ARBITRATION AGREEMENTS

Abstract

Arbitration in the early days was seen as a shining crown in the process of dispute resolution; being introduced to make justice delivery faster and an efficient thing as compared to long standing adversarial system of justice delivery but now, Govt. is looking into efficacy of arbitration (once again). The growth of Indian arbitration jurisprudence is a result of both legislation and judicial precedents. The crucial scholastic writings induced the stakeholders to learn and grasp the complicated arbitration technique.

Introduction

With the increase in the pendency of cases, the judicial system has become unable to furnish timely and cost-effective relief to the parties. This delay in proceedings costs a lot, sometimes it even exceeds the claim amount. It causes physical, mental, financial, and other hazardous problems for the parties to the dispute. Due to the increase in the diversity of the cases, the judges might lack expertise resulting in less efficiency in the justice-providing system. Due to this arises a need to establish a new mechanism. Thus, arbitration emerged as a dispute resolution mechanism. Arbitration is the procedure that is binding on both parties. It is often administered by private organizations which provide rules for arbitration procedures. Arbitration processes are faster than litigation as they are comparatively simple procedures. It acts as a judicial decree which provides parties with an easy and flexible way to resolve their disputes. Over the years, arbitration has spread to every corner of the world. Arbitration has flourished as a free-standing dispute resolution mechanism due to the underpinning principles of party autonomy and confidentiality. It is a binding procedure that the parties and the arbitral tribunal are required to base their decisions on by an arbitration agreement. What presents itself as the very basic core on which arbitration rests party autonomy and confidentiality has made it, in general, a very attractive choice for dispute resolution among parties. However, the technicalities involved in the process of arbitration make it a bit daunting. At the time of the dispute, it is the arbitration agreement that mandates guides, and establishes arbitration proceedings. In other words, facts decide and guide the law, not the other way around. An arbitration agreement can therefore not be devoid of any significance in any type of agreement wherein the ‘arbitrate’ route has been chosen by the parties for the resolution of their issues; this requires a lot of brainstorming and foresight on the part of the drafter.

What Is Arbitration?

Arbitration is an alternative dispute resolution process by a private forum that the parties choose. In case of difference, one or more persons issue a judgment to solve the matter in dispute and usually call in an “umpire” if needed. With few exceptions, all non-criminal matters can be referred to this method however; common law did not provide for making awards enforceable at that time. Any arbitration whether administered through permanent arbitral institutions is covered under Arbitration and Conciliation Act, 1996 (India) Section 2(1)(a). Furthermore, there exists a difference between certifier and arbitrator as far as building contracts are concerned; Hudson’s Building and Engineering Contracts describes this distinction best in its 11th edition; Volume I; paragraph 6.065 where it emphasizes that the former will mostly perform administrative rather than judicial functions, especially in construction contracts. He has been described as a “preventer of disputes” in contradistinction to an arbitrator whose function can only arise once a dispute is in existence. He is not under the same obligation to afford the parties or their representatives a full hearing and to receive evidence from them. Thus, each contractual provision may need to be scrutinized to see into which category the person named falls.  The regulated practice of arbitration in India dates to the nineteenth century when the government enacted the Indian Arbitration Act, of 1899. However, the act was only available in the three principalities of Bombay, Madaras, and Calcutta. After that, the Courts Act, of 1940 was introduced which came into force throughout India. The 1940 Act, although an improvement over the earlier Act, proved inefficient, cumbersome, and lacking in diversity. The Supreme Court also criticized the Act as poorly drafted; Judge D.A Desai said 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 speedier for resolution of disputes, avoiding procedural claptrap and this led them to Arbitration Act, 1940. Thus, based on the UNCITRAL Model Law on International Commercial Arbitration, 1985, the Arbitration and Conciliation Act, 1996, hereinafter referred to as the 1996 Act. It was introduced with a breath of fresh air for faster and more efficient operation. It attracted cross-border trade and investment in the wake of the major changes in the global system in 1991. The Arbitration and Conciliation Act, of 1996 amended the existing Arbitration Act, of 1940, the Arbitration (Protocol Convention) Act, of 1937, and 1961 which affected hard foreign awards. The appeal to the High Court for setting aside the suit under Section 34 automatically stayed the enforcement of the award, thereby granting relief to the party against whom the award was made and delayed and there was no time limit to fulfill the promise of speedy work. Facing severe challenges to the 1996 Act, the government invited suggestions from various learned judges, and amendments were made to the Act in 2015. The amendments to the Arbitration and The Conciliation Amendment Act, 2015 completely changed the face of the process and reduced the level of participation.

Arbitration Agreement and Its Essential Elements

An agreement between the parties to arbitrate all or some issues that have arisen or may develop between them about a specific legal connection, whether or not the relationship is contractual.

A written agreement under Section 2(a) of the Arbitration Act, 1940 (India) to submit current or future disputes to arbitration, whether or not an arbitrator is designated therein. Act 26 of 1996 repealed this.

