What Constitute An Arbitration Agreement [FCS Deepak P. Singh]



Dear Friends,

As you are aware that “ Arbitration” is an alternate method of dispute resolution. It saves time, money and avoid  lengthy court process. In Arbitration Proceedings parties to the agreement choose arbitrators and decide the place of hearing. In arbitration there is autonomy to the parties and secrecy in proceedings will be maintained and hence it one of the most preferred dispute resolution process adopted all over the world.   Arbitration can only take place if both parties have agreed to it. In the case of future disputes arising under a contract, the parties insert an arbitration clause in the relevant contract. An existing dispute can be referred to arbitration by means of a submission agreement between the parties. In contrast to mediation, a party cannot unilaterally withdraw from arbitration.

Under the WIPO Arbitration Rules, the parties can select a sole arbitrator together. If they choose to have a three-member arbitral tribunal, each party appoints one of the arbitrators; those two persons then agree on the presiding arbitrator. Alternatively, the Center can suggest potential arbitrators with relevant expertise or directly appoint members of the arbitral tribunal. The Center maintains an extensive roster of arbitrators ranging from seasoned dispute-resolution generalists to highly specialized practitioners and experts covering the entire legal and technical spectrum of intellectual property.

WIKIPEDIA: Arbitration is a form of alternative dispute resolution (ADR) that resolves disputes outside the judiciary courts. The dispute will be decided by one or more persons (the 'arbitrators', 'arbiters' or 'arbitral tribunal'), which renders the 'arbitration award'. An arbitration decision or award is legally binding on both sides and enforceable in the courts, unless all parties stipulate that the arbitration process and decision are non-binding.

Arbitration is often used for the resolution of commercial disputes, particularly in the context of international commercial transactions. In certain countries such as the United States, arbitration is also frequently employed in consumer and employment matters, where arbitration may be mandated by the terms of employment or commercial contracts and may include a waiver of the right to bring a class action claim. Mandatory consumer and employment arbitration should be distinguished from consensual arbitration, particularly commercial arbitration.

LEGAL FRAMEWORK

The Arbitration and Conciliation Act, 1996 (hereinafter 1996 Act or the Act) was enacted, based on the UNCITRAL Model Law on International Commercial Arbitration, 1985. The new Act came into force with a breath of fresh air of an expedited and improved procedure. It also attracted cross border trade and investment after the remarkable shift of global policy in 1991. The Arbitration and Conciliation Act, 1996 consolidated and amended the existing Arbitration Act, 1940, Arbitration (Protocol & Convention) Act, 1937 and the Foreign Awards Act, 1961. Part 1 of the Act dealt with domestic arbitration and enforcement of the domestic award while Part 2 dealt with the enforcement of foreign awards arising from the Geneva Convention and the New York Convention.

The Arbitration and Conciliation (Amendment) Act, 2015 brought sweeping changes to the procedure and entailed a series of strong judicial interpretations. The amendment was essentially founded on the principles to strengthen the arbitral tribunal and minimise the scope of intervention by the court. 

 A High-Level Committee to Review the Institutionalisation of Arbitration Mechanism in India was constituted on 13th January 2017 and headed by Justice B.N. Srikrishna. In line with the committee’s recommendations, the Arbitration and Conciliation (Amendment) Act, 2019 was passed.

AEBITRATION AGREEMENT- SECTION 7 OF A&C ACT,1996 (1) 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 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) a document signed by the parties.

(b) an exchange of letters, telex, telegrams or other means of telecommunications [including communication through electronic means] which provides a record of the agreement; or

(c ) an exchange of statements of claim and defence in which the existence of the agreement is alleged by one party and not denied by the other party.

(5) the reference in a contract to a document containing an arbitration clause constitute an arbitration agreement if the contract is in writing and the reference is such as to make that arbitration clause part of the contract.

PLEASE NOTE THAT: To constitute an arbitration agreement under Section 7(4)(c ) of the Act,1996 what is required is a statement of claim containing a specific allegation about the existence of an arbitration agreement by the applicant and non-denial thereof by the other party. An “ Allegation” is an assertion or declaration about a fact and also refers to the narration of a transaction [ S.N. Prasad Vs. Monnet Finance Ltd. 2020(II)JT;479:2010 SCALE225:2010(7) SC 85].

FORMS OF ARBITRATION AGREEMENT

A fundamental requirement under Section 7 of the 1997 Act is that an arbitration agreement shall be in writing. Besides that, Section 7 grants liberty to the parties to form an arbitration agreement in multiple ways as enumerated below:

  1. A standalone separate Arbitration Agreement

A separate arbitration agreement can be formed in addition and reference to the operative agreement between the parties.

  1. An Arbitration Clause

An arbitration clause can be formed in the operative agreement as to the section of the agreement that deals with the rights and options of the parties in the event of a legal dispute arising out of the contract. An arbitration clause is construed as an arbitration agreement.

