Arbitration Agreements

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Published On: 17th August, 2024

Authored By: Kashish Khanduja
University of Petroleum and Energy Studies

ABSTRACT

Arbitration agreements are the foundation of the arbitration process in India. They must clearly and unambiguously express the parties’ intention to resolve disputes through arbitration rather than litigation. Vague or permissive language should be avoided in favor of more compulsory terms. The arbitration agreement defines the scope of disputes that will be subject to arbitration. A broad agreement covering both national and international claims gives the arbitral tribunal more flexibility. The arbitration agreement grants the arbitral tribunal jurisdiction over the disputes, while also precluding courts from hearing those matters. This “negative” and “positive” enforcement of the agreement is crucial.[1] Importantly, the Supreme Court has ruled that arbitration agreements embedded in unstamped or insufficiently-stamped commercial contracts are still valid and enforceable. Non-payment or inadequate stamping is considered a curable defect that does not affect the arbitration proceedings. Additionally, the “group of companies” doctrine allows an arbitration agreement to bind non-signatory parties if they have a defined legal relationship with the signatories and were intended to be bound by the agreement through their conduct. Overall, the arbitration agreement is the key instrument that enables parties to efficiently resolve disputes through arbitration in India, as per the Arbitration and Conciliation Act of 1996.[2]

INTRODUCTION

The Indian Arbitration Act, 1899, which was passed by the government in the nineteenth century, is credited with codifying the practice of arbitration in India. However, the Act was limited to Bombay, Madras, and Calcutta—the three princely states. Subsequently, however, arbitration was mentioned in Section 89 of the Code of Civil Procedure, 1902. However, it deserved its own legislation because there were insufficiently strong procedural mechanisms. Consequently, the Arbitration Act, 1940 (henceforth referred to as the 1940 Act) became operative, including the entirety of India. Even while the 1940 Act was an improvement over the previous Act, it was found to be ineffective, unwieldy, and deficient in many areas. The Supreme Court expressed disapproval of the Act in Guru Nanak Foundation v. Rattan Singh[3], Judge D.A. Desai said: “Judicial procedures that are lengthy, costly, complicated, and time-consuming forced jurists to look for a less formal, quicker, and more efficient forum for resolving conflicts rather than wasting time on procedural nonsense, which led them to the 1940 Arbitration Act.” Legal philosophers have wept and lawyers have laughed at the manner the Act’s procedures are carried out and consistently contested in courts. Thus, the UNCITRAL Model Law on International Commercial Arbitration, 1985 served as the foundation for the enactment of the Arbitration and Conciliation Act, 1996 The new Act, which enhanced process, went into effect. Cross-border commerce and investment were also drawn to it following the notable change in world policy in 1991. The Foreign Awards Act of 1961, the Arbitration Act of 1940, and the Arbitration (Protocol & Convention) Act of 1937 were all merged and altered by the Arbitration and Conciliation Act of 1996. While Part 2 of the Act addressed the execution of international awards resulting from the Geneva and New York Conventions, Part 1 of the Act dealt with domestic arbitration and the enforcement of domestic decisions.

WHAT IS ARBITRATION?

Arbitration is a formal method of resolving disputes involving third parties, which helps them to make decisions that are just and fair for everyone. The third party includes the ‘arbitrators’, ‘arbiters’, or ‘the arbitral tribunals’. They make decisions in the form of an ‘arbitration award’. The third party made a decision by keeping all the aspects of the law in their mind for both parties and it is legally enforceable in court, Unless and until any party puts an allegation that is unbinding. Commercial disputes are frequently resolved through arbitration, especially when it comes to cross-border transactions. Arbitration is also commonly used in consumer and employment disputes in several nations, such as the United States. In these cases, arbitration may be required by the terms of employment or commercial contracts, and it may also entail a surrender of the right to file a class action lawsuit. It is important to distinguish between consensual arbitration, especially commercial arbitration, and mandatory consumer and employment arbitration[4]. Arbitration awards are subject to restricted review and appeal powers. Despite the fact that court processes are occasionally referred to as arbitrations in some nations, alternative conflict resolution, expert determination, and mediation—a type of settlement discussion assisted by an impartial third party—are not synonymous with arbitration.

ARBITARILITY OF DISPUTES

Knowing whether a dispute’s subject matter is arbitrable is important because, in accordance with Section 34(2)(b), the court has the authority to set aside an arbitration award if it determines that “the subject matter of the dispute is not capable of settlement by arbitration under the law for the time being in force.” Furthermore, as neither of the Acts specifically lists any group of conflicts as not subject to arbitration, the matter needs to be resolved by the courts. Prior to the 1996 Act, the Court was asked to decide whether a dispute may be arbitrated, and its ruling was considered final. In Uttam Singh Duggal & Co. v. Union of India[5], “the contractor was required to pay compensation for the loss caused by delayed performance, in accordance with the provisions of the contract. The contractor filed a suit challenging the validity of the levy, the court refused the stay and held that the matter was not arbitrable.”