Under Section 7 of The Arbitration and Conciliation Act, 1996, “arbitration agreement” means an agreement by the parties to settle any disputes between them relating to a defined legal relationship whether contractual or not using the process of arbitration. This applies irrespective of whether the disputes may be noted in a contract or not. The type of agreement is also referred to as an agreement to submit. An arbitration agreement refers to a legal contract made by two or more parties. It states that, if some disagreement or conflicts arise between them, only an arbitration process should be adopted instead of court proceedings. In most cases, it is a form of agreement where all the parties involved decide to present the case or dispute to an arbitrator or any arbitral panel. This would then make a final and binding decision based on the facts and arguments of both sides. An arbitration agreement generally spells out the terms under which any disputes will be taken to arbitration. These could include the types of disputes that may be addressed, rules for the conduct of the arbitration procedure, how the arbitrator(s) is chosen, where the arbitration will take place, and anything else the parties agree on to be important. An arbitration agreement will naturally have several conditions that need to be fulfilled to have a valid and effective agreement.

Presence of a Dispute

For an arbitration agreement to be valid, there needs to exist a dispute between the parties concerned. This is a precondition for the agreement to come into force and effect. The lack of a dispute makes it impossible to invoke an arbitration clause challenging a settlement that has already been reached by the concerned parties.

Written Agreement

An arbitration agreement should invariably be in writing. There are many forms it can take, to be labeled a written agreement:

Document with Signatures: Any signed document by both parties is valid for an agreement.

Written Communications: Communications, letters, or telegrams recording the agreement for arbitration, are also valid.

Exchange of Statements: If the parties have exchanged statements of claim and defense, wherein one admits the existence of an arbitration agreement and no denial from the other party’s existence of the same, the agreement is considered valid.

The Intention of the Parties

One of the most essential elements of the agreement is the intention of the parties entering into it. Though the words “arbitrator” or “arbitration” may not appear, the planning and desire of the parties to be bound by the conditions of the arbitration agreement is sine qua non. Only when the intention of both parties coming into the agreement is to resolve their disputes through arbitration does the agreement attain validity under the law.

Signatures of Parties

It is through the signatures of the parties that a valid arbitration agreement is conceived. The scenarios may be two in number:

1. Mutual Signatures: The agreement may be a document signed by both parties, spelling out all the terms and conditions.
2. Unilateral Signature: One party may sign the document containing the terms and the other party may accept. The agreement becomes valid on acceptance by the other.

Considerations In Drafting Arbitration Clauses

A human deceased and one-size-fits-all precedents are used for an arbitration agreement slipping into a commercial contract with not much great concern. This may have the effect of defeating the purpose of an effective and efficient dispute resolution process, with the addition of time, cost, and complication. Attention to the issues identified by this article in the drafting of a well-drafted arbitration agreement may serve to mitigate those risks.

1. Scope:

It sets out the nature of disputes that are expected to be referred to arbitration. A badly drafted scope is a fertile source of disputes and may deny the tribunal jurisdiction over the whole or part of the dispute.

There are three key things to look out for:

Language – every phrase such as “arising out of”, “arising under” or “arising in connection with” has a different meaning, some much broader than others;

Carveouts – trying to carve out specific kinds of disputes generally gives rise to unintended consequences and should be avoided whenever possible; antielectron:

Parties – the right entities must be parties to the arbitration agreement. This may be a problem where the contractual counterparty is a newly incorporated joint venture with no assets or a state-owned entity. The arbitration agreement should contain the party against which any award will be enforced.

        2. Seat of arbitration:

The choice of seat for the arbitration dictates the procedural law of the arbitration, and the seat is not a concept without importance; among other things, the availability of interim remedies and rights relating to the enforcement of the award will depend on it. It need not be the same as the venue of arbitration, that is, where the arbitration will take place and need not be the same as the governing law of the arbitration agreement.

Though not the most important, the choice of a proper governing law is certainly crucial to an international commercial arbitration agreement. Choosing a neutral jurisdiction to be the seat is the preferred choice by most parties, but this shouldn’t be the only criterion. Arbitral are different from one country to another and have significant implications on the efficiency of the arbitration and enforceability of an award. Recognizing this, the Chartered Institute of Arbitrators has formulated the “London principles”, to help parties choose a “safe seat” for their arbitrations.

      3. Governing law:

The decisions, in so far as it is well settled that an arbitration agreement is a contract separate from the substantive contract, make it follow that the system of law by which the Arbitral Agreement the law determining its validity and extent is to be decided may not be the same as the proper system of law in the substantive contract.

The place of performance may be in another; the parties may be in various jurisdictions while the governing law for the contract is that of one jurisdiction, and the seat of the arbitration may be another jurisdiction. Therefore, if an express choice of the governing law for the arbitration agreement has not been provided for, what will follow is a protracted dispute regarding which sort of law would be applicable.

      4. Choice of rules:

One of the most critical decisions when drafting an arbitration agreement is whether to adopt the institutional rules of a well-established arbitral institution, like the International Chamber of Commerce or the London Court of International Arbitration. The intrinsic value in this approach has an institution the consideration for which includes the requirement of the payment of a fee taking on an active role in the administration of the dispute, and the rules set out a very well-established, predictable procedure.

