This article is written by Shubham Sharma who is pursuing a Diploma in Advanced Contract Drafting and Negotiation and Dispute Resolution from Lawsikho.
In recent years, arbitration has grown leaps and bounds worldwide. Due to the underlying principles of party autonomy and confidentiality, it has flourished as a standalone dispute resolution mechanism. The arbitration agreement forms a binding procedure to be followed by the parties as well as the arbitral tribunal in its decision making. The underlying principles of arbitration such as party autonomy and confidentiality have made it an attractive choice of dispute resolution among the parties, however, the technicalities involved in arbitration can make it seem a tad bit daunting.
One must understand that unlike the traditional dispute resolution methods, the arbitral process does not begin from the date the dispute arises. Regardless of the dispute, the arbitration process starts when the parties enter into an arbitration agreement. At the time of dispute, it is the arbitration agreement that mandates, guides and establishes the arbitration proceedings. In other words, the facts decide and guide the law, not the other way round. The arbitration agreement, therefore, becomes a vital aspect of any agreement where the parties choose to take their issues to arbitrate. and requires considerable brainstorming and foresight.
The present article traces the recent developments in the arbitration domain and attempts to encapsulate the guidelines and principles necessary to draft a watertight arbitration agreement.
History of Arbitration in India
The codified practise of arbitration in India dates back to the nineteenth century when the government enacted the Indian Arbitration Act, 1899. The Act, however, was confined to the three princely states i.e. Bombay, Madras and Calcutta. Later, however, arbitration found mention in the Code of Civil Procedure, 1902 under Section 89. But due to lack of robust procedural modalities, it merited an independent statute. In turn, the Arbitration Act, 1940 (hereinafter 1940 Act) came into force which applied to the whole of India. The 1940 Act, although an improvement to the prior Act, proved inefficient, cumbersome and lacking in the various domains. The Act also faced criticism from the apex court; Justice D.A. Desai stated in Guru Nanak Foundation v Rattan Singh – “Interminable, time-consuming, complex and expensive Court procedures impelled jurists to search for an alternative Forum, less formal, more effective and speedy for resolution of disputes, avoiding procedural claptrap and this led them to Arbitration Act, 1940. However, the way in which the proceedings under the Act are conducted and without exception challenged in Courts has made Lawyers laugh and legal philosophers weep.”
Hence, the Arbitration and Conciliation Act, 1996 (hereinafter 1996 Act or the Act) was enacted, based on the UNCITRAL Model Law on International Commercial Arbitration, 1985. The new Act came into force with a breath of fresh air of an expedited and improved procedure. It also attracted cross border trade and investment after the remarkable shift of global policy in 1991. The Arbitration and Conciliation Act, 1996 consolidated and amended the existing Arbitration Act, 1940, Arbitration (Protocol & Convention) Act, 1937 and the Foreign Awards Act, 1961. Part 1 of the Act dealt with domestic arbitration and enforcement of the domestic award while Part 2 dealt with the enforcement of foreign awards arising from the Geneva Convention and the New York Convention.
Despite the far-reaching improvements made in the statute, arbitration failed to emerge as a sound and reliable resolution mechanism due to a multitude of reasons. Due to the lack of a fee matrix, the arbitrators bombarded the parties by charging exorbitant fees. The application to the High Court seeking an award to be set aside under Section 34 automatically stayed the enforcement of the award, thereby prolonging the remedy to the award holding party. Furthermore, there was no time limit to ensure that the promise of the expedite procedure is actually fulfilled. After facing serious challenges with the 1996 Act, the government invited suggestions from several eminent jurists and amended the Act in 2015. The Arbitration and Conciliation (Amendment) Act, 2015 brought sweeping changes to the procedure and entailed a series of strong judicial interpretations. The amendment was essentially founded on the principles to strengthen the arbitral tribunal and minimise the scope of intervention by the court.
