Arbitration Agreements: Understanding the Basics

in Alternative Dispute Resolution, Arbitration, Study Materials

Author: Sibani Panda, Research Associate

‘At all events, arbitration is more rational, just, and humane than the resort to the sword’ – Richard Cobden

The provisions of the Arbitration & Conciliation Act govern arbitration in India. The United Nations Commission on International Trade law (‘UNCITRAL’) which was established in the 1966 has been responsible for the development of international arbitration. India enacted the Arbitration and Conciliation Act, 1996 by taking into account the arbitration rules of UNCITRAL Modern Law on International commercial Arbitration. India is also a signatory to the New York Convention (1960) and the Geneva Convention (1924).  Arbitration under Arbitration and Conciliation Act, 1996 is a matter of consent, not coercion and the parties are free to structure their arbitration agreements as they see fit. ‘This concept of arbitral contractualism allows the parties  to write their own rules of arbitration, therefore, they can customize the arbitral process according to the needs of their transaction, eliminate legal rules or trial techniques that might prove inconvenient or unsuitable , and maintain procedural elements they believe essential to the dictates of fairness, finality and functionality ((Charbonneau, Cases and Materials on law and practice of Arbitration , second edn,2000, p 15)).’

According to Section 7 of the Arbitration and Conciliation Act, 1996

  1. An ‘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 document signed by the parties;
  • an exchange of letters, telex, telegrams or other means of telecommunication which provide a record of the agreement; or
  • an exchange of statements of claim and defense in which the existence of the agreement is alleged by one party and not denied by the other.
  1. 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 Arbitration agreements, the parties have the freedom and legal right to engage in arbitration and to make specific provisions for the implementation and operation of their arbitration. By entering into a contract of arbitration, the parties voluntarily abandon their rights to judicial relief and, in effect, create a private system of adjudication that presumably is better adapted to their transactional needs.

Section 7(1) contemplates two types of arbitration agreements:

        I. The first type of agreement is referred to as an ‘Arbitration clause’ where an agreement mainly takes place in the form of an arbitration clause, which is embedded, in the principal contract between the parties. The agreements where a clause is inserted in the contract that creates some rights and duties which, in the event of dispute, will be the subject of the intended arbitration are called substantive contract ((Mustill & Boyd, Commercial Arbitration, second edition , 1989, p 6)). The arbitral clause is a contract where the parties agree to submit future disputes to arbitration.  The arbitral clause has an autonomous legal existence and it must identify the contractual relationship to which it applies.

      II. The second type of agreement is referred to as a ‘Submission to arbitration’ or a ‘Submission agreement’ where an agreement is made between the parties after the disputes have already arisen. In submission agreement, an agreement is formed between the parties to submit a dispute to arbitration, which has already arisen between the parties before the arbitration agreement, comes into existence. The submission agreement is usually a detailed document, dealing with the construction of the arbitral tribunal, the procedure to be followed, the issues to be decided and other matters ((Redfern and Hunter , Law And Practice Of International Commercial Arbitration , fourth edn, 2004, p 7,para 1- 10)). It is necessary to have the necessary terms of reference in an arbitral process because it helps to establish the arbitral tribunal’s jurisdiction to adjudicate.

In Bihar State Mineral Development Corporation v Encon Builders (I) Pvt Ltd, ((2003 (3) Arb LR 133,137 (SC).))the Supreme Court has observed that the following four essential elements of an arbitration agreement:

  1. There must be a present or future difference in connection with some contemplated affair.
  2. There must be the intention of the parties to settle such difference by a private tribunal.
  3. The parties must agree in writing to be bound by the decision of such tribunal.
  4. The parties must be ad idem.

In KK Modi v KN Modi, ((AIR 1998 SC 1297))Supreme Court observed some of the important attributes of Arbitration agreement which are as follows:

  1. The arbitration agreements contemplates that the decision of the tribunal will be binding on the parties to the agreement.
  2. The jurisdiction of the tribunals to decide the rights of the parties is derived either from the consent of the parties or from an order of the court or from a statute, the terms of which make it clear that the process is to be an arbitration.
  3. The arbitration agreements contemplates that the substantive rights of the parties will be determined by the agreed tribunal.
  4. The tribunal determines the rights of the parties in an impartial and judicial manner, owing an equal obligation of fairness towards both sides.
  5. The agreement of parties to refer their disputes to the decision of the arbitral tribunal is intended to be enforceable in law.
  6. The agreement contemplates that the tribunal will make a decision upon a dispute, which is already formulated at the time when a reference is made to the tribunal.

