Arbitration proceedings are the creature of an agreement between parties to the dispute. Unlike ‘statutory tribunals’, which derive their power from a statute passed by the legislature, the source of an arbitral tribunal’s power is the arbitration agreement that is confirmed between the parties. An arbitration agreement is, therefore, the backbone of any arbitration proceedings. Arbitration proceedings may not begin or, if they appear to have begun, will be invalid, in the absence of a valid agreement to arbitrate.
An agreement is essentially a contract and its recognition and enforcement must, therefore, be governed by the Indian Contract Act, 1872. Accordingly, the agreement must be constituted by an offer, be cemented by the other party’s acceptance, contain corresponding promises to refer any dispute to arbitration and must be made by persons having the capacity to contract who give their free consent.[i]
Section 28 of Indian Contract Act, 1872 bars agreements which place absolute restraints on adopting legal proceedings, an arbitration agreement does not constitute such a restraint.[ii] In Scott vs. Avery,[iii] the arbitral clause had been challenged on the grounds that it was meant to oust the jurisdiction of the civil courts by referring the dispute to an arbitrator instead. However, it was found that such arbitration clauses, then known as Scott vs. Avery clauses, were not meant to take away the parties’ ability to approach the court but rather to act as an attempt to resolve a dispute privately, while reserving the right to approaching the judiciary as a last resort.
The definitions clause of the Arbitration and Conciliation Act, 1996, specifically Section 2(b), defines an arbitration agreement by referring Section 7 of the Act. Section 7 of the Act which is the reproduction of Article 7 of the Model Law states that an arbitration agreement is one by which parties agree to refer any or certain disputes to an arbitral tribunal for determination. These provisions are to be read with Article II(2) of the New York Convention.[iv] An arbitration agreement, therefore, must be in writing and signed by the parties in signification of their consent to refer disputes to arbitration.[v] Even though Section 7 does not specifically require that the agreement be signed by the parties, this requirement has been read in from Article II(2) of the New York Convention.
In Smita Conductors Ltd. vs Euro Alloys Ltd.,[vi] a contract for the supply of aluminum rods was proposed with an arbitration clause and sent to the appellant, who did not sign or return it. The arbitral agreement was added only later by the respondent who proposed the inclusion of the arbitration clause as an amendment to the contract. This proposed amendment was not signed or returned to the respondent wither. The appellant shipped the contract goods on the basis of a letter of credit issued and in keeping with the terms of the unsigned agreement. Disputes arose when the Reserve Bank of India issued guidelines placing restrictions on the import of aluminum rods, the contract was frustrated and the respondent initiated arbitration proceedings against the appellant, who argued in counter that there was no arbitration clause. The court held that when an arbitration agreement has been concluded orally, but there is some form of communication between the parties referring to this arbitration agreement and the conduct of the party shows acceptance of this agreement, then a valid agreement to arbitrate may subsist because the above conduct can be substituted for the signature of the parties insofar that it signifies consent.
An arbitration agreement may be said to be in writing if it is found in any document signed by the parties, in an exchange of letters, telex, telegrams, or any other means of telecommunication, which provide a record of the agreement or in an exchange of statements of claim and defence in which the existence of the agreement is alleged by one party but not denied by the other.[vii] Such agreements can be in two forms –
1. They may constitute a clause in a contract which refers the parties to arbitration, or
2. There may be a separate arbitration agreement altogether.
A document may be said to contain an arbitration clause or agreement if it refers to another document in writing in such a manner that the arbitration clause in the second document is incorporated into or brought within the fold of the first document. In the case of Owners and Parties Interested in the Vessel MV “Baltic Confidence” v State of Trading Corporation of India Ltd.,[viii] it was held that it is important to show that the incorporation of an arbitration clause from document M into document X is in keeping with the intention of the parties to document X. A mere casual reference of document M in document X will not constitute incorporation.[ix]
In Rukmanibai Gupta v Collector,[x] the court held that an arbitration agreement is not required to be in any particular form. What is required to be ascertained is whether the parties have agreed that if disputes arise between them in respect of the subject-matter of the contract, such dispute shall be referred to arbitration and then such an arrangement would spell out an arbitration agreement. The foremost principle guiding the determination of whether or not an arbitration clause exists is that there must be manifest and clear proof of that intention of parties to go for arbitration or their willingness to be bound by the arbitration agreement. While there is no specific form of an arbitration agreement, the words used should disclose “a determination and obligation to go to arbitration and not merely contemplate the possibility of parties agreeing to arbitration”.[xi] Even when such clause does not specifically mention the words ‘arbitration’, ‘arbitral tribunal’ or ‘arbitrator’, the parties may nonetheless be referred to arbitration as long as the intention to settle a dispute by alternate dispute resolution methods is clear.[xii] Conversely, the mere use of the words ‘arbitration’ or ‘arbitrator’ will not constitute a valid arbitration clause, especially where the clause shows an uncertainty in the agreement between the parties as to whether they are bound to adhere to the mentioned arbitration proceedings.
In Naina Thakkar vs Annapurna Builders,[xiii] it was held that where the document is compulsorily registrable, but is not registered, but the arbitration agreement is valid and separable, what is required to be borne in mind is that “the arbitrator appointed in such a matter cannot rely upon the unregistered instrument except for two purposes, that is
- As evidence of contract in a claim for specific performance and
- As evidence of any collateral transaction which does not require registration”.