In the case of Booz Allen and Hamilton v. SBI Finance (Booz Allen), the Supreme Court stated that absent a stated exclusion from arbitral tribunal jurisdiction or a necessarily implied exclusion, every civil or business issue (whether contractual or non-contractual) that a court can determine can, in theory, be adjudicated and settled through arbitration. But the court also acknowledged that some issues should be left for their appropriate fora and not be decided in private fora. The court also sees a list such matters such as :

  • disagreements over obligations and rights that result in or are caused by criminal crimes;
  • marriage conflicts pertaining to child custody, legal separation, divorce, and the restoration of marital rights; guardianship matters; 
  • insolvency and winding-up matters;
  • testamentary matters (letters of administration, succession certificates, and grants of probate);
  • evictions or tenancy concerns are covered by special legislation under which the tenant is protected from eviction by law and only designated courts have the authority to award evictions or resolve disputes.

There was also a standard for determining whether a disagreement may be arbitrated in the Booz Allen case. “Rights in personam,” or personal rights enforceable against specific individuals, must be the exclusive subject matter of arbitrable conflicts, the court ruled. “Rights in rem” that could be used against the entire world were not included in the list of issues that could be arbitrated.[6]

If the arbitration agreement lists and restricts the types of disputes that can arise from it, it should be noted that a dispute will not be considered “arbitrable” if it is not included in the joint list of disputes referred to arbitration, even if it is capable of being resolved through arbitration and falls within the purview of the arbitration agreement. The arbitration agreement places restrictions on the tribunal’s authority to decide whether a matter is arbitrable. As a result, the arbitral tribunal is limited to what the arbitration agreement specifies.

ARBITRATION AGREEMENT

An arbitration agreement is the raison d’être of an arbitration proceeding. Parties may only submit their disputes for arbitration to be decided by the arbitral tribunal by means of an arbitration agreement. An arbitration agreement creates the arbitral tribunal and provides its structure. Thus, it is essential to comprehend the arbitration agreement’s legal status under the legislation. 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.” Furthermore, the section was replaced in “The ARBITRATION AND CONCILIATION ACT, 1996” To section 7.

Section 7 states that :

(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 document signed by the parties;
  • an exchange of letters, telex, telegrams, or other means of telecommunication 1 [including communication through electronic means] which provide a record of the agreement; or
  • 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

To put it briefly, an arbitration agreement is created when two parties sign a contract and decide in writing that any conflicts that may arise between them as a result of that contract will have to be settled out of court with the help of an impartial third party: an arbitrator, who is a third party chosen by both parties and who will serve as a judge with a decision that will be binding on the parties.

FORMS OF ARBITRATION AGREEMENT

Section 7 of The ARBITRATION AND CONCILIATION ACT, 1996 tells many ways to form an argument:

  • A standalone separate Arbitration Agreement

In addition to and with reference to the parties’ operating agreement, a separate arbitration agreement may be drafted.

  • AN ARBITRATION CLAUSE

The part of the operative agreement that addresses the parties’ rights and alternatives in the case of a legal dispute arising out of the contract may contain an arbitration provision. An arbitration agreement is interpreted to include an arbitration provision.

  • INCORPORATION BY REFERENCE

A contract that is being formed may also include an arbitration clause found in a different contract. According to Section 7(5), if a written contract is referred to with the goal of incorporating the arbitration provision into the contract, then any reference to a document that contains an arbitration clause will likewise be interpreted as an arbitration agreement. In M/s Elite Engineering and Construction (HYD.) Private Ltd. v. M/s Techtrans Construction India Private Ltd.,[7] the Supreme Court ruled that it is not legal to make a general mention of adding a separate arbitration clause. The reference needs to be explicit and state that the parties want to incorporate.

  • By communication

A record of the agreement between the parties can be obtained via the exchange of letters, telegrams, telex, or other forms of communication, as stated in Section 7(b) of the 1996 Act. This also applies to other means of communication. To put it briefly, when there is a distinct and unambiguous desire to submit the issues to arbitration, it is possible to infer an agreement from the correspondence between the parties.

Recently, in Galaxy Infra and Engineering Pvt. Ltd v. Pravin Electricals Pvt. Ltd[8] the Delhi High Court held that the draft agreement exchanged by email between the parties can be construed as a valid arbitration agreement.

DRAFTING AN EFFECTIVE ARBITRATION AGREEMENT

In order to create arbitration agreements that work, the parties should think about adding some extra procedures to assist them deal with any issues that could come up throughout the arbitration process.

