Enforcement of Foreign Arbitration Awards in India, Malaysia and Indonesia

Risha Sharma, Research Associate

What is arbitration? Black’s Law Dictionary defines arbitration as ‘a method of dispute resolution involving one or more neutral third parties, who are agreed to by the disputing parties and whose decision is binding’. It has been recognised as an effective form of dispute resolution mechanism. It primarily consists of dispute resolution processes and techniques which enable the disagreeing parties to come to an agreement without resorting to litigation. The parties normally resolve their disputes with or without the aid of a third party. It entails the submission of disputes to an independent authority by whose decision the parties generally abide. In today’s world of shrinking boundaries, free trade and international commerce have become global necessities. Increasing competitiveness often leads to conflicts between entrepreneurs, resulting in commercial disputes. Arbitration is chosen as a means of effective consensual and speedy dispute resolution ((Suri Preeti, Enforcement of foreign awards in India: Simplification under the 1996 Act, at www.psalegal.com, on p. 1 as seen on July 14, 2013 at 23.07)). When a dispute arises between two parties, they mutually refer the dispute to a third impartial authority which is also referred to as the arbitral tribunal and the decision undertaken by the said authority is called the arbitral award. These awards are not always binding in nature. A jurisdiction’s credibility as an arbitration friendly one rests primarily on the efficiency and the efficacy of its award enforcement regime ((Kachwaha Sumeet, Enforcement Of Arbitration Awards In India, at www.kaplegal.com on p. 1 as seen on July 15, 2013, at 00.27)).

ENFORCEMENT REGIME IN INDIA:

‘Foreign arbitration’ is an award or arbitration conducted in a place outside India. The resultant award is an award, if sought to be enforced in India, constitutes a foreign award. It was realised that the economic reforms may not become fully effective as long as the law dealing with enforcement of both domestic and international commercial disputes remains out of touch with these reforms. In India, foreign arbitral awards can be enforced under the international conventions of Geneva Convention of 1927 and the New York Convention of 1958, both of which India is a signatory of.  Prior to January 1996, the law of enforcement of arbitration awards in India was spread between three enactments: enforcement of domestic awards was dealt with under a 1940 Act, enforcement of foreign awards was divided between two statutes — a 1937 Act to give effect to the Geneva Convention awards and a 1961 Act to give effect to the New York Convention awards.  It was established that the awards have to be made in the country which has ratified the respective convention. The Geneva Convention is virtually non-applicable due to Article VII of the New York Convention which states that the Geneva Convention ceases to have effect when the latter comes into play. Hence for all practical purposes, enforcement of arbitral awards in India came to be governed by New York Convention and the Act of 1940 for international and domestic awards respectively. The 1961 Act confined challenge to an arbitral award only on the limited grounds permitted under the New York Convention.

In January 1996, India enacted a new Arbitration Act which repealed all the three previous statutes (the 1937 Act, the 1961 Act and the 1940 Act). The new Act is divided in two parts. Part I provides for any arbitration conducted in India and enforcement of awards therein. Part II provides for enforcement of foreign awards. Any arbitration conducted in India or enforcement of award therein (whether domestic or international) is governed by Part I, while enforcement of any foreign award to which the New York Convention or the Geneva Convention applies, is governed by Part II of the Act.  Previously, the Supreme Court had held in Bhatia International v. Bulk Trading S.A. and and Venture Global Engineering v Satyam Computer Services Limited that provisions of Part I would apply to international commercial arbitration as well unless the parties have excluded the applicability of Part I. As a result, Indian courts were empowered to set aside foreign awards using section 34 of the 1996 Act. This decision was criticised for ignoring the wordings of the statute. Recently, in Bharat Aluminium Co. v Kaiser Aluminium Technical Services the Court overruled Bhatia’s case and held that such awards would only be subject to the jurisdiction of the Indian courts when the same are sought to be enforced in India in accordance with the provisions contained in Part II of the Arbitration Act, 1996 and that there can be no intermingling between the two parts of the Act as per the New York Convention and the UNCITRAL model. This decision lays to rest the long drawn debate of India not being an arbitration friendly jurisdiction.

