This article has been written by Kritika Sethi and Somya Vyas from WeVaad. It is a legal tech company that provides services including, online dispute resolution, agreement drafting, online consultation, litigation tracking software, find a lawyer, etc.
This article has been published by Sneha Mahawar.
Arbitration as an alternative dispute resolution mechanism is prospering all around the world as well as in India owing to the benefits that this mechanism brings to the table. This mechanism has grown a lot in the country and is constantly improving to provide better and faster dispute resolution to parties. Arbitration is governed by the essential legal document called the ‘Arbitration Agreement’ which forms the very base of the arbitration proceedings in any dispute between the parties. Rules governing arbitral proceedings, mode of appointment of an arbitrator, etc. are governed by the arbitration agreement. Arbitration ensures party autonomy, but as freedom comes with restrictions, Arbitration and Conciliation Act, 1996 (“Arbitration Act”) imposes some restrictions and conditions on the parties.
There is ambiguity surrounding the contours of an arbitration agreement, for eg: what constitutes a valid arbitration agreement, does an arbitration agreement necessarily need to provide the procedure for conducting the arbitration in detail, etc. To clear out this ambiguity regarding an arbitration agreement, it is advisable to understand the prerequisites of an arbitration agreement generally as well as according to the Arbitration Act.
This article will give the reader an insight into the alternative dispute resolution mechanism; arbitration and arbitration agreement along with what constitutes an arbitration agreement in the true sense with special reference to the Mahanadi Coalfields Ltd. v IVRCL AMR Joint Venture (Civil Appeal No 4914 of 2022) decided by the Hon’ble Supreme Court of India.
What is arbitration
Arbitration is one of the most used mechanisms of alternative dispute resolution (“ADR”). The various mechanisms of ADR are mediation, conciliation, negotiation, arbitration and lok adalats. All of these offers easier and faster out-of-court dispute resolution.
Arbitration as defined in the Arbitration Act under Section 2(a) means any arbitration whether or not administered by a permanent arbitral institution. Arbitration can be voluntary or even ordered by a court. Arbitration proceedings are headed by an arbitrator/arbitral tribunal which is also the decision maker and passes the arbitral award.
Process of arbitration : Online Dispute Resolution (ODR) as a breakthrough in the realm of arbitration
The process of arbitration is based upon the arbitration agreement and commences when the arbitration notice is served on the other party under Section 21 of the Arbitration Act. Thereafter, an arbitrator is appointed for conducting the arbitration. At last, the arbitral award is passed which is binding on both parties. Throughout the process of arbitration, the confidentiality of the parties is ensured which makes it more trustworthy for the parties. There are two types of arbitrations conducted in India – ad hoc arbitration and institutional arbitration. The former refers to the arbitration wherein the procedure has not been predetermined and the same is decided as and when the need arises. Institutional arbitration is arbitration wherein the arbitration is conducted in accordance with the rules formulated by that particular institution.
Online Dispute Resolution leverages technology to provide a convenient and cost-efficient mode of dispute resolution. WeVaad is an online dispute resolution platform that conducts arbitrations/mediations/conciliations on its platform under its respective rules. Under WeVaad Arbitration Rules, an arbitration proceeding is completed within 45-90 days depending upon the quantum of claims involved in the matter. Further, under its Rules, the process is completely confidential and includes limited court intervention, these factors make the process of online dispute resolution both cost and time effective which is needed the most.
Arbitration is usually used in contractual disputes, some disputes are arbitrable, and some disputes cannot be referred to arbitration. While the Arbitration Act does not elucidate the same, the different courts in India have propounded tests on the basis of which the arbitrability of any dispute can be assessed.
What is an arbitration agreement
An arbitration agreement is the very foundation of any arbitration proceeding. If there is no arbitration agreement the parties will not be able to resolve their disputes through arbitration. The arbitration agreement is defined under Section 2(b) of the Arbitration Act as ‘arbitration agreement means an agreement referred to in Section 7’, the arbitration agreement is explained under Section 7 of the Arbitration Act as –
(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.
Under the Arbitration Act, an arbitration agreement can be in a form of an arbitration clause in the original contract attested by the parties or in a form of a free-standing agreement separately signed by the parties. The undisputed condition for an arbitration agreement is that the agreement shall be in writing and oral promises will not be considered an arbitration agreement. An arbitration agreement will be considered in writing if the same is contained in a legal document that is signed by both parties or is contained in an exchange of letters, telex, telegrams, or some other modes of telecommunications including electronic telecommunications providing a record of the agreement.
It can also include an interchange of various statements of assertion and protection in which the existence of an arbitration agreement is alleged by one of the parties and is not denied by the other party as in this case silence means agreeing.
The Arbitration Act has clearly defined what can come under the meaning of an arbitration agreement and that an arbitration agreement is not restricted to a legal document but shall be in written form. An arbitration agreement as defined above is an agreement or promise between the parties to settle the dispute out of court using the alternative dispute resolution mechanism called arbitration. It is important to note that once the parties give their consent for arbitration it becomes obligatory to first refer the dispute to arbitration and the said dispute would not be maintainable before a court.
Arbitration clause and arbitration agreement
Arbitration clauses and arbitration agreements have one foundational difference but have the same objective which is to settle the dispute through arbitration. An arbitration clause is inserted in the original agreement which is signed by both parties but the act comes within the definition of an arbitration agreement if the contract is in written form and the reference is such as to make that arbitration clause a part of the contract. An arbitration agreement essentially is a separate agreement entered into by the parties to refer and resolve disputes through arbitration.
