Arbitration Agreements: Key Elements and Legal considerations in drafting arbitration clauses

INTRODUCTION

Arbitration is one of the alternative forms of dispute resolution where in the parties agree to make out of court settlement without taking a litigation route. A third party is mutually appointed by both parties to settle the disputes. Such arbitration procedure is quasi-judicial in nature, time, and cost-effective means of settling disputes without being part of elaborate legal procedures.

An arbitration agreement is a contractual obligation between both parties to settle the dispute outside the court amicably without involving themselves in elaborate, costly, and time-consuming legal procedures. An arbitration agreement is the fundamental requirement of an arbitration mechanism.

This article gives detailed insights into the arbitration agreement by discussing key elements and legal considerations in drafting arbitration clauses.

TYPES OF ARBITRATION AGREEMENTS

Section 7 of the Arbitration and Conciliation Act, 1996, defines Arbitration Agreement as under:

[1]“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 1 [including communication through electronic means] which provide a record of the agreement;

(c) an exchange of statements of claim and defense 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”

Following are the ways to include an Arbitration Clause in professional engagement with another party:

1. By a separate arbitration agreement which refers to a set of contracts:

This method is followed in which the dispute resolution clause can be substantiated by an arbitration clause. However, if a party is dealing with another party in separate capacities or different work, then in such case they are bound to have separate contracts for each work or capacity.

The Karnataka High Court in the case of Town Essentials Pvt Ltd v. Daily Ninja Delivery Services Pvt Ltd held that non-signatory defendants cannot be compelled to participate in arbitration under Section 8 of the A&C Act. The Court declared that it will not consider an application under Section 8 if the plaintiff and one defendant have an arbitration agreement but the other defendants are not parties to it. If the cause of action cannot be split, it would result in several court cases, delays, higher expenses, and inconsistent rulings if the procedures were divided to permit arbitration for certain defendants and a lawsuit for others. Thus, pursuing a lawsuit against each and every defendant is the only practical course of action under such circumstances.[2]

2. A clause in the agreement:

The commercial contract may have an arbitration clause which makes it easier for both parties to find all relevant details with regard to performance of the contract and consequence on non-performance of the contract.

3. An agreement:

Parties can agree to make a separate arbitration agreement for the disputes connected to a single contract or for different contracts between them.

Considerations for drafting an effective arbitration clause

Following are some of the key elements and legal considerations in drafting an effective arbitration clause:

1. Mandatory reference to Arbitration

There should be utmost clarity to the fact that the arbitration mechanism can be taken into consideration or can be effectively used only if there is a clause that demands arbitration in case of dispute resolution.

2. Scope of Arbitration proceedings

The scope of the arbitration clause should include all the situations that may arise in relation to the referred contract or any professional engagement. Any ambiguous or general scope of arbitration would lead to confusion and will result in multiple parallel dispute resolution proceedings.

Honourable Supreme Court in the case of Gujarat Composite Limited v. A Infrastructure Limited & Ors. Civil Appeal No. 3260 of 2023 upheld the decision of the honorable Gujarat High Court(“HC”) rejecting a commercial civil suit filed under Section 8 of the Arbitration and Conciliation Act, 1996 (Arbitration Act).  Consistent with the HC ruling, the SC determined that the requested relief exceeded the scope of the arbitration clause found in the signed contract.

 The issue raised under the suit comprised multiple transactions, involving different parties and agreements that contained no arbitration clause barring one agreement. The Supreme Court’s ruling made it clear that when a suit is filed and the subject matter and relief sought by a party do not fall under the purview of the arbitration agreement, the court is not permitted to refer the parties under Section 8 of the Act.^[3]

3. Decide between Institutional Arbitration and Ad Hoc arbitration and applicable arbitration rules

The parties should determine which rules will govern the arbitration. It is best to clarify what procedures one wants to opt for in case of a dispute resolution and hence it is necessary to include the applicability of the same in the arbitration clause itself.

4. Method of selection and number of arbitrators

Section 10 of the Act deals with the number of arbitrators as under:

“10. Number of arbitrators.—(1) The parties are free to determine the number of arbitrators, provided that such number shall not be an even number.

(2) Failing the determination referred to in subsection (1), the arbitral tribunal shall consist of a sole arbitrator. “  [4]

Alternatively, institutional rules (if the parties arrive at a consensus on the institution) may also provide for appointing authority where parties cannot agree on the appointment of an arbitrator.

5. Qualification of Arbitrators

Arbitration stems from a particular contract. Hence, the parties while signing the contract can have a better idea of the problems they may face going ahead in the business. With the acknowledgment of a probable dispute, the parties may be able to identify the qualifications one needs to adjudicate the dispute.

6. Oral Hearings

Section 29B of the Act, provides for a fast-track arbitration which will not have any oral hearings unless the arbitrator finds the need to hold one. The arbitration clause in an agreement can be drafted in a way that includes the necessity to hold “fast-track arbitrations” for less complicated smaller disputes.

7. Language of the arbitration

The parties should select the language of arbitration, especially where the witnesses and parties speak different languages that may be convenient for the speedy disposal of the arbitration in an efficient manner and to reduce costs.

