ARBITRATION AND ITS KEY ELEMENTS TO BE CONSIDERED WHILE DRAFTING ARBITRATION AGREEMENT

ABSTRACT

Arbitration is one of the practices under Alternative Dispute Redressal (ADR). It is a strategic way of bypassing the traditional justice system, which is known for its long procedures and delays that come with it. Arbitration not only provides speedy justice but also weighs down the burden of courts that usually deal with thousands of cases. Arbitration is a simpler and cost-effective method of settling disputes between parties in conflict.

In today’s fast-paced world, many try to avoid dealing with a tardy system of getting justice and for this, arbitration is one of the solutions.

In this article, we are going to explore the intricacies of arbitration and what are the basic requirements that we need to take into consideration while drafting an arbitration agreement.

INTRODUCTION

Arbitration can also be termed a “private court setting” where parties in conflict can choose their judge or arbitrator who will be a neutral third party. Arbitrator accords arbitration award or arbitral decision which is legally binding on both sides and is enforceable in the courts.

Arbitration is usually used for commercial disputes, partnerships, construction projects, insurance, time-barred debts, and all civil matters. Arbitration often finds its place in international commercial transactions also.

Lack of care in drafting an arbitration agreement can increase the delays and costs, therefore, arbitration agreements must be cautiously drafted and reviewed.

In this piece of writing, we will go through the types of arbitrations that can be performed, then we will move towards essential elements of an arbitration agreement and then finally we will see some tips that should be acknowledged will drafting an arbitration agreement.

TYPES OF ARBITRATION

1. Ad-hoc arbitration – one of the most common forms of arbitration that is used in India. In this type of arbitration, parties are free to choose their mutual arbitrator and can choose their rules and procedures without following institutional proceedings.
2. Institutional arbitration – in this type of arbitration parties can choose their preferred arbitral institution which they must mention in their arbitration agreement or arbitration clause. The institutional body will appoint one or more arbitrators as specified in the agreement by the parties. Parties to the agreement will have to follow the rules and procedures of the arbitral institution. The London Court of International Arbitration, the Singapore International Arbitration Centre, the International Court of Paris, and The National Arbitration Forum USA are a few examples of institutional arbitration centers.
3. International arbitration – as the term suggests, international arbitration is performed where one party is domestic while the other party is a foreign entity or person. In this case, either foreign or Indian law would be followed as previously decided by the parties or as decided after the dispute has been raised and should be mutually agreed by both parties.
4. Fast-track arbitration – this was incorporated by the 2015 amendment to Arbitration and   Conciliation Act in India. In this type of arbitration, parties can appoint only one arbitrator that will be mutually agreed upon by both the parties and the arbitrator has to pass the award within six months from the date of the dispute referred to him.

KEY ELEMENTS OF AN ARBITRATION AGREEMENT

There are certain elements that should be included in every arbitration agreement. These elements are imperative to give legal and practical effectiveness of the arbitration agreement. Elements that should be made part of the arbitration agreement are:

1. Scope of claims under the agreement: this clause clearly defines which type of disputes will be subject to arbitration. It could include all disputes arising from the contract or any specific dispute.
2. Arbitration rules: this clause will define what kind of arbitration parties will enter into, whether it will be ad-hoc arbitration or institutional arbitration. The one which will be mutually agreed upon by the parties will take effectiveness.
3. Seat: a venue where proceedings of arbitration shall take place and where particular court supervisory jurisdiction will preside.
4. Language of arbitration: determining the language in which proceedings of arbitration will be conducted is significant for the effective exchange of communication.
5. Number of arbitrators: specify whether arbitration will be conducted by the sole arbitrator or panel of arbitrators.
6. Governing law: mention the substantive law that will help in governing the contract and any dispute that arises from it.
7. Confidentiality: this clause will ensure that proceedings of arbitration will remain private and confidential, restricting any disclosure of it in public.
8. Fees and Cost: specify the fees of the arbitrator, if not awarded by him, and also mention the legal cost and administrative costs that may arise.
9. Severability: this clause is significant because if any part of the agreement is found invalid, the whole agreement will not be rendered unenforceable. The agreement will still be effective.
10. Waiver: no failure to enforce any of its rights by a party shall not constitute waiver of such rights.
11. Aggregate claim: under this clause, no party can aggregate claims with others and/or being or participate in a collective, class, or other representative action.
12. Amendments: no amendment, supplement, modification, or restatement of any provision of this agreement shall be binding unless it is in writing and signed by each party.
13. Notice clause: this clause outlines the procedure for parties to give formal notification. This ensures that communication between parties is formal and documented, reducing misunderstandings.
14. Execution: finally, we will close the agreement by providing the space for the signature of both parties and also mentioning the date of signing the agreement.