Despite these improvements, the lack of institutional arbitration culture was felt strongly as most of the arbitrations were ad hoc. A High-Level Committee to Review the Institutionalisation of Arbitration Mechanism in India was constituted on 13th January 2017 and headed by Justice B.N. Srikrishna. In line with the committee’s recommendations, the Arbitration and Conciliation (Amendment) Act, 2019 was passed. The highlight of the amendment was the introduction of the Arbitration Council of India (ACI) to promote arbitration and grade arbitration institutions.
Arbitrability of Disputes
It is pertinent to know whether the subject matter of a dispute is arbitrable or not because according to Section 34(2)(b), an arbitration award can be set aside by the court if the court finds that ‘the subject matter of the dispute is not capable of settlement by arbitration under the law for the time being in force’. And since neither of the Acts explicitly exclude any category of disputes as being non-arbitrable, the question remains to be settled by the courts.
Before the 1996 Act, the question of the arbitrability of a dispute was referred to the Court and the decision of the court was deemed final. In Uttam Singh Duggal & Co. v. Union of India, the contractor was required to pay compensation for the loss caused by delayed performance, in accordance with the provisions of the contract. The contractor filed a suit challenging the validity of the levy, the court refused the stay and held that the matter was not arbitrable.
After the enactment of the 1996 Act, the tribunal was empowered to decide upon its jurisdiction and the arbitrability of the disputes referred to it. This change brought down the number of cases being referred to the court. However, many questions about the arbitrability of several disputes yet remained unanswered.
In the case of Booz Allen and Hamilton v. SBI Finance (Booz Allen), the Supreme Court stated that every civil or commercial dispute (contractual or non-contractual) which can be decided by a court, is in principle capable of being adjudicated and resolved by arbitration unless the jurisdiction of arbitral tribunals is excluded either expressly or by necessary implication. However, the court also recognised that certain disputes shall be excluded from being adjudicated in private fora and be reserved for their respective fora. The court went on to list out such matters as those which are –
- disputes relating to rights and liabilities which give rise to or arise out of criminal offences;
- matrimonial disputes relating to divorce, judicial separation, restitution of conjugal rights, child custody;
- guardianship matters;
- insolvency and winding-up matters;
- testamentary matters (grant of probate, letters of administration and succession certificate);
- eviction or tenancy matters governed by special statutes where the tenant enjoys statutory protection against eviction and only the specified courts are conferred jurisdiction to grant eviction or decide the disputes.
The Booz Allen case also provided a test for deciding the arbitrability of disputes. The court stated “the scope of arbitrable disputes must be limited to those concerning ‘rights in personam’ or personal rights enforceable against certain individuals. ‘Rights in rem’ exercisable against the world at large were excluded from the scope of arbitrable disputes.”
In case the arbitration agreement enumerates and limits the kinds of disputes arising out of the agreement, it shall be noted that even if a dispute is capable of being decided by arbitration and is falling within the scope of the arbitration agreement, it will not be `arbitrable’ if it is not enumerated in the joint list of disputes referred to arbitration. Although the tribunal is capable of deciding the arbitrability of issues, it is limited by the arbitration agreement. The arbitral tribunal, therefore, cannot venture outside the scope of the arbitration agreement.
An arbitration agreement is the raison d’être of an arbitration proceeding. It is only through an arbitration agreement that parties can submit their issues to be adjudicated by the arbitral tribunal. An arbitration agreement not only engenders an arbitral tribunal but also gives shape to it. Therefore, it is crucial to understand the position of the arbitration agreement under the statute.
In the 1940 Act, the Arbitration Agreement was defined under Section 2(a) as-
“A written agreement to submit present or future differences to arbitration, whether an arbitrator is named therein or not.”
The vague definition was replaced in the 1996 Act by Section 7 which stated –
“7. Arbitration agreement. —
(1) In this Part, “arbitration agreement” means an agreement by the parties to submit to arbitration all or certain disputes which have arisen or which may arise between them in respect of a defined legal relationship, whether contractual or not.
(2) An arbitration agreement may be in the form of an arbitration clause in a contract or in the form of a separate agreement.
(3) An arbitration agreement shall be in writing.
(4) An arbitration agreement is in writing if it is contained in—
(a) a document signed by the parties;
(b) an exchange of letters, telex, telegrams or other means of telecommunication which provide a record of the agreement; or
(c) an exchange of statements of claim and defence in which the existence of the agreement is alleged by one party and not denied by the other.
