White Printer Paper

 Introduction

In today’s fast-paced global landscape, arbitration has emerged as a preferred method for resolving disputes, gaining significant traction across various sectors. Its appeal lies in core principles such as party autonomy, confidentiality, and efficiency, making it a compelling alternative to traditional litigation. Central to the arbitration process is the arbitration agreement, which outlines the framework within which disputes will be addressed. This agreement not only delineates the parties’ commitment to arbitration but also sets the stage for the conduct of proceedings and the powers of the arbitral tribunal. Understanding the essentials of an arbitration agreement is crucial for parties seeking to navigate the complexities of this dispute resolution mechanism effectively. As arbitration continues to evolve, a deeper comprehension of its foundational elements will enable stakeholders to harness its benefits while mitigating potential challenges.

Defining the Arbitration Agreement

In the 1940 Act, the Arbitration Agreement was defined under Section 2(a) as:

“A written agreement to submit present or future differences to arbitration, whether an arbitrator is named therein or not.” 

This definition was replaced in the 1996 Act by Section 7 which stated:

7. Arbitration agreement.—  (1) In this Part, ‘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) 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 defence 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.”

The Enforceability of the Arbitration Agreement

An arbitration agreement, as a contract under the Indian Contract Act, 1872 (ICA), will be deemed void and unenforceable if executed by someone not competent to contract, such as a minor or a person of unsound mind. Additionally, if a party’s consent was obtained through coercion, undue influence, fraud, or misrepresentation, the agreement will be voidable at that party’s discretion.

Furthermore, an arbitration agreement will not be enforceable if it lacks validity under the law governing its formation or if it pertains to subject matters that are not arbitrable under Indian law. This highlights the importance of ensuring that arbitration agreements meet all legal requirements to be effective and enforceable. Consequently, understanding the legal standing and requirements of the arbitration agreement within the relevant statutory framework is crucial for parties seeking to resolve their disputes through arbitration.

Essentials of an Arbitration Agreement

The existence of a valid arbitration agreement under Section 7 of the Act is sine qua non for a court to exercise its powers to appoint an arbitrator/arbitral tribunal under Section 11 of the Act.

It was observed in Bihar State Mineral Development Corporation vs Encon Builders ltd. 2003 that the essential features of an arbitration agreement include four elements:

1. There must be a present or a 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.

  1. Intention of the parties to arbitrate and be bound by it

In the case of Babanrao Rajaram Pund vs M/s. Samarth Builders & Developers & Anr, the court considered whether the clause in the Development agreement constituted a valid arbitration agreement. It was held that Clause 18 clearly discloses the intention and obligation of the parties to be bound by the decision of the tribunal, despite the absence of the express terms “final and binding.”

The court inferred that the intention of the parties was to refer disputes to arbitration, as there was no specific exclusion of any attributes of an arbitration agreement. Even assuming the clause lacked certain essential characteristics, the parties demonstrated a clear intention to arbitrate and abide by the tribunal’s decision. The court emphasized that party autonomy should be protected, and the deficiency of words in agreement which otherwise fortifies the intention of the parties to arbitrate their disputes, cannot legitimise the annulment of arbitration clause.

2. Subject matter of the Arbitration must be certain or capable of being made certain

It may be seen that Section 7 of the Act does not mandate any particular form for the arbitration clause. This proposition was settled by this Court way back 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.”

A passage from Russell on Arbitration, 19th Edn., p. 59, may be referred to with advantage:

“If it appears from the terms of the agreement by which a matter is submitted to a person’s decision that the intention of the parties was that he should hold an inquiry in the nature of a judicial inquiry and hear the respective cases of the parties and decide upon evidence laid before him, then the case is one of an arbitration.”

3. Consenus Ad Idem

This very principle was riterated in K.K. Modi v. K.N. Modi and Ors. (1998), which also dealt with Section 2(a) of the 1940 Act. While attempting to decide whether the arbitration clause embodied in a Memorandum of Understanding was a valid arbitration clause or not, the Court in K.K. Modi vs. K.N. Modi and Ors. laid down the essential attributes of an arbitration agreement in the following terms:

1. The arbitration agreement must contemplate that the decision of the tribunal will be binding on the parties to the agreement.

2. The jurisdiction of the tribunal to decide the rights of parties must derive 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 agreement must contemplate that substantive rights of parties will be determined by the agreed tribunal.

4. The tribunal will determine the rights of the parties in an impartial and judicial manner with the tribunal owing an equal obligation of fairness towards both sides.

5. The agreement of the parties to refer their disputes to the decision of the tribunal must be intended to be enforceable in law.

6. 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.

The other factors which are relevant include whether the agreement contemplates that the tribunal will receive evidence from both sides and hear their contentions or at least give the parties an opportunity to put them forward; whether the wording of the agreement is consistent or inconsistent with the view that the process was intended to be an arbitration, and whether the agreement requires the tribunal to decide the dispute according to law.

4. Arbitration agreement related to, or must be applicable to, the suit transaction/contract

In Yogi Agarwal v. Inspiration Clothes and U and Others (2009) 1 SCC 372, it was held as under:“ When a defendant invokes Section 8 of the Act by alleging existence of an arbitration agreement, he should establish that such arbitration agreement related to, or is applicable to, the suit transaction/contract. The parties may enter into different contracts at different points of time or may enter into a series of unrelated transactions.

It is possible that in regard to some, they may provide for arbitration and in regard to others, may not provide for arbitration. Obviously, the existence of an arbitration agreement with reference to some other transaction/contract to which the plaintiff was or is a party, unconnected with the transactions or contracts to which a suit relates, cannot be considered as existence of an “arbitration agreement” in regard to the suit transactions/contracts.

It was held that two conditions muct be fulfilled by arbitration agreement:

1. Arbitration agreement must be between the parties to the dispute and

2. The provision for arbitration should be contained in any contract or document relating to the suit transactions, not in any documents relating to some unconnected independent transactions.

5. Arbitation as Sole Remedy

If the arbitration is not intended as the sole remedy for resolving disputes and allows the parties the choice to either go to court or arbitrate, then it will not be recognized as a an arbitration agreement. This lack of exclusivity undermines the essential characteristics of an arbitration agreement, which requires a commitment to resolve disputes through arbitration only.

In Wellington Associates Ltd. vs Mr. Kirit Mehta, 2000, the court held that the words in sub-clause (1) of section 7, “means an agreement by the parties to submit to arbitration”,  postulate an agreement which necessarily or rather mandatorily requires the appointment of an arbitrator/arbitrators. Section 7 does not cover a case where the parties agree that they “may” go to a suit or that they ‘may’ also go to arbitration.

Conclusion

As arbitration continues to evolve, understanding the intricacies of the arbitration agreement is vital for parties who wish to leverage this mechanism effectively. By ensuring that the arbitration agreement includes all essential elements and clearly outlines the parties’ intentions, disputes can be resolved efficiently and fairly. Arbitration, with its flexibility and confidentiality, remains a powerful tool for resolving conflicts in a constructive manner, fostering a more cooperative business environment.

Leave a Reply

Your email address will not be published. Required fields are marked *