Image Source: https://bit.ly/37Zf9Ks

This article is written by Beejal Ahuja from the New Law College, Bharati Vidyapeeth University, Pune. This article discusses the significance of having a separate arbitration agreement and an arbitration clause in a contract agreement.

Introduction 

“Arbitration is the justice blended with charity”.

These are the words of Nacham of Breslov. Our Indian Judiciary system is overloaded with cases almost all the time and it is difficult for the parties to get their disputes resolved quickly. But if the parties go for arbitration then they will get their dispute resolved very quickly and it will be a very confidential process also.

Though arbitration is still a growing sector in India, the Government of India has taken certain steps toward it to make its place in global hubs of arbitration. So, to speed up the resolution of various disputes and to make the international and domestic arbitrations work effectively, a high-level committee was set up with Justice B N Srikrishna (Former Judge of the Hon’ble Supreme Court) and members from State High Courts, representatives of Industry and senior advocates. The recommendations made by the committee were approved by the Union Cabinet which affected the Arbitration and Conciliation (Amendment) Bill 2018 which was already passed by Lok Sabha.  

The bill encouraged institutional arbitration for settlement of disputes and made India a centre for the Alternative Disputes Resolution (ADR) mechanism. The bill also contained the provisions that dealt with the domestic and international arbitration and the laws for the conduction of conciliation proceedings. After these efforts by the Indian Government to promote arbitration and international trade, New Delhi became the centre for international arbitration.

If the company opts for the arbitration process then there are two ways, either, to have an independent agreement of arbitration or have an arbitration clause in a contract agreement. The Arbitration & Conciliation Act, 1996, mentions the same under Sub-section (2) of Section 7 that an arbitration agreement may be in two forms, either as a separate agreement or in the form of an arbitration clause in a contract agreement, but should be in writing. In both cases, the disputers can have the arbitrator of their choice.

Arbitration over Litigation

There are many reasons and benefits of choosing arbitration over litigation. Some of them are:

Private and Confidential

The arbitration process is confidential. Apart from the arbitrator and the disputing parties, no one knows about the matter. Only if the two parties and the third party who is going to be included agree then only the third party is allowed to interfere in the matter.

Faster than litigation 

In arbitration, the disputes are resolved faster than cases in court. Normally, first one has to file a case, then wait for the date of first hearing and that too firstly in a session or district court, if the party is not satisfied with the judgment of the lower court then they appeal in high court, and it goes on. It takes at least 1 year for a case to be solved, sometimes it may go on for 5 years also. But unlike courts, there is no overloading of cases in the arbitration system.

Flexible than courts

In courts, the case comes according to the court calendars and dates are fixed by the judges accordingly. But the arbitration proceedings are scheduled and fixed according to the needs and availability of the parties. In courts, there are no hearings after 5 p.m. and also not on weekends but in arbitration, the hearings are on weekends and as well as in the evening. 

Cost-effective

Resolving a case through the arbitration process is way cheaper than a litigation one. Because in arbitration you have to pay to the tribunal and other administrative services are included in it whereas in court you have to pay the fee for everything as more your case will take time, more will be the fee you have to pay for everything.

Fairness

In the arbitration process, parties get to choose their arbitrator as per their choice, the parties are heard individually and the process of arbitration is based on facts which are discussed by the parties amicably to settle the disputes.

Avoids hostility

In courts, there is an open argument between the lawyers and hurling of acquisitions whereas in the arbitration process there is an amicable discussion between the parties and an arbitrator.

Control

In courts, everything is handled by the advocates, but in the arbitration process, the control is with parties as they are involved directly in the case from the starting of the arbitration process.

Informal Process

There is a level of formality and decorum which has to be maintained in the courtroom, whereas in the arbitration process the parties and arbitrators are allowed to have a friendly conversation.

Independent ‘Agreement of Arbitration’

Arbitration Agreement

The Arbitration & Conciliation Act, 1996, defines the Arbitration Agreement under Sub-section (1) of Section 7 as an agreement submitted by the parties to resolve their certain disputes arising or may arise between them in respect of a defined legal relationship, whether contractual or not by the means of arbitration. 

Usually, when the business relationship starts the parties get the arbitration agreement signed even before a disagreement, so that if in future there is any disagreement between the parties then they are going to arbitrate to resolve the dispute. This agreement can be between two businesses, a business and an employee, a homeowner and a builder or a tenant, a business and an individual or a party, a business and a labour union, and many more. So, if any of the two parties come into a business relationship then they should sign an arbitration agreement for working amicably and peacefully. 

Section 7 states that an arbitration agreement is in writing if it has the following-

  • A document that has been signed by the parties;
  • If there is an exchange of letters, telex, telegrams, or any other means of telecommunication which provide a record of the agreement; or
  • An exchange of the statements of claim and defence in which the existence of the agreement is alleged by one party and not denied by the other.

Essential Elements

The Hon’ble Supreme Court mentioned the essential elements of an arbitration agreement-

  • There should be an existence of a present possibility or a difference in the future.
  • Both parties should agree to settle the disputes by arbitration process and shall have the intention for the same.
  • The written arbitration agreement has to be bound by the decision of the tribunal and the parties must be agreed.

Nature of Disputes

The types of disputes that can be referred to the arbitration tribunal are:

Present or Future Disputes

All matters of civil nature, having a relation to present or future differences or disputes, but not a dispute that is having relation to any illegal transaction, can be referred to the tribunal. An arbitration agreement can refer a dispute to arbitration only if it exists.  

Defined legal relationship

Whether a dispute is contractual or not, it has to be of a defined legal relationship and not the one which is void ab initio, and should be legal. But if the matters or transactions lie outside the category under which legal rights are likely to occur, then it would not be arbitrable.

Advantages

  • Arbitration agreements maintain the confidentiality of the disputes.
  • Arbitration agreements limit the expense of litigation and make the disputes less expensive than the one in court.
  • While signing the arbitration agreement, the parties may choose their arbitrator as the one who will decide their dispute. This is helpful as you can choose accordingly the one who has expertise in your field.
  • As an employer, your employees won’t be able to go to the court for any dispute as they have signed the employment arbitration agreement while joining. So, this can be the criteria and a way to avoid any court cases.
  • If you have an arbitration agreement, then the jury will not be there to decide the disputes, but only the arbitrator of your choice.

Disadvantages

Signing an arbitration agreement may limit litigation costs and resolve disputes faster but it may take your many rights and you may not be comfortable with certain conditions. Here are some of the disadvantages of an arbitration agreement-

  • When you sign an arbitration agreement then you must accept the arbitrator’s decision as final because the arbitration award cannot be appealed.
  • If you are an employee then there is a disadvantage for you that in arbitration agreement you cannot opt for a jury trial.
  • If you have signed an employment arbitration agreement then in this the employer doesn’t share all the information to you, so while there is any dispute the employer has more information than the employee.
  • Mostly, the arbitration agreement is signed even before any dispute has arisen so at that time one may not be sure that he/she wants to arbitrate all the disputes. So, if in case in future you want to go to court for a dispute then you won’t be able to do that, as first you have to invalidate the arbitration agreement signed which would require a lot of legal fees.
  • There are chances of the agreement to be one-sided. Like, the agreement may be in favour of the one who has written it. So, one should ensure that he/she gets an equal voice in the agreement like choosing the arbitrator, having equal remedies, and no denial of the right to an attorney.

Arbitration Clause in Contract Agreement

Arbitration Clause

Now, there are two options for the parties to arbitrate either through incorporating a separate agreement or inserting a clause in the contract agreement called ‘Arbitration Clause’. When you include an arbitration clause then it can be called contractual arbitration. Under this type of arbitration, parties are obliged to go through the arbitration process for any disputes that arise under or are concerning the contract. 

Types of Contractual Arbitration

There are two types of contractual arbitration. It can be either Ad-hoc or Institutional. It is the parties who will decide which type of arbitration they will prefer.

Ad-hoc Arbitration 

In this, it is like giving a chance or a reasonable opportunity to the other party to comply with the agreement before they claim that the other has not adhered to the obligations of the agreement. Then the parties will try to solve the dispute in connection with the contract amicably in good faith through arbitration and by the laws of India and the Arbitration and Conciliation Act, 1996. The decision or the arbitration award will be final and binding on both the parties, without any appeal and in writing. There will be three arbitrators two from each party and then they will amicably appoint the third arbitrator who will be the chairman of the proceedings. But if any party fails to choose or appoint an arbitrator from their side then the arbitrator of the other party will be the sole arbitrator for both.

Institutional Arbitration

It is obvious from the name of this type of arbitration that in this the arbitration is done following any arbitration institution. Some of the arbitration institution in India are- 

Nani Palkhivala Arbitration Centre, Bombay Chamber of Commerce and Industry, IIAM, etc. So, any dispute or difference between the parties arising out or concerning the contract shall be resolved by arbitration, but per the rules of any Arbitration Institutions. The Arbitral Award will be binding on both the parties. In this, the clause can be changed or modified according to the needs of the parties.

