Introduction
Arbitration agreements play a pivotal role in resolving disputes efficiently and effectively, providing parties with an alternative to traditional litigation. Understanding the various forms of arbitration agreement is crucial for parties looking to navigate dispute resolution effectively. Under Section 7(1) of the Arbitration and Conciliation Act, 1996, defines ‘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. There exists a fundamental requirement that such agreements must be in writing, but the Act also offers considerable flexibility in how these agreements can be formed. This flexibility accommodates various forms, including standalone arbitration agreements, arbitration clauses embedded within operative contracts, incorporation by reference from separate documents, and even inferred agreements through correspondence.
Recent judicial interpretations, such as in M/s Elite Engineering and Construction v. M/s Techtrans Construction India,(2018) emphasize the necessity for clear intent when incorporating arbitration clauses, while cases like Galaxy Infra and Engineering Pvt. Ltd v. Pravin Electricals Pvt. Ltd.,(2020) illustrate how modern communication can serve as a valid basis for establishing such agreements. Ultimately, despite the diverse options available, it is prudent for parties to standardize their approach by incorporating a well-defined arbitration clause within their contracts, ensuring clarity and minimizing potential disputes down the line. This overview will explore the various forms of arbitration agreements and the legal implications associated with each.
Legal Framework for Arbitration Agreements
Forms of Arbitration Agreements
Section 7(2) of Arbitration agreement provides that an arbitration agreement may be in the form of an arbitration clause in a contract or in the form of a separate agreement. As laid down in in Atlas Export Industries v. Kotak and Co. (1999), there is no specific form in which an arbitration agreement is required to be drawn. The arbitration agreement may be a single document containing all the terms signed by both the parties or it can comprise of two documents one containing all the terms signed by one party and the other a plain acceptance by the other party of the first document or it can be an unsigned document containing the terms of which both parties agree either orally or by a separate acceptance. Arbitration agreement may be express or can be spelt out by implication or it may be referential incorporation.
Similarly, in Rukmanibai Gupta v. Collector, Jabalpur and Ors.(1981), while viewing erstwhile Section 2(a) of the Arbitration Act, 1940, which contained the definition of “arbitration agreement.” It was held that:
“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; then such an arrangement would spell out an arbitration agreement.”
Arbitration agreement must be in writing
Section 7(3) further lays down that an arbitration agreement shall be in writing.
In M. Dayanand Reddy v. A.P. Industrial Infrastructure Corporation Limited,(1993) the court reiterated that an arbitration agreement no way classifies the right of the parties under the Contract but it relates wholly to the mode of determining the rights. The court referenced Jugal Kishore Rameshwardas v. Mrs. Goolbai Hormusji, clarifying it is not necessary that the contract between the parties should be signed by both the parties. But it is necessary that the terms should be reduced in writing and the agreement between the parties on such written terms is established. In the backdrop of such position in law relating to an agreement for arbitration, it was decided that it was the signed agreement between the parties which was binding on the parties and only such written terms in the original agreement signed by the parties should be taken into consideration and not the terms contained in the copy of the agreement which was forwarded to the applicant after some time. Hence, no reference to arbitration could be made.
Section 7(4) provides that 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 telecommunication including communication through electronic means which provide a record of the agreement; or
(c) 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.
(5) 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.
Reference by Incorporation
The principle of incorporation by reference of an arbitration clause, from another document or contract is a well-established principle in arbitration jurisprudence. This principle has been followed by the courts in India, and has been given statutory recognition in sub-section (5) of Section 7 of the 1996 Act. The arbitration agreement need not necessarily be in the form of a clause in the substantive contract itself. It could be an independent agreement; or it could be incorporated by reference either from a parent agreement, or by reference to a standard form contract.
Doctrine of Incorporation
The court in Giriraj Garg vs Coal India Ltd.(2019) summarized the doctrine of incorporation regarding arbitration clauses as follows:
- Incorporation by Reference: An arbitration clause in another document can be incorporated into a contract if:
- The contract contains a clear reference to the document with the arbitration clause.
- The reference indicates an intention to incorporate the arbitration clause.
- The arbitration clause is appropriate and applicable to disputes under the contract, and not contrary to any term of the contract.
