This article is written by Anuradha Goel, pursuing a Diploma in Advanced Contract Drafting, Negotiation and Dispute Resolution from lawsikho.com.
As on March 06, 2020, approx. 37% of the sanction posts for the judges in the High court are lying vacant. Pendency of cases in the Supreme court, High court, District and Subordinate courts has increased by 8%, 29%, and 21% respectively since 2018.
Category of the court
Number of Pending cases (As on January 2020)
District and Subordinate courts
Given the huge amount of pendency of cases and judges in the court, one can imagine the time it would take to get a case resolved and have a judgment in their favour.
Companies with commercial interests want quick and effective mechanisms for the resolution of a dispute. What remedy do they have?
This is where the insertion of an alternative dispute resolution clause became a trend.
Amongst all the alternate dispute resolution options, arbitration is the most preferred one as it offered the following features-
- The arbitration proceedings are confidential to the parties.
- They are far less time-consuming than courts.
- Parties have the liberty to choose their judge.
- Arbitration proceedings are flexible as the strict rules of evidence and procedure do not apply.
- The decision of an arbitrator is binding on the parties.
However, merely adding an arbitration clause in the agreement does not serve any purpose. An arbitration clause should be crisp, clear, and should have all the necessary ingredients to make it enforceable and avoid unnecessary complications in the event of a dispute.
In this article, we shall try to understand the prerequisite requirements to draft and make an arbitration clause valid and enforceable.
Ingredients of an Arbitration clause
Primarily, an arbitration clause can be broken down into the following elements-
Appointment of an Arbitrator
This sub-clause should specify the number of arbitrators and the procedure to be followed for their appointment.
As per Sec.10 of the Arbitration and Conciliation Act, 1996, the number of arbitrators shall not be even. If the agreement does not provide for the number of arbitrators, it shall be deemed that a sole arbitrator is to be appointed.
Hence, the parties can choose to appoint an odd number of arbitrators and specify the procedure for their appointment. They can also create a list of arbitrators and decide to choose an arbitrator from that list in case a dispute arises.
Along with the procedure, it is extremely important to mention the timelines within which the parties shall fulfil their obligations. Otherwise, a party might take its own sweet time to appoint an arbitrator which will render the entire purpose of opting for arbitration proceedings ineffective.
Sample clause: In the event of a dispute, the parties agree to appoint with mutual consent within 7 (seven) days from the date of the dispute a sole arbitrator from the list of arbitrators annexed in schedule-1 of the Agreement.
Additional specifications such as nationality, experience, educational qualifications of an arbitrator can be decided by the parties and provided in the schedule.
Sample clause: In the event of a dispute, each party shall within 7(seven) days from the date of the dispute, appoint one arbitrator. The two arbitrators shall with mutual consent appoint a third arbitrator within 15 (fifteen) days from the date of their appointment. The arbitrator appointed by the parties shall possess the characteristics as described in schedule-1 of the Agreement.
Language is one of the vital elements for the smooth functioning of the arbitration proceedings. In the absence of an express provision, disputes might arise relating to the language in which the arbitration proceedings shall be conducted.
Additionally, the parties will have to bear more costs in translating every document for the understanding of the other party.
Sample clause: Arbitration proceedings shall be conducted in English.
Governing law and Jurisdiction
The parties should expressly mention the law governing the arbitration proceedings between them.
The seat of an arbitration proceeding determines the governing law to be made applicable to the proceedings. It refers to the courts that would have exclusive jurisdiction over the arbitration proceedings.
Example: The arbitration proceedings shall be governed by the Arbitration and Conciliation Act, 1996. The seat shall be Bengaluru, Karnataka, and courts of Bengaluru shall have exclusive jurisdiction.
The venue merely determines the place where such proceedings shall be conducted for the sake of the convenience of the parties.
Where only the venue is mentioned in the agreement, and no specific reference is made to the seat, the venue shall be considered as the seat for arbitration proceedings.
Example: The arbitration proceedings shall be governed by the Arbitration and Conciliation Act, 1996, and the venue shall be New Delhi.
If the clause states words like “the tribunals shall meet, examine witnesses” at XYZ, such place may be designated only as a venue if a reference is made to the seat in the agreement. Otherwise, the venue shall be construed as a seat in the Agreement.
Example: The arbitration proceedings shall be governed by the Arbitration and Conciliation Act, 1996, and the seat shall be New Delhi, India. The arbitral tribunal shall meet, examine witnesses and hear the proceedings at Mumbai, India.
