Define Arbitration Agreement. Explain its essential Ingredients.
Introduction:
1. Arbitration means the settlement of a dispute by a third party’s judgment called arbitrator
without recourse to the court of law.
2. . Arbitration is governed under the Arbitration and Conciliation Act, 1996, and it extends to
the whole of India.
3. Arbitration agreement is a written agreement in which two or more parties agree to resolve
disputes through arbitration rather than going to court.
Definition:
Section 7 of the Arbitration and Conciliation Act, 1996 Defines Arbitration agreement as:
(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.
Essentials of an Arbitration Agreement
Presence of a Dispute
For an arbitration agreement to hold weight, a dispute between the involved parties must exist.
This is a fundamental requirement for the agreement to come into effect. If no dispute is present,
the arbitration clause cannot be used to challenge a settlement that has already been reached by
the parties.
Written Agreement
An arbitration agreement must always be documented in writing. It can take various forms to
qualify as a written agreement:
Document with Signatures: The agreement is valid when it’s a signed document by both
parties.
Written Communications: Communications such as telex, letters or telegrams that record
the agreement for arbitration also suffice.
Exchange of Statements: When parties exchange statements outlining their claims and
defences and one party acknowledges the existence of an arbitration agreement while the
other party doesn’t dispute it, the agreement is considered valid.
The intention of the Parties
The intention of the parties involved is a pivotal aspect of the agreement. While specific terms like
“arbitrator” or “arbitration” need not be explicitly stated, the intention of both parties to abide by
the terms of the arbitration agreement is crucial. The agreement’s validity is based on the shared
intention to utilise arbitration for dispute resolution.
Signatures of the Parties
The signatures of the parties play a crucial role in forming a valid arbitration agreement. There are
two scenarios:
Mutual Signatures: The agreement can be a document signed by both parties, outlining all
terms and conditions.
Unilateral Signature: Alternatively, one party can sign the document containing the terms
and the other party can express acceptance. In this case, the agreement becomes valid upon
the acceptance.
Attributes of Arbitration Agreement
In the notable legal case of K.K. Modi v. K.N. Modi and Ors. (1998) 3 SCC 573, the Hon’ble
Supreme Court highlighted several crucial attributes that must be present in an arbitration
agreement:
Binding Decision: The agreement should explicitly state that the tribunal’s decision will be
legally binding on both parties involved.
Jurisdictional Consent: Both parties must mutually agree on the tribunal’s jurisdiction to
arbitrate the matters concerning their rights. This consent can either arise from a
consensual decision or from a court order directing that the proceedings proceed through
arbitration.
Fair and Impartial Determination: The tribunal holds the responsibility to impartially
determine the rights of the parties, ensuring a fair judgment.
Legally Enforceable: The agreement’s terms, which outline the parties’ commitment to
arbitration, must adhere to the legal framework and be enforceable by law.
Timely Formulation: The agreement should specify that any decisions rendered by the
tribunal on the dispute must be formulated prior to the commencement of the arbitration
process.
Common (Non-Essential) Elements of Arbitration Agreement:
While not essential, parties may include certain optional elements in an arbitration agreement to
add clarity and structure to the process:
Seat of Arbitration
The seat refers to the legal location of arbitration, which determines the procedural law. It is
especially significant in international arbitration and need not be the same as the hearing venue.
Procedure for Appointing Arbitrators
Parties may agree on how arbitrators are appointed. Any qualified person, regardless of nationality,
may be chosen unless agreed otherwise.
Language
The language selected must be understood by both parties to avoid misinterpretation and reduce
translation costs.
Number and Qualifications of Arbitrators
Parties may decide the number of arbitrators, but it must be odd to prevent deadlock in decision-
making.
Type of Arbitration
Parties may opt for institutional arbitration, governed by institutional rules, or ad hoc arbitration,
arranged specifically for the dispute.
Governing Law
The substantive law governing the agreement should be specified to prevent complications in
future disputes and provide a firm legal basis.
Important Provisions in an Arbitration Agreement
1. Written Agreement (Section 7)
An arbitration agreement must be in writing. It can be in the form of a signed document or through
any mode of communication (letters, telegrams, telex, electronic records) provided there is a
record of such agreement.
2. Appointment of Arbitrators (Section 11)
Parties are free to appoint arbitrators by mutual consent. If they fail to do so, the Chief Justice of
the High Court (for domestic arbitration) or the Chief Justice of India (for international commercial
arbitration) may appoint the arbitrator.
3. Interim Relief (Sections 9 & 17)
Section 9: Courts can grant interim measures before, during, or after arbitral proceedings
but before enforcement of the award.
Section 17: The arbitral tribunal itself can order interim measures relating to the dispute.
4. Finality of Award (Section 34)
The arbitral award is final and binding on the parties. It can only be set aside by the court on
limited grounds under Section 34.
5. Appeal (Section 37)
An appeal lies against orders under Sections 9, 16, and 17, or against setting aside/refusal to set
aside an award. However, no appeal lies against orders under Section 11 relating to appointment of
arbitrators.