ENFORCEMENT REGIME IN MALAYSIA:

In Malaysia, the Arbitration Act of 2005 was enacted to regulate all aspects related to arbitration to ensure synchronisation between Malaysian arbitration and the UNCITRAL model of International Commercial Arbitration.  Malaysia is also a signatory ((http://www.newyorkconvention.org/contracting-states/list-of-contracting-states))to the New York Convention of enforcement of Arbitral Awards. It is a mandated rule that the venue of arbitration is the country that has adopted the New York Convention. The Malaysian legal system is based upon the English common law system which Malaysia inherited from the British colonial rulers ((http://jurist.law.pitt.edu/world/malaysia.htm)). The Arbitration Act, 2005 is modeled on the basis of the New Zealand Arbitration Act, 1996 and the UNCITRAL Model of International Commercial Arbitration ((supranote1)). A clear distinction was brought between domestic arbitration and international arbitration. In case of international arbitration, when the seat of arbitration is in Malaysia, the court’s intervention under Part III of the Arbitration Act (which is the Part regulating Judicial Intervention during arbitral proceedings) is non- mandatory ((Section 3(3) of the Arbitration Act, 2005))unless the parties mutually decide to ‘opt in’, that is, the parties mutually decide the application of Part III with respect to arbitral proceedings ((Section 3(4)of the Arbitration Act, 2005)). The distinction brought forth between the domestic arbitration and international arbitration aims to put a restriction on judicial control over the arbitral proceedings depending upon the kind of arbitration. Court’s intervention is limited to instances mentioned in the Act and the courts are not allowed to intervene in the arbitral proceedings using inherent jurisdiction of the court ((Section 8 of the Arbitration Act, 2005)). Part III restricts the intervention of the court to the following instances:

  • Determination of any preliminary points of law by any party with consent of the arbitral tribunal or with consent of other parties ((Section 41 of the Arbitration Act, 2005)).
  • Reference of question of law arising out of the arbitral award ((Section 42 of the Arbitration Act, 2005)).

The changes in the arbitration law to be at par with the UNCITRAL Model of International Commercial Arbitration and the pro-arbitration judicial decisions by the Courts adhering to the doctrine of minimal judicial intervention in arbitration ((http://www.baliraif2012.com/assets/pdf/session1/SundraRajoo_NATIONALCOURTSANDINTERACTIONWITHARBITRAL%20TRIBUNALS.pdf pages 5-8;))along with the fact that it being a common law country and being a signatory of the New York Convention on enforceability of foreign award has made Malaysia an ideal spot for arbitration.

ENFORCEMENT REGIME IN INDONESIA:

Arbitration in Indonesia is governed by the Arbitration and Dispute Resolution Act, 1999. Indonesia is a signatory to the New York Convention of Enforcement of Foreign Awards ((http://www.newyorkconvention.org/contracting-states/list-of-contracting-states)). The Arbitration and Dispute Resolution Act, 1999 does not follow the UNCITRAL Model of International Commercial Arbitration. The Indonesian legal system is a civil law system based on the Roman-Dutch model and influenced by customary law ((https://www.cia.gov/library/publications/the-world-factbook/geos/id.html)). The Roman-Dutch model of civil law system was inherited by Indonesia due to the Dutch Colonial Rulers. The Indonesian law takes territorial approach to bring a distinction between domestic and international arbitration. Article 1(9) of the Arbitration Law makes it clear that all arbitrations held within Indonesia are considered ‘domestic’ and all those held outside Indonesia are characterised as ‘international’ arbitrations, regardless of the nationality of the parties, location of the subject of the dispute, and governing law. Thus if the seat of arbitration is Indonesia, then it will be considered as a domestic arbitration irrespective of a foreign party to the arbitration proceeding. The enforcement of the award whether domestic or international, may be refused by the Court on the following grounds ((Article 62 and Arbitration Guide, IBA Arbitration Committee, Indonesia, April 2013, pg 21: www.ibanet.org/Document/Default.aspx?DocumentUid=06406456-22F4-4035-BF04-75B85A5E903F)):

  1. Arbitration agreement no valid
  2. Subject matter not arbitrable under Article 5 of the Act
  3. Against public morality and order.

