ARBITRATION AGREEMENT- ANALYSIS AND LEGAL ASPECT

BY LABDHI JAIN

LEGAL INTERN, H.K. LAW OFFICES

INTRODUCTION

An Arbitration agreement is characterized in Section 7 of the Arbitration and Conciliation Act 1996. An Arbitration agreement is a contract between two or more parties to yield the Arbitration in a particular debate that should be settled down between the parties. This assertion may be a lawfully official contract. Consolidation of rules chosen with the assistance of reference into the Arbitration clauses would be included beneath the regulation agreement. After this, the discretion would be managed by that institution. Institutional norms plan to supply a complete system for the forms from beginning to wrap-up, making them more adjusted to deal with any possibilities that will arise. This can be particularly imperative when a partner denies coordinating with the arbitral procedure. It may be a consensual and intentional. The arbitral tribunal does not have inherent jurisdiction to settle a debate, and it was not just like the other national courts. In case all the parties can assent to yield their debate within the Arbitration. An agreement clause has been embedded to draft the agreement for Arbitration.

Plenty of complaints are regularly heard by the solicitors or the aggrieved party of a specific case. The lawful expenses charged were excessively tall, the debate was settled after several hearings, or the decision did not give them a suitable cure. However, with the approach of elective debate determination, we will watch a noteworthy diminish in such complaints. Assertion can mainly be seen as a later drift in commercial contracts and disputes. An increment in outside exchange has come about in a consequent increment in cross-border debate, giving rise to a need for a viable shape of debate determination. Discretion has risen to protect the connections between two companies and resolve a debate amicably. The Supreme Court gave the last judgment within the case of Amazon v Future Retail Restricted, 2021[1], which earned consideration and laid down a framework to the parties selecting for discretion to resolve the issue in hand.

 TYPES OF ARBITRATION AGREEMENTS

A. Domestic arbitration: – Both the parties must be Indians, and the procedures take place within the territory of India. Within the Arbitration and Conciliation Act, 1996, there is no particular definition given to residential discretion. A perusing of section 2(2)[2] can lead us to gather that residential Arbitration occurs when the parties concur to resolve any issue in India. The procedures must be held within the residential region instead of the procedural and substantive law in India.

B. International arbitration: – International arbitration occurs outside the national territory either because of a provision included in an agreement between the parties or by cause of action arising from a party situated in a foreign country in connection with the dispute. Depending on the circumstances leading to the filing of the complaint, foreign Law or Indian Law will apply.

C. International commercial arbitration: – According to Section 2(1)(f), “international commercial arbitration can be understood as arbitration for settling disputes arising out of commercial contracts in which one of the parties resides in a foreign country or has a foreign nationality, or the governing committee of an association, company or group of persons controlled by foreigners.”[3]

D. International commercial arbitration: – Under the ambit of Indian Law, the participation of a foreign party would fall under Part I of the Act, i.e. it would fall under the jurisdiction of international commercial arbitration. However, it will not be applicable in the case of international commercial arbitration outside India’s territory. Under the Amendment Act 2015, “company” was removed from the scope of the ICA. “The Supreme Court considered the scope of section 2(1)(f)(iii) in TDM Infrastructure Pvt. Ltd. versus EU Development India Pvt. Ltd., (“TDM Infrastructure”), where, even if a company is in foreign hands, it will be considered an Indian company as it is incorporated in India. As a result, companies with Indian nationality and already registered in India will be excluded from the scope of foreign legal entities, regardless of whether the company is in foreign hands or not.”[4]

E. AD HOC arbitration: – Individual arbitration is when the parties mutually agree to choose an arbitrator to resolve the dispute. It is the most common form of arbitration used in India due to its reasonable cost and adequate infrastructure. Arbitration is conducted without any institutional procedure, i.e. it does not follow the rules of an arbitration institution. The parties can choose the rules and procedures to follow. This form of arbitration can be used for international business transactions and domestic disputes. Jurisdiction is of primary importance as most matters are resolved under applicable Law regarding the position of arbitration.

