Arbitration Agreement and its essential elements

To refer the dispute to Arbitration, there should be an Arbitral Agreement.

In the absence of an Arbitral Agreement, proceedings cannot be conducted.

S.2(1)(b), defines the term Arbitral Agreement. “Arbitration Agreement”

means, an Agreement referred to in S.7.

According to S.7(1), Arbitration Agreement means, an Agreement between

the parties to submit all or certain disputes which have arisen or which may
arise between them, to Arbitration in respect of a defined legal relationship,
whether contractual or not.

S.7(2) says that, Arbitration Agreement may be in the form of an Arbitration

clause in a contract or in the form of a separate Agreement.

S.7(3) lays down that, an Arbitration Agreement should be in writing.

S.7(4) says that, an Arbitration Agreement is in writing, if it forms the part

of :
- 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
Agreement is alleged by one party and not denied by the other.

If the Arbitration Agreement refers to present dispute, it is known as a

Reference. But if the Arbitration Agreement refers to future dispute, it is
known as an Arbitration clause.
If a contract containing an Arbitration clause is incorporated into another
new contract, and the terms of previous contract are not inconsistent with
the terms of new contract, then the Arbitration Agreement arises in the new
contract in the form of an Arbitral clause.

If any rules of any Arbitral institution is referred to in the Agreement, then

such rules shall be treated as, Arbitration Agreement.

S.7(5) lays down that, if in a contract any reference is made of a document,

which contains an Arbitration clause, then such reference shall be an
Arbitration Agreement, if :-

- The contract in which reference to a document is made, is in writing ;

- The nature of reference should be such that it should make the
Arbitration clause a part of the contract ; and
- The document to which reference is made, should contain Arbitration
clause.

Rules or bye-laws of trade associations, are deemed to be an Arbitral

Agreement.

If any contract contains an Arbitration Agreement in the terms of Arbitration

Clause then, according to S.16 –

1) An Arbitration clause which forms the part of a contract shall be treated

as a separate Agreement, which is independent of the other terms of the
contract. S.16(1)(a).

2) If the Arbitral Tribunal declares that, the contract in which Arbitration

 clause is incorporated, is null and void, then such nullity of the contract will
not render the Arbitration clause invalid. S.16(1)(b).

Hence, even if the contract containing the Arbitration, is declared null and
void, it will not invalidate the validity of Arbitration clause. As the Arbitration
clause is a separate Agreement independent of the terms of contract.

Case Law :
1) J.K. Agarwal vs. Nalco 1995 ARB.L.R. 421 Orissa

It was held that, when the contract comes to an end, then the Arbitration
clause does not survive independently.

2) Heyman vs. Darwin 1942 1 ALL.E.R. 337

It was held that, even if the contract is frustrated, still the Arbitral clause will
prevail.

3) Suwalal vs. Clive Mills AIR 1960 CAL. 90

It was held that, if the contract itself is illegal, the Arbitral clause also becomes
illegal, as the contract is forbidden by law.

4) Chitram Ramdas vs. Bridhichand Kesrichand AIR 1916 CAL. 68

It was held that, if any dispute is referred to Arbitration by an association,

then the rules of that association forms the part of Arbitration Agreement.

5) K.K. Modi vs. K.N. Modi 1998 3 SEC 573

 It was held that, intention of the parties to go for Arbitration, must be
expressed in clear, precise and unambiguous terms. Words of the Arbitration
Agreement must clearly express the intention of the parties.

If any Agreement containing Arbitration clause or a separate Arbitration

Agreement is made with the Government, then it should confirm to the
requirements as laid down in Article 229 of the Constitution of India.

For a valid and binding contract with the Government, it is necessary that :-

- The contract must be expressed to be in the name of the President or the

Governor of the State.
- It must be executed on behalf of the President or the Governor of the
State.
- The execution must be in writing.
- It must be executed by a person who is authorized to execute such
Agreement on behalf of the President or the Governor of the State.