  • Number of arbitrators

The parties were free to choose as many arbitrators as they wanted under the 1940 Act. When even-numbered arbitrators were assigned to tribunals, disagreements among the arbitrators sometimes caused the ruling to be delayed excessively. Thus, a much-needed modification was introduced by Section 10 of the 1996 Act, which permitted the parties to designate an odd number of arbitrators.

It is customary to select one arbitrator or three arbitrators since assigning more arbitrators increases the parties’ financial burden and makes it more difficult to set dates.

  • Procedure for appointment

Section 11 of the 1996 Act gives the parties the authority to create and decide upon an appointment process independently. In the event that the parties cannot agree on a method, the court will choose the arbitrator in a single arbitrator arbitration; in a three-arbitrator arbitration, each party must designate one arbitrator, and the two nominated arbitrators will then select a presiding arbitrator.

  • Language of the proceedings

Due to varying language proficiency, it is common for the parties—domestic or foreign—to experience communication problems throughout the dispute resolution procedure. In these circumstances, the cost of the translation might rise, further upsetting the parties. Thus, it is usually a good idea to decide on the arbitration’s language in advance.

  • Ad hoc or institutional arbitration

The parties to an arbitration agreement must decide between institutional or ad hoc arbitration. The method and modalities agreed upon by the parties are followed in ad hoc arbitration procedures. A specialized organization is chosen to oversee the proceedings and select the arbitrator in institutional arbitration. The Delhi International Arbitration Centre (DIAC), Nani Palkhivala International Arbitration Centre, and Mumbai Centre for International Arbitration (MCIA) are a few Indian arbitration institutes. Ad hoc systems are less expensive and offer greater autonomy. Conversely, the institutional arbitration approach provides administrative support, qualified empanelled arbitrators, and a pre-established, refined procedure.

LANDMARK JUDGEMENTS

  1. TATA Sons (P) Ltd. v. Siva Industries & Holdings Ltd.: “The SC examined that to ensure flexibility in completing proceedings in cross-border disputes, the amended Section 29A of the Act explicitly states, “in matters other than international commercial arbitration”, which specifically precludes international commercial arbitrations from the mandatory timeline for rendering the arbitral awards. Further, the SC clarified that the 2019 amendment to the Act applies to all pending arbitral proceedings as of the effective date.”[9]
  2. Gujarat Composite Limited v. A Infrastructure Limited & Ors.: “In consonance of the decision of the civil court and the HC, the SC while dismissing the appeal held that the words used ‘in a matter which is the subject of an arbitration agreement under Section 8 of the Act make it abundantly clear that the subject matter of the dispute should be amenable to an arbitration agreement. The SC’s decision clarified that the court cannot refer the parties under Section 8 of the Act when a suit is instituted where the subject matter and the relief claimed by a party falls outside of the rubic of the arbitration agreement”[10].
  3. Batliboi Environmental Engineers Ltd. v. Hindustan Petroleum Corpn. Ltd: “The SC while upholding the HC Division Bench’s decision ruled that the award has been rightly held to be unsustainable by the HC. The SC stressed that the impugned Arbitral Award is deficient as it is silent on the method of computation of damages. The SC revisited the scope of the Court’s power to review the awards under Section 34 of the Act and criticized the arbitral award for callous computation of claims, emphasizing careful reasoning and fairness. The SC highlighted the following aspects while determining the claims for loss of profit and overheads:
  • In order to be compensated for lost revenue that affects business turnover and overhead labour costs that could have been used for future contracts, the contractor must substantiate his claims;
  • The drop-down of turnover due to the delay needs to be proved through books of accounts;
  • Should the claimant neglect to account for the turnover loss resulting from the delay, it would be deemed a payment delay, for which interest on the invested capital would be granted;
  • Applying Hudson’s, Emden’s, or Eichleay’s methods to calculate the loss of overhead and earnings should be done last, after carefully evaluating the circumstances of each individual situation.

Bibliography

[1] https://www.lexology.com/library/detail.aspx?g=c74be5b9-f8c1-4d5a-ae87-936d0ca6de8b

[2] Id at 1.

[3] Guru Nanak Foundation Vs Rattan Singh, 1981 AIR 2075, MANU/SC/0001/1981.

[4] https://en.wikipedia.org/wiki/Arbitration#cite_note-1

[5] 1998 Latest Caselaw 331 Del

[6] Booz Allen & Hamilton Inc v SBI Home Finance Limited & Ors (2011) 5 SCC 532

[7] (2018) ibclaw.in 118 SC

[8] Pravin Electricals Pvt. Ltd. vs. Galaxy Infra and Engineering Pvt. Ltd., MANU 0160 SC 2021

[9] 2023 (SC) 39

[10] CIVIL APPEAL NO.3260 OF 2023

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