TOPIC 2- ARBITRATION AGREEMENT

I. INTRODUCTION

Disputes are a part of everyday life, but how do we resolve them, and is it necessary for only
individuals to be involved in the dispute? Arbitration emerges as our savior in this situation.
Arbitration is a form of alternative dispute resolution (ADR) mechanism in which any
individual, entity, company, enterprise, or group of enterprises submits the disagreement to an
arbitral group of one, three, or as many members as the parties agree upon for private
resolution.1 The dispute will be decided by one or more persons (the 'arbitrators', 'arbiters', or
'arbitral tribunal'), which renders the 'arbitration award'.2 This procedure is implemented
outside of legal proceedings as it a private form of dispute resolution mechanism. But the main
question that arises here is whether this procedure is binding upon the parties. The answer lies
in the Arbitration Agreement. Various companies bind themselves in an Arbitration Agreement
to avoid the cost and time-consuming litigation procedures along with the compliance of
Arbitration and Conciliation Act 1996.3

Let us understand what exactly is an Arbitration Agreement:

As per the Arbitration and Conciliation Act, 19964:-

It 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.

1. It must be in writing.
2. It must have all the essential elements of a valid contract
3. It must be to refer a dispute, present or future, to arbitration
4. It may be in the form of:
a. an arbitration clause in a contract, or

1
Deepak Pratap Singh, What Constitute an Arbitration Agreement?, CA Club India (Sept. 10,
2022), https://www.caclubindia.com/articles/what-constitute-arbitration-agreement-47719.asp
2
Ibid.
3
The Arbitration and Conciliation Act, 1996 (No. 26 of 1996)
4
Ibid.

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 b. in the form of a separate agreement, or
c. in the form of a reference in a written contract containing an arbitration clause5

In Svapn Const. v. IDPL Employees Co-op. Group Housing Society Ltd.,6 it was held that the
agreement does not need to be signed by the parties if it is accompanied by another written
contemporaneous instrument that is binding on the parties. However, in the 2018 case of M/s
Caravel Shipping Services Pvt Ltd v M/s Premier Sea Food Exim Pvt Ltd,7 the Supreme Court
found that an unsigned arbitration agreement is admissible, as the only need for a valid
arbitration agreement under the 1996 Act is that it be written.

The Supreme Court’s 2011 judgment in Booz Allen and Hamilton Inc v. SBI Home
Finance Ltd. & Others8 (“Booz-Allen”) forms the foundation for any discussion on the
question of arbitrability in India as it lays down a test for determining whether a subject matter
of a dispute is capable of arbitration in India or not (the “Booz-Allen Test”). In Booz-Allen,
the Supreme Court observed that the question of arbitrability is to be decided on the basis of
the ‘nature of rights’ involved in the dispute. If the dispute involves a right in rem, i.e., a
person’s right against the world at large, the dispute is not arbitrable. On the other hand, the
dispute is arbitrable if a dispute involves a right in personam, i.e., rights against specific
individuals, such as in a contract.9 The law has given jurisdiction to determine certain matters
to specified tribunal only; these cannot be referred to arbitration:

1. Disputes relating to rights and liabilities which give rise to or arise out of criminal
offences;
2. Matrimonial disputes relating to divorce, judicial separation, restitution of conjugal
rights, child custody;
3. Guardianship matters;
4. Insolvency and winding up matters;
5. Testamentary matters (grant of probate, letters of administration and succession
certificate);
6. Eviction or tenancy matters governed by special statutes10

5
s. 7, The Arbitration and Conciliation Act, 1996
6
Svapn Const. v. IDPL Employees Co-op. Group Housing Society Ltd., (India Sup. Ct. (2005)
7
Caravel Shipping Services Pvt. Ltd. V. Premier Sea Foods Exim Pvt. Ltd. SC 1252 (2018)
8
Booz Allen and Hamilton Inc v. SBI Home Finance Ltd. & Others, (2011) 5 SCC 532.
9
Ibid.
10
Ibid.

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 II. TYPES OF ARBITRATION AGREEMENTS:

Before diving into the intricacies of the Arbitration Agreement, we need to have a look at the
types of Arbitration Agreements. These agreements serve as the cornerstone for the arbitration
procedure. The agreements have to be necessarily customized to each party’s requirements
because the key is customization. Whilst drafting these agreements, we need to make sure what
sort of Agreement shall be drafted in resonance with the particular dispute in hand. Below is
an in-depth exploration of the various types of arbitration agreements:

Standard Arbitration Agreements

When we usually draft a contract, we anticipate that disputes may take place. For this
anticipation, we have to draft an inclusive arbitration clause in the agreement.11 So, we can
understand that Standard Arbitration agreements are typically a clause which is embedded
within the contract itself. This type of agreement helps in providing a resolution in advance
making it a proactive agreement. These agreements are commonly used in commercial,
employment, and consumer contracts.