INSIGHT INTO DRAFTING AN ARBITRATION AGREEMENT

After understanding several important clauses, it’s time to know how to position them into an arbitration agreement.

TITLE AND DETAILS OF EACH PARTY

• While drafting an arbitration agreement, our first action will comprise awarding a title to the agreement. “Arbitration agreement” or “agreement to arbitrate” will be the main heading of the agreement.
• The second element would be to provide the details of the parties entering into an agreement. Providing details of the parties is essential for the identification role. If it’s a company that is incorporated under some Companies Act under the jurisdiction of its territory or if it’s an Indian company that is registered under the Companies Act then will mention the CIN no., its registered head office, and a PAN no. If it’s an individual entering into an agreement with a company or with another individual person then we could mention their name, age, parents name, PAN no., or any such details which help them in their identification.

RECITAL CLAUSE

• The third element would subsume the recital clause, it’s a clause that provides the gist of the whole background facts. This clause is placed at the commencement of an arbitration agreement or in general any agreement or a contract. Here under this recital clause, we will also mention that if any dispute arises it will be resolved through the means of arbitration and not through approaching courts.

SUBSTANTIVE PART OF THE AGREEMENT

• The fourth element shall contain the substantive part of the agreement, under which we will make several pointers as aforementioned in key elements of the arbitration agreement mentioning the scope of the claims, arbitration rule, language, governing law, seat, confidentiality, cost, and fees of arbitrator, severability, waiver, and execution.

BOILERPLATE CLAUSE

History of boilerplate clause

The term boilerplate clause first came into existence in the 19^th century in the printing industry. In printing boilerplate was a piece of text that could be used repeatedly without much change. The name was derived from the metal plates of text that were cast in Molds and could be reused in the printing press.

Over time, the term “boilerplate” expanded beyond the printing industry and started using legal contracts, agreements, and other legal documents as standardized language. These clauses address common situations and legal requirements that are typically for that type of document.

WHAT ARE BOILERPLATE CLAUSES?

Boilerplate clauses are standard provisions that are usually found in commercial contracts. These clauses are placed at the end of an agreement and serve a crucial role in the contract. These clauses provide clarity and consistency which ensures that the contract or agreement is comprehensible and consistent in its interpretation.

TYPES OF BOILERPLATE CLAUSES

• Severability clause
• Waiver clause
• Amendment clause
• Aggregate claims clause
• Notice clause
• Arbitration Confidentiality clause
• Force majeure clause

ADVANTAGES OF ARBITRATION OVER LITIGATION

Arbitration has several advantages over the traditional system of getting justice through litigation. Here are some key advantages of opting for arbitration.

1. Choice of arbitrator: in arbitration, parties are free to choose their arbitrator or arbitrators, by doing so they will ensure that the arbitrator that they have selected is impartial and provide an arbitral award without any bias.
2. Flexibility and informality: arbitration is more flexible as parties can choose their own arbitrator and follow rules and regulations that are formulated by them through mutual understanding or could follow the rules of the arbitral institution to which they have assigned their dispute to resolve.
   • Speedy procedure: arbitration tends to be the faster method of receiving justice as it has fewer obstructions when compared to litigation which generally has a long procedure making it a less suitable option to explore when the dispute needs to be resolved as early as possible.
   • Cost effective: arbitration practice does bear a cost; however, it is less expensive than litigation where a hefty amount of money could flow out from the pockets of the parties, the reason supporting arbitration as the cost-effective method is that it requires few pre-trial motions and quicker resolution, and the same is not possible in litigation.
3. Expertise of arbitrators: arbitrators can be selected from the subject matter expert who will be able to make more informed decisions compared to judges in a court who may not have specialized knowledge.
4. Confidentiality: arbitration proceedings are usually confidential and take place in private sitting, which ultimately helps businesses to keep their reputation intact, while in litigation businesses come under the spotlight of the public which damages their goodwill.
5. Enforceability: it is easier to enforce arbitration awards internationally than a verdict passed in a court.
6. Maintains business relationships: in commercial disputes especially, arbitration preserves the business by keeping the conflict out of the public eye and provides a collaborative environment for resolving issues.
7. Finality: arbitration awards are generally final and binding without much ground for appeal, which can provide closure to the parties involved and reduce prolonged legal battles between the same parties.

Overall, arbitration is a more efficient, flexible, and quick alternative to traditional litigation, making it the preferred choice for many parties involved in conflict establishing its international presence and gaining fame in the legal world.