F. Fast track arbitration: – this type of arbitration can be seen as an effective solution to problems encountered due to the delay and length of proceedings in other forms of arbitration. It does not involve any time-consuming procedure and respects the primary goal of arbitration to resolve disputes quickly. By Law, expedited arbitration has a stipulated time limit of six months. The arbitrator uses only written submissions and, unlike other forms of arbitration, a single arbitrator is sufficient to resolve the dispute.

SCOPE OF ARBITRATION

A proceeding is a procedure in which a dispute is decided in court with a judge or jury, while arbitration is a procedure in which two parties agree to cooperate with an impartial third party to resolve a dispute. An Arbitration is a private form of binding dispute resolution that arises from the parties’ agreement and takes place before a fair arbitral tribunal.

ARBITRATION AGREEMENT AND ITS FORMS

The forms of arbitration agreements are given under article 7 of UNCITRAL Model Law on International Commercial Arbitration (1985)[5]. This act of 1985 was adopted with amendments in the year 2006. 

An arbitration agreement must be in writing, although no specific format has been established. It might be included in a single document or compiled from numerous papers or fax messages, telegrams, communication consisting of several letters, or telex messages.

“Section 2(a) of the 1940 Act defined the Arbitration Agreement as follows: – A formal agreement, whether or not an arbitrator is designated, to refer existing or future conflicts to arbitration.” [6]

“Section 7 of the 1996 Act Replaced the ambiguous definition. Section 7 states that an arbitration agreement is described as an agreement by the parties to submit to arbitration all or some problems that have occurred or will develop between them at a later period concerning a specified legal relationship, whether contractual or not.” [7] An Arbitration agreement is created when two parties sign a contract under which disputes over the contract agreement are to be addressed without going to court and with the assistance of an Arbitrator. The agreement should state who will choose the arbitrator, what type of dispute the arbitrator will decide on, where the arbitration will take place, etc. The parties must sign the Arbitration Agreement, and the ruling is binding on them.

“When a disagreement emerges, an arbitration agreement that has been established cannot be revoked. The Supreme Court ruled in Ravi Prakash Goel v. Chandra Prakash Goel[8] If an arbitration agreement is in place and effect, the parties cannot move to civil court without first going through arbitration. When there is an appropriate arbitration agreement, the courts must under Section 8 of the 1996 Act.”[9] to send the parties to the arbitration.

FORMS OF ARBITRATION AGREEMENT: –

The need that an arbitration agreement is in writing is a necessary condition under Section 7 of the 1996 Act. Aside from that, Section 7 allows the parties to construct an arbitration agreement in a variety of methods, as listed below: –

I. A stand-alone Arbitration Agreement- In addition to the operating agreement between the parties, a separate arbitration agreement can be drafted.

II. An Arbitration Clause- In the portion of the agreement that deals with the parties’ rights and alternatives in the case of a legal dispute arising out of the contract, an arbitration provision can be written. Arbitration clauses are seen as arbitration agreements.

III. Incorporation by reference- An arbitration clause in a separate contract can be integrated into a contract that is already being prepared. Section 7(5) states that any reference to a document containing an arbitration provision is considered an arbitration agreement if the referred contract is in writing and the reference is made to make the arbitration clause a part of the contract. The Supreme Court ruled in M/s Elite Engineering and Construction (HYD.) Private Ltd. v. M/s Techtrans Construction India Private Ltd[10]. that a general reference to including a separate arbitration clause is not tenable in law. The reference must be explicit and show the parties’ desire to incorporate.