Submission Agreements

What happens if, let’s say, the contract does not have an Arbitration Clause as a dispute
resolution mechanism but they wish to opt for the same? There comes the solution of a
submission agreement which is drafted after a dispute has already arisen between parties who
did not have an existing arbitration clause. This type of agreement allows them to choose
arbitration as their method of resolving the specific dispute without having to spend time and
money on the long-drawn litigation procedure. Unlike the standard arbitration clause, it is not
pre-emptive but a reactive measure taken once a conflict has materialized.

Ad hoc Arbitration Agreements

Ad hoc arbitration is an agreement where the parties themselves make arrangements for the
arbitration without the involvement of an arbitral institution. They appoint the arbitrators,
decide on the procedure, and handle administrative tasks. Ad hoc arbitration is often chosen for

11
Gary B. Born, International Commercial Arbitration, 2d ed. (Kluwer Law International 2014)

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its flexibility and cost-effectiveness. However, it may face challenges such as delays and lack
of procedural clarity due to the absence of institutional support.

Example: Two companies agree to arbitrate their disputes regarding a construction contract
without involving any arbitral institution and appoint retired judges as arbitrators.

Institutional Arbitration Agreements

Institutional arbitration involves arbitration administered by a specialized arbitral institution,

such as the Indian Council of Arbitration (ICA) or the International Chamber of Commerce
(ICC). These institutions provide a set of rules, administrative support, and facilities for
conducting arbitration. Institutional arbitration is preferred for its procedural clarity,
administrative efficiency, and established rules.12

Example: Parties include a clause in their contract specifying that any disputes will be resolved
under the rules of the ICC.13

Domestic Arbitration Agreements

Domestic arbitration refers to arbitration conducted within India where both parties are Indian
entities. The arbitration proceedings, substantive law, and procedural rules are governed by
Indian statute i.e., The Arbitration and Conciliation Act, 1996.14 Domestic arbitration is often
chosen for disputes arising from domestic contracts and is less complex compared to
international arbitration.

Example: A dispute between two Indian companies regarding a supply contract is resolved
through arbitration in India under the Arbitration and Conciliation Act, of 1996.15

International Arbitration Agreements

International arbitration involves parties from different countries, and the arbitration may be
conducted in India or abroad. International arbitration agreements often involve complex issues
of jurisdiction, choice of law, and enforcement of awards. The Act's provisions align with the

12
Indian Council of Arbitration, https://www.icaindia.co.in (last visited on 3rd July 2024)
13
International Chamber of Commerce, https://iccwbo.org (last visited on 4th July 2024)
14
Arbitration and Conciliation Act, 1996, No. 26, Acts of Parliament, 1996
15
Ibid.

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UNCITRAL Model Law16, facilitating India's role as an arbitration-friendly jurisdiction.

Example: An Indian company and a foreign company include an arbitration clause in their joint
venture agreement specifying that disputes will be resolved through arbitration in Singapore
under the SIAC rules.17

Foreign Seated Arbitration Agreements

Foreign seated arbitration agreements refer to agreements where the arbitration proceedings
are conducted outside India, even if one or both parties are Indian. The seat of arbitration
determines the procedural law governing the arbitration. Foreign seated arbitrations can be
enforced in India under the New York Convention and the Geneva Convention.

Example: An Indian company and a US company agree to resolve their disputes through
arbitration in London under the LCIA rules.18

Fast-Track Arbitration Agreements

Fast-track arbitration is designed for expedited resolution of disputes. The parties agree to a
simplified and faster arbitration process with strict timelines and limited procedural formalities.
Fast-track arbitration is suitable for less complex disputes requiring quick resolution.

Example: Two companies agree to resolve any disputes arising from a short-term supply
contract through fast-track arbitration with a single arbitrator and a fixed timeline of six
months.