An arbitration clause must, in definite and certain terms, demonstrate the intention of the parties to opt for arbitration as a means to settle any or certain disputes between them. A valid arbitration clause cannot present the vague possibility that the parties may, decide at a later stage, to agree to opt for arbitration proceedings. For example, stating that the parties in the event of a dispute arising between them ‘may’ refer such dispute to arbitration is not binding; only words like ‘shall’ can constitute a binding agreement.[xiv]
The statute requires that the dispute to be referred to arbitration must arise out of a legal relationship between the parties whether or not such legal relationship is a contractual one. The Model Law has been interpreted so as to give them the term ‘defined legal relationship’ a wide connotation allowing disputes arising out of a larger number of non-contractual commercial relationships to be settled by arbitration. For a valid reference to be made under an arbitration agreement, the requirement of a ‘defined legal relationship’ is a sine qua non or a necessary prerequisite.[xv]
What if the contract containing the arbitral clause is deemed to be void, discharged or illegal? The doctrine of severability in its essence states that when parts of a document are found to be contrary to the principle of law, and therefore, are unenforceable, the remainder of the contract may be saved and be made binding so long as they are independent of the invalid parts of the contract. The valid clauses may, therefore, be severed from the invalid clauses and saved so as to uphold legally binding contractual obligations agreed upon as between the parties while invalidating those provisions that are disallowed by law.
The doctrine of severability is also found in Section 16(1) of the 1996 Act[xvi], it states that an arbitration clause in a contract may be considered as being independent from the rest of the agreement.[xvii] In Lufthansa German Airlines vs Airport Authority of India,[xviii] the court held that merely because the contract which contained the arbitration clause has “come to an end by the efflux of time”, this would not itself put an end to the arbitration clause. For an arbitration clause to become invalid alongside the contract in which it is contained, the infirmity which affects the contract, must also affect the arbitration clause. In the absence of this, the arbitration clause will survive.
In Dolphin Drilling Ltd. v ONGC Ltd.,[xix] the court held that a single arbitration agreement can be successively invoked for different disputes as long as they are not barred by limitation or by the doctrine of res judicata. However, in Newton Engg. and Chemicals Ltd. v Indian Oil Corpn. Ltd.,[xx] the court held that “where the arbitration clause provided that no person other than an officer of the respondent or his delegate shall act as an Arbitrator, and that named office of the respondent ceased to exist, the arbitration clause was frustrated and would not survive, and the parties were relegated to ordinary civil proceedings”.
In conclusion, an arbitration agreement will set forth, which of possibly several disputes between the parties are to be referred to arbitration, where and in what manner the proceedings are to be conducted, how many arbitrators are to be appointed, who these arbitrators will be and several other details as may be required to settle a dispute by such means. It is the singular document upon which the entire arbitration proceedings rest, as it demonstrates the autonomy of the parties to the proceedings and the flexibility permissible in their conduct. The existence of an arbitration agreement is a jurisdictional fact forming the basis of the exercise of power both by the arbitral tribunal and concerned courts.
Similarly, in an application for interim relief to be granted by the court under Section 9 or an application for the appointment of the arbitrators by the Chief Justice or his designate under Section 11 or an application to set aside an award made by an arbitral tribunal under Section 34, the court will always satisfy itself that a valid arbitration agreement does in fact exist. Thus, at every stage where the courts of law are approached with a request to intervene in arbitration proceedings, the existence of a valid arbitration agreement is checked.
Frequently Asked Questions:
1. Can an agreement to arbitrate be oral instead of being in writing?
When an arbitration agreement has been concluded orally, but there is some form of communication between the parties referring to this arbitration agreement and the conduct of the party shows acceptance of this agreement, then a valid agreement to arbitrate may subsist because the above conduct can be substituted for the signature of the parties insofar that it signifies consent.
2. Is the agreement to arbitrate severable from the contract in which it is contained?
Yes. This is because though the contract or document that contains the arbitration clause may be invalid, the arbitration clause contained therein, which is always a collateral term as distinguished from the contract’s substantive terms, may be severed and survive in order to allow parties to settle any disputes that may arise even after and sometimes because the contract ceases to exist.
Edited by Anubhuti Rastogi
Approved & Published – Sakshi Raje
[i] The Indian Contract Act, 1872, §10 (India).
[ii] The Indian Contract Act, 1872, §28 (India).
[iii] (1856) 5 HL Cas 811: 10 ER 1121.
[iv] Article II(2), New York Convention.
[v] The Arbitration and Conciliation Act, 1996, §7 (India).
[vi] (2001) 7 SCC 728: AIR 2001 SC 3730.
[vii] Mallika Tally, Introduction to Arbitration, 38, (2015), Eastern Book Company, Lucknow.
[viii] (2001) 7 SCC 473: AIR 2001 SC 3381.
[x] (1980) 4 SCC 556: AIR 1981 SC 479.
[xi] Jagdish Chander v Ramesh Chander, (2007) 5 SCC 719: (2007) 2 Guj LH 377.
[xii] Mallika Tally, Introduction to Arbitration, 38, (2015), Eastern Book Company, Lucknow.
[xiii] (2013) 14 SCC 354.
[xiv] Wellington Associates Ltd. v Kirit Mehta, (2000) 4 SCC 272: AIR 2000 SC 1379.
[xv] Mallika Tally, Introduction to Arbitration, 38, (2015), Eastern Book Company, Lucknow.
[xvi] The Arbitration and Conciliation Act, 1996, §16(1) (India).
[xvii] National Agricultural Corp. Mktg. Federation India Ltd. v Gains Trading Ltd., (2007) 5 SCC 692: AIR 2007 SC 2327.
[xviii] (2012) 11 SCC 554: (2013) 1 SCC (Civ) 401.
[xix] (2010) 3 SCC 267: AIR 2010 SC 1296.
[xx] (2013) 4 SCC 44: (2013) 2 SCC (Civ) 457.