  1. Incorporation by reference

An arbitration clause contained in a separate contract can also be incorporated in a contract being drafted. As per Section 7(5), any reference to a document containing an arbitration clause shall also be construed as an arbitration agreement provided that the referred contract is in writing and the reference is made with the intention to make that arbitration clause the part of the contract.

In M/s Elite Engineering and Construction (HYD.) Private Ltd. v. M/s Techtrans Construction India Private Ltd., the Supreme Court held that a general reference to the incorporation of a separate arbitration clause will not be tenable in law. The reference shall be clear and must indicate the intention of the parties to incorporate.

  1. By communication

According to Section 7(b) of the 1996 Act, an arbitration agreement can also be inferred from the exchange of letters, telex, telegrams, or other means of telecommunication, which provide a record of the agreement between the parties. In short, an agreement can be construed from the correspondence of the parties where there is a clear and unequivocal intention to refer the disputes to arbitration.

In Galaxy Infra and Engineering Pvt. Ltd v. Pravin Electricals Pvt. Ltd the Delhi High Court held that the draft agreement exchanged by email between the parties can be construed as a valid arbitration agreement.

In Pravinchandra Murarji Savla v. Meghji Murji Shah, it was held that it is the substance of the agreement and not the form which is of importance.

Also, as per Section Section 7(c) of the 1996 Act and S.N. Prasad v. Monnet Finance Ltd., where a statement of claims or allegations is made and is met with ‘non-denial’ by the other party, the presence of an arbitration agreement can be construed.

LET’S CONSIDER SOME WELL SETTLED PRINCIPLES TO DECIDE WHAT CONSTITUTE AN ARBITRATION AGREEMENT.

  1. The intention of parties to enter into an arbitration agreement shall have to be gathered from the terms and conditions of the agreement. If the terms of the agreement clearly indicate an intention on the part of the parties to the agreement to refer their disputes to a private tribunal for adjudication and a willingness to be bound by the decision of such tribunal on such disputes, it is arbitration agreement. While there is no specific form of an arbitration agreement , the words used should disclose a determination and obligation to go to the arbitration and not merely contemplate the possibility of going for arbitration. Where there is merely possibility of the party’s agreeing arbitration in future , as contrasted from an obligation to refer disputes to arbitration, there is no valid and binding arbitration agreement.

  2. Even if words “arbitration” and “ arbitral tribunal” are not used with reference to the process of settlement or with reference to the private tribunal which has to adjudicate upon the disputes, in a clause relating to settlement of disputes , it does not detract from the clause being an arbitration agreement if it has the attributes or elements of an arbitration agreement. They are

  • The Agreement should be in writing.

  • The parties should have agreed to refer any disputes( present or future) between them to the decision of a private tribunal.

  • The private tribunal should be empowered to adjudicate upon the disputes in an impartial manner, giving due opportunity to the parties to put forth their case before it.

  • The parties should have agreed that the decision of the private tribunal in respect of the disputes will be binding on them.

  1. Where the clause provides that in the event of disputes arising between the parties, the disputes shall be r to make it referred to Arbitration , it is an arbitration agreement. Where there is a specific and direct expression of intent to have disputes settled by arbitration, it is not necessary to set out the attributes of an arbitration agreement to make it an arbitration agreement. But where clause relating to the settlement of disputes , contains words which specifically excludes any of attributes of an arbitration agreement or contains anything that detracts from an arbitration agreement , it will not be and arbitration agreement.

For example , where an agreement requires or permits an authority to decide a claim or dispute without hearing , or requires the authority to act in the interests of only one of the parties , or provides that the decision of the authority will not be final and binding on the parties , or that if either party is not satisfied with the decision of the Authority , he may file a civil suit seeking relief, it cannot be termed as an arbitration agreement.

  1. But mere use of words “ arbitration” or “arbitrator” in a clause will not make it an arbitration agreement , if it requires or contemplates a further or fresh consent of the parties for reference to the arbitration.

For use of words such as “ parties can, if the so desire , refer their disputes to arbitration” or “in the event of any dispute , the parties may also agree to refer the same to arbitration” or “ if any disputes arise between the parties , they should consider settlement by arbitration” in a clause relating to settlement of disputes, indicate that the clause is no intended to be an arbitration agreement.

Similarly, a clause which states that “ if the parties so decide , the disputes shall be referred to arbitration” or “ any disputes between the parties , if they so agree , shall be referred to arbitration” is not an arbitration agreement. Such clauses merely indicate a desire or hope to have the disputes settled by arbitration or a tentative arrangement to explore arbitration  as a mode of settlement if and when disputes arise. Such clauses require parties to arrive at a further agreement to go to arbitration, as and when the disputes arise.

Any agreement or a clause in an agreement requiring or contemplating a further request or consensus before a reference to arbitration, is not an arbitration agreement , but an agreement to enter into an arbitration agreement in future.

WHETHER AN ARBITRATION AGREEMENT NEEDS TO BE SIGNED.