6) Chaturbhuj vs. Moreshwar AIR 1954 SC 238

It was held that, Agreements made with the Union or the State, must be in
conformity with the provisions of Article 229 of the Constitution of India.

Essential ingredients of an Arbitration Agreement :

1) Validity

An Arbitration Agreement, including an Arbitration clause in an Agreement is

a contract. It must be legally valid under the Indian Contract Act, 1872. A
contract to be legally valid under the Indian Contract Act, 1872, must have
 the following essential ingredients :

- Parties must be legally competent to enter into contract. (S.11 and S.12
of the Indian Contract Act).
- Consent of the parties must be free, not influenced by fraud or coercion,
etc. (S.13 to S.22 of the Indian Contract Act).
- The object of the contract must be lawful. (S.23 to S.27 and S.30 of the
Indian Contract Act)
- The contract must be capable of being carried into effect. It should not be
uncertain. (S.29 of the Indian Contract Act).

If all the above conditions are fulfilled, then an Arbitration Agreement is a

valid contract.

2) Writing

An Arbitration Agreement must be in writing.

3) Intention

There should be a clear intention on the part of the parties to dispute, to refer
the dispute to Arbitration.

4) Dispute

The Arbitration Agreement can be in respect of present or future dispute.

Such dispute must arise out of the legal relationship. Dispute not arising
from
 legal relationship, is beyond the scope of Arbitration. The legal relationship
can be –
● Contractual, i.e. arising out of a contract ; or
● Non-contractual, i.e. arising out of a breach of a statutory obligation.

5) Parties to dispute

Parties to dispute must be legally competent to enter into contract. Parties

include the parties in representative capacity.

Legal effects of an Arbitration Agreement

Powers of judicial authority to refer to refer the parties to Arbitration

The parties to dispute can enter into an Arbitration Agreement, to settle the
dispute amicably, arising out of defined legal relationship. Such arbitration
agreement must be legally valid.

When a dispute, which is the subject matter of a valid Arbitration Agreement,

brought before the Judicial Authority, then the Judicial Authority has power to
refer such dispute to Arbitration. S.8 of the Arbitration and Conciliation Act,
1996, confers the power on Judicial Authority to refer such dispute to
Arbitration. Such power of Judicial Authority, is mandatory and not
discretionary. Hence, if the requirements of S.8 of Arbitration and Conciliation
Act, 1996 are fulfilled, the Judicial Authority is bound to refer the dispute to
Arbitration. However, the Judicial Authority before which the matter is
brought, has the discretion to determine –

● Whether the dispute is subjected to Arbitration or not ;

 ● Whether the dispute forms the subject matter of the Arbitration
Agreement.

According to S.8, if a party to Arbitration Agreement does not take recourse to

Arbitration for settlement of their dispute, and brings an action against the
other party to Arbitration Agreement before the Judicial Authority, then the
Judicial Authority shall refer the parties to Arbitration, if the following
conditions are satisfied :

i) there exists an Arbitration Agreement between the parties to dispute to settle

the dispute by Arbitration ;

ii) such Arbitration Agreement must be legally valid ;

iii) without resorting to Arbitration Agreement, an action must be brought

before the Judicial Authority for the dispute which is the subject matter of the
Arbitration Agreement ;

iv) the subject matter or action brought before the Judicial Authority, must be
same as the subject matter of the dispute forming the Arbitration Agreement ;

v) the dispute bought before the Judicial Authority must be capable of being
settled by Arbitration ;

vi) one of the party should apply to the Judicial Authority, to refer the dispute
which is brought before the Judicial Authority to the Arbitration ;

vii) such application to Judicial Authority should be made before the

submission of first statement to the Judicial Authority, which states the nature
and substance of the dispute ;

viii) the application,, so made, to the Judicial Authority, should be

accompanied by the original Arbitration Agreement or a duly certified copy of
the same.
If all the above conditions are satisfied, then the Judicial Authority is under
compulsion to refer the dispute brought before it (which is the subject matter
of Arbitration) to Arbitration.

