Arbitration Agreements (The Arbitration and Conciliation Act, 1996)

By Naina Chawla 21 Minutes Read

Introduction

Arbitration has expanded dramatically in recent years around the world. Due to the principles of party autonomy and confidentiality, arbitration has thrived as an independent dispute resolution method. The arbitration agreement establishes a binding procedure that both- the parties and the arbitral tribunal must follow in rendering their decisions. The core concepts of arbitration, such as party autonomy and confidentiality, have made it a popular choice for conflict settlement among the parties; nonetheless, the formalities involved in arbitration can make it appear difficult. When a dispute arises, the arbitration agreement governs, guides, and establishes the arbitration processes. In arbitration, the facts presented by the parties influence the outcome more than the rigid application of law. As a result, the arbitration agreement becomes an essential component of any agreement in which the parties decide to have their disputes arbitrated. This necessitates extensive brainstorming and foresight.

What is an Arbitration Agreement?

• Arbitration is a method in which the parties agree to submit the dispute to one or more arbitrators, who issue a binding ruling on the matter. Section 2 of the Arbitration and Conciliation Act, 1996 defines arbitration as any arbitration, regardless of whether it is administered by a permanent arbitral tribunal.[1]
• An arbitration agreement is the basis for an arbitration proceeding. Only through an arbitration agreement can parties submit their disputes to be decided by the arbitral panel. An arbitration agreement both creates and shapes an arbitral tribunal. As a result, it is critical to understand the arbitration agreement’s status under the Act.
• An “arbitration agreement”, according to Section 7,  means a written agreement to submit present or future differences to arbitration, whether an arbitrator is named therein or not[2].
• The term “arbitration agreement” refers to the parties’ agreement to resolve issues related to their legal relationship, whether contractual or not, by arbitration[3].
• To put it briefly, an arbitration agreement is created when two parties sign a contract and decide in writing that any disagreements that may arise between them as a result of that contract will have to be settled out of court with the help of an impartial third party: an arbitrator, who is a third party chosen by both parties and who will serve as a judge with a decision that will be binding on the parties.
• Arbitration agreements can be drafted as distinct legal agreements or as arbitration clauses in other agreements, as long as the parties’ intention to submit their disagreement to arbitration is explicit[4].
• Furthermore, the 1996 Act establishes the arbitration agreement as inviolable. Section 8[5] clearly specifies that after taking notice of a valid arbitration agreement between the parties, the court must refrain from delving into the merits of the dispute and instead submit the parties to arbitration. Once made, an arbitration agreement cannot be revoked in the event of a disagreement.
• The Supreme Court ruled in Ravi Prakash Goel v. Chandra Prakash Goel[6] that parties cannot file a lawsuit in civil court without first resolving to arbitrate their dispute if there is a valid arbitration agreement in place. When there is a relevant arbitration agreement, the courts are required by Section 8 of the 1996 Act to submit the parties to arbitration.

Essentials of an Arbitration Agreement

Section 7 of the Arbitration and Conciliation Act 1996 establishes various prerequisites for a valid arbitration agreement, which are as follows:

1. Written Agreement

According to Section 7(3) of the Act, every agreement relating to the resolution of disputes through the process of arbitration must be in writing[7] and include the signatures of the parties[8], whether in the form of an exchange of letters, fax, or other electronic forms of mail[9]. Such agreements must reflect mutual consent and not be unilateral[10].

In the 2018 case of M/S Caravel Shipping Services Pvt. Ltd. vs M/S Premier Sea Foods Exim Pvt. Ltd[11], the Supreme Court ruled that an unsigned arbitration agreement is legal because the only requirement for a valid arbitration agreement under the 1996 Act is that it be written.

2. Subject matter of the dispute

One of the most important prerequisites for a valid arbitration agreement is that the dispute in question be “arbitrable” in nature, which means that the adjudication of the dispute through arbitration proceedings must not be prohibited by law. For example, if the subject matter of the dispute is ineligible for arbitration due to particular legal limitations prohibiting arbitration, such conflicts cannot be resolved by arbitration. Disputes over criminal charges, regarding testamentary, guardianship, and matrimonial issues, bankruptcy and corporate liquidation, proceedings with criminal repercussions that require court intervention, are non-arbitrable. The Hon’ble Supreme Court ruled in the landmark case of Vidya Drolia & Ors. V. Durga Trading Corporation[12] that there are certain conflicts that cannot be arbitrated.

3. Place of Arbitration

The place of arbitration refers to the location where arbitration procedures must be performed. Furthermore, the place of arbitration determines the appropriate forum for dispute resolution.

4. Laws and Arbitration Rules

Every arbitration agreement must include the applicable rules and laws that will regulate the arbitration procedures, as well as the applicable behavior of the parties in arbitration and the procedure that the arbitrator will follow to adjudicate the disputes. The parties to an arbitration case have the freedom to choose their own arbitration method and are not constrained by the country’s statutory substantive and procedural rules.

