Essentials of Arbitration Agreement

The essentials of arbitration agreement hold the key to its validity and effectiveness. From the presence of a genuine dispute to the manner of its documentation, each facet plays a pivotal role in shaping the course of arbitration. The arbitration agreement stands as a cornerstone for resolving disputes outside the traditional court system. Crafted with precision, this agreement not only delineates the framework for conflict resolution but also sets the stage for a smoother and more efficient process. 

Definition of Arbitration Agreement

As per Section 7 of The Arbitration and Conciliation Act, 1996, an “arbitration agreement” means a promise by parties to settle any disputes between them about a specific legal relationship using arbitration. This applies whether the disputes are mentioned in a contract or not. This type of agreement is also called a submission agreement.

An arbitration agreement is a legal contract made by two or more parties. It states that if any disagreements or conflicts arise between them, they will use arbitration to solve the issues instead of going to court. This is an agreement where all parties decide to present their disagreements to an arbitrator or an arbitration panel. These arbiters will make a final and binding decision based on the facts and arguments from both sides.

Usually, an arbitration agreement explains the terms for taking disputes to arbitration. It might cover things like the types of disputes that can be addressed, the rules for the arbitration process, how the arbitrator(s) will be chosen, where the arbitration will happen and any other important things the parties agree on.

Essentials of an Arbitration Agreement

An arbitration agreement involves several key conditions that must be met for it to be valid and effective. These conditions ensure that the agreement serves its intended purpose and guides the arbitration process fairly.

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.

Constituents of Arbitration Agreement

While not deemed essential, certain essential elements can be included in an arbitration agreement based on the parties’ preferences. These elements provide further clarity and structure to the arbitration process. Here are some common optional components:

Seat of Arbitration

The “seat” refers to the location where the arbitration proceedings are based. Specifying the seat is particularly crucial in international commercial arbitration. It determines the procedural laws governing the arbitration. Notably, the seat need not coincide with the hearing location; it’s where the arbitration process is administered.

Procedure for Appointing Arbitrators

The procedure for selecting arbitrators follows guidelines outlined in the Arbitration Act. Generally, any qualified person, regardless of nationality, can be appointed as an arbitrator unless the parties agree otherwise. Parties can also mutually decide on the arbitrator’s appointment.

Language

Language plays a vital role in an agreement. The chosen language should be understood by all parties involved to prevent misinterpretations. Clarity is essential to ensure both parties comprehend each clause. Opting for a mutually understood language can reduce translation costs.

Number and Qualifications of Arbitrators

The Arbitration Act permits parties to determine the number of arbitrators. However, an odd number is required to prevent deadlock. This allows decisions to be reached even in the presence of disagreements among arbitrators.

Type of Arbitration

Parties can select between institutional arbitration, which follows established arbitration institution rules and ad hoc arbitration, which is designed specifically for the dispute at hand. Institutional arbitration involves adhering to established arbitration institution rules, while ad hoc arbitration involves arranging an arbitrator privately.

Governing Law

Specifying the substantive law governing the agreement is crucial. Failing to do so can lead to complications in future disputes. Clearly mentioning the governing law ensures a solid legal foundation for resolving disagreements.

Important Provisions on Essentials of Arbitration Agreement

An arbitration agreement contains crucial provisions that guide the arbitration process. These provisions play a significant role in ensuring a fair and effective resolution of disputes. Here are the important provisions outlined:

Written Agreement

An arbitration agreement must be documented in writing, as emphasised by Section 7(4) of the Act. This can be in the form of a written document or any form of communication, including telegrams or telex, as long as there’s a record of the communication.

Appointment of Arbitrators

Section 11 grants parties the freedom to select arbitrators. If parties can’t agree on an arbitrator, the Chief Justice of the High Court (for domestic arbitration) or the Chief Justice of the Supreme Court (for International Commercial Arbitration) can be approached for appointment.

Interim Relief

Sections 9 and 17 of the Act address interim relief orders related to arbitration. Section 9 permits relief petitions if there’s prima facie evidence of an arbitration agreement. Parties can approach the Court before or after arbitration proceedings start, but before award enforcement (as per Section 36). Section 17 empowers the tribunal to grant interim measures upon party request.

Finality of Arbitration Award

Section 34 establishes the finality of an arbitrator’s award, which is binding on the contracting parties. Once a court decree is granted, it becomes enforceable under Section 34.

Appeal

Section 37 provides avenues for appeal if parties are dissatisfied with arbitrator decisions. Appeals can be made against orders under Section 9 (granting/refusing interim measures), setting aside or refusing to set aside an award and decisions on pleas referred to in Section 16. However, no appeal is permitted against arbitrator appointments under Section 11.

Conclusion

The essentials of arbitration agreement include a genuine dispute, a written agreement, parties’ intent to arbitrate and their signatures. These essential conditions of an arbitration agreement help to define its validity. 

Understanding the essential elements and optional provisions of an arbitration agreement is pivotal for creating effective and enforceable contracts that promote fair and efficient dispute resolution between parties.