In Svapn Const. v. IDPL Employees Co-op. Group Housing Society Ltd., it was held that the agreement need not be signed by the parties if it is established by another written contemporaneous document, which is binding between the parties. However, in 2018, the Supreme Court held in M/s Caravel Shipping Services Pvt Ltd v M/s Premier Sea Food Exim Pvt Ltd that an unsigned arbitration agreement is valid as the only prerequisite for a valid arbitration agreement under the 1996 Act is that it must be in writing. 

WHETHER AN ARBITRATION AGREEMENT NEEDS TO BE STAMPED

Arbitration Agreement is chargeable under Section 5 of the Indian Stamp Act, 1899. With respect to the 1940 Act, the Calcutta High Court held in Bengal Hire Purchase Corpn v. Harendra Singh that an unstamped arbitration agreement cannot be given effect unless the full stamp duty is duly paid. The courts would first impound the unstamped agreement and send it to the relevant authorities for the payment of stamp duty and penalty (if any). Only after ensuring that the lacuna is cured, the arbitration agreement can be executed. The Supreme Court held the same position with respect to the 1996 Act in Garware Walls Ropes Ltd. v. Coastal Marine Constructions & Engineering Ltd. 

WHEN THE ARBITRATION AGREEMENT IS VAGUE

the Calcutta High Court held in State Trading Corporation of India Ltd. v. Owners & Parties Interested in the Vessel M.V. Baltik Confidence, that an application referring to an ambiguous and ambiguous agreement will not be maintained. However, in the judgement of Zhejiang Bonly Elevator Guide Rail Manufacture Co. Ltd. v. M/S Jade Elevator Components, the Supreme Court while dealing with a vague arbitration clause, scrutinized the clause examining the intention of the parties instead of doing away with the agreement itself.

Therefore, vague and unclear arbitration agreements can hold validity as long as the intention to refer the parties to arbitration is clear and upheld the validity of the arbitration agreement. 

SECTION 8 IN THE ARBITRATION AND CONCILIATION ACT, 1996

Power to refer parties to arbitration where there is an arbitration agreement.—

(1) A judicial authority before which an action is brought in a matter which is the subject of an arbitration agreement shall, if a party to the  arbitration agreement or any person claiming through or under him, so applies not later than the date when submitting his first statement on the substance of the dispute, then notwithstanding any judgement ,decree or order of the Supreme Court or any court , refer the parties to arbitration unless it finds that prima facie no valid arbitration agreement exits.

(2) The application referred to in sub-section (1) shall not be entertained unless it is accompanied by the original arbitration agreement or a duly certified copy thereof.

Provided that; where the Original Agreement or a Certified Copy thereof is not available with the party applying for reference to arbitration under sub-section(1) , and the said agreement or certified copy is retained by the other party to that agreement , then, the party so applying shall file such application along with a copy of the arbitration agreement and a petition praying the Court to call upon the other party to produce the Original Agreement or its duly certified copy before the court.

(3) Notwithstanding that an application has been made under sub-section (1) and that the issue is pending before the judicial authority, an arbitration may be commenced or continued, and an arbitral award made.

PLEASE NOTE THAT:

  1. Merely because agreement has come to an end by its termination by mutual consent , the arbitration clause does not get extinguished, nor it become inoperative. Arbitration Clause remain operative even end of agreement and applied in case of future disputes arises due to terms and conditions of agreement.

  1. Where there are allegation of fraud simplicitor and such allegation are merely alleged, it would not nullify effect of arbitration agreement between parties. Such issues can be determined by Arbitral Tribunal.

  2. The provisions of Section 8 will be applied ,only when there is an arbitration agreement between the parties.

 

  1. Where dispute is referable to the arbitration , parties cannot be compelled to take recourse to civil court.

 

 

  1. In cases where there is an arbitration clause in the agreement, it is obligatory for the court to refer the parties to arbitrator in terms of their arbitration agreement and nothing remains to be decided in the original action after such an application is made except to refer the dispute to an arbitrator.

 

  1. It was held that mere existence of arbitration clause in an agreement does not bar jurisdiction of Civil Court automatically[Mahesh Kumar Vs. Rajasthan State Road Transport Corporation AIR 2006,Raj 56]
  1. The power of Court to refer parties for arbitration would and must include ,imply and inhere in it the power and jurisdiction to appoint Arbitrator also.

CONCLUSION: Arbitration is most favored and less expensive Dispute Resolution Process. The secrecy maintained during arbitration proceedings and autonomy to the parties to choose arbitrators and place of arbitrations makes it more acceptable. An arbitration is a time bound process in which only parties to the dispute are allowed to participate. The most important is that there should be an Arbitration Agreement between the parties or there would be an Arbitration Clause in the agreement between the parties ,which specifically provide that any dispute arise on the terms and conditions of the agreement will refer to arbitration and parties to the agreement consent to be bind themselves with the award /order of the Arbitral Tribunal.

AUTHOR'S DISCLAIMER:

The article presented here is only for sharing information and knowledge with the readers. The views are personal ,should not be considered as professional advice. The article has been prepared on the basis of available data on various forums at the time of preparation. The author has taken all precaution to share true data and details with the readers. In case of necessity do consult with legal advisors for more clarity and understanding of subject matter.

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