16
United Nations Commission on International Trade Law (UNCITRAL) Model Law on International
Commercial Arbitration, 1985, (with amendments as adopted in 2006)
17
Singapore International Arbitration Centre, https://www.siac.org.sg. (last visited on 4th July 2024)
18
London Court of International Arbitration, https://www.lcia.org (last visited on 4th July 2024)

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 III. KEY ELEMENTS OF ARBITRATION AGREEMENT
Whenever we draft an agreement, there are certain things to be kept in mind for customization.
Customization is the key, remember? So, moving forward we shall hereby discuss the essentials
of the Arbitration Agreement which are the heart and soul of the agreement. These essentials
revolve around having a genuine dispute to the manner of it proper documentation. Every
essential is a crucial criterion for the precise drafting of this agreement and timely resolution
of the dispute.

1. Consent and Voluntariness

2. Mutual Agreement
3. Scope of Disputes Covered
4. Applicable Arbitration Rules
5. Arbitrator Appointment Process
6. Seat of Arbitration
7. Governing law
8. Jurisdiction

Let’s delve into the intricacies of each of the essentials.

CONSENT AND VOLUNTARINESS

The first and foremost thing any agreement requires is the consent of the party but not just any
party but both the parties. It is essential to note that consent shall be of free will and voluntary.
The Supreme Court in the case of Cox & Kings Ltd. v. SAP India (P) Ltd. (2018)19 held that
consent is a fundamental principle of arbitration and that an arbitration agreement must be
entered into with free consent. The Court emphasized that the absence of consent vitiates the
arbitration agreement.20

Whereas in another landmark judgment of Sunderam Finance Ltd. v. NEPC India Ltd. (1999)21,
it was held by the very Apex court that consent is sine quo non for arbitrations in India and
mutual consent and its voluntariness shall be bound by the Arbitration Agreement. 22 These

19
Cox & Kings Ltd. v. SAP India (P) Ltd., (2018) 10 SCC 200
20
Ibid.
21
Sunderam Finance Ltd. v. NEPC India Ltd., (1999) 2 SCC 479.
22
Ibid.

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precedents ensure that alternative dispute resolutions like Arbitration are valid and not
unlawful, thereby further reducing the burden on the courts.23 The Supreme Court in M.
Dayanand Reddy v. A.P. Industrial Infrastructure Corpn. Ltd. 24 emphasized that the intention
to arbitrate must be ascertained from the relevant documents and surrounding circumstances.

MUTUAL AGREEMENT

The core of the Arbitration agreement is the mutual agreement of all the parties upon the opting
Arbitration as the dispute resolution mechanism. The vital aspect for the mutual agreement is
that it must be explicit. All the parties shall explicitly agree to enter into the Arbitration
agreement. It means that there shall be a clear indication of all the parties regarding their
intention and mutual acceptance of the agreement.25 There must be mutual consent and
"consensus ad idem" between the parties to the arbitration agreement, as per the principles laid
down in Jagdish Chander v. Ramesh Chander.26 This ensure that there is no coercion in the
process of arbitration.

SCOPE OF DISPUTE

Whilst drafting the Arbitration agreement, it is essential to make the scope as inclusive of all
the possible disputes that may take place or as agreed upon by the parties. Wherever we leave
the scope for doubt, further legal complications are bound to take place.27 The agreement shall
clearly inculcate every detail of the scope of disputes that will be resolved through arbitration.
It should specify whether all disputes or only certain defined disputes will be subject to
arbitration. The ambiguity in terms of scope will lead to legal complexities.

APPLICABLE ARBITRATION RULES

The arbitration agreement should clearly specify the set of arbitration rules that will govern the
proceedings, such as the rules of institutions like the ICC, SIAC, or LCIA. This ensures clarity
on the procedural framework to be followed.28 The parties are bound by the arbitration statutory

23
Ibid.
24
M. Dayanand Reddy v. A.P. Industrial Infrastructure Corpn. Ltd., (1993) 3 SCC 137
25
Siya Sharma, Arbitration and the Rule of Severability, Arbitration Agreement, Essentials, and Rule of
Severability - Legal Vidhiya (last visited on 6th July 2024)
26
Jagdish Chander v. Ramesh Chander, (2007) 5 SCC 719
27
Ibid.
28
UNCITRAL Model Law on International Commercial Arbitration, Art. 6(1) (1985)

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rules and no arbitration agreement contrary to those rules can supersede. The provisions of the
agreement shall reflect the same without leaving any scope for ambiguity.29

ARBITRATOR APPOINTMENT PROCESS

The first and foremost step in the Arbitration process it sending the notice to the opponent party
in regard to the initiation of the process. Whilst the process is initiated the next step comes to
the choice between Ad-Hoc or Institutional form of proceedings. Then, the Arbitration
Agreement shall outline the process for appointment of arbitrator(s). Typically, it shall entail
all the particular specifications like the number of arbitrators, their qualifications, and the
method of selection.