An arbitration clause can prove to be more convenient than a separate arbitration agreement as the process of entering into an agreement will not be repeated in the case of an arbitration clause which is the opposite of an arbitration agreement.
Principles outlined in the Mahanadi Coalfields case
In this case, the Hon’ble Supreme Court outlined what exactly will be interpreted as an arbitration agreement and is it the words that are necessary or the meaning and the effectiveness those words hold to render it an arbitration agreement. The bench comprising of Hon’ble Justice DY Chandrachud and Hon’ble Justice AS Bopanna observed that plain use of words like ‘arbitrator’ or ‘arbitration’ in an arbitration clause will not be considered to be a valid arbitration agreement if that particular clause demands or anticipates an additional and renewed consent from the parties to refer the dispute to arbitration.
In the present case, the issue arose deriving from clause 15 of the contract between Mahanadi Coalfields Ltd. and IVCRL AMR Joint Venture labelled ‘Settlement of Disputes/Arbitration’ which specifically talked about avoiding litigation and settling disputes at the company level and approaching the Court of Law as the last preference, but nothing was mentioned about referring the dispute to an arbitral tribunal except for inserting a plain term arbitration in the title of the Clause 15. Clause 15 of the contract is attached below for a better understanding of the readers:
“15. Settlement of Disputes/Arbitration:
15.1 It is incumbent upon the contractor to avoid litigation and disputes during the course of execution. However, if such disputes take place between the contractor and the department, effort shall be made first to settle the disputes at the company level. The contractor should make request in writing to the Engineer-in-Charge for settlement of such disputes/claims within 30 (thirty) days of arising of the case of dispute/claim failing which no disputes/claims of the contractor shall be entertained by the company.
15.2 If differences still persist, the settlement of the dispute with Govt. Agencies shall be dealt with as per the Guidelines issued by the Ministry of Finance, Govt. of India in this regard. In case of parties other than Govt. Agencies, the redressal of the disputes may be sought in the Court of Law.”
The bench referred extensively to the judgment passed in Jagdish Chander vs Ramesh Chander (2007) 5 SCC 719 and outlined that though there is no specific or express format of an arbitration agreement but there are some essentials the most important being that the language and words used in the arbitration agreement shall divulge a grit to refer the dispute to arbitration and not just a mere probability to go for arbitration. In case there is a mere probability then no valid or binding arbitration agreement exists between the parties which is the foundation of arbitration, and only the use of terms like arbitration or arbitrator will not constitute a valid arbitration agreement if it requires fresh approval from the parties.
The Hon’ble Bench observed that such types of clauses or agreements are a mere indication of the hope that the parties may refer the dispute to arbitration and there is just a possibility that the parties may consider going to arbitration when the dispute arises but a further agreement and discussion would be required for the same and thus this will not pass as an arbitration agreement as it is not binding in nature and the parties are not surrendering to arbitration which is one of the essentials of any arbitration agreement. This can be referred to as an agreement to approach arbitration and enter into an arbitration agreement in the near future.
An arbitration agreement is one through which the intention of the parties can be clearly gathered to enter into a binding arbitration agreement and referring the disputes that arise to an arbitral tribunal and both the parties are equally willing to be bound by the arbitral award and consider it as the final and binding decision. Even if the words like arbitration, arbitral tribunal or arbitrator is not inserted in any clause or agreement but an obvious intent is indicated and it consists of all the essential factors of an arbitration agreement, it will also be considered a valid arbitration agreement.
It was also noted by the Hon’ble Court that if in any case, the clause relating to dispute resolution comprises of terms or phrases, anything which purposely and explicitly rules out any of the attributes of arbitration or if in any case anything that can significantly detracts from an arbitration agreement. For instance, if in an arbitration agreement there is an authority that can decide a claim without even hearing to the parties and the authority is biased towards one of the parties or the award passed is not final and binding in nature and there is no restriction whatsoever to approach the civil court if the parties are not satisfied with the arbitral award will not be considered as a valid and functional arbitration agreement.
Further, the Hon’ble Court observed that there is no valid arbitration agreement between the parties as through clause 15, the determination to go to arbitration cannot be derived rather it only refers the dispute to the company level dispute resolution. The present clause did not indicate any intention of the parties to refer the dispute to arbitration.
Arbitration as a dispute resolution mechanism can prove to be a boon for commercial contracts where time is of the essence not just in the performance of the contract but also in the resolution process in case a dispute arises. While the court interference under the Arbitration Act has been limited over the years, fundamental principles of the arbitration agreement and adherence to party autonomy provide grounds for challenge to the arbitral award. Accordingly, clarity on the prerequisites of an arbitration agreement assumes significance.
Additionally, as ODR offers an alternative to the current ADR mechanisms, it has been accepted and suggested by the Government and the Judiciary for its adoption for faster dispute resolution. NITI Aayog in its report released in 2021 suggested that wide implementation of ODR in India has the potential to add up to Rs. 1,99,000 crores to the GDP every year. Further, current and retired Hon’ble Supreme Court judges including, Hon’ble J. Ramana, Hon’ble Indu Malhotra and Hon’ble D. Y. Chandrachud have become the biggest proponents of ODR. In fact, Hon’ble Chandrachud observed that “The strength of Online Dispute Resolution (ODR) is founded in the concepts of decentralization, diversification, democratization and disentanglement of the entire justice delivery mechanism” All of these modes can be resorted to, provided that the fundamental of arbitration in India are adhered to.
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