TRINITY INSTITUTE OF PROFESSIONAL STUDIES

DEPARTMENT OF LAW

SUBJECT: ALTERNATE DISPUTE RESOLUTION.

TOPIC: ARBITRATION AGREEMENT.

SUBMITTED TO:

MR. AMIT BAISOYA , ASSISTANT PROFESSOR

SUBMITTED BY:

SAHIL AGGARWAL , BALLB (5TH SEM) ,02420603821

INTRODUCTION
In recent years, arbitration has grown leaps and bounds worldwide. Due to the underlying
principles of party autonomy and confidentiality, it has flourished as a standalone dispute
resolution mechanism. The arbitration agreement forms a binding procedure to be followed by
the parties as well as the arbitral tribunal in its decision making. The underlying principles of
arbitration such as party autonomy and confidentiality have made it an attractive choice of
dispute resolution among the parties, however, the technicalities involved in arbitration can make
it seem a tad bit daunting.

One must understand that unlike the traditional dispute resolution methods, the arbitral process
does not begin from the date the dispute arises. Regardless of the dispute, the arbitration process
starts when the parties enter into an arbitration agreement. At the time of dispute, it is the
arbitration agreement that mandates, guides and establishes the arbitration proceedings. In other
words, the facts decide and guide the law, not the other way round. The arbitration agreement,
therefore, becomes a vital aspect of any agreement where the parties choose to take their issues
to arbitrate. and requires considerable brainstorming and foresight.

ARBITRABILITY OF DISPUTES
It is pertinent to know whether the subject matter of a dispute is arbitrable or not because
according to Section 34(2)(b), an arbitration award can be set aside by the court if the court finds
that ‘the subject matter of the dispute is not capable of settlement by arbitration under the law for
the time being in force’. And since neither of the Acts explicitly exclude any category of disputes
as being non-arbitrable, the question remains to be settled by the courts.

Before the 1996 Act, the question of the arbitrability of a dispute was referred to the Court and
the decision of the court was deemed final. In Uttam Singh Duggal & Co. v. Union of India, the
contractor was required to pay compensation for the loss caused by delayed performance, in
accordance with the provisions of the contract. The contractor filed a suit challenging the validity
of the levy, the court refused the stay and held that the matter was not arbitrable.

After the enactment of the 1996 Act, the tribunal was empowered to decide upon its jurisdiction
and the arbitrability of the disputes referred to it. This change brought down the number of cases
being referred to the court. However, many questions about the arbitrability of several disputes
yet remained unanswered.

In the case of Booz Allen and Hamilton v. SBI Finance (Booz Allen), the Supreme Court stated
that every civil or commercial dispute (contractual or non-contractual) which can be decided by a
court, is in principle capable of being adjudicated and resolved by arbitration unless the
jurisdiction of arbitral tribunals is excluded either expressly or by necessary implication.
However, the court also recognised that certain disputes shall be excluded from being
adjudicated in private fora and be reserved for their respective fora. The court went on to list out
such matters as those which are
  disputes relating to rights and liabilities which give rise to or arise out of criminal
offences;
 matrimonial disputes relating to divorce, judicial separation, restitution of conjugal
rights, child custody;
 guardianship matters;
 insolvency and winding-up matters;
 testamentary matters (grant of probate, letters of administration and succession
certificate);
eviction or tenancy matters governed by special statutes where the tenant enjoys

statutory protection against eviction and only the specified courts are conferred
jurisdiction to grant eviction or decide the disputes.
The Booz Allen case also provided a test for deciding the arbitrability of disputes. The court
stated “the scope of arbitrable disputes must be limited to those concerning ‘rights in personam’
or personal rights enforceable against certain individuals. ‘Rights in rem’ exercisable against the
world at large were excluded from the scope of arbitrable disputes.”

In case the arbitration agreement enumerates and limits the kinds of disputes arising out of the
agreement, it shall be noted that even if a dispute is capable of being decided by arbitration and
is falling within the scope of the arbitration agreement, it will not be `arbitrable’ if it is not
enumerated in the joint list of disputes referred to arbitration. Although the tribunal is capable of
deciding the arbitrability of issues, it is limited by the arbitration agreement. The arbitral
tribunal, therefore, cannot venture outside the scope of the arbitration agreement.

ARBITRATION AGREEMENT1
An arbitration agreement is the raison d’être of an arbitration proceeding. It is only through an
arbitration agreement that parties can submit their issues to be adjudicated by the arbitral
tribunal. An arbitration agreement not only engenders an arbitral tribunal but also gives shape to
it. Therefore, it is crucial to understand the position of the arbitration agreement under the
statute.

