Arbitration Agreements under Arbitration and Conciliation Act 1996

Author: Prerna Khatri, Research Associate

For an arbitrator goes by the equity of a case, a judge by the law, and arbitration was invented with the express purpose of securing full power for equity.”  Aristotle

In layman’s terms, arbitration can be understood as an alternative means of resolving a dispute between conflicting parties. It is the submission of a dispute to an unbiased and neutral third party, known as an arbitrator, in order to settle the differences between the parties. The parties mutually agree to abide by the arbitrator’s decision, referred to as an award, which is final and rarely re-examined by the courts. The purpose of arbitration, as a means to resolve disputes, is to ensure speedy, efficacious and a reliable remedy to the parties as well as preserve the contractual/business/legal relationship.

Arbitration is increasingly growing to avoid the stringent court formalities and technical laches associated with it. It is largely preferred to litigation in the context of international transactions where for the purposes of trade and commerce, a foreign element is involved. In such a scenario, arbitration plays an important role if a dispute arises at the time of completion of the contract. To avoid confusion and chaos with respect to the prevailing law, the arbitration clause incorporated in the terms of the agreement would be of much help in case of a dispute since it clearly lays down the formalities to be followed at the time of an arbitration.

It is important to note that, not all matters can be referred to arbitration. There are certain exceptions, areas where the law of arbitration cannot be applied such as criminal proceedings, matters relating to divorce, guardianship insolvency, testamentary matters, dissolution of a company and matters concerning charitable trusts, among many others depending upon the relevant subject matter. Usually, all matters concerning civil rights such as contractual relationships, enforcement of contract, breach etc., can be referred to arbitration.


An arbitration clause usually finds place either as a provision inserted in the contract or as an exclusive contract to facilitate arbitration in case of a dispute ((Section 7, The Arbitration and Conciliation Act, 1996)). The purpose of the ‘Arbitration and Conciliation Act, 1996’ is to ensure that in case of a dispute, an amicable settlement is achieved by the parties. It promotes a fair and unbiased means of resolving a dispute following the principles of natural justice ((Maneka Gandhi vs Union of Indian [1978 AIR 597, 1978 SCR (2) 621].))and the basic rules embodied in Article 14, The Constitution of India, 1950. The prime object of enacting such legislation was laid down by the Supreme Court in Food Corporation of India vs. Joginderpal, ((AIR 1981 SC 2075at 2076-77.))wherein it was observed that,

The law of arbitration must be `simple, less technical and more responsible to the actual reality of the situations’, `responsive to the canons of justice and fair play.”

The most important requirement for an arbitration agreement is that it must necessarily be in writing. Oral arbitration agreements that were acceptable by the old Arbitration Act, 1940 no longer find any relevance in the provisions of Section 7, The Arbitration and Conciliation Act, 1996. The Bombay High Court in Jayanth N. Sheth v Gnaneshwar Apartment Co-operative Housing Limited ((2000(1) RAJ 117 (Bom). 96))held that,

“A mere oral understanding between the parties to refer the dispute to arbitration will not make it a written agreement.”

The Act is liberal and very broad in terms of interpreting the term ‘the agreement must be in writing’. It is based upon the mutual consent of the parties as to how they want their agreement to be and what formalities are to be followed during the proceedings ((Impex Corporation AndOrs. vsElenjikal Aquamarine Exports AIR 2008 Ker 119)). All the conditions laid down in Section 7, The Arbitration and Conciliation Act 1996 must be complied with to be regarded as a valid arbitration agreement. It is essential that the agreement must be communicated between the parties in any form which can be either by mails, telefax, telecommunications, exchange of statement of claim and defence and the like, as prescribed in the Act ((M/S. Amk&Amp; Co. vs Deputy Chief Materials Manager [Writ Petition (MD) No.8856 of 2010].)).

The arbitration clause in the contract may also stipulate the following criteria which can be decided by the parties such as:

  • The law governing the contract;
  • The number of arbitrators to be appointed;
  • The language and the place of the proceedings; and
  • Other essentials which the parties agree upon during the course of the contract.

The terms of the arbitration agreement must be clear and unambiguous. It is extremely important to discuss and draft the terms of the agreement carefully. In a situation where foreign parties are involved, the national laws and other special requirements, if any, must be thoroughly examined to avoid any liability at a later stage. There must be consensus between the parties at every level with respect to the agreement.

In Videocon Industries Limited v. Union of India and Anr, ((SLP(C) No.16371 of 2008))whilst the agreement was to be governed by the law of India and the venue of arbitration was agreed to be Kuala Lumpur, Malaysia, parties had agreed that the arbitration agreement would be governed by the laws of England. The Supreme Court held that this would operate as an implied exclusion of Part 1 of the Act of 1996. Further inYograj Infrastructure Limited v. Ssang Yong Engineering and Construction Company Limited, ((SLP(C) No.25624 of 2010))the Supreme Court, amongst other things, held that once the parties had agreed to arbitrate under the Singapore International Arbitration Centre Rules with the seat of arbitration in Singapore, Part 1 of the Act would stand excluded. Once the terms of the agreement have clearly been laid down, it makes the arbitration proceedings convenient and free from any technical difficulties such as deciding the jurisdiction or the applicable law.


“When will mankind be convinced and agree to settle their difficulties by arbitration?” – Benjamin Franklin

The law is clearly laid down with respect to the essential conditions to be followed in drafting an arbitration agreement and deciding the other formalities. The Act is liberal in granting several rights and benefits to the parties to decide the terms of the proceedings. All in all, arbitration is a very useful means of peacefully resolving disputes between parties. It aims at arriving at an amicable solution keeping in mind the fundamental principles of fair play and natural justice. It ensures that the parties involved are given ample opportunity to present their case and after considerable discussions and deliberations only the decision is announced. Quite obviously it has its own downsides, but the benefits of arbitration, as an alternative means of resolving a dispute, clearly outweighs its negatives. Hence, it is largely preferred and extremely beneficial.

The most important element of a successful arbitration is the arbitration agreement. Once the agreement is properly drafted in accordance with the terms of the Act, nothing else can go wrong.

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