Arbitration Agreement: Contract Offering Alternate Dispute Resolution Between Two Parties

Most companies in today’s competitive marketplace are either unable to afford or do not want to deal with the time, expense, and detrimental impacts of traditional litigation on their operations. However, a possibility of conflict over business procedures or contractual duties in any business connection exists.

When such issues arise, subjecting oneself to exorbitant fees and delays related with traditional litigation is not necessary. Alternative dispute resolution procedures are readily available and can resolve conflicts quickly, equitably, and inexpensively. Arbitration is one of the easiest methods to resolve disputes. Let us begin with what is an arbitration agreement in India.

Arbitration agreement

According to Section 7 of the Arbitration and Conciliation Act of 1996, an arbitration agreement is when two parties agree to submit all or a portion of their future disputes between them involving a specific legal connection, regardless of whether they are contractual, to arbitration. Examples of relationships that are legal but not necessarily contractual include those between a doctor and his patient or a lawyer and his client.

Any two parties who sign a contract must agree to arbitrate any disputes that may arise between them over the terms of the agreement without resorting to the courts and with the assistance of an arbitrator. The agreement should specify who will choose the arbitrator, the type of dispute that will be decided by the arbitrator, where the arbitration will occur.

Forms of the arbitration agreement

A written arbitration agreement is a requirement under Section 7 of the 1997 arbitration Act. Furthermore, Section 7 gives the parties freedom to create an arbitration agreement in the following various forms:

• A separate and independent arbitration agreement
• A provision for arbitration
• Incorporation through citation
• By communication

Essentials of Arbitration Agreement

• A disagreement must exist for arbitration to take place. When a disagreement is settled peacefully, the parties cannot challenge the agreement and use the arbitration clause.
• A written arbitration agreement is required by Section 7(4) of the act.
• The parties’ intentions are of utmost significance. An arbitration agreement does not have a prescribed format, and it is not mentioned anywhere that terms such as ‘arbitration’ and ‘arbitrator’ are necessary preconditions for an arbitration agreement. Leading case law on the matter holds that it should be easy to tell from the arbitration agreement whether the parties intended to submit their dispute to arbitration.
• The parties shall enter into an arbitration agreement in writing. The agreement may take the form of a document signed by both parties and contain all terms or it can be a document that is signed by one party and contains the terms and an acceptance that is also signed by the other party.

Principles for drafting an arbitration agreement

• Arbitration’s place

  The arbitration’s seat determines the procedural rules that control the arbitration process, and it does not have to be the same as the hearing place.

• Process for electing arbitrators

  Under Section 11 of the Act, the method for selecting the arbitrator is up to the parties to decide. A three-arbitrator arbitration process will be used if the parties cannot agree. Each party will name one arbitrator, and the two appointed arbitrators will then choose a third arbitrator to serve as the presiding arbitrator.

• Number and qualification of arbitration

  The number of arbitrators should be odd. If the number of arbitrators is not decided, then there will only be one arbitrator on the arbitral panel.

• Agreements should be bound by law

  Agreements between the parties should be valid legally, or else they should be void.

• Name and location of the arbitral tribunal

  The parties to a dispute must indicate the name and location of the arbitration facility in clear terms if they are sending their problems to an arbitration centre.

Whether a formal arbitration agreement is necessary

In M/s Caravel Shipping Services Pvt Ltd v. M/s Premier Seafoods Exim Pvt Ltd in 2018 revealed that an unsigned arbitration agreement is acceptable because the 1996 Act simply requires that an arbitration agreement is in writing.

Whether a clause requiring arbitration should be stamped

Section 5 of the Indian Stamp Act of 1899 states that arbitration agreements are chargeable.

In Bengal Hire Purchase Corpn v. Harendra Singh, the Calcutta High Court ruled that an unstamped arbitration agreement cannot be given under the 1940 Act unless the stamp duty gets paid. First, the unstamped agreement would first be impounded by the courts and sent to the appropriate authorities for the payment of stamp duty and penalty (if any). The arbitration agreement shall not be effective until the gap has been cured.

Explanation of certain clauses in standard arbitration

Separate provisions are made to refer domestic and international issues to arbitration in template standard clauses. These clauses are a convenient way to guarantee that any future disputes will be arbitrated, even when they do not specify the exact steps to be taken in conjunction with some such arbitrations.

Another advantage is that simple, straightforward terms are sometimes easier for contracting parties to accept than some of the more complicated clauses discussed in the following sections of this page.

• Standard Arbitration Provisions for Domestic Commercial Contracts

  Arbitration in [insert desired arbitration location] before [one/three] arbitrators shall use to resolve any dispute, claim, or controversy arising out of or relating to this Agreement or the breach, termination, enforcement, interpretation, or validity thereof, including the determination of the scope or applicability of this agreement to arbitrate (s). This paragraph does not prevent parties from asking a court with fair jurisdiction for temporary relief to support arbitration

• Standard Arbitration Provisions in Global Commercial Contracts

  Any disagreement, conflict, or claim arising out of or connected with this contract—including its creation, interpretation, breach, or termination—shall be submitted to arbitration under the Arbitration Rules, where it will be finally decided. There will be [3 and 1 arbitrator] on the tribunal. The arbitration will take place. The arbitral procedures are conducted in [language]. Any court with jurisdiction over the matter may issue a judgement based on the arbitrator(s)’ award.

Conclusion

When a dispute resolution system can potentially have such wide-ranging implications, the disputes should be handled with extreme care. Numerous High Court interpretations and the Supreme Court’s views emphasise the necessity of correctly drafting the arbitration provisions in the contract. Treat it as just another procedural provision is playing with fire.

The arbitration process does not start when a dispute first surfaces and the arbitration procedure begins when the parties sign an arbitration agreement, regardless of the nature of the conflict.