As per S.8 of the Arbitration and Conciliation Act, 1996, if the parties to the
Arbitration Agreement do not object to the Judicial Authority, then such
judicial procedure shall not be invalid. The Arbitration Agreement does not
oust the jurisdiction of the Court.

If the judicial procedure is commenced and none of the party to the Arbitration
Agreement make an objection to the suit, then the Arbitration Agreement
becomes ousted. Even if any arbitration proceeding is pending or commenced,
then also such Arbitration proceeding can continue and an Award can be made
on such Arbitration Agreement.

According to S.8(3), even if an application under S.8(1) has been made to the
Judicial Authority to refer the dispute to Arbitration, and the issue is pending
before the Judicial Authority, an Arbitration proceedings can be commenced or
continued and an Award can be made on such arbitral proceedings.

Even if a suit filed before the Judicial Authority is pending, the Arbitration
proceeding on the subject matter of dispute pending before the Judicial
Authority can be initiated. The initiation of Arbitration proceedings during the
pendency of suit is not barred by the pending civil proceedings. Such
proceeding cannot be restrained by Civil Court. This is the power of Judicial
Authority to refer parties to Arbitration.

Arbitration Agreement by incorporation

Incorporation of a document containing an arbitration clause into the contract
by reference makes the contract itself an arbitration agreement. Arbitration
clauses by incorporation were recognized earlier also even though there was no
specific provision in this regard in the 1940 Act. A specific provision has now
been made in S.7(5).

It is provided in S.7(5) that, the reference in a contract to a document may also

constitute an arbitration agreement if:-

i) the contract containing the reference is in writing ;

ii) the reference is such as to make that arbitration clause part of the contract ;
and

iii) the document to which reference is made contains an arbitration clause.

Status of an Arbitration Clause in Contract

The status of an arbitration clause in a contract should be judged in the light

of the provisions of S.16(1) wherein it is provided that :-

i) an arbitration clause which forms part of a contract shall be treated as an

agreement independent of the other terms of the contract ; and

ii) a decision by the arbitral tribunal that the contract is null and void shall not
entail ipso jure the invalidity of the arbitration clause.

An arbitration clause in a contract usually represents a freely negotiated

method of dispute resolution selected in advance, by the parties. Though an
arbitration clause is an integral part of the contract in which it is contained, a
contract containing an arbitration clause amounts to two contracts rolled into
one. The one relating to the execution of the work being the substantial
stipulation of the main contract and the other, which is merely procedural and
ancillary to the contract, and provides a machinery for resolution of disputes in
the event of such dispute arising and invocation of the arbitration clause by a
party to the contract. An arbitration clause is a collateral term of the main
contract as distinguished from the substantive terms which set out the
obligations which the parties have undertaken towards each other binding
them. An arbitration clause stands apart from the rest of the clauses in the
contract and it gives rise to collateral obligations. Since it constitutes an
agreement sui generis (on its own force) it is not automatically affected by the
fate of the main contract of which it forms a component part. The collateral
obligations may survive the termination of all primary obligations assumed by
the parties under the other clauses in the main contract whether the
termination takes place by fundamental breach or breach of condition or
frustration or repudiation or rescission or performance or substitution. S.16(1)
throws light on the separability and autonomy of an arbitration clause in a
contract.

A contract can be discharged by the same process by which it was created, that
is by mutual agreement. An arbitration agreement is a contract therefore,
parties can rescind it by mutual agreement (S.62 of the Indian Contract Act,
1872) or discharge its performance or supersede it with a substituted one. It
may be brought to an end by performance or by discharge. Where the contract
ends by performance, the arbitration clause survives to determine quality and
quantity of performance or rate of payment or damages, in case of breach of
contract, arbitration clause survives for measuring claims arising out of the
breach. Where the contract is discharged by accord and satisfaction, there can
be no dispute for reference to arbitration. A validly executed contract
containing an arbitration clause may be put to an end by the parties by
superseding it with another contract which may or may not contain the
arbitration clause of the original contract. If the original contract is
extinguished by the substituted one the arbitration clause of the earlier
contract falls with it.
Case law :

J.K.Agarwal vs. Nalco (1995) Arb.L.R. 421 Oris

The Court observed that, where the agreement itself has come to an end, an
arbitration clause of the agreement cannot survive independently.