5. Appointment of Arbitrator and Tribunal

The parties to an arbitration agreement can choose the arbitrators or the mechanism for appointing them[13]. However, it should be ensured that the arbitrators are appointed in a fair and impartial manner, so that the agreement is not voided and a trial is initiated by the courts. One of the allied conditions for the number of arbitrators mentioned in the statute is that the Tribunal be made up of an odd number of arbitrators in order to avoid a deadlock situation in the dispute resolution process. The Hon’ble Supreme Court observed in many cases and has emphasized that one side should not have complete control over the appointment of the arbitrator.

6. Stamping of Arbitration Agreements

Stamping an agreement means affixing the amount of the agreed stamp charge to an agreement. One of the main elements for a valid contract is that the agreements be sufficiently stamped to be regarded as legitimate[14].

The Hon’ble Supreme Court recently ruled in Re: Interplay Between Arbitration Agreements Under the Arbitration and Conciliation Act of 1996 and the Indian Stamp Act of 1989[15] that there is a distinction between a document’s admissibility and enforceability. For example, a duly stamped arbitration agreement may be inadmissible as evidence but is unquestionably enforceable against the parties to the agreement. Additionally, it has been established that courts are not compelled to consider the appropriateness of stamping the agreement during the pre-arbitration relief stage.

Types of Arbitration Agreements

An arbitration agreement must be in writing in order to comply with Section 7 of the Act. In addition, Section 7 gives the parties the freedom to create an arbitration agreement in the manners listed below:

1. A stand- alone, independent Arbitration Agreement

In addition to and with reference to the parties’ operational agreement, a separate arbitration agreement may be drafted.

2. A clause in the Arbitration Agreement

The part of the operative agreement that addresses the parties’ rights and alternatives in the case of a legal dispute arising out of the contract may contain an arbitration clause. An arbitration agreement is interpreted to include an arbitration clause.

3. Reference- based Incorporation

A contract that is being drafted may also include an arbitration clause found in a different contract. According to Section 7(5), if a written contract is referred to with the goal of incorporating the arbitration clause into the contract, then any reference to a document that contains an arbitration clause will likewise be interpreted as an arbitration agreement.

The Supreme Court ruled in M/s Elite Engineering and Construction (HYD.) Private Ltd. v. M/s Techtrans Construction India Private Ltd[16].  that a general allusion to the inclusion of a distinct arbitration clause will not be upheld by the courts. The reference shall be explicit and must convey the intention of the parties to incorporate.

4. Through communication

According to Section 7(b) of the Act, an arbitration agreement can also be inferred from the exchange of letters, telex, telegrams, or other forms of communication that serve as a record of the parties’ agreement. In brief, an agreement can be derived from the parties’ correspondence in which there is a clear and unequivocal purpose to refer the disputes to arbitration. The Delhi High Court recently ruled in Galaxy Infra and Engineering Pvt. Ltd v. Pravin Electricals Pvt. Ltd[17] that the parties’ email-exchanged draft agreement might be read as a legitimate arbitration agreement.

Even though the 1996 Act allows for a variety of ways to construct an arbitration agreement, it is usually suggested as normal practice to include an arbitration clause in the contract itself.

Drafting of a valid Arbitration Agreement

Some of the points to remember while drafting an arbitration agreement are as follows:

• Must be in writing.
• Parties will refer their dispute to the private tribunal and the tribunal will adjudicate upon the issue in an impartial manner, giving opportunity to both the parties.
• There must be “consensus ad idem” between the parties i.e. they should agree on the same thing in the same sense. Also, the parties must be bound by the decisions of the Arbitral Tribunal.

To create effective arbitration agreements, parties should consider some additional procedures to help them overcome any issues that may occur throughout the arbitration process. Here are some more important things to be kept in mind while drafting an arbitration agreement:

1. The number of Arbitrators

Choosing the composition of the arbitration tribunal is important. The Arbitration Act, 1940 Act permitted the parties to nominate any number of arbitrators. In tribunals when even-numbered arbitrators were selected, the award was frequently delayed due to differing opinions among the panelists. As a result, Section 10 of the Act made a welcome adjustment by permitting the parties to nominate as many arbitrators as they wanted, as long as the number of arbitrators is odd. Appointing numerous arbitrators increases the parties’ costs and makes scheduling dates harder; hence the typical practice is to choose either a lone arbitrator or three arbitrators.

2. Procedure for Appointment

The 1996 Act[18] permits the parties to create and agree on their own appointment method. If the parties cannot agree on a method, the court will appoint a sole arbitrator in an arbitration with three arbitrators, and each party must pick one arbitrator before the two appointed arbitrators select a presiding arbitrator.

One important thing to be kept in mind is that when designing the arbitration agreement, one must avoid granting appointment rights to a single party.