Award to be final and binding
It is important to mention that the award passed by the arbitrator shall be final and binding on the parties to the agreement.
Hence a simple dispute resolution clause can be as follows-
- In the event of a dispute arising out of or in connection with this Agreement, it shall be referred to and resolved by arbitration.
- The Parties agree to appoint with mutual consent within 7 (seven) days from the date of the dispute a sole arbitrator from the list of arbitrators annexed in schedule-1 of the Agreement.
- Arbitration proceedings shall be conducted in English.
- The award passed by the arbitrator shall be final and binding on the Parties to the Agreement,
- The arbitration proceedings shall be governed by the Arbitration and Conciliation Act, 1996. The seat shall be Bengaluru, Karnataka, and courts of Bengaluru shall have exclusive jurisdiction.
Can unsigned arbitration agreement be enforceable in a court of law
The Honorable SC vide its judgement dated October 29, 2018 in Caravel Shipping Services Private Limited v Premier SeaFoods Exim Private Limited has stated that the mere condition that the arbitration agreement is not signed does not render the arbitration clause invalid.
The intention to submit to arbitration and validity of the clause can be deduced by the court from the performance of the contract by the parties.
As per Sec.7(3) of the Arbitration and Conciliation Act, 1996, the only precondition for an arbitration agreement to be valid is that it should be in writing. It doesn’t need to be signed by the parties to be valid and binding.
Whether unilateral arbitration clauses are enforceable in a court of law
There are several instances wherein the companies have constructed the arbitration clause in such a manner to appoint either their employee as an arbitrator or have made the appointment of an arbitrator unilateral, i.e. only one Party gets to appoint a sole arbitrator of his/her choice.
The Honorable Supreme court vide its judgment dated July 03, 2017 in TRF Ltd. v Energo Engineering Projects Ltd declared that arbitration clauses wherein the sole arbitrator appointed by a party might have some interest in the outcome of the disputes are invalid.
Such a person who is interested in the outcome is not eligible to function as an arbitrator. Additionally, such a person upon him/her becoming ineligible cannot appoint another person as an arbitrator in his/her place.
The Supreme court vide its judgement dated November 26, 2019, in Perkins Eastman Architects DPC v HSCC (India) Ltd stated that a person who has an interest in the outcome of a dispute is ineligible to appoint a sole arbitrator on his own.
This is a landmark judgement which can open a Pandora box. Most standard one-sided contracts such as loan agreements, terms, and conditions of an e-commerce website, agreements signed for purchasing a sim card, etc. executed in day-to-day working have a one-sided arbitration clause allowing the other party, i.e. the companies to appoint arbitrators as per their choice.
Circumstances where the document entailing an arbitration clause is not stamped
Suppose the parties to an agreement do not pay the stamp duty and in the event of a dispute, resort to the arbitration clause mentioned in the agreement.
Will the arbitration clause be upheld and enforceable in the court of law?
The Supreme court vide its judgement dated April 10, 2019, in Gallaware wall ropes Ltd. v Coastal Marine Construction and Engineering Ltd held that the arbitration clause in an agreement that is not stamped could not be enforced. Appropriate stamp duty is required to be paid on such an agreement to bring into effect.
Additionally, if the stamp duty has been insufficiently paid, it needs to be sent to the relevant authorities for payment of the deficit stamp duty, along with a penalty, if any before it can be adjudicated upon.
Arbitration is no doubt, one of the most preferred dispute resolution mechanisms. Arbitration clauses today find themselves a place in almost every contract as the disputes can be resolved quickly instead of getting stuck in the court of law.
Additionally, with the advancement of technology, e-arbitration has gained momentum. Physical presence has taken a back seat and parties located at different places can resolve their disputes amicably over a video call. Unlike traditional litigation, it is far more convenient and saves them time and costs of the parties as well.
Arbitration in India is still an emerging field. Many people are not aware of it and the only mode of resolving disputes for them is to go to the courts and wait for years for the decision.
Those who are aware tend to incorporate the traditional elements of the courts in the arbitration process. For example, in several countries, during arbitration, the parties only rely on written submissions made to the arbitrator for resolution of disputes, but in India, oral arguments along with written submissions are still a preferred choice of representation.
To conclude, arbitration is one of the most effective means of resolving disputes between the parties. However, drafting an effective arbitration clause is a vital requirement for any contract. In the event the clause itself is challenged in a court of law and proved to be unenforceable, it can open floodgates to the courts of litigation, which will render the whole purpose of resorting to arbitration futile. Hence, emphasis should be to make arbitration clauses crisp, clear, air-tight, and as simple as possible!
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