In the 1940 Act, the Arbitration Agreement was defined under Section 2(a) as-

“A written agreement to submit present or future differences to arbitration, whether an arbitrator

is named therein or not.”

The vague definition was replaced in the 1996 Act by Section 7 which stated –

“7. Arbitration agreement.

1
The arbitration and conciliation Act , 1996.
(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.

(2) An arbitration agreement may be in the form of an arbitration clause in a contract or in the
form of a separate agreement.

(3) An arbitration agreement shall be in writing.

(4) An arbitration agreement is in writing if it is contained in—

(a) a document signed by the parties;

(b) an exchange of letters, telex, telegrams or other means of telecommunication which provide a
record of the agreement; or

(c) an exchange of statements of claim and defence in which the existence of the agreement is
alleged by one party and not denied by the other.

(5) The reference in a contract to a document containing an arbitration clause constitutes an

arbitration agreement if the contract is in writing and the reference is such as to make that
arbitration clause part of the contract.”

In short, an arbitration agreement is formed when two parties enter into a contract and agree in
writing that any disputes arising between them out of that contract will have to be resolved
without going to the courts and with the assistance of a neutral person: a third party appointed by
both of the parties, known as the Arbitrator, who would act as a judge and whose decision will be
binding upon the parties.

Also, the 1996 Act ascribes an inviolable position to the arbitration agreement. Section 8 clearly
states that after taking cognizance of a valid arbitration agreement between the parties the court
shall abstain from dwelling into the merits of the dispute and refer the parties to arbitration.

An arbitration agreement once made, cannot be deterred when a dispute arises. In Ravi Prakash
Goel v. Chandra Prakash Goel, the Supreme Court held that where there is an arbitration
agreement present and applicable, the parties cannot take recourse to the civil court without first
undergoing arbitration. It is mandatory for the courts under Section 8 of the 1997 Act, to refer
the parties to arbitration when there is an applicable arbitration agreement.
FORMS OF ARBITRATION AGREEMENT
A fundamental requirement under Section 7 of the 1997 Act is that an arbitration agreement shall
be in writing. Besides that, Section 7 grants liberty to the parties to form an arbitration agreement
in multiple ways as enumerated below:

 A standalone separate Arbitration Agreement

A separate arbitration agreement can be formed in addition and reference to the operative
agreement between the parties.

 An Arbitration Clause
An arbitration clause can be formed in the operative agreement as to the section of the agreement
that deals with the rights and options of the parties in the event of a legal dispute arising out of
the contract. An arbitration clause is construed as an arbitration agreement.

 Incorporation by reference
An arbitration clause contained in a separate contract can also be incorporated in a contract being
drafted. As per Section 7(5), any reference to a document containing an arbitration clause shall
also be construed as an arbitration agreement provided that the referred contract is in writing and
the reference is made with the intention to make that arbitration clause the part of the contract.

In M/s Elite Engineering and Construction (HYD.) Private Ltd. v. M/s Techtrans Construction
India Private Ltd., the Supreme Court held that a general reference to the incorporation of a
separate arbitration clause will not be tenable in law. The reference shall be clear and must
indicate the intention of the parties to incorporate.

 By communication
According to Section 7(b) of the 1996 Act, an arbitration agreement can also be inferred from the
exchange of letters, telex, telegrams, or other means of telecommunication, which provide a
record of the agreement between the parties. In short, an agreement can be construed from the
correspondence of the parties where there is a clear and unequivocal intention to refer the
disputes to arbitration.

Recently, in Galaxy Infra and Engineering Pvt. Ltd v. Pravin Electricals Pvt. Ltd the Delhi High
Court held that the draft agreement exchanged by email between the parties can be construed as a
valid arbitration agreement.

In Pravinchandra Murarji Savla v. Meghji Murji Shah, it was held that it is the substance of the
agreement and not the form which is of importance.
Also, as per Section Section 7(c) of the 1996 Act and S.N. Prasad v. Monnet Finance Ltd., where
a statement of claims or allegations is made and is met with ‘non-denial’ by the other party, the
presence of an arbitration agreement can be construed. Therefore in the

Even though the 1996 Act has left the field open with a plethora of ways to form an arbitration
agreement, it is always recommended as a standard practice to choose to have an arbitration
clause in a contract itself.