8. Seat and venue of the arbitration

The most important detail and the one that can cause the most amount of confusion later on is the seat of the arbitration. The seat and the venue of the arbitration are to be distinguished. All venues are not necessarily the seat of arbitration and a nexus has to be developed to consider the venue as the seat of the arbitration. Different views with regard to the jurisprudence between the seat and the venue of the arbitration are delivered in a lot of judgments. Hence for utmost clarity, it becomes important to specify the seat of the arbitration as well as the venue and the courts which shall have the jurisdiction in case of any court-related issue with regards to arbitration.

The choice of a specific geographic location for the arbitration seat will have ramifications because it will give the courts in that jurisdiction supervisory jurisdiction over the arbitral process and jurisdiction over the procedural and curial laws governing the arbitration proceedings. When there is no option of controlling law provision in the arbitration agreements, the parties frequently choose the seat, and the law of the seat frequently governs the arbitration process. The law of seat is sometimes referred to as the lex arbitri by eminent experts in the field of international arbitration.

Leading arbitration jurisdictions frequently emphasize the arbitration’s seat in determining the lex arbitri and in establishing a territorial connection between the arbitration procedures and the arbitration’s seat. Although the terms “venue” and “seat” are frequently used interchangeably, this may not always be the best course of action. The term “place” does not refer to the seat or venue; rather, it often refers to a convenient site agreed upon by the parties to conduct the arbitration procedures. Without a doubt, the word “seat” has more significance than “venue” or “place.”

It’s also crucial to remember that neither “seat” nor “venue” are defined in the Act at this point. The phrase “place of arbitration,” which is synonymous with “seat” and “venue,” is defined in Section 20 of the Act. It is also true that parties that frequently reach arbitration agreements are unaware of the consequences of choosing a specific location as the seat, and as a result, unnecessary litigation frequently breaks out between the parties. Though the term “seat” has been heavily stressed by Indian courts, it seems that these courts have frequently confused the term “seat” with “venue” and used them interchangeably, creating a disagreement that the Supreme Court has not yet been able to definitively settle.[5]

CONCLUSION

The above-mentioned list of key elements is not exhaustive but is a guideline for drafting an effective arbitration clause. While drafting an arbitration agreement one may find other specifications which are essential to be included in that particular agreement.

Specifications of time limit and limitations for conducting a domestic arbitration do not seem to be allowed since the Arbitration and Conciliation Amendment Act, 2015, has clearly stated that an award has to be passed within 1 year of the reference to the domestic arbitration.

The Supreme Court in the case of TATA Sons Pvt Ltd v. Siva Industries & Holdings Ltd held that the time limit of 12 months provided under Section 29A for making an award is only applicable to domestic arbitrations and does not apply to International Commercial Arbitrations. The Court further concluded that the 12-month period from the date the pleadings were completed for making an award under the proviso of Section 29A(1) is not a requirement.[6]

The Delhi High Court in the case of Department of Transport, GNCTD v. Star Bus Services Pvt Ltd recently ruled that a significant and unexplained delay of 18 months in delivering an arbitral award after the conclusion of the hearing can lead to a challenge under Section 34(2)(b)(ii) of the Act based on conflict with India’s public policy. According to the Court, these delays make arbitration less effective as a quick dispute settlement process. Due to the arbitrator’s fading memory, the greater the delay, the more it affects the quality of the award.[7]

Certain arbitration clauses also include the names of the arbitrators that are to be considered for the reference to the dispute. As long as both parties accept the procedure to be followed mentioned in the arbitration clause, the same may be included as part of the agreement as long as it is legally valid.

Reference(s):

[1] ‘Arbitration and Conciliation Act 1996 – Search’ <https://www.bing.com/search?pglt=41&q=arbitration+and+conciliation+act+1996&cvid=da0408f5d1c845048d6c29734330fd29&gs_lcrp=EgZjaHJvbWUyBggAEEUYOTIGCAEQABhAMgYIAhAAGEAyBggDEAAYQDIGCAQQABhAMgYIBRAAGEAyBggGEAAYQDIGCAcQABhAMgYICBBFGDzSAQg3ODM4ajBqMagCALACAA&FORM=ANNTA1&PC=LCTS> accessed 28 June 2024.

[2] Tariq Khan, ‘30 Important Judgments on Arbitration by Indian Courts [January – June 2023]’ (Bar and Bench – Indian Legal news, 21 July 2023) <https://www.barandbench.com/columns/30-important-judgments-on-arbitration-by-indian-courts-january-june-2023> accessed 28 June 2024.

[3] https://www.indialaw.in, ‘Landmark Judgments Of The Supreme Court On Arbitration (2023)’ (IndiaLaw LLP, 15 January 2024) <https://www.indialaw.in/blog/arbitration-and-conciliation/landmark-judgments-of-the-supreme-court-on-arbitration-2023/> accessed 28 June 2024.

[4] ‘Arbitration and Conciliation Act 1996 – Search’ (n 1).

[5] Bhumika Indulia, ‘Seat v. Venue in Contemporary Arbitral Jurisprudence’ (SCC Times, 6 May 2021) <https://www.scconline.com/blog/post/2021/05/06/seat-v-venue-in-contemporary-arbitral-jurisprudence/> accessed 28 June 2024.

[6] Khan (n 2).

[7] ibid.