International arbitral awards will only be recognized and enforced by the Indonesian courts if the following conditions are met ((Article 66)):

  1. The award is rendered in a country which has signed a bilateral or multilateral treaty on the recognition and enforcement of International Arbitration Awards with the Republic of Indonesia.
  2. The award falls within the scope of commercial law.
  3. The award is not against public morality and order.

International awards must be registered with the District Court of Central Jakarta ((Article 65 and 67)). There is no time limit for registration of international awards. There is no time limit for registering of the international arbitral award. The application for enforcement should be accompanied with ((Article 67)):

  1. the original Award, or a copy authenticated in accordance with the provisions on authentication of foreign documents, along with an official translation of the award in Indonesian
  2. the original Arbitration Agreement, or a copy authenticated in accordance with the provisions on authentication of foreign documents, along with an official translation of the award in Indonesian
  3. a certification from the diplomatic representative of the Republic of Indonesia in the country in which the International Arbitration Award was rendered stating that such country and the Republic of Indonesia are both bound by a bilateral or multilateral treaty on the recognition and implementation of International Arbitration Awards.

An order of Exequatur from the Chief Judge of the District Court of Central Jakarta needs to be obtained for the enforcement of the award. If the respondent stays in any other court’s jurisdiction other than the District Court of the Central Jakarta, the exequatur order will be send to that court for execution ((Article 69)). Indonesia can be made a seat of arbitration since the Court’s intervention is a bare minimum and even though the Arbitration and Dispute Resolution Act, 1999 is not based on the UNCITRAL Model on International Commercial Arbitration, almost all principles of the same is incorporated in the Arbitration and Dispute Resolution Act, 1999.

Enforcement of Foreign Arbitral Award under the New York Convention: Procedure and Practice

Author: Vedang Mishra, Research Associate

“Arbitration improves access to justice. It enhances the likelihood of recovery. It delivers speedier results. It keeps costs down. For many, it is a superior option to the expensive, slow, cumbersome ways that have come to typify our civil justice system.” -Peter B. Rutledge

The rapid growth of international trade and the complexities of its transaction lead to the growth of arbitration as the internationally accepted means of resolving commercial disputes. An arbitral award made in the territory of a state other than the state where the recognition and enforcement of the award is sought is a foreign arbitral award. Prior to the enactment of the Arbitration and Conciliation Act, 1996 (hereinafter 1996 act), the foreign arbitral awards were regulated by two separate acts namely, the Foreign Awards (Recognition and Enforcement) Act, 1961 and the Arbitration (Protocol and convention) Act, 1937.

Generally a jurisdiction’s credibility depends upon the efficiency of its award enforcement regime. The 1996 act deals with the enforcement of foreign awards in India and consists of two chapters in part II of the act. Chapter I relates to the awards made under the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (1958) and Chapter II to the Geneva Convention on the Execution of Foreign Arbitral Awards (1927). As India is signatory to both these conventions, the relevant provisions relating to the enforcement of these awards have been incorporated under the 1996 Act.

New York Convention Awards

The developments in laws related to recognition and enforcement of foreign awards led to the birth of the New York Convention, 1958. The scope of New York Convention is very wide and an arbitral award made in any foreign country, whether in contracting state or otherwise, is covered under the New York convention.

‘Foreign award’ is defined under 1996 Act as an award which must fulfill the following ingredients ((The Arbitration and Conciliation Act, 1996 section 44)):

        i.            It must be an award on difference arising out of legal relationships considered as commercial under the law in force in India;

      ii.            It must have been made on or after 11th October 1960;

    iii.            It must have been made in pursuance of an agreement in writing for arbitration to which the convention set forth in the First Schedule (New York Convention) applies; and

    iv.            It must have been made in one of the reciprocating contracting states notified by the Central government.