An Arbitration agreement is required to be in writing which means that a legally binding and valid agreement between the parties purporting to submit to arbitration any existing or future disputes arising out of or in connection with the main contract, ((Union of India v GS Atwal and Co (1996) 3 SCC 568))must be in writing. A mere oral understanding between the parties to refer the disputes to arbitration would not constitute a valid arbitration agreement ((Jayant N Sheth v Gyaneshwar Apartment co-operative Housing society Ltd (1999) 1 Bom CR 774)).

According to Section 7(4) ((The Arbitration and Conciliation Act, 1996)), there are three situations in which an arbitration agreement should be treated in writing:

                    I. In a document: An arbitration agreement may be in the form of an arbitration clause in a contract, or in the form of a separate agreement. It is mainly required that the documents relating to the agreement should indicate that it is an agreement to arbitrate and it should be signed by the parties.

                 II. In the correspondence: An arbitration agreement also results from the correspondence between the parties. An arbitration agreement is in writing if it is contained in an exchange of letters, telex, telegrams or other means of telecommunication, which provide a record of the agreement ((The Arbitration and conciliation act, 1996, s 7(4)(b).)).  In these cases, even if the parties but the assent of do not sign the agreement each party is required in written form ((Study on New York Convention  A/CN 9/168, para 21)).

               III. In the claim and defense statements: In cases where the claimant in his claim statement alleges the existence of an arbitration agreement and the defendant, in his defense does not deny it, then a valid arbitration agreement will be inferable.

An agreement enforceable by law is a contract ((The Indian Contract Act 1872, s 2 (e).)). An arbitration agreement stands on the same footing as any other agreement. Every person capable of entering into a contract may be a party to an arbitration agreement. He who cannot contract, cannot make a reference to arbitration. An agreement to submit a dispute to arbitration is based on the consent of the parties. It is binding upon the parties unless it is tainted with fraud, undue influence etc. in which case it can be avoided like any other agreement. The terms of the arbitration agreement must be definite and certain. The parties to the arbitration agreement must be clearly identified either in the main contract or in the arbitration agreement. It is essential that while drafting an arbitration agreement, the intention of the parties should be mentioned in a clear and unambiguous language. The first and foremost requirement of drafting an arbitration clause is that the intention of the parties, that all disputes between them shall be resolved by arbitration, should be stated in clear and unequivocal words.

In order to constitute an arbitration agreement between two parties, the other must accept the proposal made by one person. Unless the proposal is accepted, there can be no binding and enforceable agreement. An arbitration agreement is separate and independent of the contract in which it is embedded. Even if the contract in which the arbitration clause has been embedded is held to be invalid for the reason that its subject matter is not arbitral under the law for the time being in force in India, the arbitration clause survives and the award resulting from the arbitral proceedings under such clause will be perfectly valid.

Incorporation of Arbitration Agreements:

An arbitration clause can be incorporated either by reference to a standard form of clause or to a set of trade terms which themselves include provisions requiring disputes to be submitted to arbitration. In Alimenta SA V National Agriculture Cooperative Marketing Federation Of India Ltd (([1987] 1 SCC 615)), the Supreme Court observed that ‘ the arbitration clause of an earlier contract can, by reference , be incorporated into a later contract, provided, however it is not repugnant to or inconsistent with the terms of contract in which it is incorporated’. Section 7(5) provides that ‘the reference in a contract to document containing n arbitration clause constitutes an arbitration agreement if the contract is in writing and the reference is such as to make that arbitration clause as a part of the contract’.

In a particular case, the scope and extent of an arbitrator’s jurisdiction and powers would depend on the proper construction of the arbitration agreement, therefore it is essential that the arbitral tribunal ‘must consider the dispute in question and then elicit from the arbitration agreement whether or not the parties intend a dispute of the kind in question to be resolved by arbitration’ ((Redfern and Hunter , Law And Practice Of International Commercial Arbitration , fourth edn, 2004, p 137,para 3-11)). The existence of difference or dispute is an essential condition for the arbitrator’s jurisdiction. If there is no dispute, there can be no right to demand arbitration. The dispute may be a present or a future one. In case of an agreement to refer future disputes to arbitration, the jurisdiction of the arbitrator does not arise until a dispute has arisen. A dispute means an assertion of a right by one party and repudiation thereof by another. A point as to which there is no dispute cannot be referred to arbitration.

So some of the essentials of the arbitration agreements can be summarized as follows:

  • An arbitration agreement must be in writing.
  • An arbitration agreement must comply with the requirements of a valid contract.
  • An arbitration agreement must be in respect of a dispute that is arbitrable.
  • Parties may agree on the number of arbitrators and their nationalities.
  • Parties may agree on the venue of the arbitration proceedings.
  • Parties may agree on the choice of procedure and the arbitration administered by an arbitral institution under its rules.
  • Parties may agree on the language of proceedings and pleadings;

Therefore it is always required that the arbitration agreements should be construed in a fair and proper manner according to the general principles of construction of statutes, statutory instruments and other contractual documents.