Any person may be appointed as the arbitrator. Generally, an impartial and independent person
is appointed like CA, Retired Judges, Advocates, or any other professional having requisite
qualifications. The parties have the free will to choose the number of arbitrators but it shall not
be an even number. Typically, one or three arbitrators are appointed. These specifications
ensure that there is no scope of biasness or ambiguity in the agreement. Parties often have the
freedom to choose the arbitrators, which is a key advantage of arbitration. 30

29
Ibid.
30
Kingstubb Kasiva, The Essentials of a Valid Arbitration Agreement, LinkedIn (Nov. 25, 2021),
https://www.linkedin.com/pulse/essentials-valid-arbitration-agreement-kingstubbkasiva-edljc (last visited on 5th
july 2024)

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SEAT & VENUE OF ARBITRATION

Another crucial and one of the most essential elements of the Arbitration Agreement is the
specification of Seat and Venue of Arbitration. The agreement should designate the seat or legal
place of arbitration. It is basically the court which shall have the jurisdiction over the matter.
The seat of arbitration is typically decided by default. The parties do not get a preference to
choose the seat of arbitration. This is particularly important in international arbitrations, as the
seat determines the procedural laws governing the arbitration.

The seat and the venue of hearings may differ as per the particular dispute.31 The difference
that lies between seat and venue is that venue is the place where parties sit altogether for the
procedure of arbitration. Parties voluntarily decides upon the venue of arbitration as per their
choice and convenience. The legal provision regarding the venue of arbitration is stated under
section 20(3) of the Act.32

GOVERNING LAW

The governing law of an arbitration agreement refers to the substantive law that will be applied
to interpret and enforce the agreement. Parties to an arbitration agreement have the freedom to
choose the governing law, which is typically specified in the agreement itself or in the main
contract containing the arbitration clause.33 In the absence of a choice of law, the governing
law will be determined by the arbitral tribunal based on the applicable conflict of laws rules.34

The law of the seat of arbitration (lex arbitri) often serves as the default governing law for the
arbitration agreement.35 In the situation when one party is from India & the other, for example,
from London and the seat of arbitration is Singapore, then in such a case it should be clearly
spelt by parties which law they want - laws of Singapore, the UK or India, to apply to
the arbitration.

JURISDICTION

The jurisdiction of an arbitration agreement, basically, connotes to the particular court or

arbitral tribunal to adjudge the disputes arising from the arbitration agreement. Parties have the

31
Shivani Nair, Significance of the Arbitration Agreement, iPleaders (Feb. 18, 2020),
https://blog.ipleaders.in/significance-of-the-arbitration-agreement/ (last visited 5th July 2024)
32
S. 20(3), Arbitration and Conciliation Act, 1996, No. 26, Acts of Parliament, 1996
33
Gary B. Born, International Commercial Arbitration 473 (2d ed. 2014)
34
UNCITRAL Model Law on International Commercial Arbitration, art. 28(1) (1985)
35
Gary B. Born, International Commercial Arbitration 2103 (2d ed. 2014)

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free will to choose the seat or legal place of arbitration in their agreement, which determines
the jurisdiction of the courts at that location. The courts at the seat of arbitration have
supervisory jurisdiction over the arbitral proceedings.

They can assist in the appointment of arbitrators, grant interim measures, and set aside arbitral
awards on limited grounds.36 In addition to the courts at the seat, the courts at the place of
enforcement may also have jurisdiction to review the validity of the arbitration agreement and
the arbitrability of the dispute when an award is sought to be enforced.37

IV. FEATURES OF ARBITRATION AGREEMENT

INCORPORATION BY REFERENCE
As we studied in the beginning of this topic that the arbitration can be sought as a means for
resolution either through clause in the main agreement or separate arbitration agreement.
Thereby, an arbitration agreement need not be a standalone document; it can be incorporated
by reference into the main contract.

The reference to the arbitration agreement must be clear, unambiguous, and leave no doubt
about the parties' intention to be bound by it. The Supreme Court, in Jagdish Chander v.
Ramesh Chander38, held that an arbitration agreement can be validly incorporated by reference,
provided the reference is clear and the agreement is identifiable.

WRITTEN FORM
One of the validity criteria of an agreement is that it shall be in writing. As per Section 7(3) of
the Arbitration and Conciliation Act, 1996, an arbitration agreement must be in writing.39
In the landmark judgment of Jagdish Chander v. Ramesh Chander40 and K.K. Modi v. K.N.
Modi41, it was reiterated that it shall be reduced in the form of writing. However, it may vary
across jurisdictions but it is generally legally advised to have the arbitration agreement in
writing.

