Arbitration is defined as an “agreement by the parties to refer to arbitration all or some disputes which have arisen or will arise on a future date between them with reference to a defined legal relationship, whether contractual or not.”[i] A doctor’s relationship with his patient or a lawyer’s with his client is both examples of fiduciary relationshipsthat are of a legal nature but might not necessarily be that of a contractual nature.
An Arbitration agreement is formed when any two parties entering into a contract and a dispute arises between them with regard to the contract agreement has to be solved, without going to the Courts and with the assistance of an Arbitrator who would act like a judge. The agreement ordinarily should mention who should select the arbitrator, regarding the kind of dispute the Arbitrator should give decisions on, the place of arbitration, and other aspects of the procedure.
The parties are also mandated to sign an Arbitration Agreement the decision of which is always binding on the parties. In the event that one is a party to any contract and if the individual seeks to resolve any disputes with the help of an Arbitrator, without going to court, then one should make this agreement.
Arbitration agreements are like contingent contracts, which basically means that these agreements come into being or become enforceable on the basis of a dispute happening between the parties. It is also only enforceable in the event that there arises a dispute between the parties.
The presence of a dispute is an essential condition for arbitration. When parties have effectively settled the dispute, they cannot refute the settlement and invoke an arbitration clause.
Essentials of an Arbitration Agreement
An arbitration agreement must be in writing. An arbitration agreement is considered to be in writing[ii], if it is:
1. Signed by the parties and is in the nature of a document;
2. It can also be an exchange of letters, telex, telegrams or other means of telecommunication the essential feature is that it should provide a record of the agreement; or
3. An exchange of statements of claim and defence in which the existence of the agreement is alleged by one party and not defined by another.
Intention of the parties is of extreme importance and forms the crux of the agreement. There is no prescribed manner of making an arbitration agreement and it has been stated nowhere that term like arbitration, arbitrator are essential prerequisites in an arbitration agreement. The Supreme Court has recently clarified its stance on in this subject, the intention of the parties to refer their dispute to arbitration should be clearly discernible from the arbitration agreement.[iii]
The signature of the parties is essential to constitute an arbitration agreement. It can be in the form of a signed document by both the parties and comprises all the terms or it may also be a signed document by one party, which contains the terms and an acceptance signed by the other party. It will be sufficient if one party puts her signature in the written submission and the other party accepts that.
The Hon’ble Supreme Court in a judgment in a landmark case held that the following attributes must be present in an arbitration agreement:[iv]
a.“The arbitration agreement must contemplate that the decision of the tribunal will be binding on the parties to the agreement.
b. That the jurisdiction of the tribunal to decide the rights of the parties must derive from their consent, or from an order of the Court or from a statute, the terms of which make it clear that the process is to be arbitration.
c. The agreement must contemplate that substantive rights of the parties will be determined by the arbitration tribunal.
d. That the tribunal will determine the rights of the parties in an impartial and judicial manner with the tribunal being fair and equal to both sides.
e. The agreement of the parties to refer their disputes to the decision of the tribunal must be intended to be enforceable in law.
f. The agreement must contemplate 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.”
Common Elements included in the Arbitration agreement:
Seat of Arbitration
This clause states what will be the seat or place of arbitration. The seat of arbitration is important especially in international commercial arbitrations since it determines the procedural laws that govern the arbitration procedure. It need not be the same as the place of hearings. Seat of arbitration is considered to be places where arbitrations are take place even if the location of the hearings differs. The Place where the hearings take place don’t affect the chosen seat of arbitration.
Procedure for Appointing Arbitrators
The procedure for the same has been provided in the Act.[v] It provides that a person irrespective of her nationality may be appointed as an arbitrator, unless otherwise agreed by the parties. The parties can themselves agree on a procedure for appointing the arbitrator(s). In the event that they fail to reach an agreement, for example, in an arbitration that has 3 arbitrators, each party will appoint one arbitrator, and the other two arbitrators, who shall be the presiding arbitrator, will appoint the third arbitrator. The parties themselves, or the designated authority or the arbitral institutions can make the appointment of arbitrators. In disputes involves international commercial transactions, it is key that the arbitrator to be appointed shall not be of the same nationality as the parties to the dispute. This is done to protect impartiality and retain the neutrality of the arbitrator.
Language of Arbitration
It is important to decide what is the language of arbitration in the agreement itself. Especially, in a country like India, where Hindi and English aren’t the only two languages spoken, it can get extremely difficult to decide and settle the disputes. Picking the language of arbitration is additionally very cost effective, because it would save you from paying exorbitant fees to the translators.
