Arbitration Agreement

Arbitration is a form of alternative dispute resolution mechanism, which gives the parties in dispute an opportunity to refer their present or future disputes to a neutral third party, who is known as the arbitrator, instead of running from pillar to post seeking justice. Arbitration is governed by the Arbitration and Conciliation Act of 1996. The decision of the third party is binding on the parties to dispute.

Arbitration, in lucid terms, means referring of disputes by the parties to a neutral third party, this neutral third party is known as an arbitrator, he adjudicates over the disputes and his decisions are binding on the parties.

It saves the parties from undergoing the hassle of waiting for years together for their cases to be heard and finalised in Courts. Arbitration is a quasi-judicial process and the disputes between the parties are not referred to normal courts but to domestic tribunals. It also has the advantage of being cost-effective and expedient unlike traditional Court procedures.

Arbitration Agreement Explained

Section 7 of the Arbitration and Conciliation Act of 1996 defines arbitration agreement 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. A doctor’s relationship with his patient or a lawyer’s with his client are both examples of relations that are legal but not necessarily contractual.

An Arbitration agreement is made by any two parties entering into a contract by which any disputes arising between them with regard to the contract agreement is to be resolved, without going to the Courts and with the help of an Arbitrator. The agreement should mention who should select the arbitrator, regarding what kind of dispute the Arbitrator should give decision, the place of arbitration, etc.

The parties need to sign the Arbitration Agreement and the decision shall be binding on the parties. If you are a party to any contract and if you wish to resolve any disputes with the help of an Arbitrator, without going to court, then you should make this agreement.

Arbitration agreement is like a contingent contract, meaning thereby that these agreements come into being or become enforceable contingent to the happening of a dispute between the parties. It is only enforceable in case there arises a dispute between the parties.

Section 7 of the Arbitration and Conciliation Act, 1996 enumerates that an arbitration agreement can be in the form of a separate agreement or in the form of an arbitration clause in the contract.

Essentials of Arbitration Agreement

The existence of a dispute is an essential condition for arbitration. Where parties have effectively settled their disputes, they cannot refute the settlement and invoke an arbitration clause.

• Written Agreement

An arbitration agreement must be in writing. As per Section 7 (4) of the Act, arbitration agreement is considered to be in writing, if it is contained in:

1. A document signed by the parties;
2. An exchange of letters, telex, telegrams or other means of telecommunication which 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

Intention of the parties is of prime importance. No form has been prescribed for an arbitration agreement and nowhere has it been mentioned that terms like arbitration, arbitrator are essential prerequisites in an arbitration agreement. According to a leading case law in this subject, the intention of the parties to refer their dispute to arbitration should be clearly discernible from the arbitration agreement.

• Signature

An arbitration agreement needs to be signed by the parties. The agreement may be in the form of a signed document by both the parties containing 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 suffice if one party puts his signature in the written submission and the other party accepts it.

Attributes of an Arbitration Agreement

The Hon’ble Supreme Court in a judgment in a landmark case held that the following attributes must be present in an arbitration agreement:

1. The arbitration agreement must contemplate that the decision of the tribunal will be binding on the parties to the agreement.
2. 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.
3. The agreement must contemplate that substantive rights of the parties will be determined by the arbitration tribunal.
4. 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.
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.

Points To Remember While Drafting Arbitration Agreement

1. Seat of Arbitration – This clause specifies the seat or place of arbitration. The seat of arbitration 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 a place where arbitrations are held even if the place of hearings differ. Place of hearings don’t by any means affect the chosen seat of arbitration.
2. Procedure for Appointing Arbitrators – Section 11 of the Arbitration and Conciliation Act talks about the appointment of arbitrators. It provides that a person of any nationality may be appointed as an arbitrator, unless otherwise agreed by the parties. The parties are free to agree on a procedure for appointing the arbitrator(s). If the parties fail to reach an agreement, in an arbitration with 3 arbitrators, each party shall appoint one arbitrator, and the two arbitrators shall thereafter appoint a third arbitrator, who shall be the presiding arbitrator. The appointment of parties may be by the parties themselves, or by the designated authority or by the arbitral institutions. In places where the dispute involves international commercial transaction, then the arbitrator to be appointed shall not be of the same nationality as the parties to the dispute.
3. Language of Arbitration – It is important to mention the language of arbitration in the agreement itself. Especially, in a country like ours, where Hindi and English aren’t the only two languages spoken, it would get very difficult to decide and settle the disputes. Choosing the language of arbitration is also very cost effective, because it would save you from paying exorbitant fees to the translators.
4. Number and Qualifications of Arbitrators – According to Section 10 of the Arbitration and Conciliation Act of 1996, parties can determine the number of arbitrators, provided that the number is an odd number. Failing to determine the no. of arbitrators, the arbitral tribunal shall consist of a sole arbitrator.
5. Type of Arbitration – Parties can choose between Institutional or Ad hoc arbitrations. If the parties choose the former, then they have to be bound by the rules of the arbitration institutions. All these institutions have their own set of rules for arbitration and these rules would be applicable to arbitral proceedings conducted by them. Whereas, in case of Ad-hoc arbitrations, arbitrations are both agreed to and arranged by the parties themselves. No help is sought from the arbitral institutions in Ad-hoc arbitrations.
6. Governing Law – This is the law that governs the main point of contention between the parties to a dispute. It is even known as the substantive law. The parties should mention the law they want to be governed by, failing which may give way to disputes in the future.
7. Name and Address of the Arbitration Institution – If the parties to the dispute are referring their disputes to an arbitration centre, then it is pertinent that they mention the name and address of the arbitration facility in clear and unambiguous words. Such inadvertent mistakes can lead to the nullification of the arbitration clause.