Nature of arbitration agreement

Author: Pankaj Sevta, Research Associate

In the present commercial regime, due to the complex and time consuming procedure of courts in tradition dispute settlement, Arbitration with its arbitration clause or agreement can be witnessed as one of the effective way of ADR. It aids the respective parties to protect their existing as well as future probabilities of disputes. An arbitration agreement basically is an agreement by the parties to submit to arbitrator all or certain disputes which have arisen or may arise between them in respect of a defined legal relationship, whether contractual or not ((Arbitration And Conciliation Act, 1996, § 7(1).)). An arbitration agreement must necessarily be in writing ((Arbitration And Conciliation Act, 1996, § 7(3) See Also O.P. Malhotra & Indu Malhotra, The Law And Practice Arbitration And Conciliation 243 (2nd Ed., 2006).))which may in the form of a signed document, exchange of letter ((Impex Corporation And Ors. V Elenjikal Aquamarine Exports, AIR 2008 Ker 119))and telegrams, or an exchange of settlements of claim and defense or any other means of communication ((Arbitration And Conciliation Act, 1996, § 7(4).)). There cannot be any doubt whatsoever that an arbitration agreement must contain the broad consensus between the parties that the disputes and differences should be referred to a domestic tribunal. The said domestic tribunal must be an impartial one ((Dr. N.V. Pranjape, Arbitration And Concilliation Act, 41 (2nd  Ed., 2002).)). The concerned agreement is based on two principles, Firstly it is a well-settled principle of law that a person cannot be a judge of his own cause. Secondly that justice should not only be done but manifestly seen to be done ((Bihar State Mineral Dev. Corpn. V.  Encon Builders Pvt. Ltd., AIR 2003 SC 3688.)). In Bihar State Mineral Dev. Corpn. v.  Encon Builders Pvt. Ltd. ((Ibid)), Supreme Court had laid down the essentials of arbitration agreement as follows:

(1) There must be a present or a future difference in connection with some contemplated affair.

(2) There must be the intention of the parties to settle such difference by a private tribunal.

(3) The parties must agree in writing to be bound by the decision of such tribunal.

(4) The parties must be ad idem ((Rajendra Barot And Sahil Kanuga, An Arbitration Agreement Demystified Available At  (Last Accessed On 13/07/2013).)).

Nature of arbitration agreement

“The arbitration clause” or arbitration agreement is quite distinct from other clauses of the contract. The other clauses set out obligations’ which the parties undertake towards each other, but the arbitration clause does not impose on any of the parties an obligation in favor of the other. It embodies the agreement of the parties that if any dispute arises with regard to the obligation which one party has undertaken to the other, such dispute shall be settled by a tribunal of their own constitution and there is this very material difference that whereas, in an ordinary contract the obligations of the parties to each other cannot in general be specifically enforced and breach of them results only in damages, the arbitration clause can be specifically enforced by the machinery of the  Arbitration Act. An arbitration clause in a commercial contract is an agreement inside an agreement. The parties make their commercial bargain. But in addition agree on private tribunal to resolve any issues that may arise between them ((Union of India V. Mcdonnell Douglas Corporation, (1993) 2 Lloyd’s Rep. See Also S.K. Chawala, Law of Arbitration and Conciliation 225 (3rd Ed.).)). An arbitration agreement in no way qualifies the rights of the parties under the contract ((Justice R.S. Bachawat’s Law of Arbitration & Conciliation 239 (4th Ed., 2005).)). It relates solely to the mode of determining those rights ((Food Corpn of India V. Surendra, Deuendra; Mahendra, AIR 1988 SC 734: (1988) 1 SCC 547. See Also 2 Gary B Born, International Commercial Arbitration 198 (3rd Ed., 2009).)).


