ARBITRATION AGREEMENTS: KEY ELEMENTS AND LEGAL CONSIDERATIONS IN DRAFTING ARBITRATION CLAUSES

An alternative technique to settle disputes between parties is ADR, which is abbreviated as Alternative Dispute Resolution. As the name suggests, the conflict resolution mechanism opted for is outside the complexities of the court.[1] In this technique, the parties agree to settle their issues in the presence of a third person; each party, i.e., the client, is represented by a legal counsel. The parties are bound to a decision very similar to that of the court. This process does not consume great time for the parties.

ADRS is of four processes namely- Arbitration, Conciliation, Mediation, and Negotiation.

Conciliation – An unbiased individual known as the conciliator aids in further discussion of the issues. Though the conciliator has the expertise, they can merely give advice to the parties but they do not make a binding decision on them. The process is confidential keeping the interests of the party intact.

Mediation – The mediating parties sit to resolve the dispute amicably. The ultimate aim is to find solutions to the issue in pursuance of maintaining the important relationship. The mediator, an impartial and experienced individual listens to both the parties and assists them to arrive at a solution. Similar to the conciliation process, the decision is not binding.

Negotiation – The most commonly used resolution method between two parties without involving a third party. They aim at reaching a mutually agreed upon settlement by discussing it among themselves. Negotiating and bargaining are used interchangeably.

Arbitration – The third party, the arbitrator determines the outcome of the dispute. The arbitrator helps in identifying and framing issues, listens to both sides, examines the necessary evidence, and then makes a decision. The ultimate aim of arbitration is to achieve a fair settlement through an unbiased tribunal timely and cost efficiently.

The arbitration in India is profoundly governed by the Arbitration and Conciliation Act of 1996 (hereinafter referred to as ACA). The aforementioned legislation lays down provisions for arbitration for vivid domestic and international scenarios.

ARBITRATION AGREEMENT:

The same is defined in Section 7 of the ACA, 1966 as the agreement to settle the legal disputes (present or future) that could divert to arbitration instead of the court procedures.

The laid down agreement forms a base for the arbitration. This draws a stark similarity to the plain and Written statement of the civil matters. Therefore, the parties:-

1. waive their right to have those matters resolved by a court; and
2. Grant jurisdictional powers to private individuals (the arbitrators). [2] Elucidating the above-
   • A contractual clause to resort to arbitration in case any dispute arises in the future. The same has to be agreed upon by both the parties of the contract (Arbitration clause); or
   • The arbitration agreements that grant jurisdiction to the arbitrators. The already aroused disputes to have been settled by a mode of arbitration.

Elements of an Arbitration Agreement:

It comprises the vital elements that have to be met for the agreement to be valid and effective.

• DISPUTE- For an arbitration settlement to be legally binding, a dispute among the involved parties should exist. This is an essential requirement for the agreement to come into If no dispute exists, the arbitration clause can not be used to challenge an agreement that has already been agreed by the parties.

• WRITTEN- The agreement to be in effect must be in writing and Stated in Section 7(4) of the ACA, 1966.
  • Document with Signatures: An agreement is not valid when it is not signed by both parties.

• Communication: Such communication channels as telex, letters, or telegrams that also contain the agreement for arbitration will also symbolize of line-break
• Statement: The agreement is regarded as valid when parties hand in statements listing their claims and defenses, and thus one party even agrees on the existence of the agreement while the other party doesn’t disprove it.
• INTENTION- The participation of the contracting parties is crucial for the agreement. Although certain terms such as “arbitrator” or “arbitration” need not be directly mentioned by the first and second parties, however, the fact that they both are meant to Compliance with the agreements negotiated in the arbitration clause is absolutely required as this will also determine the validity of the agreement together with the shared agreement to dedicate arbitration for the purpose of dispute resolution.

• STAMP DUTY: In India, all agreements are subject to stamp duty under the Indian Stamp Act.[3] The specific duty varies from state to state, so it’s important to be aware of the specific requirements in your area. It’s worth noting that failing to properly stamp an agreement can actually make it unenforceable. To shed more light on this, a recent Supreme Court decision clarified that unstamped arbitration agreements cannot be enforced until the necessary duty and penalty are paid. So, it’s crucial to ensure that all agreements are duly stamped to avoid any legal complications.[4]

• ENFORCEABILITY- Section 8 states that if parties have a valid arbitration agreement and one party objects to taking the dispute to court, the matter must be referred to arbitration, unless the agreement itself is invalid.[5]

Now, not all disputes can be resolved through arbitration in India. Some examples of disputes that cannot be arbitrated are criminal offenses, matrimonial disputes, and insolvency matters. Whether a dispute can be resolved through arbitration may also depend on the parties’ ability to privately settle it through a contract.

• SELECTING THE GOVERNING LAW- When it comes to domestic arbitrations, Indian law is usually the go-to governing law by default. In other situations, the parties involved can explicitly choose a governing law, or it can be determined from the contract and the surrounding circumstances. Typically, the law that governs the arbitration agreement is in line with the law that governs the main contract. There’s a general assumption that it corresponds to the location where the arbitration takes place.[6]

In the landmark legal matter of K.K. Modi v. K.N. Modi, and Ors.[7], the esteemed Supreme

Court emphasized certain pivotal factors that an arbitration agreement must possess, as the need arises in the future.