LAWS GOVERNING ARBITRATION AGREEMENT

“When there are challenges to arbitration agreements and international arbitral tribunals are not bound by any lex forti,they tend to apply to the body of law related to the arbitration. It was decided by the parties to control some of their arrangements’ applicability.”[11]

The solution to the above problem which comes up in mind is to extend all the laws which are pertinent under the underlying contract where arbitration clauses take place. in the case of Sulamerica Cia National De Seguros SA and Others vs Enesa Engenharia[12] The court has seen the approach of interpretation of parties’ choices. In this approach, it would be assumed that the parties will choose the new Law to govern their arbitration agreement. An insurance policy was governed by Brazilian Law. Seats of arbitration were given to London. The insurers of an arbitration commenced the arbitration without respecting the multi-tiered dispute resolution clause, and in consequence of the same, the insured company in Brazil filed court proceedings. An anti-suit injunction was obtained by the high court of justice to append the proceedings of the insured company in Brazil. The assured company then appealed the injunction and argued before the Brazilian court by stating that under the Brazilian laws, they cannot invoke against them without their consent. Laws which are governing the arbitration agreement would determine the issue of whether or not the arbitration clause could be invoked? The High Court in the above case observed that if an implied choice of Law is absent in the agreement of arbitration, then, in that case, parties assumed to intended that the entire connection will be controlled by the same legal system, which indicates that the choice of Law is for the underlying agreement.

Furthermore, the court concluded that the main agreement was governed by Brazilian Law would make the same agreement invalid and void. Moreover, because of this, parties had no choice to choose Brazilian Law even if parties agreed to arbitrate. The underlying agreement would apply if in case, this was chosen as an implied choice of Law for the agreement of arbitration is absent. 

INITIATING ARBITRATION UNDER ARBITRATION AGREEMENTS

The recording of Arbitrations based on different assertion assertions, contained in two (or more) partitioned contracts, in a single discretion continuing may be conceivable but must be done with caution. The advancement of major ventures within building, development, oil, gas, and mining regularly allows rise to circumstances where related debate concerning a single extended concern numerous contracts with different discretion understandings. Notwithstanding whether distinctive discretion assertions are depended upon in a starting ask for Arbitration (named a composite ask for discretion), or consolidation is asked afterward within the arbitral procedures, there are preferences of gathering diverse debate related to the same venture into one Arbitration proceeding.

Tackling all related issues in a single continuing will ordinarily be more productive and temperate, requiring the installment of fewer mediators and other costs. A single continuing moreover kills the plausibility of clashing grants, as diverse arbitral tribunals may choose unexpectedly, indeed on the premise of comparable reality designs. Additionally, settling debate in a single continuing may permit the arbitral tribunal or sole referee to have a distant understanding of the basic facts, which may make strides in the quality of the ultimate grant that’s rendered.

RECOMMENDATIONS AND THE WAY FORWARD

Many parties failed to realize that the phrasing of an arbitration clause is important for arbitration to function smoothly. Following are ten guidelines for designing arbitration provisions to prevent procedural events that jeopardise fast, efficient resolution of a dispute and drive up dispute resolution expenses through arbitration.

A. Start with the standard arbitration clause proposed by Arbitral Institutions: – Standard arbitration provisions provided by major arbitral tribunals are generally safe to use as a template. These standard provisions provide straightforward, basic wording of the arbitration clause, which the parties must change to the conditions of their contract if necessary. The SCC proposed the following standard clause “Any disagreement, controversy, or claim arising out of or in connection with this contract, or its violation, termination, or invalidity, will be decided by arbitration by the Arbitration Rules of the Stockholm Chamber of Commerce Arbitration Institute.” Additions suggested: Three arbitrators or a single arbitrator will make up the arbitral tribunal. The arbitration will take place in […]. The arbitral procedures will be conducted in the following language: […]. The Substantive law of […] shall apply to this contract.

B. Use terms precisely: – All wording used in the arbitration clause is significant because the arbitral panel will interpret them. Arbitral tribunals will place paramount attention on the language of arbitration provisions when interpreting them. They will focus on what the parties agreed to, rather than what they may have agreed to but did not. For example, the phrases “must” and “may” have a significant difference. The former is required, whereas the latter is merely optional. The language used should be precise.

C. Arbitration clause simple: – Arbitration clauses that are straightforward, specific, and unambiguous are the most effective. This means that all phrases are evident and unmistakable, and so cannot be seriously questioned. When the arbitration provision declares in one phrase that a single arbitrator will determine the issue but then states in another language that “each arbitrator will be independent and impartial,” there is ambiguity.