Interpretation of Arbitration Agreement

An arbitration clause is a written submission agreed to by the parties to the contract and like other written submissions to arbitration must be construed according to its language and in the light of the circumstances in which it was made ((Gaya Electric Supply V, State Of Bihar, AIR 1953 SC 182; See Also Gousiajaved  V. Jagdish Pd. Associates, AIR 1992 AP 12 At 15 : (1992) 1 Arb LR 178. See Also Julian Dm Lew, Loukas A Mistelis & Stefan Mkroll, Comparative International Commercial Arbitration; 129 (1st Ed., 2007).)). The ordinary principles of construction apply on arbitration agreement ((Heyman V. Darwins Ltd., (1942) AC 356 At P. 177 Per LORDWRIGIIT: (1942) 1 All ER337.)). The submission is subject to the same rules of interpretation as govern other written documents ((Supra Note 10, P. 190. See Also Shankar Lal Lachmi Narain V. Jainey Bros., AIR 1931 All 13)). Arbitration agreements should be strictly construed in the sense that clear language should be introduced into the contract which is to have the effect of ousting the jurisdiction of the court and compelling the parties to have recourse to arbitration for the decision of disputes ((Ganpatrai Gupta V. Moody Bros., (1950) 85 CLJ 136 At P. 143; Tarachand  V. Paras Ram, AIR 1930 Sind 202; Sri Krishna Khanna & Bros., Re AIR 1934 Sind 29; Hormusji & Daruwala V. District Loca Board, AIR 1934 Sind 200.)). If two interpretations are possible, the construction which will make the agreement reasonable rather than unreasonable should be adopted ((Ashoka Construction V. Union Of India, AIR 1969 Tri 19; Narshing Narain Singh V. Ajoydhya Prasad Singh, 16 CWN 256 : 15 Elj 110)). Interpretation of scope of arbitration clause is governed by two guiding legal principles: (1) that, as there is strong policy favoring arbitration, any doubt concerning scope of arbitral issues should be resolved in favor of arbitration and (2) that an order to arbitrate particular grievance should not be denied unless it may be said with positive assurance that arbitration clause is not susceptible of interpretation that covers asserted dispute ((G.K. Kwatra, Arbitration And Conciliation Law Of India (7th Ed., 2008)   See Also Universal Marine Ins. Co. V. Beacon Ins. Co., (1984, WD NC) 588 F Supp 735)).

Arbitration Agreement to Satisfy Enforceability Requirements of Contract Act

The agreement of the parties to refer their disputes to the decision of the arbitral tribunal must be intended to be enforceable by law. It must satisfy all the requirements of enforceability as prescribed by Sec. 10 of the Indian Contract Act, 1872 and there must also be the intention of entering into a legally binding obligation ((UP Rajkiya Nirman Nigam Ltd. V. Indure P Ltd., AIR 1996 SC 1373; (1996) 1 Arb LR 236 At 240)). To constitute an arbitration agreement, there must be an agreement, that is to say, the parties must be ad idem. ((Justice R.S. Bachawat’s Law Of Arbitration & Conciliation 158 (4th Ed., 2005).))To be enforceable, the agreement must be made by the free consent of the parties ((The Indian Contract Act 1872, § 10)). The agreement must contemplate that the parties’ chosen tribunal will determine their rights in an impartial manner. The arbitral tribunal must owe an equal obligation of fairness towards all the parties. The parties are said to consent when they agree upon the same thing in the same sense ((Ibid, § 13)). In other words if there is no consensus ad idem, without written agreement then arbitration is not possible. .Consent can be said to be free ((Ibid, § 19))when it is not induced by coercion ((Ibid, § 15))or undue influence ((Ibid, § 16))or fraud ((Ibid, § 17.  See Also Vinod  Shantilal Gosalia V. Anil Vassudev Salgaocar (1996) Supp Arb LR 380))or misrepresentation ((The Indian Contract Act 1872, §18. See Also H C Johari, Commentary on Arbitration And Conciliation Act, 1996 159 (1997).))or mistake as to a matter of fact essential to the agreement ((Supra Note 20, § 20, 21, 22. See Also Stavros L Brekoulakis, Third Parties in International Commercial Arbitration 12.03 (2009).)). The onus of proving that free consent was not given is upon the party asserting ((Rajktya Nigam Ltd. V. Indure P. Ltd., AIR 1996 SC 1373 : (1996) 1 Arb LR 236: (1996) 2 SCC 667)).

Arbitration Agreement and Its Requirements

No Optional agreement:

It is pertinent to note that if there is no mandatory obligation or binding on parties then it would not amount to proper arbitration agreement ((Wellington Associates Ltd. V. Kirti Mehta, AIR 2000 SC 1379 : 2000 CLC 1003 : (2000) 1 RAJ 433. See Also B.B. Verma V. CMD, South. Eastern Coalfields Ltd., (2001) 4-RAJ 97: (2001) 4-Arb LR 135 (MP).)). An agreement provided that the parties “may go to suit or may also go to arbitration.” This was held to be not an arbitration agreement. The Apex Court observed that the agreement must mandatorily require appointment of arbitrator. Moreover in order to be an arbitration clause, the decision under it should be binding on both parties. If the decision is to be binding on one party only, the clause does not amount to an arbitration agreement ((State Of UP. V. Padam Singh Rana, AIR 1971 All 270; Chhabil Das & Co. V. State Of UP., AIR 1977 All 143, 144)). This is the procedural aspect of the agreement, namely, the agreement under which the arbitral process is commenced must contemplate that the tribunal’s decision would be binding on the parties to the agreement ((Justice R.S. Bachawat’s Law of Arbitration & Conciliation (4th Ed., 2005).)).


