PRACTICAL TIPS FOR DRAFTING ARBITRATION  AGREEMENT

ABSTRACT

The study focuses on the procedure of arbitration which is increasingly adopted by the judicial systems thus minimizing the court proceedings as already there is a lot of burden on the courts. Our country after the time of covid has become online, increasing the scope of arbitration. In the court proceedings, the judge is a public servant but in the case of the arbitration, the third party is appointed as per his expertise in the subject and is appointed amongst all. The parties do not get a chance to appoint a judge in case of judicial proceedings, but the process of arbitration is the complete opposite. As we all know, the coming future is of arbitration and hence in this article, we tried to explain what arbitration is, how it works, and what are the key elements for drafting an arbitration agreement.

INTRODUCTION

Nowadays disputes are increasing in day-to-day life. For resolving the dispute, opting for a court procedure proves to be hectic. The solution to this problem is opting for the Alternative Dispute Resolution [ADR] mechanisms, which is not only speedier but also less costly as compared to litigation. The ADR method involves solving disputes by appointing neutral third parties. There are several forms of ADR which include Arbitration, Mediation, Conciliation, Negotiation, and settlement. The most common among all is arbitration, arbitration is the process in which the parties appoint a third party or parties[arbitrators] to resolve the dispute whose decision[award] is binding on the parties. Here in this article, we are going to focus on the arbitration method of resolving disputes.

According to section 2[1][a] of the Arbitration and Conciliation Act, 1996, arbitration is a formal method where a dispute is solved outside of court, and in section 7 of the same Act, the arbitration agreement and its essentials are explained. The arbitration agreement is a document that denotes the terms and conditions of the agreement agreed to by the parties. The arbitration in any agreement can be through a separate agreement or by an arbitral clause in the same agreement.

PURPOSE OF ARBITRATION AGREEMENT

An arbitration agreement provides a more private means of resolving the disputes. Arbitration is generally faster and more cost-effective than court proceedings. The arbitral awards are final and binding upon the parties, unlike the mediation. Arbitration aims to protect the privacy of parties by providing a confidential procedure. The process proves to be more effective as arbitrators are appointed according to the expertise in the disputed matter. The process is comparatively less formal than the court proceedings.

PREREQUISITES FOR A VALID ARBITRATION AGREEMENT

Section 2[e] of the Indian Contract Act, of 1872 gives a general definition of an agreement which says every promise forming the consideration for each other [benefitting both the parties] is known as an agreement. An enforceable agreement has some conditions which include free consent of parties, parties must be competent to contract, lawful consideration, and lawful object, and hereby must not be declared unlawful by any law as per section 10 of the same Act. Moving towards the arbitration agreement, let’s first break into the essentials of a valid arbitration agreement as stated under section 7 of the Arbitration and Conciliation Act, 1996;

1. Agreement by the parties: The parties must agree that if in case any dispute arises in the future in terms of the defined legal relationship that they are entering, must be resolved by the method of arbitration. The parties must agree with their free consent i.e., there must be no coercion, undue influence, fraud, misrepresentation, or mistake. The parties must have an intention to enter into such an agreement. The agreement must be clear and definite for the expression of its terms and conditions.
2. Written agreement: The most essential condition of any agreement is that the agreement must be in writing as it forms strong proof. The disputing party is prevented by this written agreement from proceeding with the dispute in court and opts for the long process when they have already agreed to the resolution method. The agreement is said to be in writing if it is signed by both parties, or there is a record of the agreement by some kind of exchange of letters, etc. between the parties, or there is an exchange of statements between the parties which shows the contents of the agreement are alleged by one party and not denied by the other.

LEGAL CONSIDERATION FOR DRAFTING ARBITRATION AGREEMENT

1. Details of the parties: Personal details of the parties, the details which help in the identification of the parties involved. The effective date from which the rights and obligations under the agreement shall take effect.
2. Recitals: It is basically the way of the agreement i.e., what is the purpose for entering into the agreement. The context which leads to the agreement must be defined as this is the most essential part of any agreement.
3. Definitions and interpretations: Every technical term used in the agreement like arbitration, dispute, settlement, arbitrator, confidential information, arbitral proceedings, or arbitral award must
4. Agreement to Arbitrate: This is the most crucial clause of the agreement where the intention of the parties to resolve the dispute through arbitration is marked up. It is to ensure that all the claims, disputes, and controversies arising between the parties will be referred to arbitration and not litigation. A specific note shall be made that the decision given by the arbitrator shall be binding on the parties. The location where the arbitration proceedings are to be conducted must be specified. Even the seat and language that must be adopted in the proceedings shall be mentioned. The proper detailing as to how the arbitrator shall be appointed shall be specified. An exclusion clause that specifies that certain disputes arising out are not covered in this agreement shall also be specified.
5. Notice of the Arbitration: It includes when and how will one party notify to other party of the initiation of the arbitration process.
6. The process of arbitration: When there arises any dispute between the parties, the parties shall agree to appoint a sole arbitrator but if the parties do not reach a conclusion, then they will appoint 2[two] arbitrators by their own choice and the appointed arbitrators shall then appoint a third neutral arbitrator who shall act as the presiding arbitrator. If the parties fail to appoint a sole arbitrator or if the appointed arbitrators fail to appoint the third one, the arbitrator shall be appointed by the Arbitration Organization whose decision shall be final.
7. Conduct of arbitral proceedings: The rules which shall be followed by the Arbitral Tribunal shall be specified. The language which shall be used in the arbitral proceedings shall be defined. The procedure for presenting the witness and evidence is to be specified and the confidentiality of the information disclosed during the proceedings shall be maintained.
8. Arbitral Award and termination of proceedings: If there is more than one arbitrator appointed, the decision shall be made by the majority of the arbitrators. If during the proceedings, the parties reach a settlement, the proceedings shall stand terminated. The Award shall be final and binding upon the parties.
9. Appeal and enforcement of the Award: The right to appeal against the Award of the Arbitral Tribunal and the process for the enforcement of the award shall be specified.
10. Costs and fees: The provisions for arbitrator’s fees and expenses shall be mentioned as to who and in what proportion shall it be borne. The responsibility for paying other costs incurred in the proceedings shall also be specifically mentioned.
11. Term of the agreement: The agreement shall remain in effect till the underlying contract remains. This Agreement shall continue to have its existence even after the termination or expiration of the contract.
12. Termination of the Agreement: The instances under which the agreement stands terminated and under which the agreement survives the termination shall also be defined.
13. Governing Law: The laws by which this arbitration agreement is governed must be specified.
14. Waiver clause: This clause protects the party’s right where failure to enforce any provision of the agreement does not constitute a waiver of its future enforcement. The acts which can be included under this clause shall also be stated.
15. Entire Agreement Clause: Any agreement captures the entire understanding between the parties and supersedes all the prior agreements entered by the parties on the same subject matter. No evidence of there being any other any other terms in the transaction will be accepted.
16. Variation Clause: If the parties wish to leave a scope for future amendments or modifications, it shall be specified that what procedure will be opted for making such modifications.
17. Severability Clause: This clause protects the whole agreement when some portion of it is struck down or declared void or illegal. In case this event occurs, the rest of the agreement will continue to be implemented and the affected portion shall be severed out of the rest of the agreement.
18. Signature section: A proper space must be provided for both parties to sign and mention the date of the agreement.