(5) The reference in a contract to a document containing an arbitration clause constitutes an arbitration agreement if the contract is in writing and the reference is such as to make that arbitration clause part of the contract.”
In short, an arbitration agreement is formed when two parties enter into a contract and agree in writing that any disputes arising between them out of that contract will have to be resolved without going to the courts and with the assistance of a neutral person: a third party appointed by both of the parties, known as the Arbitrator, who would act as a judge and whose decision will be binding upon the parties.
Also, the 1996 Act ascribes an inviolable position to the arbitration agreement. Section 8 clearly states that after taking cognizance of a valid arbitration agreement between the parties the court shall abstain from dwelling into the merits of the dispute and refer the parties to arbitration.
An arbitration agreement once made, cannot be deterred when a dispute arises. In Ravi Prakash Goel v. Chandra Prakash Goel, the Supreme Court held that where there is an arbitration agreement present and applicable, the parties cannot take recourse to the civil court without first undergoing arbitration. It is mandatory for the courts under Section 8 of the 1997 Act, to refer the parties to arbitration when there is an applicable arbitration agreement.
Forms of Arbitration Agreement
A fundamental requirement under Section 7 of the 1997 Act is that an arbitration agreement shall be in writing. Besides that, Section 7 grants liberty to the parties to form an arbitration agreement in multiple ways as enumerated below:
- A standalone separate Arbitration Agreement
A separate arbitration agreement can be formed in addition and reference to the operative agreement between the parties.
- An Arbitration Clause
An arbitration clause can be formed in the operative agreement as to the section of the agreement that deals with the rights and options of the parties in the event of a legal dispute arising out of the contract. An arbitration clause is construed as an arbitration agreement.
- Incorporation by reference
An arbitration clause contained in a separate contract can also be incorporated in a contract being drafted. As per Section 7(5), any reference to a document containing an arbitration clause shall also be construed as an arbitration agreement provided that the referred contract is in writing and the reference is made with the intention to make that arbitration clause the part of the contract.
In 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 incorporation of a separate arbitration clause will not be tenable in law. The reference shall be clear and must indicate the intention of the parties to incorporate.
- By communication
According to Section 7(b) of the 1996 Act, an arbitration agreement can also be inferred from the exchange of letters, telex, telegrams, or other means of telecommunication, which provide a record of the agreement between the parties. In short, an agreement can be construed from the correspondence of the parties where there is a clear and unequivocal intention to refer the disputes to arbitration.
Recently, in 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 construed as a valid arbitration agreement.
In Pravinchandra Murarji Savla v. Meghji Murji Shah, it was held that it is the substance of the agreement and not the form which is of importance.
Also, as per Section 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 is met with ‘non-denial’ by the other party, the presence of an arbitration agreement can be construed. Therefore in the
Even though the 1996 Act has left the field open with a plethora of ways to form an arbitration agreement, it is always recommended as a standard practice to choose to have an arbitration clause in a contract itself.
Drafting an Effective Arbitration Agreement
Supreme Court, in the cases Jagdish Chander v. Ramesh Chander and K. K. Modi v. K. N. Modi directly tackled the question of what constitutes a valid arbitration agreement. The Hon’ble Court arrived at a list of principles that should be incorporated in an arbitration agreement. The principles are as follows:
- The arbitration agreement must be in writing.
- The parties shall agree to refer any dispute (present or future) arising out of a contract to a private tribunal.
- The private tribunal should be empowered to adjudicate upon the disputes in an impartial manner, giving due opportunity to the parties to put forth their case before it.
- 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 unequivocally reflected.
- There must be ‘consensus ad idem’ between the parties i.e. they should agree to the same thing in the same sense.
- The words shall contemplate an obligation and determination on the part of the parties to invoke arbitration and not merely a possibility. For example, use of the words such as “parties can if they so desire, refer their dispute to arbitration” or “ in the event of any dispute, the parties may also agree to refer the same to arbitration” shall not be construed as submission to arbitration.