Number and Qualifications of Arbitrators
The Arbitration and Conciliation Act of 1996[vi] allows parties to determine the number of arbitrators, provided that the number is an odd number. In the event that they are unable to determine the number of arbitrators, the arbitral tribunal shall consist of a sole arbitrator.
Type of Arbitration
Parties have a choice between Institutional or Ad hoc arbitrations. If the parties choose institutional arbitration, then they have essentially agreed to be bound by the rules of the arbitration institutions. All such institutions have their own set of rules for arbitration and these rules would be applicable to arbitral proceedings conducted by them. On the other hand, in case of Ad-hoc arbitrations, arbitrations are both agreed to and arranged by the parties themselves. No help whatsoever is sought from the arbitral institutions in Ad-hoc arbitrations.
This is the law that will decide the primary points of contention between the parties to a dispute. It is alsocalled the substantive law. It is essential that the parties mention the law they want to be governed by, failing which this might be a huge cause of concern for future disputes.
Name and Address of the Arbitration Institution
If the parties to the dispute wish to refer their disputes to an arbitration center, then it is essential that they should mention the name and address of the arbitration facility in clear and unambiguous words. Such mistakes can make the arbitration clause void.
Samples of Arbitration agreements[vii]:
1. Every dispute, difference, or question which may at any time arise between the parties hereto or any person claiming under them, touching or arising out of or in respect of this agreement (deed) or the subject matter thereof shall be referred to the arbitration of XY, etc. or if he shall be unable or unwilling to act, to another arbitrator to be agreed upon between the parties or failing agreement to be nominated by…………or, failing agreement to two arbitrators one to be appointed by each party to the difference (whether consisting of one or more than one person) and in case of difference of opinion between them to an umpire appointed by the said two arbitrators before entering on the reference and the decision of the arbitrator ( or such arbitrators, or umpire as the case may be) shall be final and binding on the parties.
b. In the event of any dispute, difference or question arising out of or in respect of this agreement or the commission of any breach of any terms thereof or of compensation payable thereof or in any manner whatsoever in connection with it, the same shall be referred to the Chamber of Commerce……….(or the Association of………..) for arbitration as provided in Rules framed by the said Chamber (or Association) for the purpose. The decision or award so given shall be binding on the parties hereto.
c. All disputes arising between the partners as to the interpretation, operation, or effect of any clause in this deed or any other difference arising between the partners, which cannot be mutually resolved, shall be referred to the arbitration of…………failing him to any other arbitrator chosen by the partners in writing. The decision of such an arbitrator shall be binding on the partners.
Frequently Asked Questions:
1. How are arbitration agreements enforced in your jurisdiction? What is the attitude of the national courts towards arbitration agreements?
The Indian courts have recently started adopting a pro-arbitration approach and thus enforcing valid arbitration agreements. The statement of objects and reasons of the Arbitration and Conciliation Act recognizes a policy of non-intervention by courts in the arbitration process. However, the Indian courts will continue to refuse to enforce an arbitration agreement when it finds that prima facie no valid agreement exists or the dispute is not arbitrable.
2. Are there any provisions on the separability of arbitration agreements?
The Arbitration and Conciliation Act, 1996provides no specific section on separability. However, Indian law generally through case law does recognize the doctrine of separability and the valid arbitration clause is separable from the parent contract and thus even the singular clause can constitute an agreement by itself.
3. Unless agreed by the parties, what is the default language and location for arbitrations?
The parties can agree on what the language of the arbitration should be and the location to be used in the arbitration proceedings. If such agreement does not exist, the tribunal has the discretion to determine the language(s) and location.
4. Can anyone enter into an arbitration agreement?
The parties must have legal capacity to enter into an arbitration agreement under UNTCAD.
5. Can parties enter into an agreement after the dispute has arisen?
Parties can do this, however they have to form an agreement after the existence of a dispute has been proved and before the procedure for arbitration can start. This is called a submission agreement.
Edited by Shuvneek Hayer
Approved & Published – Sakshi Raje
[i]Arbitration and Conciliation Act, 1996, Section 7
[ii]Arbitration and Conciliation Act, 1996, Section 7 (4)
[iii]Zhejiang Bonly Elevator Guide Rail Manufacture Co. Ltd vs. Jade Elevator Components
[iv]In K.K. Modi v. K.N. Modi and Ors. (1998) 3 SCC 573
[v]Arbitration and Conciliation Act, 1996, Section 11
[vi]Arbitration and Conciliation Act, 1996, Section 10
[vii] FORM OFARBITRATION CLAUSE IN AN AGREEMENT