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Overview of Arbitration Agreement

Arbitration in a general sense means the resolution of the dispute which has occurred between parties by an arbitrator. An arbitrator is a neutral third party who uses his/her expertise and skills to pass a decision to a dispute which is binding on parties.

A resolution of the dispute by way of arbitration help parties to save time which would have been consumed if the parties would have approached the court. Usually, it takes a lot of time before a court passes a final decision. The process of arbitration is a quasi-judicial process and parties are referred to be present before a domestic arbitral tribunal in spite of going to courts. It is a cost-effective process, unlike the traditional court process.

The term “Arbitration Agreement” has been defined in the Arbitration and Conciliation Act of 1996 under Section as an agreement entered between parties to refer to the process of arbitration in case they get into some dispute which has arisen or might arise in the near future related to the legal and contractual relationship established between them.

Such an agreement is made by two parties that have formed a contract for resolving any disputes by way of arbitration if the matter is related to the contract. It is done with the help of a neutral arbitrator without the need for parties to go to court. It is the responsibility of the parties to decide the person who shall be their arbitrator, what type of disputes can be solved by the arbitrator, the seat and place of arbitration, etc.

To make the arbitration agreement binding on parties, it is mandatory for both parties to sign the arbitration agreement. If a person is willing to enter into a commercial contract and wishes to solve contract-related disputes with the help of an arbitrator, he/she can form such an agreement and resolve the dispute without going to court.

An Arbitration agreement can be considered an example of a contingent contract as the enforceability of the arbitration agreement takes place only if a dispute occurs between the parties.

As per Section 7 of the Arbitration and Conciliation Act of 1996, an arbitration agreement can be formed as a separate agreement attached to the contract or by inserting an arbitration clause in the main contract.

Need for Arbitration

As it has been seen that the courts in India have been overburdened with a lot of pending cases, it is difficult for them to work with a lot of burdens. Therefore, there was an urgent need to have an alternate method for the resolution of disputes. For fulfilling the urgent need and decreasing the burden of traditional courts, the Arbitration and Conciliation Act was enacted to provide speedy resolution with the help of a neutral third party called an Arbitrator.

Objectives of Arbitration Agreement

The main objectives of forming an arbitration agreement for resolving disputes are:

  • Speedy,
  • Convenient,
  • Cost-effective, and
  • Private manner.

Matters Which May Be Referred to Arbitration

Not all legal disputes can be solved by way of arbitration. Only a selected type of matter can be referred by parties for arbitration.

  • When calculation of damages is to be made in the event of a breach of contract by either party to the contract.
  • The matter where the validity of a marriage is in question.
  • Where the matter is related to the calculation of the maintenance amount which has to be paid to the wife.
  • In the case of time-barred claims.
  • Disputes of commercial nature.

Essentials of Arbitration Agreement

The presence of a dispute is a necessary condition for arbitration. Without a dispute between parties in a contract, the arbitration agreement or clause cannot be enforced. There are a few essentials of an arbitration agreement. These are as follows:

Written Agreement

It is a must for parties to form an arbitration agreement in writing. As per the provisions of the Arbitration Act of 1996, the arbitration agreement is said to be in writing if:

  • It is in the form of a necessary paper which has been duly signed by both parties, or
  • Any exchange of letters, telegrams or any other means of telecommunication that acts as a record of the agreement, or
  • A necessary paper is either called a statement of claim or defence in which the existence of the agreement is stated by one party and not defined by the other party.
  • A contract containing a clause mentioning an arbitration clause is considered to be an arbitration agreement if it has been mentioned in writing and such a clause is considered to be a part of the main contract.

Intention

One of the basic elements of a valid contract is the intention of parties who are willing to form a contract. There is no pre-defined format of an arbitration agreement in the prevailing laws in India and no provisions with regard to essential prerequisites such as arbitration, arbitrator, etc of an arbitration agreement. As per the landmark judgements passed by the judicial authorities, it is essential to mention the intention of parties to refer to arbitration in case of dispute between them in the arbitration agreement.

Signature

It is mandatory for parties to sign the arbitration agreement. Either both parties can sign the necessary paper to form an arbitration agreement or it can be presented to another party for accepting the terms and conditions of an agreement which has been already signed by the first party.

Attributes of an Arbitration Agreement

There are no specified attributes of an arbitration agreement but the Hon’ble Supreme Court has laid down certain important attributes of an agreement through various landmark judgements. These are as follows:

  • The arbitration agreement should state that the decision passed by the arbitral tribunal must be binding on the parties to the agreement.
  • The jurisdiction of the tribunal for dispute resolution by way of arbitration must be decided as per the mutual consent of both parties, or through an order of the Court or from a statute.
  • The arbitration agreement must contain a statement with regard to the substantive rights of parties which shall be determined by the tribunal.
  • The tribunal while deciding the rights and liabilities of parties must be impartial and fair for both parties. The tribunal must act in a judicial manner.

