Essentials of Arbitration Agreement
Essentials of Arbitration Agreement
An arbitration agreement is a contract between parties agreeing to submit disputes to arbitration rather than courts. It is the cornerstone of arbitration because without a valid arbitration agreement, arbitration cannot proceed.
1. Definition
Under Section 2(1)(b) of the Arbitration and Conciliation Act, 1996, an arbitration agreement is:
"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. Essentials of a Valid Arbitration Agreement
(a) It Must Be in Writing
The arbitration agreement must be in writing.
Section 7 of the Arbitration and Conciliation Act, 1996 requires the arbitration agreement to be either:
A written agreement signed by the parties,
An exchange of letters, emails, or other communication, or
An arbitration clause in a contract.
The expression "in writing" includes:
An arbitration clause in the contract,
A separate agreement,
Electronic communications (emails, faxes),
Reference in a contract to another document containing an arbitration clause, provided the reference is such that the arbitration clause is incorporated by reference.
(b) Intention to Arbitrate
The parties must have a clear intention to refer disputes to arbitration.
The agreement should express a willingness to resolve disputes through arbitration instead of courts.
This intention is often shown by wording like "all disputes shall be referred to arbitration" or "any dispute arising out of this contract shall be settled by arbitration."
(c) Identification of Disputes Covered
The arbitration agreement should specify which disputes or differences are to be referred to arbitration.
It can cover all disputes arising from the contract or only certain disputes (partial arbitration).
The scope must be clear, e.g., disputes relating to breach of contract, performance, or interpretation.
(d) Parties to the Agreement
The arbitration agreement must be between the actual parties to the dispute.
It is binding only on parties who have signed or are otherwise bound by it.
Third parties not signatories to the arbitration agreement generally cannot be forced into arbitration unless there are legal exceptions like assignment or agency.
(e) Reference to Arbitration Procedure
While not mandatory, it’s common for the arbitration agreement to refer to:
The number of arbitrators,
The seat or place of arbitration,
The rules governing the arbitration (institutional rules like ICC, SIAC, or ad hoc),
The language of arbitration,
The method of appointment of arbitrators.
These procedural details ensure smooth conduct of arbitration.
(f) Legal Validity
The arbitration agreement must be valid and enforceable under the law.
It should not be vitiated by fraud, coercion, undue influence, or mistake.
It should not cover disputes that are non-arbitrable under Indian law (e.g., criminal matters, certain statutory disputes).
(g) Mutual Consent
Both parties must mutually consent to arbitration.
Unilateral imposition without the other party’s agreement is generally invalid.
3. Types of Arbitration Agreements
Arbitration Clause: A clause within a broader contract agreeing that disputes will be arbitrated.
Separate Arbitration Agreement: A standalone agreement between parties agreeing to arbitrate.
Submission Agreement: Agreement to arbitrate a dispute that has already arisen.
4. Relevant Legal Provisions and Case Law
Section 7, Arbitration and Conciliation Act, 1996: Defines and requires arbitration agreement to be in writing.
Fazalbhoy v. K.S. Seth (1963 AIR 182): Emphasized the need for an arbitration agreement to be certain and clear.
S.B.P. & Co. v. Patel Engineering Ltd. (2005) 8 SCC 618: Supreme Court held that arbitration agreements are to be given effect to unless patently invalid or non-arbitrable.
Oil and Natural Gas Corporation Ltd. v. Saw Pipes Ltd. (2003) 5 SCC 705: Clarified that an arbitration agreement must be interpreted strictly but with the presumption in favor of arbitration.
5. Why are these Essentials Important?
Validity: Without these essentials, courts will not enforce arbitration.
Enforceability: Awards passed based on invalid arbitration agreements can be set aside.
Clarity: Properly drafted agreements reduce disputes over the arbitrability and scope.
Autonomy: Parties can design dispute resolution to suit their needs, but must ensure compliance with legal requirements.
Summary Table
| Essential Element | Description |
|---|---|
| Writing | Must be in written form or electronic communication |
| Intention | Clear intention to submit disputes to arbitration |
| Scope of disputes | Defined or all disputes covered |
| Parties | Binding only on signatories |
| Procedural references | Seat, number of arbitrators, rules (optional) |
| Legal Validity | Must comply with law, free from vitiating factors |
| Mutual Consent | Both parties must agree |
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