DRAFTING AN EFFECTIVE ARBITRATION AGREEMENT

Supreme Court, in the cases Jagdish Chander v. Ramesh Chander and K. K. Modi v. K. N.
Modi directly tackled the question of what constitutes a valid arbitration agreement. The Hon’ble
Court arrived at a list of principles that should be incorporated in an arbitration agreement. The
principles are as follows:

1. The arbitration agreement must be in writing.

2. The parties shall agree to refer any dispute (present or future) arising out of a contract
to a private tribunal.
3. The private tribunal should be empowered to adjudicate upon the disputes in an
impartial manner, giving due opportunity to the parties to put forth their case before it.
4. The parties must agree to be bound by the decision of the arbitral tribunal.
5. The intention of the parties to refer the dispute to a private tribunal must be
unequivocally reflected.
6. There must be ‘consensus ad idem’ between the parties i.e. they should agree to the
same thing in the same sense.
7. The words shall contemplate an obligation and determination on the part of the parties
to invoke arbitration and not merely a possibility. For example, use of the words such
as “parties can if they so desire, refer their dispute to arbitration” or “ in the event of
any dispute, the parties may also agree to refer the same to arbitration” shall not be
construed as submission to arbitration.
8. The agreement clauses shall not in any way specifically exclude any of the
aforementioned essentials. For example, a clause permitting the tribunal to decide a
claim without hearing the other side.
Although it is always preferable to draft clear and unambiguous clauses, an arbitration agreement
not mentioning the words “arbitration”, “arbitration tribunal” and/or “the arbitrator” may still be
considered a valid arbitration agreement if the basic attributes of a valid arbitration agreement (as
aforementioned) are present therein.
It is to be noted that the aforementioned list is not comprehensive. To draft effective arbitration
agreements, contemplating some additional mechanisms can help the parties overcome
complications that may arise in the arbitral process. The following are such mechanism:

 Number of arbitrators
Deciding the composition of the arbitrator tribunal is crucial. At times, the subject matter of the
contract may be so intricate and convoluted that it would require the expertise of multiple
arbitrators. Furthermore, in some cases, both the parties may want to exercise the right of
appointing a nominee arbitrator.

The 1940 Act allowed the parties to appoint any number of arbitrators. Oftentimes in tribunals
where even-numbered arbitrators were appointed, the award faced inordinate delay due to
conflicting opinions between the arbitrators. Therefore, the 1996 Act, under Section 10, brought
a welcomed change allowing the parties to appoint as many arbitrators as they wished, as long as
the number of arbitrators is odd

Since appointing multiple arbitrators adds to the cost burden of the parties and causes difficulties
in scheduling dates, the general practice is to appoint either a sole arbitrator or three arbitrators.

 Procedure for appointment

Under the 1996 Act, Section 11, empowers the parties to formulate and agree upon an
appointment procedure by themselves. If the parties fail to agree upon a procedure, in an
arbitration with a sole arbitrator, the court shall make the appointment and in an arbitration with
three arbitrators, each party must appoint one arbitrator and then the two appointed arbitrators
choose a presiding arbitrator.

Since the 1940 Act, a standard drafting practice being followed in India was to give unilateral
powers to one party to appoint the sole arbitrator. However, since the 246th Report of the Law
Commission of India and the subsequent amendments of 2015 and 2019, more and more cases
cropped up where the unilateral appointment was struck down by the courts to uphold the
principle of party autonomy. The dispute finally came to rest in Perkins Eastman Architects DPC
& Anr v. HSCC (India) Ltd, where the Supreme Court held that unilateral appointment of the
sole arbitrator would no longer be valid. Therefore, while drafting the arbitration clause one must
eschew giving appointment rights to a single party.

 Language of the proceedings

Many a time, the parties (domestic or international) may suffer communication difficulties
during the dispute resolution process due to different language proficiencies. In such situations,
the translation fee may skyrocket and bring further distress to the parties. Therefore, choosing the
language of the arbitration proceedings beforehand is always a wise decision.

 Ad hoc or institutional arbitration

In an arbitration agreement, the parties must select either ad hoc or institutional arbitration. In ad
hoc arbitration, the proceedings are carried out as per the procedure and modalities agreed to by
the parties. In institutional arbitration, a specialised institution is appointed to administer the
proceedings and appoint the arbitrator. Some of the arbitration institutes in India are Delhi
International Arbitration Centre (DIAC), Nani Palkhivala International Arbitration Centre,, and
Mumbai Centre for International Arbitration (MCIA). The ad hoc system grants more autonomy
and is cost-effective. On the other hand, the institutional arbitration model offers pre-established
fine-tuned procedure, administrative assistance and qualified empanelled arbitrators.

In India, ad hoc arbitration is more prevalent as compared to institutional arbitration. Through

the Arbitration and Conciliation Amendment Act, 2019, through the Arbitration and Conciliation
Amendment Act, 2019, the government has tried to push the arbitral institutions to develop into
cost-effective centres for domestic and international arbitration.

