Arbitration Agreement

Introduction

An “arbitration agreement” is an agreement between the parties which can in the form of an arbitration clause in a contract or as a separate agreement for resolving a dispute (if any dispute comes up) without filing a lawsuit and going to court. The definition of arbitration agreement is given under section 7 of the Arbitration and Conciliation Act, 1996.

Due to the underlying principles of party autonomy and confidentiality, it has evolved into a standalone dispute resolution mechanism. The arbitration agreement creates a binding procedure for the parties as well as by the arbitral tribunal in making its decision. The underlying principles of arbitration such as party autonomy and confidentiality make it an attractive alternative to dispute resolution between parties, however, the technicalities involved in arbitration may make it bit daunting.

It should be understood that unlike the normal dispute resolution methods, the arbitration process doesn’t start from the date the dispute arose. Regardless of the dispute, the arbitration process begins when the parties enter into an arbitration agreement. If a dispute happens, it is the arbitration agreement that mandates, guides and establishes the arbitration proceedings. The arbitration agreement, therefore, becomes an important aspect of any settlement, where the parties prefer to arbitrate their issues and it requires considerable brainstorming and foresight.

The present article traces the recent developments within the arbitration field and attempts to encapsulate the guidelines and principles required to draft an undisputed arbitration agreement.

Forms of Arbitration Agreement

Section 7 gives freedom to the parties to enter into an arbitration agreement in a number of ways, as detailed below:

A standalone separate Arbitration Agreement

A separate arbitration agreement may be made in reference to and in addition to the operative agreement between the parties.

An Arbitration Clause

An arbitration clause may be constituted in the operating agreement as a clause of the agreement concerning the rights and options of the parties in the event of a legal dispute arising out of the contract. An arbitration clause is treated as an arbitration agreement.

Incorporation by reference

An arbitration clause contained in a separate contract may also be included in the contract being entered into. In accordance with Section 7(5), any reference to a document containing an arbitration clause shall also be deemed to be an arbitration agreement, provided that the contract referred to is in writing and the reference is made with the intention of forming part of that arbitration clause.

In the case M/s Elite Engineering and Construction (HYD.) Private Ltd. v. M/s Techtrans Construction India Private Ltd., the Supreme Court held that a general reference to the inclusion of a separate arbitration clause will not be valid in law. The context should be clear and indicate the intention of the parties to include it.

By communication

According to Section 7(b) of the Arbitration and Conciliation Act of 1996, an arbitration agreement may also be inferred from the exchange of letters, telex, telegrams, or other means of telecommunication, which provides a record of the agreement between the parties.

Recently, in the case of Galaxy Infra and Engineering Pvt. Ltd v. Pravin Electricals Pvt. Ltd, the Delhi High Court held that the draft agreement exchanged by email between the parties can be treated as a valid arbitration agreement.

In Pravinchandra Murarji Savla v. Meghji Murji Shah, it was held that it is the essence of the agreement and not the form that is of importance.

Also, as per Section 7(c) of the 1996 Act and S.N. Prasad v. Monnet Finance Ltd., where a statement of claims or allegations is made and met with ‘non-denial’ by the other party, the presence of an arbitration agreement may be construed.

Even though the 1996 Act has left the field open with an abundance of methods for creating an arbitration agreement, it is always recommended to select an arbitration clause in a contract itself as a standard practice.

Drafting an Effective Arbitration Agreement

The Supreme Court, in Jagdish Chander v. Ramesh Chander and K. K. Modi v. K. N. Modi directly dealt with the question of what constitutes a valid arbitration agreement. The Hon’ble Court arrived at a list of principles that should be included in the arbitration agreement. The principles are as follows:

The arbitration agreement must be in writing.
The parties should agree to refer any dispute (current or future) arising out of a contract to a private tribunal.
The private tribunal should be empowered to adjudicate disputes in an impartial manner, giving the parties a fair opportunity to place their case before them.
The parties must agree to be bound by the decision of the arbitral tribunal.
The intention of the parties to refer the dispute to a private tribunal must be clearly indicated.
There should be ‘consensus ad idem’ between the parties i.e. they should agree to the same thing in the same sense.
To enforce the term arbitration shall consider an obligation and determination on the part of the parties, and not merely a possibility.
The clauses of the contract shall in no way specifically exclude any of the above exigencies. For example, a clause that allows the tribunal to adjudicate a claim without hearing the other party.

Although it is always better to draft clear and explicit clause, an arbitration agreement that does not mention the words “arbitration”, “arbitration tribunal” and/or “the arbitrator” can still be considered a valid arbitration agreement if the basic qualities of a valid arbitration agreement (as stated above) are therein.

It should be noted that the above list is not exhaustive. In order to draft effective arbitration agreements, consideration of certain additional mechanisms can help the parties to overcome the complexities that may arise in the arbitration process.

Conclusion

When the dispute resolution mechanism can have such far-reaching effects, it should be given careful attention to detail. Interpretations made by various High Courts and the Hon’ble Supreme Court highlight the need to carefully draft the arbitration clause in the settlement. Treating it like just another boilerplate clause can be like playing with fire.

Bibliology

Diganth Raj Sehgal, Arbitration agreement: a primer and a checklist, https://blog.ipleaders.in/arbitration-agreement-primer-checklist/.
Definition and form of arbitration agreement, https://www.jus.uio.no/lm/en/html/un.arbitration.model.law.1985/7.html.
Jane Haskins, What Is an Arbitration Agreement? , https://www.legalzoom.com/articles/what-is-an-arbitration-agreement.

This article is written by Priyanka Choudhary, currently pursuing BALLB from Mody University of Science and Technology, Lakshmangarh, Rajasthan.

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