Where the parties intend to refer their difference to ad hoc arbitration institutionalized, then the parties shall agree herein, a built-in procedure for their ad hoc arbitration; to resort to any pre-existing ad hoc procedural rules, such as the United Nations Commission on International Trade Law Arbitration Rules, if any.

Bringing the rules of an institution. However, here the parties should also make it clear that the provisions to which that institution acts as an administrative agency and concerning which it charges fees, would not apply.

      5. Language:

It ought to clearly spell out the language of the arbitration, more so where the parties are from countries having different first languages.

This will turn out to be a very important decision since every document and evidence presented will be in the language chosen for the conduct of the proceedings. Choosing a language, that is primarily used by the parties in their day-to-day correspondence, might save tons of money in translation and interpretation costs.

      6. Number and appointment of arbitrators:

In general, the parties are advised to provide that the tribunal shall consist of three arbitrators in disputes that are likely to be of high value and complex. Where there is likely to be only a low value and/or uncomplicated dispute then the parties might find it more apposite and cost-efficient to provide a sole arbitrator.

“Multi-party disputes: In case of multi-party disputes wherein it is impractical for the parties to appoint an arbitrator, the parties shall agree to the procedure of appointing the arbitrators. For example, the parties can agree that appointments should be made by an appointing authority.

       7. Specifying arbitrator characteristics:

Arbitration makes it possible for the parties to agree on the characteristics of an arbitrator and the experience required of one type of arbitrator”.

While being nonspecific in general will enable parties to choose a proper set of arbitrators when the dispute arises, if parties do wish to state qualifying criteria for example, specific industry or sector experience or nationality there are specific points to bear in mind.

It is also important to avoid a class of potential arbitrators that is too small, which may invalidate the arbitration agreement. For this reason, parties should avoid mentioning specific individuals.

The chosen criteria should not have the effect of inadvertently including or excluding a class of potential arbitrators.

          8. Consolidation and joinder:

Herein lies the risk for parties bound by multi-contract arrangements that, in the event of disputes, will result in multiple tribunals being appointed to deal with several arbitrations relating to the same or similar set of facts. In this respect again, this can result in conflicting decisions, adding costs and delays.

The key to dealing effectively with multi-contract disputes is to make sure that any arbitration agreement in each interrelated contract is consistent and that it openly provides for both “consolidation” as well as “joinder.”

           9. Multi-tiered clauses:

Multi-tiered clauses create gateways for attempts at a negotiated settlement in which the dispute that opens such gateways may progressively be moved beyond negotiation and mediation or conciliation to arbitration.

Very often, by the time the dispute resolution process is invoked, the parties will already have tried to resolve the dispute or at least will claim to have tried to resolve the dispute informally through discussion, negotiation, or mediation and failed. The disaffected party, often the putative respondent may seek to frustrate the process by various means. Accordingly, this clause should ensure the existence of an apparent timetable and trigger points, which may be advanced without the active participation of both parties.

        10. Not complicated over-complicate it:

With so much to consider, it can be tempting to set out a detailed clause covering every conceivable possibility, but this can, in fact, be counterproductive. It is impossible to predict every dispute that may arise. An overly prescriptive clause could fail to suit the dispute that eventually arises, or it could be so complicated that the parties could not reasonably comply with it.

Conclusion

The arbitrator shall finally determine the respective rights and obligations of the parties hereto. Under this agreement, the arbitrator may further determine that a party shall be entitled to damages from one or more of the other parties and the way such damages are to be assessed against the other parties. When such far-reaching effects could be brought about by the dispute resolution mechanism, it shall be dealt with meticulous attention to detail. Bringing to the fore the care that must be taken in drafting the arbitration clauses in the agreement are judgments of various High Courts and the Hon’ble Supreme Court. It may literally be playing with fire if it is treated like just another boilerplate clause.

References

1.  S Surya Prakash Prof (Dr) & V Suryanarayana Raju Mr., Law, Practice and Procedure of Arbitration in India (2022) International Journal on Consumer Law and Practice

<https://repository.nls.ac.in/cgi/viewcontent.cgi?article=1084&context=ijclp> Accessed 2022.

2. Shubham Sharma, Arbitration Agreement: a primer and a checklist (2020) iPleaders

<https://blog.ipleaders.in/arbitration-agreement-primer-checklist/> accessed 8 October 2020.

3. Essential of Arbitration Agreement (2023) Law Bhoomi

<https://lawbhoomi.com/essentials-of-arbitration-agreement/> accessed 31 August 2023.

4. Norton Rose Fulbright, Top 10 considerations for drafting arbitration agreement (2021) Lexology <https://www.lexology.com/library/detail.aspx?g=12e85576-4ca0-4317-9c4c-758f572a0561> accessed 2 September 2021.
5. SCC Online <https://www.scconline.com/Members/wordsandphrases.aspx>
6. Law Insider < https://www.lawinsider.com/clause/conclusion-of-arbitration#:~:text=The%20arbitrator%20shall%20make%20the,assessed%20against%20the%20other%20parties>