Procedural Requirements for Enforcement of Foreign Awards

Enforcement process is a three dimensional process integrated in Sections 47, 48 and 49 of 1996 Act. A party seeking enforcement of foreign award has to make an application under section 47, accompanied by the required documentary evidences set forth in it. This section lays down the method of proof for the enforcement of the foreign award.

Documentary Evidence:

 The party applying for the enforcement of a foreign award is required to produce the following evidences before the court along with the application for along with application for enforcement:

        i.            the duly authenticated original award or a duly certified copy thereof ((Ibid section 47 (1) (a).));

      ii.            the original agreement referred to in Article II or a duly certified copy thereof ((Ibid section 47 (1) (b).));

    iii.            other relevant evidences necessary to prove that the award is a foreign award ((Ibid section 47 (1) (c).));

    iv.            Certified English translation of the arbitral award or the arbitration agreement ((Ibid section 47 (2).)).

Jurisdiction of the Court

This provision sets forth the formal requirement necessary to apply for the enforcement of a foreign award. It can be enforced if it fulfills two fundamental requirements:

        i.            That the parties have submitted to  arbitration by an agreement valid under its governing law;

      ii.            The award is final and valid according to the law which governs the arbitration proceedings.

The claimant, therefore, must plead and prove both the existence and validity of the arbitration agreement and the award and depending upon the context, the proceedings may be classified as a claim on the award itself or on the submission agreement ((Dicey and Morris, The Conflict of  Laws, Vol I, 13th Ed, 2000, pp 620-621)).

Place of filing

A petition for the enforcement of a foreign award can be filed in any part of the country where a suit for recovery can be filed ((Tata International v. Trisuns Chemical, 2002 (2) Bom CR 88)). It is determined through investigation i.e. if the investigation reveals that the property and assets of losing party are likely to be available in India, the party seeking enforcement has to move the court in India.

A party seeking to enforce an award in an international commercial arbitration may have a choice of country in which to do so, as it is sometimes expressed, the party may be able to go forum shopping. This depends upon the location of the assets of the losing party. Since the purpose of enforcement proceedings is to try to ensure compliance with an award by the legal attachment or seizure of the defaulting party’s assets, legal proceedings of some kind are necessary to obtain title to the assets seized or their proceeds to sale. These legal proceedings must be taken in the State or States in which the property or other assets of the losing party are located ((Redferm and Hunter, Law and Practice of International Commercial Arbitration, 1986 Ed, pp 337- 338)).

Limitation

It cannot be that a foreign award can be enforced at any time, since even a domestic award can be enforced only within a specified time limit. The New York Convention states that each contracting state shall enforce foreign arbitral award in accordance with the rules of procedure of the territory where the award is relied upon. It is clear that this Article enables the state wherein the award is sought to be enforced to impose ((Article III of New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (1958).)), under its procedural law, time limits within which the enforcement of the award is sought.

Since Part II of the 1996 Act does not prescribe any time limit, the Limitation Act, 1963, would apply ((Orient Middle East Lines Ltd v. M/s. Brace Transport Corporation, AIR 1966 GUJ 62.)). Normally, the starting point of limitation would be the date of finality in the country where the award is made. However, there is a need of clear judicial authority on this point. It would be pertinent to note that neither under the old laws nor under the 1996 Act, the Indian courts are empowered to set aside a foreign award. The only enquiry which the court is supposed to make is about its enforceability.

