Arbitration Agreement: Key Components, Legal Contexts, and Global Alignment

Published On: 23rd July, 2024

Authored By: Inayat Ahmed

Abstract:

Arbitration has become a prominent method of dispute resolution in business agreements due to its systematic procedure. The Arbitration and Conciliation Act 1996 is the governing law for arbitration in India. The Act is in alignment with the UNCITRAL Model Law. This article is all about the origin of arbitration laws in India and their developments from time to time. We will be looking at the initial arbitration enactment back in 1899 and the latest governing laws and the amendments to it. The Act lays down provisions such as Arbitration procedures, the establishment of the arbitration tribunal, arbitration agreement, issuance of awards, foreign awards, the appointment of an arbitrator, etc. The Essential components of an Arbitration agreement are emphasized by the Act, such as clauses, scope, venue, confidentiality, and fairness. Legal considerations such as compliance with the Indian Laws, Impartiality in the terms of the agreement, the qualifications of the arbitrator, and the powers and importance of an arbitrator in dispute resolution. Further, this article will discuss some of the international laws dealing with arbitration and the landmark judgments by Indian Courts in relation to the arbitration agreement. The Indian Judiciary has played a vital role in establishing an independent and efficient arbitration system.

Introduction:

Arbitration has recently emerged as one of the best ways of dispute resolution in the world. Due to its simple and binding nature and process, arbitration has become part of most business agreements. Arbitration, unlike other dispute resolution methods, follows a fixed procedure for dispute resolution. This procedure is laid down by the laws governing it. In India, the Arbitration and Conciliation Act 1996 is the governing law that lays down the rules and procedures relating to Arbitration. The Act explains arbitration and lays down the procedures to be followed by the parties and the establishment of the arbitration tribunals as well. The procedures laid down by the Act are binding on both the parties and the arbitration tribunal. The tribunal/authority shall pass their decision in the manner as laid down in the Act. The principles of confidentiality are what make arbitration a better choice for dispute resolution. Arbitration as a method of dispute resolution can be enforced when the parties have included an ‘Arbitration Clause’ or drafted a separate ‘Arbitration Agreement’ and have signed it. The parties may choose to take their dispute to the arbitrator.

Background:

The history of arbitration in India stretches back to 1899 when the government enacted the Indian Arbitration Act. However, this Act was limited to three states only: Bombay, Madras, and Calcutta. Arbitration was mentioned in the Civil Procedure Code 1902, but it was never properly used as a dispute resolution mechanism due to a lack of proper procedures.

In 1940, a separate Act was enacted for Arbitration, the Arbitration Act of 1940, which was applicable to the whole of India. The 1940 Act, although an improvement to the prior Act, proved inefficient, cumbersome, and lacking in the various domains.

The Act also faced criticism from the apex court; Justice D.A. Desai stated in Guru Nanak Foundation v Rattan Singh – “Interminable, time-consuming, complex and expensive Court procedures impelled jurists to search for an alternative Forum, less formal, more effective and speedy for resolution of disputes, avoiding procedural claptrap and this led them to Arbitration Act, 1940. However, the way in which the proceedings under the Act are conducted and without exception challenged in Courts has made Lawyers laugh and legal philosophers weep.”^[1]

In 1996, the government enacted the Arbitration and Conciliation Act 1996, which laid down all the rules, regulations, and procedures relating to Arbitration.

Arbitration and Conciliation Act 1996:

The Arbitration and Conciliation Act 1996 was enacted after the previous Acts failed. It is based on the Model Law on International Arbitration and Conciliation adopted by the United Nations in 1985. The Act of 1996 has simple objects, such as:

Provide fair and effective procedures for arbitration and conciliation
Establishment of Arbitration tribunals
Give the powers to the tribunal to grant an arbitral award
Ascertain the jurisdiction of the tribunal
The award granted by the tribunal shall have the same powers as a decree of a court
Reduce the burden of the courts
Powers to enforce foreign awards

The Act was amended from time to time, with major amendments in 2015, 2019, and 2021. The Amendment Act of 2015 stressed the improvement of the arbitration process and reduced the interference of courts in arbitration matters. The Amendment Act of 2019 established the Arbitration Council of India. The Amendment Act of 2021 focused on maintaining arbitration accountability and disclosing the independence of the arbitrator.

Understanding an Arbitration Agreement:

An Arbitration Agreement plays a vital role in dispute resolution. The parties can choose to resolve their disputes via arbitration only after entering into an arbitration agreement or if they have an arbitration clause in their business agreement. An arbitration agreement must be signed by both parties who wish to resolve their disputes via Arbitration.

Section 7 of the Arbitration and Conciliation Act 1996 lays down the definition of ‘Arbitration Agreement’ as follows –

Section 7: Arbitration agreement.

7. (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.^[2]

Key Elements:

There are several key elements of an Arbitration Agreement. Some of the key elements are:

Arbitration Clause: The Arbitration Clause or Agreement shall clearly state that the dispute shall be resolved via Arbitration. It is important that the parties sign the agreement.
Scope: The Agreement shall state the types of disputes that can be resolved by way of Arbitration.
Governing Law: The governing law in India is ‘Arbitration and Conciliation Act 1996’
Venue: The parties may determine the place and time for the arbitration proceedings
Appointment of Arbitrator: The Agreement shall determine the process of appointment of the arbitrator(s) and their qualifications.
Number of Arbitrators: The parties can ascertain whether the arbitration proceedings will be carried out by a single arbitrator or a panel of arbitrators.
Language of Arbitration proceedings: The agreement shall state the language in which the arbitration proceedings shall be carried out.
Confidentiality: This element of the agreement ensures that no information relating to the arbitration proceedings is shared with any outsider or third party who is not relevant to the dispute.