36
Ibid.
37
Ibid.
38
Jagdish Chander v. Ramesh Chander & Ors., (2007) 5 SCC 719
39
S. 7, Arbitration and Conciliation Act, 1996, No. 26, Acts of Parliament, 1996
40
Ibid.
41
K.K. Modi v. K.N. Modi, (1998) 3 SCC 573

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A written agreement provides clarity and evidence of the parties' intention to arbitrate. It helps
avoid misunderstandings and disputes regarding the terms of the agreement. 42

DOCTRINE OF SEPARABILITY
What will happen to the arbitration clause if, let’s say, the main agreement is held “invalid” or
“void”? There comes the concept of Separability of “Doctrine of Separability”. The arbitration
agreement is considered "separable" or "autonomous" from the main contract under the
doctrine of separability. This means that the validity of the arbitration agreement is independent
of the validity of the underlying contract and it will survive as a separate clause.

The Supreme Court, in Rashtriya Ispat Nigam Ltd. v. Verma Transport Company43, affirmed
the principle of separability, stating that the arbitration agreement has an independent existence.
However, if any particular part of the arbitral award is declared invalid, then the rest of the
award will be enforced without any issue. This ensures that the invalidity or termination of the
main contract does not necessarily affect the validity of the arbitration agreement.44

COMPETENCE-COMPETENCE DOCTRINE
This principle is enshrined in Section 16 of the Indian Arbitration and Conciliation Act, 1996.
The doctrine refers to the fundamental principle in arbitration that empowers the arbitral
tribunal by giving it the autonomy and independence. It empowers the tribunal to rule on its
own jurisdiction, including any objections regarding the existence or validity of the arbitration
agreement.45

The key aspects of this doctrine are:

 The arbitral tribunal has the authority to decide on its own jurisdiction, without the
matter being referred to a court, unless the court finds the tribunal's decision on
jurisdiction to be incorrect.
 This ensures that the arbitral tribunal can rule on challenges to its jurisdiction, such as
the non-existence, invalidity or scope of the arbitration agreement.
 The doctrine prevents parties from frustrating the arbitration process by challenging the
tribunal's jurisdiction before courts at the first instance.

42
Ibid.
43
Rashtriya Ispat Nigam Ltd. v. Verma Transp. Co., (2006) 7 SCC 275
44
Ibid.
45
Arbitration and Conciliation Act, 1996, No. 26, Acts of Parliament, 1996

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  The Indian courts have recognized and upheld the doctrine of competence-competence.
In the case of Duro Felguera, S.A. v. Gangavaram Port Ltd. 46, the Supreme Court held
that the arbitral tribunal has the power to rule on its own jurisdiction under Section 16
of the Act.
 Similarly, the Chloro Controls case47 established that the doctrine allows the arbitral
tribunal to determine the existence and validity of the arbitration agreement.

ARBITRABILITY OF DISPUTES

Remember, we studied earlier that not all disputes can be referred to arbitration as a means of
resolution. This feature ensures that no such matter is taken up through arbitration which may
render injustice to either of the party. The arbitrability refers to the eligibility of disputes which
are “arbitrable” under Indian law. The Supreme Court’s 2011 judgment in Booz Allen and
Hamilton Inc v. SBI Home Finance Ltd. & Others48 (“Booz-Allen”) forms the foundation for
any discussion on the question of arbitrability in India as it laid down a test for determining
whether a subject-matter of a dispute is capable of arbitration in India or not (the “Booz-Allen
Test”).

In Vidya Drolia & Ors v. Durga Trading Corporation49, the Supreme Court laid down a four-
part test to determine the arbitrability of a dispute to ensure that only “arbitrable” matters are
considered for arbitration agreement. The Court held that the following factors should be
considered:

 Whether the dispute relates to rights in rem (rights exercisable against the world at
large) or rights in personam (rights exercisable against specific persons).

 Whether the dispute affects the rights of third parties or requires centralized
adjudication by specialized courts.

46
Duro Felguera, S.A. v. Gangavaram Port Ltd., (2017) 9 SCC 729
47
Chloro Controls India (P) Ltd. v. Severn Trent Water Purification Inc., (2013) 1 SCC 641
48
Booz Allen and Hamilton Inc v. SBI Home Finance Ltd. & Others, (2011) 5 SCC 532.
49
Vidya Drolia & Ors v. Durga Trading Corp., (2021) 2 SCC 1

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  Whether the dispute relates to inalienable sovereign functions or matters of public
interest.