Conditions for Enforcement of Foreign Awards

Section 46 of the 1996 Act deals with conditions for enforcement of foreign awards and enumerates the circumstances which justify court’s refusal to enforce the award. Briefly stated these circumstances are:

a)      Incapacity:  Incapacity of the party to conclude the arbitration agreement, under the law applicable to him, can be a ground for the refusal for enforcement of foreign awards ((The Arbitration and Conciliation Act, 1996 section 48 (1) (a).)).

b)     Invalid arbitration agreement: If the arbitration agreement was invalid under the law of the country where the award was made. The principle that the parties are free to designate the law applicable to arbitration agreement is embodied in this ground ((Ibid section 48 (1) (a).)).

c)      Due Process: If the due process of law has been violated. In other words, if the party was not given the proper notice of the appointment of the arbitrator or of the arbitration proceedings or was unable to present the case. It deals with the fundamental principle of procedure and requires fair hearing ((Ibid section 48 (1) (b).)).

d)     Jurisdictional Defect: The enforcement of foreign award may be refused if the respondent can prove that the award has exceeded the scope of the submission to arbitration. This ground does not deal with failure of the arbitration tribunal to exercise jurisdiction but it only deals with overstepping authority by the arbitral tribunal ((Ibid section 48 (1) (c).)).

e)      Composition of the tribunal and procedure: Irregularity in the composition of arbitral tribunal or arbitral proceedings may be a ground for the refusal for enforcement of foreign awards ((Ibid section 48 (1) (d).)).

f)       Ineffective award: The enforcement of foreign award may be refused if the award is being set aside or suspended in the country in which, or under the law of which, that award was made ((Ibid section 48 (1) (e).)).

Ex Officio Grounds:

The court also may refuse to enforce a foreign award of it finds:

  1. Non-arbitrability: that the award is in respect of a matter which is not capable of settlement by arbitration under the law of India ((Ibid section 48 (2) (a).)).
  2. Contrary to public policy: that the enforcement of the foreign award would be contrary to public policy of India ((Ibid section 48 (2) (b).)).

Conflict with public policy of India:

Public policy is a ground on which the court may refuse enforcement of foreign arbitral award on its own motion without any request of the party against whom the award is invoked. ‘Public Policy’ has been defined by Winfield as “a principle of judicial legislation or interpretation founded on the current needs of the community” ((Murlidhar v. State of UP, AIR 1974 SC 1924.)).

An arbitral award can be set aside on the ground of public policy in India under section 34 of the Arbitration and Conciliation Act, 1996. A foreign award may not be enforced if the court dealing with the case is satisfied that the enforcement of the award would be contrary to public policy. The Supreme Court of India in Gherulal Parakh Vs. Mahadeodas Maiya ((AIR 1959 SC 781))has held that public policy of India is nothing but the policy of law in India. The doctrine of public policy should only be invoked in clear and incontestable cases of harm to the public. Though the heads are not closed and though theoretically it may be permissible to evolve a new head under exceptional circumstances of the ever changing world, it is convenient in the interest of stability of society not to make any attempt to discover new heads of public policy.

In Renusager Power Co. Ltd v. General Electric Co ((AIR 1994 SC 860)). the Supreme Court observed that in order to attract the bar of public policy, the enforcement of award must involve something more than mere violation of law in India. Again in the Oil & Natural Gas Corporation Ltd. v. SAW Pipes Ltd (([2003] 5 SCC 705))while upholding the validity of Renusager case, the Hon’ble Court held that the term “public policy of India” should be given wider interpretation. The enforcement of award would be contrary to public policy if it is contrary to (a) Fundamental policy of India; (b) Interest of India; (c) Justice or morality; and (d) if it is patently illegal. It is heartening to note that the Arbitration (Amendment) Bill, 2010 seeks to define the term ‘Public Policy’ so as to give it an exact meaning.

Conflicting Decisions: From Bhatia International to Venture Global Engineering

The Judgment of Apex Court in both Bhatia Internationa case ((Bhatia International v. Bulk Trading S.A., AIR 2002 SC 1432 ))and Venture Global Engineering case ((Venture Global Engineering Company U.S.A. v. Satyam Computer Services, AIR 2008 SC 1061))revolves around the issue of lex loci arbitri i.e. seat of arbitration. It is a well accepted principle of law that the country of the seat of arbitration alone has jurisdiction to set aside an award. In Bhatia International v.  Bulk Trading, Supreme Court held that though there was no provision in Part II of the Act providing for challenge to a foreign award, a petition to set aside the same would lie under Section 34 Part I of the Act (i.e. it applied the domestic award provisions to foreign awards).

