12.
 Id. § 14.
 Carr (SC) para. 39.
 New Zealand Arbitration Act 1996, First Schedule, cl. 7(1).
 Carr (SC) para. 41.
 Id. at paras. 44, 46.
 Id. at para. 14.
 Carney v. Herbert  AC 801 (PC) 311.
 Humphries v. The Proprietors “Surfers Palms North” Group Titles Plan 1955  179 CLR 597 (HC) 621-622 (citations and internal quotation marks omitted).
 Kyocera Corp. v. Prudential-Bache Trade Services, Inc., 341 F.3d 987, 1002 (9th Cir. 2003).
 Carr (SC) para. 62.
 Id. at para. 68.
 Id. at para. 70.
 Id. at para. 80.
 New Zealand Arbitration Act 1996, § 6.