D. The ambit of Arbitration Clause Matters: – The arbitration clause’s ambit, or scope of applicability, refers to the topics and conflicts that the clause covers and can thus be handled by arbitration. The arbitration clause’s phrasing is crucial here, as well. Although parties can agree to arbitrate just specific contract claims, they can also give a purposefully broad scope of an arbitration agreement that covers all contract disputes and issues linked to the contract, including non-contractual claims in some situations. Various words are commonly used in this context, such as “arising out of the contract,” “arising under the contract,” “connected to the contract,” and “in relation with the contract.”

E. Appointing a good number of arbitrators: – The parties can agree on the number of arbitrators who will sit on an arbitral tribunal in their arbitration agreement; often, one of three members is named. The number of arbitrators will directly influence the entire expenses of the arbitrators’ fees that the parties will be responsible for. When a three-member tribunal is formed in a case involving just a modest amount of damages or receivables, the price of the arbitrators’ fees may be disproportionate to the amount in dispute (even, at times, exceeding the amount in dispute). As a result, it is more practicable to select a single arbitrator for a contract involving minor funds than a three-member panel.

F. Name the applicable Law: – Another factor parties should remember to mention in their agreement is the relevant, or controlling Law (also known as “substantive law” or “law of the contract”), if they want to prevent future discussions after initiating an arbitration. When no law is mentioned, choosing an appropriate law to apply to the merits of a dispute is a complex undertaking, and the arbitral tribunal will take into account several factors, generating legal confusion. Contractual terms are subject to various legal regimes under different laws and legal systems, which the parties should be aware of. A force majeure clause, for example, is regarded differently under French and English Law. As a result, attention should be given while choosing governing legislation.

G. Procedural Law selected: – The parties have the option of choosing between institutional arbitration and entirely ad hoc arbitration. Selecting purely ad hoc arbitration (unless the UNCITRAL Arbitration Rules are used) is generally a bad idea because if the parties are unable to agree on a tribunal when a dispute arises, which happens frequently, court Arbitration will be required to form the arbitral tribunal, resulting in delays, wasted time, and costs.

H. Place/seat of arbitration: – It establishes the jurisdiction, i.e., the nation, in which a losing party may challenge the arbitral award and in which State courts may interfere in the arbitration procedures. In general, choosing an arbitration seat where there would be a low opportunity for judicial involvement in the arbitration procedures and which is regarded as arbitration-friendly is suggested. Paris, London, Geneva, and Singapore are all popular arbitration venues. Although the annulment regime is a significant concern, it is not the only one because the seat of arbitration might affect other aspects of the arbitration, such as the arbitration language, if it is not clearly stated in the arbitration agreement.

I. Language of arbitration: – To avoid any further procedural discussions on this subject or the use of default rules included in the Law applicable in the seat of arbitration, the parties should incorporate the language of arbitration in their arbitration clause. Parties are allowed to use any terminology they like. The choice of arbitration language is significant when the parties are of different countries.

J. Other consideration: – The parties can agree on any (legally possible) characteristic of their arbitration provision in their contract. This might contain or omit the following: Other factors to consider when appointing arbitrators: sex, education, professional background (professor, engineer, an attorney), nationality, and other factors; a fee cap for arbitrators.


[1] 2021 SCC Online Del 1279.

[2] Arbitration and Conciliation Act 1996, s. 2, cl. 2.

[3] Arbitration and Conciliation Act 1996, s. 2, cl. 1.

[4] 2008 14  SCC Online SC 271, 279.

[5] UNCITRAL Model Law on International Commercial Arbitration, 1985 art. 7.

[6] The Arbitration Act 1940, s. 2 cl. A(f).

[7] The Arbitration & Conciliation Act 1996, s. 7.

[8] 2007 SCC Online SC 404.

[9] Supra note 3, s. 8.

[10] 2018 SCC Online SC156.

[11] 2018 SCC Online SC159.

[12] SA [2012] EWCA Civ 538.

Published by meghachaturvedi

Associate Partner, H.K. Law Offices

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

%d bloggers like this: