Significance of the Arbitration agreement

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This article is written by Shivani Nair, from Manipal University Jaipur. This is an exhaustive article which deals with the topic of Significance of an Arbitration Agreement and describes the importance of certain provisions in the Arbitration Act. 

Introduction

The term arbitration in very lucid terms means the disputes of the parties with one another, gets referred to a neutral party where this neutral party solves the disputes. Arbitration is a form of alternative dispute resolution, where the settlement of the dispute takes place outside the Courtrooms. This third party who solves the dispute is known as an arbitrator. His decisions regarding the dispute are always binding upon the parties. It is an adequate way to save time and resources. This method of settlement outside the court is governed by an Act called, “The Arbitration and Conciliation Act, 1966”. This Act saves the parties from the hassle of spending years in the Courts and saves them a lot of time and money, which otherwise would have been a lot to invest. Arbitration is a quasi-judicial process and the parties are referred to a domestic tribunal. 

Arbitration agreements

The formation of an arbitration agreement takes place when two parties, enter into a contract and in which, the contract states that any dispute arising between the parties have to be solved without going to the courts with the assistance of a person, who would be a neutral person, a third party, appointed by both of the parties, known as the Arbitrator, who would act as a judge. The arbitrator so appointed should have been previously mentioned in the contract that they made. They should also state who should select the arbitrator, regarding the kind of dispute the arbitrator should give decisions on, the place where the arbitration would take place. Furthermore, they should also state the other kinds of procedures mentioned or that has to be required during an arbitration agreement. 

The parties are generally required to sign an Arbitration Agreement. The decision taken by the arbitrator regarding any issue, is binding on both the parties, as stated by the agreement. In any event, where one party decides that an agreement must be made prior to entering the contract, it can be stated that the agreement was made to deviate from the hassles of the court. These agreements are like contingent contracts, which means that these agreements shall only come into force or become enforceable if any dispute happens, and on the basis of the same dispute between two parties mentioned in the contract. It also takes place or is enforceable in the light of any dispute that arises between the parties to the contract. 

Essentials of an Arbitration Agreement

  • There must be a dispute that should take place, only then the agreement will be valid. The presence of a dispute amongst the parties is an essential condition for the contract to take place. When the parties have already settled the dispute, in no case, they can invoke the arbitration clause to refute the settlement. 
  • Another essential is the written agreement. An agreement related to the arbitration must always be in writing. An arbitration agreement will be considered as a written agreement when:
  1. It has been signed by both parties and it is in the form of a document. 
  2. It can be the exchange of the telex, the letters, the telegrams, or any other means of communication which provides the record of the exchange and the agreement for arbitration.
  3. There must be an exchange of statements between the parties that gives the statement of claim and defence in which the existence of the agreement of the arbitration is agreed by one of the parties and which is not defined by the other party. 
  • The third essential intention. The intention of the parties while forming the contract is of utmost importance and it forms the basis of the agreement. There have been no prerequisite citations of terms such as an “arbitrator” or “arbitration” to be made in the agreement. Therefore, it is necessary to note that the intention of both parties plays a very important role in such an agreement. However, one must keep in mind that even if the words have not been mentioned, the intention must show that both the parties have agreed to come to the terms with the Arbitration Agreement. 
  • The fourth essential element is the signature of the parties. The signature of the parties is an essential element to constitute an arbitration agreement. The signature can be in the form of a document signed by both the parties to the contract which comprises all the terms and conditions, or it can also be in the form of a document which is signed by only one party to the contract which contains the terms and acceptance by the other party to the contract. It will be sufficient if one party puts up a signature in the agreement and the other party accepts that. 

In the landmark case of K.K. Modi v. K.N. Modi and Ors. (1998) 3 SCC 573, it was held by the Hon’ble Supreme Court that the following attributes must be present in an arbitration agreement:

  1. The agreement must state that the decision of the tribunal will be binding upon by both the parties.
  2. That the jurisdiction of the tribunal on the rights of the parties should be decided by both the parties consensually or from an order obtained by the Court which states that the proceeding shall be made through arbitration. 
  3. The tribunal has the right to determine the rights of the parties by being fair and just.
  4. The agreement that the parties will refer to the tribunal must be enforceable by law.
  5. The agreement must state that any decision made by the tribunal on the dispute must be formulated prior to the time when the reference is made. 

Some common elements included in the Agreement other than the essential agreements

The following are some of the common elements included in an arbitration agreement, which is generally not considered as an essential element, but shall be included if the parties want it to be mentioned in the contract. 

  1. Seat of Arbitration- the seat here means the place. Therefore, this clause states that there will be a place of arbitration in the case of the dispute. This provision is an important one, especially in the case of an international commercial arbitration, as this seat helps in determining the procedural laws that govern the procedure of the arbitration. However, the seat of the arbitration does not have to be the same place as the hearing of the proceedings. It is the place where the arbitration takes place, even though it differs from the place of the hearings.
  2. Procedure for appointing the Arbitrators- the procedure is the same as mentioned in the Arbitration Act. It states that any person, irrespective of the nationality, may be appointed as an arbitrator, unless the parties agree to something otherwise. The parties can themselves agree for the appointment of an arbitrator. 
  3. Language- The language plays an important role while making an agreement. It is necessary that the language which has been chosen in the contract doesn’t have to be the one that is not understood by both parties. There must not be any sort of communication gap and that the agreement made by the parties are of such a manner that each and every clause mentioned in the contract is actually understood by both the parties signing the contract. Picking the language which can be understood by both parties is important because then it would save both the parties, the cost of a translator. 
  4. Number and Qualifications of Arbitrators- The Act allows the parties to determine the number of the arbitrators, with the only condition that the number shall not be an even number, but an odd number of arbitrators, so that the decision can be made even if there is a disagreement amongst the arbitrators. 
  5. Type of Arbitration- The parties have the choice to choose between the institutional and the ad hoc (which means it is created for that specific purpose) kind of arbitration. Institutional means that agreeing to be bound by the rules of the arbitration institutions ad hoc means that the parties themselves agree to arrange an arbitrator. 
  6. Governing Law- It is important to mention the substantive law that they want to be governed by as failing to mention this substantive law might be a huge issue in the future disputes arising between the parties, if any. 

Important provisions in the arbitration agreement

There are a few important provisions under an arbitration agreement, and these are mentioned below:

  1. Written Agreement- As stated as an essential condition, there must be a written agreement. Section 7(4) of the Act, states that every agreement made must be in the form of a written document or even in the form of any kind of communication whether or not those communications take place through telegrams, telex or even other telecommunication devices provided that there must be a record of the communication. 
  2. Appointment of the Arbitrators- Section 11 states that the arbitrator can be appointed at the liberty of the parties to the contract. In case, where the parties fail to decide the appointment of the arbitrator, the Chief Justice of the High Court, in case of the domestic arbitration and the Chief Justice of the Supreme Court, in case of International Commercial Arbitration is approached. 
  3. Interim Relief- Section 9 and Section 17 of the Act provide for the Interim relief orders with respect to the arbitration. The relief petition is maintainable under section 9 if there is prima facie evidence that there is an agreement for the arbitration proceeding. The parties, if they want, can move to the Court before the arbitration proceeding actually starts or even after making the arbitral award but before its enforcement as per section 36 of the Act. Section 17 states that, at the parties’ request, the tribunal may order the party to take interim measures, the way it deems fit and necessary in respect to the subject matter of the dispute. 
  4. Finality of an Award by Arbitration- Section 34 states that the award given by the arbitrator is final and is binding upon the parties who have signed the contract. Once the decree is granted by the court, it shall be enforceable with respect to section 34 of the Act. 
  5. Appeal- Section 37 states that if the parties are not satisfied with the decision of the arbitrators, an appeal lies against the order granting or refusing to grant any measure under section 9 and also against refusing to set aside or setting aside an award. An appeal can also lie against the order of the tribunal accepting the plea referred to in section 16 or granting or refusing to grant an interim measure under section 17. However, there is no provision for an appeal against the appointment of an arbitrator as given under section 11. 
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Significance

The growth of arbitration signifies that there is a fundamental change that is present in our way of legislating. Another significance is in deciding the matters in a significantly lesser amount of time and the different or the separate clauses mentioned in the commercial contract. These are paving the way for the most effective and the most suitable remedy without having to go through the recourse of the courtrooms. Arbitration is generally the most efficient form of remedy for settlement of disputes amongst the parties, which actually does not require any long procedures of the Court for the decisions to be made. It is cost-efficient, it is time-saving, it also permits one to choose their own arbitrators. Through this, the decisions are given swiftly, and according to the nature of the case, they are also, most of the time satisfactory. The severability, separability, and the autonomy principle of the Arbitral agreement prevent the validity of one agreement from being overlapped by the other. Nonetheless, the two agreements may co-exist. Having such a principle does not negate the value of the other principles mentioned in the contract, but mostly adds on to those principles. Thus it plays an important role when the contractual clauses arise when dealing with the disputes. 

Conclusion

Therefore, from the above article, we can state that an arbitration agreement is not only beneficial to the parties whilst saving the resources, but also in means of the time and efforts put in by each of the parties. Despite a few people stating that it is not a complete procedural aspect of dealing with the cases, one state that it does help both the parties who have faced the dispute. However, most importantly, it is important that there are certain things that have to be kept in one’s mind before actually drafting or while drafting a contract for the arbitration agreement. In practice though, almost all arbitration agreements are concluded with arbitration clauses. 

Reference

  • http://letspedia.com/importance-arbitration-clauses/
  • http://www.helplinelaw.com/business-law/SIGOAAC/significance-of-an-arbitration-clause-in-an-agreement.html
  • https://unctad.org/en/Docs/edmmisc232add39_en.pdf

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