 Whether there are any statutory restrictions on the arbitrability of the dispute.

These tests ensure that justice is sustained and neither party suffers the loss due to forced
resolution form. The doctrine maintains the criteria of consent and mutual agreement for the
arbitration agreement without sufficing the scope of the arbitration.50

INTERIM RELIEF
Interim relief basically refers to the temporary remedy that may be granted to the parties in
case of dispute. It is upon the discretion of the court and not a choice upon parties. The
arbitration agreement also empowers the arbitral tribunal to grant interim measures of
protection, as per Section 17 of the Indian Arbitration and Conciliation Act, 1996.51 This allows
the tribunal to take necessary steps if it seems requisite and reasonable to preserve the rights of
the parties or the subject matter of the dispute during the pendency of the final resolution of
the dispute.

The tribunal's powers under Section 17 are wide, flexible and discretionary, enabling it to pass
orders for interim measures such as attachment of property, appointment of receivers, and
preservation of evidence.52 The courts can also grant interim relief under Section 9 of the Act
to support the arbitration proceedings.53

The Indian judiciary has recognized the broad powers of the arbitral tribunal to grant interim
relief. In Firm Ashok Traders v. Gurumukh Das Saluja54, the Supreme Court held that the
tribunal has wide powers to grant interim measures under Section 17. Additionally, the Alka
Chandewar case55 emphasized that the courts should exercise restraint in granting interim relief
once the arbitral tribunal is constituted.

50
Ibid.
51
Arbitration and Conciliation Act, 1996.
52
Ibid.
53
Ibid.
54
Firm Ashok Traders v. Gurumukh Das Saluja, (2004) 3 SCC 155
55
Alka Chandewar v. Shamshul Ishrar Khan, (2017) 16 SCC 119

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FINALITY AND ENFORCEABILITY

Amongst the various forms of alternative dispute resolutions, arbitration is one of the forms of
resolution which makes the decision binding upon parties. Arbitral awards given by the tribunal
are final and binding on the parties, subject to limited grounds for challenge under Section 34
of the Indian Arbitration and Conciliation Act, 1996.56 These awards are enforceable in the
same manner as a court decree, as per Section 36 of the Act which empowers the tribunal as to
the similar powers as of a civil court.

Arbitral awards can be challenged only on narrow grounds, such as lack of jurisdiction,
violation of natural justice, and other limited grounds. But this is only upon the discretion of
the court as to the entertainment of the challenges and decision upon the same.

The grounds for setting aside an award under Section 34 are interpreted narrowly to uphold the
finality of arbitration.57

Once an award attains finality, it is enforceable as a decree of the court under Section 36.
The Indian courts have provided guidance on the interpretation and application of these
principles. In the Ssangyong Engineering case58, the Supreme Court laid down the principles
for interpreting the grounds for setting aside an award under Section 34. Additionally, in the
Fiza Developers case59, the Supreme Court emphasized the need to strictly adhere to the time
limits for challenging an award. The limitation period applies to the application for challenging
the award.

56
s. 34, Arbitration and Conciliation Act, 1996.
57
Ibid.
58
Ssangyong Eng'g & Constr. Co. Ltd. v. Nat'l Highways Auth. of India (NHAI), (2019) 15 SCC 131
59
Fiza Developers & Inter-Trade Pvt. Ltd. v. AMCI (India) Pvt. Ltd., (2009) 17 SCC 796

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 V. SAMPLE CLAUSES – AD HOC

While drafting the arbitration clause, we have to keep in mind to make the clause inclusive and
include all the essential elements that we discussed earlier. The following are some of the
Important considerations that must be kept in mind while. drafting an effective arbitration
clause are:

1. Decide between Institutional arbitration and ad hoc arbitration

2. Method of Selection and Number of Arbitrators:

Parties in the arbitration clause usually opt for the number of arbitrators. The parties usually
select either one or three arbitrators, or more. However, the number of arbitrators, to avoid a
deadlock, should be odd numbered. Where the number of arbitrators are not mentioned in the
arbitration clause, the prescribed authority of the law of the seat will appoint the number of
arbitrators. Alternatively, an institutions' rules (if the parties' arrive at consensus) may also
provide for an appointing authority where parties cannot agree on the appointment of an
arbitrator(s).

3. Arbitration Rules:

The parties should determine the arbitration rules which will govern the arbitration. The parties
tend to, but not necessarily, choose the arbitration rules of an institution that may be chosen to
administer the arbitration. However, some of the common arbitration rules adopted are ICA
Rules, the MCIA Rules and until recently LCIA (India) Rules.

4. Language of the Arbitration

The parties should choose the language of arbitration, especially where the witnesses speak
different languages that may be convenient for speedy disposal of the arbitration in an efficient
manner and to reduce costs.

5. Time limits for decision making: It is extremely essential to make sure time frame is
specified for the disposal of the entire process. This specifies the time within which the parties
and arbitrator must take specific actions to forward arbitration proceedings.

Now we will take a hypothetical situation and draft the sample clause of Ad Hoc arbitration.

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Factual Scenario-

ABC Enterprises ("ABC") entered into a contract with XYZ Suppliers ("XYZ") for the supply
of raw materials for a period of 5 years. The contract contained a clause stating that any disputes
arising out of or in relation to the agreement shall be resolved through arbitration.
After 2 years, a dispute arose between the parties regarding the quality and quantity of the
materials supplied by XYZ. ABC alleged that XYZ had consistently supplied substandard
materials and had failed to meet the agreed delivery schedules. XYZ refuted these claims and
demanded payment for the outstanding invoices.
Unable to resolve the dispute amicably, ABC invoked the arbitration clause and served a notice
to XYZ proposing to refer the matter to arbitration.

SAMPLE CLAUSE: -

1. Arbitration
Any dispute, controversy or claim arising out of or relating to this contract, or the
breach, termination or invalidity thereof, between [Party A] and [Party B], arising out
of, or in relation to or in connection with this agreement/contract, including without
limitation, the manner of entering into, execution, validity, enforcement, registration,
breach, performance, interpretation, implementation, alleged material breach, alleged
fraud, or fraudulent conduct in inducing, entering into, and/or performance,
termination/expiration of this agreement shall be settled by arbitration in accordance
with Arbitration Rules as at present in force.
1.1. The appointing authority shall be the _____________ and shall have power to hear
both the parties in accordance with the principles of natural justice.
1.2. The arbitral tribunal shall have the power to adjudge and pass the “Arbitral
Award” on the same.
1.3. The number of arbitrators shall be three as per the mutual discussions by all the
parties.
1.4. The seat of arbitration shall be New Delhi, India as agreed upon by the parties.
1.5. The language of the arbitral proceedings shall be English for the purpose of
convenience for all parties involved in the process.
1.6. The law governing the arbitration agreement and the contract shall be the
substantive laws of India.

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 1.7. The arbitral award shall be final and binding on the parties.
1.8. The arbitral tribunal shall have the power to award interest at such rate as it deems
reasonable, and to apportion the costs of the arbitration, including the fees of the
arbitral tribunal and reasonable attorneys' fees incurred by the parties.
1.9. Judgment upon the award rendered may be entered in any court having jurisdiction
thereof.

VI. SAMPLE CLAUSE – INSTITUTIONAL ARBITRATION

Institutional arbitration refers to arbitration proceedings administered by a specialized arbitral
institution, such as the International Chamber of Commerce (ICC), the American Arbitration
Association (AAA), or the London Court of International Arbitration (LCIA).
Institutional arbitration clauses typically name the administering institution and incorporate its
rules.

Factual Scenario-

ABC Enterprises, a leading manufacturer of industrial machinery, entered into a long-term

supply contract with XYZ Components, a major supplier of specialized parts, in 2018. The
contract contained a clause stating that any disputes arising out of or in relation to the agreement
shall be resolved through arbitration.
After 2 years, a dispute arose between the parties regarding the quality and quantity of the
materials supplied by XYZ. ABC alleged that XYZ had consistently supplied substandard
materials and had failed to meet the agreed delivery schedules. XYZ refuted these claims and
demanded payment for the outstanding invoices.
Unable to resolve the dispute amicably, ABC invoked the arbitration clause and served a notice
to XYZ proposing to refer the matter to arbitration.

2. Arbitration
"Any dispute, controversy, difference or claim arising out of or relating to this contract,
including the existence, validity, interpretation, performance, breach or termination thereof
or any dispute regarding non-contractual obligations arising out of or relating to it shall be
referred to and finally resolved by arbitration administered by the
_____________________ under the ______________________in force when the Notice
of Arbitration is submitted.