Clauses in an Arbitration Agreement:

The International Chamber of Commerce, Court of Arbitration has explained the following as the most important clauses in an Arbitration agreement:

Scope Clause – This clause determines whether all disputes arising out of the agreement are to be resolved by arbitration or only a few.
Interim Measures Clause – This clause lays down the interim measures, such as injunctions, that the arbitrator can grant.
Confidentiality Clause – This clause lays strict rules that the parties shall not disclose any information relating to the dispute to any third party/outsider.
Rules of Arbitration – This clause outlines how the arbitration is to be conducted, with the rules forming part of it.
Appointment of arbitrator – This clause deals with the appointment of the arbitrator, the process, and the qualifications.

Legal Considerations:

One should always ensure that the Arbitration Agreement does not contradict Indian laws. The Arbitration Agreement shall be valid and enforceable under Indian laws. The Indian Judiciary has played a vital role in redefining the scope and importance of Arbitration. Through various landmark Judgments, the importance of a precise and good Arbitration Agreement was highlighted. Indian Judiciary has emphasized the importance of Fair and effective procedures to make Arbitration a successful method of dispute resolution.

The following are important aspects for an Arbitration Agreement to be enforceable under the Indian Laws:

Written form
Intent to resolve the dispute by way of Arbitration
Define the Legal relationship, whether contractual or otherwise

The parties to the Agreement shall make sure of the following legal considerations:

Compliance with Indian Laws
There shall be no ambiguity in the Agreement
The Agreement shall not be biased. It should be fair and equal to both parties.
It shall not be against the public order or public policy
The qualification of the arbitrator shall make sure that the arbitrator is capable of handling and resolving such disputes. (Well-versed with the subject matter)
The costs of the arbitration and how they will be shared among the parties
If parties desire, they may add a timeframe within which the arbitration proceedings shall be concluded. This ensures that the arbitration does not prolong.

Indian Laws and International Laws:

As mentioned above, the Arbitration and Conciliation Act 1996 was construed on the basis of the Model Law on International Arbitration and Conciliation adopted by the United Nations. India, being one of the signing countries, has acknowledged the International Arbitration Laws and standards. The Act has also given the arbitral tribunals in India the ability to grant foreign awards.

The Arbitration Act is based on the UNCITRAL Model Law and the UNCITRAL Conciliation Rules. The Arbitration Act contains four parts: Part I deals with domestic arbitration and international commercial arbitration seated in India; Part II regulates the enforcement of foreign awards; Part III provides for a conciliation mechanism, which has now been subsumed under the Mediation Act, 2023; and Part IV contains supplementary provisions.

India has been steadily moving towards a pro-arbitration regime with a conscious restraint from excessive judicial interference. The Judiciary, as well as the Legislature, has consistently adopted the path of minimal interference in arbitral proceedings and awards, except when absolutely necessary.

Pertinently, for the purposes of recognition and enforcement of awards passed in international commercial arbitrations, India is a signatory to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards of 1958 (“New York Convention”) and the Geneva Convention on the Execution of Foreign Arbitral Awards of 1927. Further, India made the following reservation while ratifying the New York Convention:

“India will apply the Convention only to recognition and enforcement of awards made in the territory of another contracting State. India will apply the Convention only to differences arising out of legal relationships, whether contractual or not, that are considered commercial under the national law.”^[3]

Case Laws Relating to Arbitration Agreements in India:

Fuerst Day Lawson Ltd. v. Jindal Exports Ltd. (2011) 8 SCC 333

The Hon’ble Supreme Court highlighted that arbitral tribunals have their own power and that courts are restricted from intervening in their matters. The court further emphasized the efficacy of arbitral tribunals as a dispute resolution mechanism.

S.B.P. & Co. v. Patel Engineering Ltd. (2005) 8 SCC 618

This case revolved around the ambiguities surrounding the arbitrator’s appointment. The Hon’ble Supreme Court emphasized the importance of Section 11 of the Arbitration and Conciliation Act and the role of the Chief Justice in appointing the arbitrator. It was clarified that the process of appointment of an arbitrator was judicial and not administrative. The Court explained that the powers conferred under the Act can be delegated by the Chief Justice of a High Court only to another judge of the same court and by the Chief Justice of the Supreme Court to another judge of that Court.

Vedanta Ltd. v. Shenzhen Shandong Nuclear Power Construction Co. Ltd., (2018) 15 SCC 257

The Hon’ble Supreme Court addressed the issue of enforcing foreign awards in India and the grounds on which an award can be resisted.

The Supreme Court, whilst criticizing the ad hocism and lack of uniformity in the method and rate of interest being awarded by arbitral tribunals, ruled that unless otherwise agreed by the parties, the rate of interest awarded must: i) be governed by the law of the seat of arbitration and ii) correspond to the currency in which the award is given.^[4]

Conclusion:

Arbitration has significantly evolved in India from its beginning in the 19th century to the current enactment with the latest amendments, which have included electronic communications. The Act has been amended to ensure that it is not outdated and stays parallel to technological developments. These amendments have ensured that the arbitral tribunals are solely responsible for dealing with arbitration matters with minimal court interventions.

This article highlights the importance of an Arbitration Agreement. A good and proper arbitration agreement, with clear arbitration clauses, defined scopes, governing law, venue, confidentiality, and arbitrator qualifications, is pivotal for ensuring fairness and enforceability.

As India continues to develop the arbitration framework, the Arbitration and Conciliation Act plays a vital role. It is critical in enhancing international businesses. The Legislature and the judiciary have played vital roles in developing this Act and continue to do so to promote Arbitration as a trustworthy and simple method of dispute resolution.