- The agreement clauses shall not in any way specifically exclude any of the aforementioned essentials. For example, a clause permitting the tribunal to decide a claim without hearing the other side.
Although it is always preferable to draft clear and unambiguous clauses, an arbitration agreement not mentioning the words “arbitration”, “arbitration tribunal” and/or “the arbitrator” may still be considered a valid arbitration agreement if the basic attributes of a valid arbitration agreement (as aforementioned) are present therein.
It is to be noted that the aforementioned list is not comprehensive. To draft effective arbitration agreements, contemplating some additional mechanisms can help the parties overcome complications that may arise in the arbitral process. The following are such mechanism:
- Number of arbitrators
Deciding the composition of the arbitrator tribunal is crucial. At times, the subject matter of the contract may be so intricate and convoluted that it would require the expertise of multiple arbitrators. Furthermore, in some cases, both the parties may want to exercise the right of appointing a nominee arbitrator.
The 1940 Act allowed the parties to appoint any number of arbitrators. Oftentimes in tribunals where even-numbered arbitrators were appointed, the award faced inordinate delay due to conflicting opinions between the arbitrators. Therefore, the 1996 Act, under Section 10, brought a welcomed change allowing the parties to appoint as many arbitrators as they wished, as long as the number of arbitrators is odd
Since appointing multiple arbitrators adds to the cost burden of the parties and causes difficulties in scheduling dates, the general practice is to appoint either a sole arbitrator or three arbitrators.
- Procedure for appointment
Under the 1996 Act, Section 11, empowers the parties to formulate and agree upon an appointment procedure by themselves. If the parties fail to agree upon a procedure, in an arbitration with a sole arbitrator, the court shall make the appointment and in an arbitration with three arbitrators, each party must appoint one arbitrator and then the two appointed arbitrators choose a presiding arbitrator.
Since the 1940 Act, a standard drafting practice being followed in India was to give unilateral powers to one party to appoint the sole arbitrator. However, since the 246th Report of the Law Commission of India and the subsequent amendments of 2015 and 2019, more and more cases cropped up where the unilateral appointment was struck down by the courts to uphold the principle of party autonomy. The dispute finally came to rest in Perkins Eastman Architects DPC & Anr v. HSCC (India) Ltd, where the Supreme Court held that unilateral appointment of the sole arbitrator would no longer be valid. Therefore, while drafting the arbitration clause one must eschew giving appointment rights to a single party.
- Language of the proceedings
Many a time, the parties (domestic or international) may suffer communication difficulties during the dispute resolution process due to different language proficiencies. In such situations, the translation fee may skyrocket and bring further distress to the parties. Therefore, choosing the language of the arbitration proceedings beforehand is always a wise decision.
Ad hoc or institutional arbitration
In an arbitration agreement, the parties must select either ad hoc or institutional arbitration. In ad hoc arbitration, the proceedings are carried out as per the procedure and modalities agreed to by the parties. In institutional arbitration, a specialised institution is appointed to administer the proceedings and appoint the arbitrator. Some of the arbitration institutes in India are Delhi International Arbitration Centre (DIAC), Nani Palkhivala International Arbitration Centre,, and Mumbai Centre for International Arbitration (MCIA). The ad hoc system grants more autonomy and is cost-effective. On the other hand, the institutional arbitration model offers pre-established fine-tuned procedure, administrative assistance and qualified empanelled arbitrators.
In India, ad hoc arbitration is more prevalent as compared to institutional arbitration. Through the Arbitration and Conciliation Amendment Act, 2019, through the Arbitration and Conciliation Amendment Act, 2019, the government has tried to push the arbitral institutions to develop into cost-effective centres for domestic and international arbitration.
Seat and Venue
The words ‘‘seat’’ and ‘‘venue’’ are not defined under the 1996 Act and were interchangeably used before the judgement of Bharat Aluminium Company v. Kaiser Aluminium Technical Services Inc. (Balco). In Balco, tIn Balco, the Supreme Court held that the ‘‘seat’’ is the centre of gravity of arbitration and decides the jurisdiction of the court along with the jurisdiction of the place where the cause of action arises. So, if arbitration is seated in London, Part 1 of the 1996 Act will not be applicable and the courts in London will have jurisdiction over the arbitration.