- General Reference Insufficient: A general reference to another contract does not incorporate the arbitration clause unless there is a specific reference to it.
- Performance Terms Only: If a contract states that its execution or performance is governed by another contract, only the performance terms apply, not the arbitration clause, unless specifically mentioned.
- Standard Form Terms: If a contract states that it will be governed by the standard terms of a Trade or Professional Institution, including any arbitration provisions, these terms are deemed incorporated by reference, especially if the parties acknowledge familiarity with them.
- Conditions of Contract: When a contract stipulates that the Conditions of Contract of one party will form part of their agreement, the arbitration clause in those Conditions will apply to the contract between the parties.
The Supreme Court further elaborated on the theory of incorporation by reference, distinguishing between “single contract cases” and “two contract cases” as articulated in the English case of Habas Sanai Ve Tibbi Gazlar Isthisal Endustri AS v Sometal Sal (2010).
In a single contract case, the arbitration clause is included within a standard form contract that the parties reference generally in their agreement. This means that the parties have explicitly accepted the standard terms, including the arbitration clause, as part of their contract.
Conversely, a two contract case arises when the arbitration clause exists in a separate contract, and the parties specifically reference that contract to incorporate its arbitration provisions into their agreement. In this scenario, the Supreme Court emphasizes that the reference must be explicit and detailed; a vague or general reference will not suffice.
Overall, while incorporation by reference is valid in single contract cases, it requires a specific reference to the arbitration clause in two contract cases to ensure clarity and enforceability. This distinction is crucial for the effective implementation of arbitration agreements.
Separability of Arbitration Clauses
In Ashapura Mine-Chem Ltd vs Gujarat Mineral Devlopment (2015), while deciding on the issue: Whether the arbitration clause contained in Memorandum of Understanding (MoU) remains enforceable as an independent agreement, despite the termination of the MoU by the respondent, allowing the parties to invoke the clause for the appointment of an arbitrator?
Court placed reliance on in Reva Electrical Car Company Private Ltd. (supra), Today Homes and Infrastructure Pvt. Ltd. and Enercon (India) Limited, the court held that the arbitration agreement in the MOU was valid as it constitutes a stand-alone agreement independent from its underlying contract. It was also held that:
“Section 16(1)(a) of the 1996 Act presumes the existence of a valid arbitration clause and mandates the same to be treated as an agreement independent of the other terms of the contract. By virtue of Section 16(1)(b) of the 1996 Act, the arbitration clause continues to be enforceable, notwithstanding a declaration that the contract was null and void.”
Further, laying down that the concept of separability of the arbitration clause from the underlying contract is essential to uphold the intention of the parties to resolve disputes through arbitration, even when challenges arise regarding the validity of the main contract. Under the Indian Arbitration Act, 1996, Section 16 recognizes that the arbitration agreement operates as a distinct contract, independent of the main contract’s terms. This separation ensures that disputes can be addressed through the chosen arbitration process without being undermined by claims about the main contract’s legality or enforceability.
Even if the main contract is contested—whether deemed void, voidable, or incomplete—the validity of the arbitration clause remains intact, allowing parties to pursue their chosen remedy outside of traditional civil court proceedings. This framework is crucial for maintaining the efficacy and integrity of arbitration as a dispute resolution mechanism.
Conclusion
In summary, the flexibility afforded by the Arbitration and Conciliation Act, 1996, allows parties to form these agreements in multiple formats, whether as standalone clauses, embedded in contracts, or through incorporation by reference. Judicial interpretations have underscored the importance of clear intent and the necessity of establishing these agreements in writing, reinforcing the principle that arbitration clauses should be explicit to ensure enforceability. Moreover, the recognition of the separability of arbitration clauses from the underlying contracts ensures that parties can seek resolution through arbitration, even amidst disputes regarding the main agreement. By adopting a standardized approach to drafting arbitration clauses, parties can significantly enhance the clarity of their agreements, thereby minimizing the likelihood of misunderstandings and disputes. Ultimately, well-crafted arbitration agreements not only facilitate smoother conflict resolution but also uphold the integrity of the arbitration process, making it a vital tool for parties seeking to resolve their disputes outside traditional court proceedings.