SOME TIPS TO DRAFT NICELY STRUCTURED ARBITRATION AGREEMENT

• Clear and precise language: make sure that language used in the agreement is clear, unambiguous, and concise, no usage of high-frequency words as the opposing party should be able to comprehend the agreement at first reading.
• Interim measures and injunctive relief: clarify whether the party can seek interim measures or injunctive relief from a court before or during arbitration proceedings. Outline the procedure for such requests and how they will interact with the arbitration process.
• Review by legal counsel: given the importance of the arbitration agreement and its potential impact on dispute resolution, consider having the agreement reviewed by the legal counsel specializing in arbitration law. This can help in identifying any legal issue in agreement and will ensure compliance with applicable laws and regulations.

By following these tips, you can draft a clear, comprehensive, and enforceable arbitration agreement that meets the needs of all parties involved in conflict and facilitates the efficient resolution of disputes outside the walls of traditional courts.

Arbitration in India has seen significant developments through various judicial decisions that have shaped its legal landscape. Here are some important cases that have influenced arbitration law in India:

SOME IMPORTANT CASES REGARD TO ARBITRATION IN INDIA.

1. Bharat Aluminium Co. v. Kaiser Aluminium Technical Service, Inc. (BALCO case):– This landmark case by the Supreme Court of India in 2012 clarified the scope of judicial intervention in arbitration proceedings. It established that Part I of the Arbitration and Conciliation Act, 1996 (dealing with arbitration conducted in India) and Part II (dealing with enforcement of foreign awards) are mutually exclusive. This decision reinforced the pro-arbitration stance of Indian courts.
2. BCCI v. Kochi Cricket Pvt. Ltd. & Ors.: – This case highlighted the importance of the autonomy of arbitral tribunals and limited judicial intervention in arbitral awards. The Supreme Court emphasized that courts should not interfere with arbitral awards unless there are grounds specified under Section 34 of the Arbitration Act, such as public policy or procedural irregularity.
3. Enercon (India) Ltd. & Ors. v. Enercon GmbH & Anr.:– In this case, the Supreme Court discussed the principle of “seat” of arbitration and its significance in determining the jurisdiction of courts to supervise arbitration proceedings. It clarified that the choice of seat in an arbitration agreement determines the procedural law governing arbitration.
4. National Insurance Company Ltd. v. Boghara Polyfab Pvt. Ltd.:– This case addressed the issue of appointment of arbitrators and the principle of party autonomy in selecting arbitrators. The Supreme Court emphasized that unless otherwise agreed by the parties, the courts should not interfere in the appointment process agreed upon in the arbitration agreement.
5. Sundaram Finance Ltd. v. NEPC India Ltd.:– This case dealt with the issue of arbitrability of disputes, specifically whether a fraud allegation renders a dispute non-arbitrable. The Supreme Court held that allegations of fraud do not automatically render a dispute non-arbitrable, and such issues should be left to the arbitral tribunal to decide.
6. S. Singh Construction Pvt. Ltd. v. State of Himachal Pradesh & Anr.:– This case highlighted the importance of time-bound arbitration proceedings. The Supreme Court emphasized that delays in arbitration proceedings defeat the purpose of alternative dispute resolution and held that arbitral tribunals must adhere to timelines set by the parties or as prescribed by law.

These cases illustrate the evolution of arbitration law in India, emphasizing principles such as minimal judicial intervention, party autonomy, and the enforcement of arbitral awards. They have significantly contributed to shaping a more arbitration-friendly legal framework in the country.

CONCLUSION

In conclusion, drafting an arbitration agreement requires careful consideration of various factors to ensure it serves its intended purpose effectively. A well-drafted arbitration agreement should prioritize clarity, fairness, and practicality, addressing key elements such as the scope of the agreement, arbitration rules, and procedure, arbitrator selection, cost allocation, confidentiality, severability, language, choice of law and venue and provisions for interim measures or injunctive relief.

 By crafting an arbitration agreement that is clear, comprehensive, and aligned with the specific needs and expectations of the parties involved, businesses and individuals can benefit from a streamlined dispute resolution process outside of traditional litigation. This not only promotes efficiency and cost-effectiveness but also preserves relationships and provides a flexible framework for resolving disputes in a manner that is both enforceable and respectful of the autonomy of the parties.

Ultimately, a well-drafted arbitration agreement not only mitigates potential disputes but also fosters confidence in the dispute resolution process, thereby contributing to a more predictable and stable business environment.

REFERENCES(s):

1. Arbitration Act 1996
2. Section 7 of arbitration and conciliation act, 1996: Arbitration Agreement – IBC Laws’ ( )
3. Section 21 in The Arbitration And Conciliation Act, 1996, https://indiankanoon.org/doc/138599/ (last visited July 23, 2024).
4. Section 10 in The Arbitration Act, 1940, https://indiankanoon.org/doc/499427/(last visited July 23, 2024).