In Venture Global Engineering case also, the Supreme Court relied heavily on Bhatia International. It was held that a person seeking to enforce a foreign award has to not only to file an application for enforcement under Section 48 of the Act; it has to meet an application under Section 34 of the Act seeking to set aside the award. But, it went on further to hold that where it is open to the parties to exclude the application of the provisions of Part I by express or implied agreement, it would mean that otherwise the whole of Part I would apply.

But now the situation related to foreign arbitral award has totally changed after the overruling of the Bhatia International Case in 2012 by the constitutional bench of Supreme Court in which Supreme Court held that the courts in India do not have jurisdiction over international commercial arbitral award where the seat of arbitration is outside India ((Balco case.)).

Award to be Deemed Decree of the Court

A foreign award becomes deemed decree only on the satisfaction of the Court in respect of enforceability of award when it is applied for. Section 49 of 1996 provides for enforcement of the award. The Supreme Court in Furest Day Lawson v. Jindal Exports Ltd ((AIR 2001 SC 2293)), held that the provisions of section 46 to 49 of the 1996 Act read together make it clear that no separate proceedings are necessary for the enforcement of award. The Court decides the enforceability of the award to make it a decree or rule of Court.

Any person who is interested in enforcing a foreign award may apply in writing to any Court having jurisdiction over the subject matter of the award. The Court for this purpose would be Principal civil Court for original jurisdiction in a District and High Court exercising original jurisdiction in Civil Courts. If the conditions for enforcement are fulfilled and the court is satisfied about the enforceability of a foreign award, the award is deemed to be a decree of that court and enforceable under the law.

Arbitration Agreements: Understanding the Basics

Author: Sibani Panda, Research Associate

‘At all events, arbitration is more rational, just, and humane than the resort to the sword’ – Richard Cobden

The provisions of the Arbitration & Conciliation Act govern arbitration in India. The United Nations Commission on International Trade law (‘UNCITRAL’) which was established in the 1966 has been responsible for the development of international arbitration. India enacted the Arbitration and Conciliation Act, 1996 by taking into account the arbitration rules of UNCITRAL Modern Law on International commercial Arbitration. India is also a signatory to the New York Convention (1960) and the Geneva Convention (1924).  Arbitration under Arbitration and Conciliation Act, 1996 is a matter of consent, not coercion and the parties are free to structure their arbitration agreements as they see fit. ‘This concept of arbitral contractualism allows the parties  to write their own rules of arbitration, therefore, they can customize the arbitral process according to the needs of their transaction, eliminate legal rules or trial techniques that might prove inconvenient or unsuitable , and maintain procedural elements they believe essential to the dictates of fairness, finality and functionality ((Charbonneau, Cases and Materials on law and practice of Arbitration , second edn,2000, p 15)).’

According to Section 7 of the Arbitration and Conciliation Act, 1996

  1. An ‘Arbitration agreement‘ means an agreement by the parties to submit to arbitration all or certain disputes which have arisen or which may arise between them in respect of a defined legal relationship, whether contractual or not.
  2. An Arbitration agreement may be in the form of an arbitration clause in a contract or in the form of a separate agreement.
  3. An Arbitration agreement shall be in writing.
  4. An Arbitration agreement is in writing if it is contained in-
  • a document signed by the parties;
  • an exchange of letters, telex, telegrams or other means of telecommunication which provide a record of the agreement; or
  • an exchange of statements of claim and defense in which the existence of the agreement is alleged by one party and not denied by the other.
  1. The reference in a contract to a document containing an arbitration clause constitutes an arbitration agreement if the contract is in writing and the reference is such as to make that arbitration clause part of the contract.