3. The language of proceedings

Due to varying language proficiency, it is common for the parties—domestic or foreign—to experience communication problems during the dispute resolution procedure. In these circumstances, the cost of the translation could rise, further upsetting the parties. Thus, it is advisable to determine the language of arbitration proceedings in advance.

4. Seat of Arbitration

The seat of arbitration is significant since it establishes the curial/procedural law for the arbitration. Seat is more than just where an institution is located or where the hearings will take place; it is also about which court will have supervisory authority over the arbitration proceedings and so as to award interim relief. As a result, before determining the seat of arbitration, parties should carefully analyze how the court system operates in that area.

5. Governing Law

By governing law, we mean the law that regulates the contract. In cross-border transactions, the parties must always designate the country whose law will govern the contract, as the Tribunal will tend to rely on the doctrines, tests, and theories of the relevant jurisdiction. However, if the same is not indicated in the contract, the courts will look to the other provisions of the contract and the surrounding circumstances to determine the parties’ intention with regard to the law that would govern the deal.

6. Scope of Reference

Section 7 of the Arbitration Act specifically provides that the parties may submit “all or certain disputes which have arisen or may arise between them” to arbitration. Thus, if the parties do not wish to resolve all conflicts through arbitration, they should explicitly indicate so in the contract. In any case, the parties should be aware that not all issues are eligible for arbitration. The Supreme Court of India[19] has ruled that disputes involving rights and liabilities that give rise to or arise out of criminal offences, matrimonial disputes, guardianship matters, insolvency and winding up matters, testamentary matters, eviction or tenancy matters, and trust, trustee, and beneficiary disputes cannot be resolved through arbitration.

7. Stamping of the Contract

It should be ensured that the contract containing the arbitration agreement, which is required is appropriately stamped; otherwise, it will not be treated as a genuine contract under Section 2(h) of the Indian Contract Act, 1872 and thus not enforceable in law[20]. Letters, telex, telegrams, or other forms of written communication that result in an arbitration agreement must also be duly stamped under the Stamp Act, 1899.

8. Multi-Tier Resolution

The parties may decide to take specific pre-arbitral actions before submitting the dispute to arbitration. These may take the shape of negotiations, mediation, or procedures before dispute resolution bodies. If the parties agree on such pre-arbitral steps, they must state the timelines within which they expect the pre-arbitral steps to be completed; otherwise, the initiation of arbitral proceedings may be delayed unavoidably.

9. Institutional or Ad Hoc Arbitration

The parties to an arbitration agreement must decide between institutional or ad hoc arbitration. Ad hoc systems are less expensive and offer greater autonomy. Compared to institutional arbitration, ad hoc arbitration is more common in India

A specialized organization is chosen to oversee the proceedings and select the arbitrator in institutional arbitration. The Delhi International Arbitration Centre (DIAC), Nani Palkhivala International Arbitration Centre, and Mumbai Centre for International Arbitration (MCIA) are a few Indian arbitration institutes.

Conclusion

Arbitration agreements are critical in the arbitration processes of a particular case, as the absence of a legal agreement may result in the rejection of the arbitration claim and the initiation of court proceedings. As a result, parties intending to resort to arbitration must ensure that the statutory and other prerequisites for finalizing a lawfully applicable arbitration agreement are met.

When a dispute resolution system has such far-reaching consequences, it must be handled with painstaking attention to detail. The interpretations of the various High Courts and the Hon’ble Supreme Court of India underline the need of carefully drafting the arbitration terms in the agreement. Treating it as if it were just another boilerplate sentence is risky business. Furthermore, if the parties desire to include an arbitration clause in another document or agreement, they must ensure that their intention to resolve conflicts through an alternative dispute resolution process in the form of arbitration is followed. Furthermore, any procedure or condition in an arbitration agreement that may not be legally permissible should not be included in order to safeguard the sanctity of the agreement.

[1] The Arbitration and Conciliation Act, 1996 (Act 26 of 1996), s.2(a).

[2] Id. at s.7.

[3] Id. at s.7(1).

[4] Id. at s.7(2).

[5] Id. at s.8.

[6] AIR 2007 SCC 1517.

[7] Id. at s.7(3).

[8] Id. at s.7(4)(a).

[9] Id. at s.7(4)(b).

[10] Id. at s.7(4)(c).

[11] 2019 (11) SCC 461.

[12] AIR 2019 SCC 3498.

[13] Id. at s.11(2).

[14] The Indian Contract Act, 1872, s. 2(h).

[15] 2023 SCC OnLine SC 1666.

[16] AIRONLINE 2018 SC 815.

[17] AIRONLINE 2020 DEL 786.

[18] The Arbitration and Conciliation Act, 1996 (Act 26 of 1996), s.11.

[19]  Booz Allen & Hamilton Inc v. SBI Home Finance Limited & Ors., (2011) 5 SCC 532.

[20]  N.N. Global Mercantile Private Limited v. M/s Indo Unique Flame Ltd & Ors., 2023 SCC OnLine SC 495.

Naina Chawla