Form/ Formation and Intention of Arbitration Agreement:

Arbitration agreement should be in writing and should be signed. If the contract containing arbitration clause stood affirmed by conduct of the parties it meant that there was a written agreement ((Austbulk Shipping SDN BHD V. P.E.G. Ltd., 2005 (1) RAJ 597, 606 (Del); Smita Conductors Ltd. V. Euro Alloys Ltd., AIR 2001 SC 3730 : 2001 (3) RAJ 188 (SC). See Also Justice Dr. B.P. Saraf & Justice S.M. Jhunjhunuwala, Law On Arbitration & Conciliation 122 (5th Ed., 2009).)). The Apex Court in Rukmani Bai Gupta v. The Collector, Jabalpur, ((Supra Note 31, P. 194. See Also AIR 1981 SC 479: (1980) 4 SC 556; Bihar Stale Mineral Development Corpn. V. Encon Builders P. Ltd., (2003) 3 RAJ 1 (Sq : (2003) 7 SCC 418))held that the arbitration agreement is not required to be in any particular form. It has been further held that what is required to be ascertained is whether the parties have agreed that if disputes arise between them in respect of the subject matter of the contract such disputes shall be referred to arbitration, and then such an arrangement would spell out an arbitration agreement. It is immaterial whether or not the expression “arbitration” or “arbitrator” has been used ((Justice R.S. Bachawat’s Law Of Arbitration & Conciliation 171(4th Ed., 2005).)). Section 7(2) permits the agreement to be in the form of an arbitration clause in a contract or in the form of a separate agreement. Whatever be the form, the validity of the agreement must be assured ((Hairtha Finance Ltd. V. ATV Projects India Ltd., (2003) 2 RAJ 582 : (2003) 2 Arb LR 376)). The validity of the arbitration agreement is fundamental to arbitration. The enforcement of an award can be opposed if the arbitration agreement is not valid under the law to which the party is subject ((Ranjeet Combine V. B.N. Khanna. (2000) 3 RAJ 551 : (2000) 86 DLT 687 : (2000) 3 Arb LR 348 (Del).)). Thereby if no form of agreement prescribed, all that is necessary is that the agreement is such that an intention to settle disputes through arbitration can be spelled out.


An arbitration agreement, the meaning of which is not certain, or capable of being made certain is void ((Indian Contract Act 1872, §29.  See Also In Re, Srikrishna Khanna & Bros, AIR 1931 Sind 29; Union Of India V. Ram Iron Foundry, (1987) 2 Arb LR 250 (Del).)). The court will do its best, if satisfied that there is an ascertainable and determinate intention to contract, to give effect to that intention, looking at the substance and not mere form. The test of intention is to be found in the words used. If the words considered, however, broadly and non-technically and with due regard to all the just implications, fail to evince any definite meaning on which the court can safely act, the court has no choice but to say that there is no contract ((Seammel (G.) And Nephew Ltd. V. Ouston, (1941) AC 251; Keshaolal Lallabhai Patel V. Lalbhai Trikumbal Mills Ltd., AIR 1958 SC 512 At P. 517 : 1959 SCR 213. See Also Adv. R.P.Kaushik, The Arbitration & Conciliation Act 1996 (2003).)). Where a clause in a contract provided for reference of “any dispute and/or claim” to arbitration in England and was followed by a clause referring “any other dispute” to arbitration in Moscow, it was held that the entire arbitration agreement was void for ambiguity ((Lovelock Ltd. V. Exportles, (1968) 1 Lloyd’s Rep 163.)). An agreement providing for reference of dispute to the arbitration of X tribunal or to Y Tribunal is uncertain as the agreement does not make it clear under what circumstances the dispute would be referred to X Tribunal and under what circumstances the dispute would be referred to Y Tribuna1 ((Laxmichnnd Baijnath V. Kishanlal, 58 CWN 743: AIR 1955 Cal 588; Delhi & Finance House & Construction Ltd. V. Brij Mohan Sha, AIR 1956 Punj 205. See Also Justice S.B. Malik, Commentary on Arbitration & Conciliation Act 1996 151 (5th Ed.).)).

Concluding remark

It can be analyzed that the Arbitration and Conciliation Act 1996 provides the respective parties with remarkable liberties in choosing the manner in which they would like to arbitrate. But it is also pertinent to note that this substantial amount of liberty leads to parties failing to take adequate care of the contents of this crucial arbitration clause or agreement. An investigation of the concerned Act gives a clear portrait where by parties have autonomy and flexibility in  choosing  the number of arbitrators, their qualifications, the seat of the arbitration, the rules to be followed, the kind of hearings that may take place and even agree that the arbitrator will pass an unreasoned award. Taking into account such a flexi concept and choices it is important that the arbitration clause so drafted is not uncertain, vague and confusing in any sort of manner. It must clearly bring out the intention of the parties to refer all or certain disputes, as the case may be, to arbitration, as well as the manner in which such arbitration is to be conducted. So it can be concluded that arbitration agreement is a commercial agreement in form of a back up option via which parties try to negotiate their commercial transactions if in case a dispute has arisen or may arise.