Separability, Severability or Autonomy of Arbitration Clause

This doctrine of separability means that an arbitration clause inserted in a contract is a separate agreement in the underlying contract. There is no such nexus between the arbitration clause and the underlying contract. Though the existence of the contract is necessary for incorporating the terms of an arbitration clause, the arbitration agreement is a separate and distinctive agreement which is the basis for arbitration as defined under the principle of separability. This principle does not affect the validity of other obligations in the contract. The choice of law determined by the parties to the contract will be binding on the arbitration agreement with all the care and precaution. This principle or doctrine of separability means that even if an arbitration agreement is included in the underlying contract, it will be treated as an independent one. Hence, even if the underlying contract agreement and the arbitration clause exist in the same drafts, they are separate agreements.

The Indian Arbitration and Conciliation Act, under Section 16 (1) clearly states that an arbitration clause included in the contract shall be treated as a separate and an independent agreement of the other terms of the contract and if the arbitral tribunal held the contract null and void it will not necessarily mean or entail ipso jure the invalidity of the arbitration clause. Though the clause should be drafted with the utmost care and precaution.

National Agricultural Co-op Marketing Federation of India Ltd. v. Gains Trading Ltd

The Hon’ble Supreme Court held, in this case, the contract valid and stated that the arbitration clause is to be treated independently from the main contract. And if the contract is held null and void, then the arbitration clause shall not be considered null and void too. The doctrine of separability just prevents the arbitration clause from being affected by the underlying contract. Hence the clause is an indispensable part of the contract.

Advantages of Arbitration Clause

Tailored rules

The rules of the arbitration clauses can be altered following the needs of the parties and also according to the type of disputes that occur under the contract.

Expert arbitrators

A well-drafted arbitration clause or provision will be required to appoint an arbitrator who has an expertise in the field of the dispute and will help to resolve the dispute amicably following the law.

Confidentiality

Arbitration proceedings are usually private and the other information and documents are kept confidential because only the parties to the contract and between whom the dispute has arisen are allowed to be present in the proceedings.

The other advantages are the same as those of the arbitration agreement normally like a faster process and limited cost of the proceedings.

Disadvantages 

Final decision is difficult to change

When an arbitrator has decided the matter or dispute then the appeals are not allowed in arbitration until and unless it is proved that the arbitrator’s decision was biased or incorrect. Because the businesses generally don’t allow non-binding arbitration as then it will give a license to the losing party to take the matter to the courtroom.

Costly

Though the arbitration limits the expense and cost of a matter or dispute than what a court requires, but sometimes, the fees of the arbitrators you hire is enormous, when one wants the best one who has expertise in that field, then have to pay a hefty amount for it.

Not beneficial for all

The arbitration clause in the underlying contract may be favouring the employers or manufacturers and may prove to be less beneficial to the employees and employees don’t have, much information as their employers have so there is a lack of transparency.

Which one is better?

Now if an arbitration clause forms a part of a contract agreement so it may be partial and favour the party who has made the contract and included that clause and give them an undue advantage to decide all the terms of the contract under which the clause is. This is somehow against the Principles of Natural Justice.

For eg: a company has mentioned such in their clause that any disputes arising out or about the contract agreement will be resolved through the arbitration process and will be held in XYZ place and there will be a sole arbitrator ABC who will arbitrate or resolve the matter. While we go through this example so the other party has these two greatest disadvantages that the other party will not have a chance to decide the place of arbitration it will be according to the company and will also not get to choose the arbitrator as there will be a sole arbitrator decided by the company. Now, you have to sign the contract to get your deal done, but the arbitration clause may not be according to your needs, and you may not pay attention to that at that time.

On the other hand, if there is an independent arbitration agreement, you will read it properly and is apart from the contract. You can renegotiate and change the terms accordingly while signing the agreement. There are fewer chances of impartiality. So, it is preferred to have an exclusive and independent agreement of arbitration rather than having an arbitration clause in your contract agreement.

Conclusion 

The arbitration sector is growing day by day as it has some advantages over the litigation. It saves you time, it is less expensive and it keeps the dispute private, only the parties are allowed to be a part of the proceedings. There are two ways to go for arbitration mentioned above. One is by having a separate arbitration agreement and one by having an arbitration clause in a contract agreement. Both the ways are suitable but it is preferred to go for a separate agreement as it is fairer than having a clause. Because even having a clause is treated as an independent agreement but still it is a part of the contract. One must be very careful while signing the arbitration agreement and also while drafting the provisions of the same.

References


LawSikho has created a telegram group for exchanging legal knowledge, referrals and various opportunities. You can click on this link and join:

Follow us on Instagram and subscribe to our YouTube channel for more amazing legal content.

Did you find this blog post helpful? Subscribe so that you never miss another post! Just complete this form…

LEAVE A REPLY