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Points To Remember While Drafting Arbitration Agreement

Following are some important points to remember while drafting Arbitration Agreement:

The seat of Arbitration

This clause defines the seat and place of arbitration. A seat of arbitration defines the procedural laws which will govern the arbitration process. The seat and place of arbitration are not required to be the same. The seat of arbitration is considered the place even when the place where the parties are being heard is different. The place of hearings doesn’t affect the decided seat of arbitration.

Procedure for Appointing Arbitrators

The Act of 1996 defines provisions related to the appointment of arbitrators under Section 11. As per the section, an arbitrator can be appointed for dispute resolution irrespective of his/her nationality unless otherwise agreed by the parties. The parties to an agreement are free to decide the method for appointment of an arbitrator or arbitrators. If the parties fail to mutually agree on the name of arbitrators, each party will then appoint one arbitrator and those 2 appointed arbitrators will appoint a third arbitrator who will have the authority to preside over the tribunal. The appointment or arbitrator can be made by the parties themselves or by the respective authority or by the established arbitral institutions. Where the dispute between parties is of international commercial nature, it is important to ensure that the appointed arbitrator does not belong to the same nationality as the parties to the dispute.

Language of Arbitration

The parties are free to decide and mention the language of arbitration in the agreement itself. In a country with diverse religions and languages, it is very important to decide the language so that it becomes easy for the parties to resolve the dispute in a cost-effective manner as it will remove the fee being paid to the translator if either party to the dispute is unaware of the language of the arbitration.

Number and Qualifications of Arbitrators

The parties are free to determine the number of arbitrators who will solve the dispute by way of arbitration. Also, they need to ensure that the number of appointed arbitrators must be an odd number as where two arbitrators have different opinions, the third arbitrator will help in deciding the majority. If the parties fail to decide the number of arbitrators in the agreement, the arbitral tribunal then consists of only one arbitrator.

Type of Arbitration

The parties to arbitration have the right to choose between institutional or ad-hoc arbitrations. If the parties decide to go with institutional arbitration then they need to follow the rules established by the arbitral institution. Every arbitral institution has its own set of rules for arbitration and such rules are applied whenever the tribunal passes a decision by conducting of arbitral proceeding. In the case of Ad-hoc arbitrations, the parties have the right to arrange everything by themselves. The parties do not seek any aid from arbitral institutions in the case of ad-hoc arbitration.

Governing Law

The law which has been decided by the parties to govern the main issue between the parties to the dispute is called a governing law. The other name for governing law is substantive law. The parties to an agreement are free to decide the law which will govern them in case any dispute arises between them in the future.

Name and Address of the Arbitration Institution

If the parties to an agreement mutually decide to approach an arbitration centre in case any dispute arises between them, then they are required to state the name and complete address of the centre in clear and unambiguous use of words. Any error with respect to the details of the arbitral institution can lead to the nullification of the arbitration agreement or clause.

Frequently Asked Questions

The place of arbitration is the geographical location where the arbitral proceeding will be held for the parties to the dispute.

An arbitration agreement will be considered invalid in the eyes of the law if such agreement contains any statement which has been declared invalid by the law or the agreement does not contain important information which if not mentioned can declare a contract invalid in India.

As per Section 14(1)(a) of the Arbitration and Conciliation Act of 1996, the mandate of an arbitrator can be terminated if such an arbitrator fails to perform his duties without any reasonable delay. In such a situation, the parties can appoint a substitute arbitrator after the appointed arbitrator has been terminated.

The two essential ingredients of an arbitral agreement are as follows:

  • The subject matter of the agreement must be the one which falls under the category of matters which can be resolved with the help of an arbitrator.
  • There must be a clear intention and free consent of the parties who are willing to settle any disputes by way of arbitration.

There are several types of arbitration in India. These are as follows:

  • Adhoc Arbitration
  • Contractual Arbitration
  • Statutory Arbitration
  • Institutional Arbitration

Whenever an arbitration clause has been mentioned in a main contract, such a clause is considered collateral to the main contract. Such a validity of the contract continues till the main contract persists.

As per Section 10 of the Arbitration and Conciliation Act of 1996, the parties are free to decide the number of arbitrators and the number of an arbitrator must not be even. If the parties are unable to decide the number, the tribunal must consist of a single arbitrator.

No, as per Section 40 of the Act, an arbitration agreement does not get discharged if either party to the agreement has died. Such an agreement is enforceable by or against the legal representative of the deceased.

There are several types of alternate dispute resolution methods. These are:

  • Negotiation, mediation, conciliation, mediation, lok adalat, etc.

The law which governs arbitration agreements is the Arbitration and Conciliation Act of 1996.

There are a few matters which can be dealt with by forming an arbitration agreement in India. These are Damages in case of breach of contract, commercial disputes, the validity of marriage, calculation of maintenance amount, time-barred debts, etc.

Parties who enter into commercial agreements can mutually agree to form an arbitration agreement or insert a clause related to dispute resolution by way of arbitration to resolve any disputes between them arising out of such contracts in a speedy and effective manner. This is also a private method to resolve disputes.

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