In Arbitration agreements, the parties have the freedom and legal right to engage in arbitration and to make specific provisions for the implementation and operation of their arbitration. By entering into a contract of arbitration, the parties voluntarily abandon their rights to judicial relief and, in effect, create a private system of adjudication that presumably is better adapted to their transactional needs.

Section 7(1) contemplates two types of arbitration agreements:

        I. The first type of agreement is referred to as an ‘Arbitration clause’ where an agreement mainly takes place in the form of an arbitration clause, which is embedded, in the principal contract between the parties. The agreements where a clause is inserted in the contract that creates some rights and duties which, in the event of dispute, will be the subject of the intended arbitration are called substantive contract ((Mustill & Boyd, Commercial Arbitration, second edition , 1989, p 6)). The arbitral clause is a contract where the parties agree to submit future disputes to arbitration.  The arbitral clause has an autonomous legal existence and it must identify the contractual relationship to which it applies.

      II. The second type of agreement is referred to as a ‘Submission to arbitration’ or a ‘Submission agreement’ where an agreement is made between the parties after the disputes have already arisen. In submission agreement, an agreement is formed between the parties to submit a dispute to arbitration, which has already arisen between the parties before the arbitration agreement, comes into existence. The submission agreement is usually a detailed document, dealing with the construction of the arbitral tribunal, the procedure to be followed, the issues to be decided and other matters ((Redfern and Hunter , Law And Practice Of International Commercial Arbitration , fourth edn, 2004, p 7,para 1- 10)). It is necessary to have the necessary terms of reference in an arbitral process because it helps to establish the arbitral tribunal’s jurisdiction to adjudicate.

In Bihar State Mineral Development Corporation v Encon Builders (I) Pvt Ltd, ((2003 (3) Arb LR 133,137 (SC).))the Supreme Court has observed that the following four essential elements of an arbitration agreement:

  1. There must be a present or 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.

In KK Modi v KN Modi, ((AIR 1998 SC 1297))Supreme Court observed some of the important attributes of Arbitration agreement which are as follows:

  1. The arbitration agreements contemplates that the decision of the tribunal will be binding on the parties to the agreement.
  2. The jurisdiction of the tribunals to decide the rights of the parties is derived either from the consent of the parties or from an order of the court or from a statute, the terms of which make it clear that the process is to be an arbitration.
  3. The arbitration agreements contemplates that the substantive rights of the parties will be determined by the agreed tribunal.
  4. The tribunal determines the rights of the parties in an impartial and judicial manner, owing an equal obligation of fairness towards both sides.
  5. The agreement of parties to refer their disputes to the decision of the arbitral tribunal is intended to be enforceable in law.
  6. The agreement contemplates that the tribunal will make a decision upon a dispute, which is already formulated at the time when a reference is made to the tribunal.

An Arbitration agreement is required to be in writing which means that a legally binding and valid agreement between the parties purporting to submit to arbitration any existing or future disputes arising out of or in connection with the main contract, ((Union of India v GS Atwal and Co (1996) 3 SCC 568))must be in writing. A mere oral understanding between the parties to refer the disputes to arbitration would not constitute a valid arbitration agreement ((Jayant N Sheth v Gyaneshwar Apartment co-operative Housing society Ltd (1999) 1 Bom CR 774)).

According to Section 7(4) ((The Arbitration and Conciliation Act, 1996)), there are three situations in which an arbitration agreement should be treated in writing:

                    I. In a document: An arbitration agreement may be in the form of an arbitration clause in a contract, or in the form of a separate agreement. It is mainly required that the documents relating to the agreement should indicate that it is an agreement to arbitrate and it should be signed by the parties.

                 II. In the correspondence: An arbitration agreement also results from the correspondence between the parties. An arbitration agreement is in writing if it is contained in an exchange of letters, telex, telegrams or other means of telecommunication, which provide a record of the agreement ((The Arbitration and conciliation act, 1996, s 7(4)(b).)).  In these cases, even if the parties but the assent of do not sign the agreement each party is required in written form ((Study on New York Convention  A/CN 9/168, para 21)).