DISPUTES THAT CAN AND CAN NOT BE REFERRED TO ARBITRATION

The disputes that relate to right in persona i.e., personal rights, the disputes relating to commercial matters, contractual disputes, property disputes, particularly all kinds of civil disputes excluding family court disputes, guardianship disputes, and taxing disputes can be referred to arbitration. Whereas the disputes involving rights in rem i.e., people at large, violations of criminal law, the disputes relating to wills, inheritance, and succession are particularly excluded from referring to arbitration.

COMMON MISTAKES THAT MUST BE AVOIDED WHILE DRAFTING THE AGREEMENT

1. Ambiguity: The terms of the agreement must be clear and definite. The language should be precise. Generally, the common mistake committed is that the language used is vague and ambiguous.
2. Omission of confidentiality clause: The confidentiality clause is the main ingredient of any agreement, and its omission can lead to a lot of future problems.
3. Incomplete clauses: Sometimes the essential clauses are omitted by the parties. While drafting an arbitration agreement, proper guidance of the legal counsel shall be taken.
4. Unfair terms: The agreement must be fair and equal between the parties; it cannot be biased against any of the parties.

JUDICIAL APPROACH  

1. Alpine Housing Development Corporation Private Limited v. Ashok S. Dhariwal

The parties referred the dispute to the arbitration where the arbitral tribunal passed an ex-parte award. The respondents filed an application under section 34 of the Arbitration and Conciliation Act, 1996 to set aside the award. They asked to cite additional evidence to support their case. On denial, they filed a writ petition in the High Court where the High Court gave the decision in favor of the respondents and permitted them to adduce evidence in their application. The applicants aggrieved from the decision, filed an appeal in the Supreme Court but the court held that if there involves a case of public policy, the parties may be allowed to adduce evidence under section 34[2] of the same Act.

2. Tata Sons Private Limited v. Siva Industries and Holdings

The case was based on section 29A of the Arbitration Act which addressed the timelines for international commercial arbitrations which said to complete the proceedings within twelve months.  The applicants filed suit for breach of contract and violation of intellectual property rights. The Supreme Court held that after the 2019 amendment, the 12-month time limit is specifically applicable to domestic arbitrations and not international commercial arbitrations.

3. Chennai Metro Rail Ltd. V. Transtonnelstroy Afcons [JV]

An arbitration agreement was entered into by the parties and when the dispute was referred to the arbitral tribunal for resolving the dispute, the per session fee was set to INR 1,00,000 but when a member of the tribunal passed away, a new tribunal was constituted thus leading to an increase in the per session fee to INR 2,00,000. Chennai Limited objected to this, but the party deposited the fees. Chennai party filed an application under section 14 of the Arbitration Act before the High Court wanting the termination of the reconstituted tribunal. The High Court dismissed the application. Aggrieved by the decision of the High Court, the applicants filed a petition under the Supreme Court. The Supreme Court held that the arbitral tribunal cannot revise the fees unless agreed to by the parties.

CONCLUSION

Basically, after having a brief discussion of the above topics we got to know that there are certain clauses in the agreement that are common to all other contracts and agreements like the recital clause, the governing law clause, severability, entire agreement clause and many more but there are certain specific clauses which are only drafted under the arbitration agreement like agreement to arbitrate, arbitral proceedings, arbitral award, and some others. Arbitration is preferred over court proceedings for several reasons. Even other ADR methods are used now to solve disputes.

REFERENCES

1. https://lawbhoomi.com/essentials-of-arbitration-agreement/
2. https://www.lexology.com/library/detail.aspx?g=175995dd-d855-4c24-b679-d107fe748f5d
3. https://lawnotes.co/tag/essentials-of-arbitration-agreement/
4. https://www.signaturelitigation.com/how-to-draft-an-arbitration-agreement/
5. https://indiankanoon.org/doc/87859262/
6. https://www.scconline.com/blog/post/2023/12/29/10-important-arbitration-judgments-2023-by-vasanth-rajasekaran-and-harshvardhan-korada/
7. https://www.legalzoom.com/articles/what-is-an-arbitration-agreement