Diluting the Balco judgement, the Arbitration and Conciliation Amendment Act, 2015 added a proviso under Section 2. The proviso was added to the effect that unless agreed to the contrary, Section 9, 27 and 37(1)(a) and 37(3) shall also apply to international commercial arbitrations even if the place of arbitration was outside India.
After the Balco judgement, issues started arising as to the interpretation of the terms “venue” or “place” in an arbitration. The Hon’ble Supreme Court in the judgement of UOI Vs. Hardy Exploration and Production (India) Inc. distinguished between ‘distinguished between ‘venue’’ and ‘‘seat’,’, and held that the ‘‘venue’’ of the arbitration signifies only the place where the arbitration proceedings are held. Therefore, in arbitrations with a foreign venue but the seat in India, Part 1 of the 1996 Act would be applicable.
Thereafter, in the case of BGS-SGS SOMA-JV Vs. NHPC Ltd., the three-judge bench of the Hon’ble Supreme Court, while deciding a matter of domestic arbitration held that where an arbitration agreement designates a venue but does not make any mention of the seat or the rules governing the tribunal, the place of the venue will be construed as the seat of the arbitration. Therefore, in absence of seat and governing law, the jurisdiction of the arbitration shall exclusively be vested in the venue.
Based on the catena of judgements by the Supreme Court taking different positions, it can be concluded that the seat and venue debate is around the curial law of the arbitration. Curial law is the law governing the arbitration proceedings and the rights of the party to the arbitration. Therefore, the seat of arbitration gains a much greater significance and must be specified in the arbitration agreement. It should be borne in mind that the courts in the designated seat will have the exclusive jurisdiction over the matters arising out of the arbitration and the arbitration itself will be governed by the laws of the seat.
Whether an arbitration agreement needs to be signed
In Svapn Const. v. IDPL Employees Co-op. Group Housing Society Ltd., it was held that the agreement need not be signed by the parties if it is established by another written
contemporaneous document, which is binding between the parties. However, in 2018, the Supreme Court held in M/s Caravel Shipping Services Pvt Ltd v M/s Premier Sea Food Exim Pvt Ltd that an unsigned arbitration agreement is valid as the only prerequisite for a valid arbitration agreement under the 1996 Act is that it must be in writing.
Whether an arbitration agreement needs to be stamped
Arbitration Agreement is chargeable under Section 5 of the Indian Stamp Act, 1899. With respect to the 1940 Act, the Calcutta High Court held in Bengal Hire Purchase Corpn v. Harendra Singh that an unstamped arbitration agreement cannot be given effect unless the full stamp duty is duly paid. The courts would first impound the unstamped agreement and send it to the relevant authorities for the payment of stamp duty and penalty (if any). Only after ensuring that the lacuna is cured, the arbitration agreement can be executed. The Supreme Court held the same position with respect to the 1996 Act in Garware Walls Ropes Ltd. v. Coastal Marine Constructions & Engineering Ltd.
When the Arbitration Agreement is Vague
the Calcutta High Court held in State Trading Corporation of India Ltd. v. Owners & Parties Interested in the Vessel M.V. Baltik Confidence, that an application referring to an ambiguous and ambiguous agreement will not be maintained. However, in the judgement of Zhejiang Bonly Elevator Guide Rail Manufacture Co. Ltd. v. M/S Jade Elevator Components, the Supreme Court while dealing with a vague arbitration clause, scrutinized the clause examining the intention of the parties instead of doing away with the agreement itself. Therefore vague and unclear arbitration agreements can hold validity as long as the intention to refer the parties to arbitration is clear. and upheld the validity of the arbitration agreement.
When the dispute resolution mechanism can have such far-reaching effects, it shall be dealt with meticulous attention to detail. The interpretations by the various High Courts and the Hon’ble Supreme Court highlight the need to carefully draft the arbitration clauses in the agreement. Treating it like just another boilerplate clause may as well be like playing with fire.
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