               III. In the claim and defense statements: In cases where the claimant in his claim statement alleges the existence of an arbitration agreement and the defendant, in his defense does not deny it, then a valid arbitration agreement will be inferable.

An agreement enforceable by law is a contract ((The Indian Contract Act 1872, s 2 (e).)). An arbitration agreement stands on the same footing as any other agreement. Every person capable of entering into a contract may be a party to an arbitration agreement. He who cannot contract, cannot make a reference to arbitration. An agreement to submit a dispute to arbitration is based on the consent of the parties. It is binding upon the parties unless it is tainted with fraud, undue influence etc. in which case it can be avoided like any other agreement. The terms of the arbitration agreement must be definite and certain. The parties to the arbitration agreement must be clearly identified either in the main contract or in the arbitration agreement. It is essential that while drafting an arbitration agreement, the intention of the parties should be mentioned in a clear and unambiguous language. The first and foremost requirement of drafting an arbitration clause is that the intention of the parties, that all disputes between them shall be resolved by arbitration, should be stated in clear and unequivocal words.

In order to constitute an arbitration agreement between two parties, the other must accept the proposal made by one person. Unless the proposal is accepted, there can be no binding and enforceable agreement. An arbitration agreement is separate and independent of the contract in which it is embedded. Even if the contract in which the arbitration clause has been embedded is held to be invalid for the reason that its subject matter is not arbitral under the law for the time being in force in India, the arbitration clause survives and the award resulting from the arbitral proceedings under such clause will be perfectly valid.

Incorporation of Arbitration Agreements:

An arbitration clause can be incorporated either by reference to a standard form of clause or to a set of trade terms which themselves include provisions requiring disputes to be submitted to arbitration. In Alimenta SA V National Agriculture Cooperative Marketing Federation Of India Ltd (([1987] 1 SCC 615)), the Supreme Court observed that ‘ the arbitration clause of an earlier contract can, by reference , be incorporated into a later contract, provided, however it is not repugnant to or inconsistent with the terms of contract in which it is incorporated’. Section 7(5) provides that ‘the reference in a contract to document containing n arbitration clause constitutes an arbitration agreement if the contract is in writing and the reference is such as to make that arbitration clause as a part of the contract’.

In a particular case, the scope and extent of an arbitrator’s jurisdiction and powers would depend on the proper construction of the arbitration agreement, therefore it is essential that the arbitral tribunal ‘must consider the dispute in question and then elicit from the arbitration agreement whether or not the parties intend a dispute of the kind in question to be resolved by arbitration’ ((Redfern and Hunter , Law And Practice Of International Commercial Arbitration , fourth edn, 2004, p 137,para 3-11)). The existence of difference or dispute is an essential condition for the arbitrator’s jurisdiction. If there is no dispute, there can be no right to demand arbitration. The dispute may be a present or a future one. In case of an agreement to refer future disputes to arbitration, the jurisdiction of the arbitrator does not arise until a dispute has arisen. A dispute means an assertion of a right by one party and repudiation thereof by another. A point as to which there is no dispute cannot be referred to arbitration.

So some of the essentials of the arbitration agreements can be summarized as follows:

  • An arbitration agreement must be in writing.
  • An arbitration agreement must comply with the requirements of a valid contract.
  • An arbitration agreement must be in respect of a dispute that is arbitrable.
  • Parties may agree on the number of arbitrators and their nationalities.
  • Parties may agree on the venue of the arbitration proceedings.
  • Parties may agree on the choice of procedure and the arbitration administered by an arbitral institution under its rules.
  • Parties may agree on the language of proceedings and pleadings;

Therefore it is always required that the arbitration agreements should be construed in a fair and proper manner according to the general principles of construction of statutes, statutory instruments and other contractual documents.