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The parties hereby agree as follows:

2.1. The parties agree to submit their dispute (s), controvery (ies), claim (s), or
difference (s) to arbitration for resolution.
2.2. The law of this arbitration clause shall be governed by the IDRC Domestic
Arbitration Rules, 2019.
2.3. The seat of arbitration shall be New Delhi... (India).
2.4. The number of arbitrators shall be... (one or three).
2.5. The Arbitrator(s) shall be nominated/appointed from the panel of Arbitrators of
Indian Dispute Resolution Centre.
2.6. The arbitration shall be administered by Indian Dispute Resolution Centre in
accordance with its Rules.
2.7. The award rendered shall be final and binding on both the parties.
2.8. The arbitration proceedings shall be conducted in... (English)"

COMMON MISTAKES:

Here are the key pitfalls to avoid when drafting an effective arbitration agreement:

 Lack of Clear Consent and Mutual Agreement:

It’s a pre-requisite for any agreement and just like every other agreement, arbitration
agreement shall also clearly demonstrate the parties' voluntary and mutual consent to
resolve disputes through arbitration. Ambiguity or equivocation regarding the intent to
arbitrate can render the agreement unenforceable and thereby making it void.
 Unclear Scope of Disputes Covered:
It is very well established by now that scope is the heart and soul of this agreement. The
agreement should inclusively specify the scope of disputes that will be subject- matter
to arbitration. If the language is either ambiguous or in its extremes, it may result into
disputes over arbitrability and thereby creating another dispute at hand to resolve.
Therefore, keep the language simple, formal, concise and yet inclusive of all kinds of
disputes.
 Failure to Specify Arbitration Rules and Procedures:
The most common mistake while drafting arbitration agreement is that it doesn’t
specify the procedure and legal provisions in orderly manner, leading to further

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 confusion and ambiguity. The agreement should clearly designate the applicable
arbitration rules, the number of arbitrators, the appointment process, the seat/place of
arbitration, and other key procedural elements that we have already discussed. Omitting
these details can create uncertainty and thereby creating a ruckus.
 Lack of Clarity on Governing Law:
The agreement should specify the law governing the arbitration agreement itself, as
well as the law applicable to the underlying contract. These are the crucial requisites,
failing to adherence may lead to serious legal complications.
 Sloppy Drafting of Multi-Tiered Dispute Resolution Clauses:
There are certain clauses that require parties to engage in pre-arbitration steps (e.g.,
mediation). These clauses shall clearly define the triggers and procedures for
transitioning between the different dispute resolution stages for the ease of all parties.
 Failure to Incorporate Model Arbitration Clauses:
Using established model clauses provided by reputable arbitral institutions can help
ensure the agreement is comprehensive and enforceable.
 Neglecting Formalities and Capacity Issues:
The negligence of not adhering to the formal legal procedures like reducing the
agreement to writing or maintaining the legal capacity of parties i.e., consent and
mutual agreement leads to legal complications and thereby making the entire arbitration
agreement as null and void.

By being mindful of these common pitfalls, parties can draft arbitration agreements that are
clear, comprehensive, and enforceable, thereby ensuring the effectiveness of arbitration as a
dispute resolution mechanism.60

60
Shivani Nair, Significance of the Arbitration Agreement, iPleaders (Feb. 18,
2020), https://blog.ipleaders.in/significance-of-the-arbitration-agreement/ (last visited on 6th July 2024)

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CONCLUSION

Therefore, we can understand that the arbitration agreement is like the foundation or backbone
of the entire arbitration procedure. Unlike any other agreement, it entails some key elements
like parties’ consent, mutual agreement. Drafting a well-crafted arbitration agreement is crucial
to ensure the effectiveness, enforceability, and smooth conduct of the arbitration proceedings.
The precision and customization is the key while drafting the arbitration agreement. Otherwise,
it will further create more dispute and burden on the traditional dispute resolution institutions
i.e., the courts or the tribunal.

Additionally, the arbitration agreement shall incorporate key principles such as the doctrine of
separability, the competence-competence of the arbitral tribunal, the availability of interim
relief, and the finality and enforceability of the arbitral award.
For ad hoc arbitration, parties can incorporate well-established rules like the UNCITRAL
Arbitration Rules, while for institutional arbitration, they can adopt the rules of reputable
institutions like the ICC, LCIA, or SIAC.

By carefully drafting the arbitration agreement to address these essential elements, parties can
ensure that their dispute resolution mechanism is comprehensive, effective, and enforceable,
both domestically and internationally. Ultimately, a well-crafted arbitration agreement provides
the parties with a reliable and efficient means of resolving their disputes, while preserving the
autonomy and finality of the arbitration process.

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