 Seat and Venue

The words ‘‘seat’’ and ‘‘venue’’ are not defined under the 1996 Act and were interchangeably
used before the judgement of Bharat Aluminium Company v. Kaiser Aluminium Technical
Services Inc. (Balco). In Balco, tIn Balco, the Supreme Court held that the ‘‘seat’’ is the centre
of gravity of arbitration and decides the jurisdiction of the court along with the jurisdiction of the
place where the cause of action arises. So, if arbitration is seated in London, Part 1 of the 1996
Act will not be applicable and the courts in London will have jurisdiction over the arbitration.

Diluting the Balco judgement, the Arbitration and Conciliation Amendment Act, 2015 added a
proviso under Section 2. The proviso was added to the effect that unless agreed to the contrary,
Section 9, 27 and 37(1)(a) and 37(3) shall also apply to international commercial arbitrations
even if the place of arbitration was outside India.

After the Balco judgement, issues started arising as to the interpretation of the terms “venue” or
“place” in an arbitration. The Hon’ble Supreme Court in the judgement of UOI Vs. Hardy
Exploration and Production (India) Inc. distinguished between ‘distinguished between ‘venue’’
and ‘‘seat’,’, and held that the ‘‘venue’’ of the arbitration signifies only the place where the
arbitration proceedings are held. Therefore, in arbitrations with a foreign venue but the seat in
India, Part 1 of the 1996 Act would be applicable.

Thereafter, in the case of BGS-SGS SOMA-JV Vs. NHPC Ltd., the three-judge bench of the
Hon’ble Supreme Court, while deciding a matter of domestic arbitration held that where an
arbitration agreement designates a venue but does not make any mention of the seat or the rules
governing the tribunal, the place of the venue will be construed as the seat of the arbitration.
Therefore, in absence of seat and governing law, the jurisdiction of the arbitration shall
exclusively be vested in the venue.

Based on the catena of judgements by the Supreme Court taking different positions, it can be
concluded that the seat and venue debate is around the curial law of the arbitration. Curial law is
the law governing the arbitration proceedings and the rights of the party to the arbitration.
Therefore, the seat of arbitration gains a much greater significance and must be specified in the
arbitration agreement. It should be borne in mind that the courts in the designated seat will have
the exclusive jurisdiction over the matters arising out of the arbitration and the arbitration itself
will be governed by the laws of the seat.

WHETHER AN ARBITRATION AGREEMENT NEEDS TO BE SIGNED

In Svapn Const. v. IDPL Employees Co-op. Group Housing Society Ltd., it was held that the
agreement need not be signed by the parties if it is established by another written
contemporaneous document, which is binding between the parties. However, in 2018, the
Supreme Court held in M/s Caravel Shipping Services Pvt Ltd v M/s Premier Sea Food Exim Pvt
Ltd that an unsigned arbitration agreement is valid as the only prerequisite for a valid arbitration
agreement under the 1996 Act is that it must be in writing.

WHETHER AN ARBITRATION AGREEMENT NEEDS TO BE STAMPED

Arbitration Agreement is chargeable under Section 5 of the Indian Stamp Act, 1899. With
respect to the 1940 Act, the Calcutta High Court held in Bengal Hire Purchase Corpn v.
Harendra Singh that an unstamped arbitration agreement cannot be given effect unless the full
stamp duty is duly paid. The courts would first impound the unstamped agreement and send it to
the relevant authorities for the payment of stamp duty and penalty (if any). Only after ensuring
that the lacuna is cured, the arbitration agreement can be executed. The Supreme Court held the
same position with respect to the 1996 Act in Garware Walls Ropes Ltd. v. Coastal Marine
Constructions & Engineering Ltd.

WHEN THE ARBITRATION AGREEMENT IS VAGUE

The Calcutta High Court held in State Trading Corporation of India Ltd. v. Owners & Parties
Interested in the Vessel M.V. Baltik Confidence, that an application referring to an ambiguous
and ambiguous agreement will not be maintained. However, in the judgement of Zhejiang Bonly
Elevator Guide Rail Manufacture Co. Ltd. v. M/S Jade Elevator Components, the Supreme Court
while dealing with a vague arbitration clause, scrutinized the clause examining the intention of
the parties instead of doing away with the agreement itself. Therefore vague and unclear
arbitration agreements can hold validity as long as the intention to refer the parties to arbitration
is clear. and upheld the validity of the arbitration agreement.
Conclusion
When the dispute resolution mechanism can have such far-reaching effects, it shall be dealt with
meticulous attention to detail. The interpretations by the various High Courts and the Hon’ble
Supreme Court highlight the need to carefully draft the arbitration clauses in the agreement.
Treating it like just another boilerplate clause may as well be like playing with fire.