• Binding Decision: It’s necessary to be crystal clear on the agreement that the decision of the tribunal will be accepted as binding by both parties in the case.

• Jurisdictional Consent: The two parties involved have to give each other mutual consent to the arbitral proceedings of the court that will resolve the matters in question that are within their rights. This could be either a mutual decision or a court order turning the proceedings to arbitration.
• Fair and Impartial Determination: The relevant tribunal, which is to make an impartial judgment on the matter in contention, should be the party responsible for impartial
• Legally Enforceable: The terms in the agreement that are the provisions of the parties to the arbitration must be in conformity with the legal system and must be such as to be enforceable by law.

• Timely Formulation: The agreement should set forth the condition that any decisions that the tribunal may reach in the course of the arbitrator of the dispute should be formulated on time and prior to the commencement of the arbitration.

Other important essentials of the Arbitration agreement:

1. Appointment of Arbitrators: The right to choose judges is given to them by Section 11. If the parties do not agree on an arbitrator, the Chief Justice of the High Court (for domestic arbitration) or the Chief Justice of the Supreme Court(for International Commercial Arbitration) can be appointed.

2. Seat of Arbitration: It is necessary to determine whether the arbitration falls under the rules for domestic cases or international ones. If it’s domestic, we follow Part I of the Arbitration and Conciliation Act. But if it’s happening offshore, we look to Part II. A recent change in the law has clarified that Indian courts can give temporary relief for arbitrations held outside the country.[8]

3. Tribunal Selection Process:

   • Party Autonomy: There are no specific qualifications for being an arbitrator Each party in a dispute has high autonomy when it comes to picking the arbitrator – this individual need only be impartial and fair. [9]

In case an arbitration mechanism does not provide for any remedies, the Arbitration and Conciliation Act, 1996 provides for a Default Procedure to appoint an arbitrator and to resolve disputes between parties.

• Default Procedure: The Arbitration and Conciliation Act,1996 in the absence of any agreement between the parties provides a default procedure under section 11 of the Act in case the government or any person authorized by the government fails to do the needful for appointment of the arbitrator. [10]

Interim Relief-

The ACA, 1966, among other provisions, sections 9 and 17 include interim relief and arbitration appeals. In section 9, interim relief petitions are allowed based on a substantiated arbitration agreement. The court can be approached at any stage before or during the arbitration proceedings but before award enforcement and that is clause Section 36. Section 17 talks about the tribunal where the tribunal may grant interim measures to freeze the assets during the pendency of the arbitration as the prime example of “specific performance”.

Finalizing the Arbitration Award-

Section 34 of the Arbitration and Conciliation Act, 1996 provides grounds on which an award may be annulled by the court. These include:

• Where the court finds that the arbitration agreement is invalid
• If the court determines that either party was not given adequate notice in time before arbitration proceedings began
• The arbitrator has acted in excess of the jurisdiction granted to him/her by law
• If the award is impossible to enforce in India, either because it is in conflict with public policy or because one of the parties died before taking action. [11]

Once, the decree is given, then it becomes enforceable due to Section 34 of the ACA,1966.

CONCLUSION-

India’s arbitration landscape is tricky, encompassing a huge spectrum of scenarios beneath the Arbitration and Conciliation Act of 1996. From the fundamental legal requirements of arbitration agreements to the enforcement of arbitral awards and the methods in between, this complete assessment provides insight into the key sides of arbitration in India. The Act strikes a balance between party autonomy and prison safeguards, making arbitration a possible and efficient approach for dispute decisions in the usa. As India continues to play a distinguished position in global commerce, its arbitration laws and practices remain a critical detail in facilitating truthful and effective dispute decisions both domestically and on the worldwide level.

References:

• Alternative dispute resolution, arbitration, conciliation, and Lok Adalats (2022) BYJUS. Available at: https://byjus.com/free-ias-prep/alternative-dispute-resolution/ (Accessed: June 2024).
• (No date) Unit-i – arbitration agreement. Available at: https://udrc.lkouniv.ac.in/Content/DepartmentContent/SM_739c0b3d-f280-4e0d-96d3-3866fe90pdf (Accessed: June 2024).
• The Indian Stamp Act, 1899 [Act no 2 of 1899]
• N. Global Mercantile Private Limited v. Indo Unique Flame Ltd. 2023 SCC OnLine SC 495.
• Arbitration and Conciliation Act of 1996, Section 8
• NTPC Singer Co. (1992) 3 SCC 551 7) 1998, 3 SCC 573
• Arbitration and Conciliation (Amendment) Act, 2015
• Perkins Eastman Architects DPC & Another HSCC (India) Limited (2019) 2019 SCC OnLine SC 1517
• Arbitration and Conciliation Act of 1996, Section 11
• “Navigating Arbitration Laws and Practices in ” King Stubb & Kasiva, September 30, 2023. https://ksandk.com/litigation/arbitration-laws-and-practices-in-india/.