Union of India vs. Kishori Lal Gupta AIR (1959) SC 1362

The court observed that, if the original contract has no legal existence, the
arbitration clause also cannot operate, for along with the original contract, it is
also void.

Prohibitions imposed by Part-III of the Arbitration and Conciliation Act,

1996
Part-III of the Arbitration and Conciliation Act, 1996, imposes following
prohibitions –

S.70 – Any information received by the Conciliator from any party on the
condition that, it shall be kept confidential, then the Conciliator is prohibited to
disclose such information to the other party.

S.75 – Confidentiality

The parties to Conciliation proceedings and the Conciliator shall keep all
matters relating to the Conciliation proceedings and the Settlement Agreement
as confidential.

S.77 – Report to Arbitral or Judicial proceedings

The parties to the Conciliation proceedings are prohibited to initiate any
Arbitral or Judicial proceedings in respect of the subject matter of the dispute,
during the pendency of the Conciliation proceedings. But, if such proceedings
are necessary to preserve his rights, then, the party may initiate such Arbitral
or Judicial proceedings.

S.80- Role of Conciliator in other proceedings

If there is no Agreement between the parties, then –

a) the Conciliator is prohibited to act as an Arbitrator or as a representative or

as a counsel of the party in any Arbitral or Judicial proceedings in respect of
the dispute, which was the subject matter of the Conciliation proceedings.

b) the Conciliator is prohibited to be presented by the parties as a witness in

any Arbitral or Judicial proceedings.

S.81- Admissibility of evidence in other proceedings

The parties to the Conciliation proceedings are prohibited to use as evidence in

any Arbitral or Judicial proceedings whether or not, such proceedings relate to
the subject matter of the dispute of the Conciliation proceedings :

a) The views and suggestions of the other party in respect of a possible

settlement of dispute.

b) The admissions made by the other party during the course of the
Conciliation proceedings.

c) Any proposal made by the Conciliator.

Settlement Agreement u/s.73.

S.72 – Conciliator helps the parties to reach an amicable settlement of the

dispute. The Conciliator may, at any stage of the Conciliation proceedings,
make proposal for the settlement of the dispute.

S.67(4) – The parties to the dispute on their own initiative or on the invitation
of the Conciliator may submit suggestions to the Conciliator for the settlement
of dispute.

S.73 – When it appears to the Conciliator that settlement, which can be

accepted by both the parties is possible, the Conciliator may formulate the
terms of the possible settlement, and submit it to the parties for their
comments and suggestions. After receiving the comments and suggestions from
both the parties, the Conciliator may re-formulate the terms of the possible
Settlement Agreement as per the comments and suggestions of both the
parties.

If the parties to the dispute reach an Agreement to settle the dispute, then –

i) they may make and sign the written Settlement Agreement, or

ii) they may request the Conciliator to make or help the parties to make the
Settlement Agreement.

The Settlement Agreement signed by the parties to the dispute is final and
binding upon the parties and the persons claiming under them, respectively.

The Settlement Agreement shall be authenticated by the Conciliator and the

copy thereof shall be given to each of the parties to the dispute.
S.74 – The Settlement Agreement has the same status and effect, as that of an
Arbitral Award, passed by the Arbitral Tribunal u/s.30.

S.75 – All the matters relating to the Conciliation proceedings shall be kept
confidential including the Settlement Agreement by both the parties.

Conciliation

Introduction

Sections 61 to 81 deal with the concept of Conciliation.

The term Conciliation means, an amicable settlement between two parties.

According to Wharton’s Law Lexicon, Conciliation means, “the settling of
dispute without litigation”.

The term Conciliation is not defined anywhere in the Act. Conciliation is a

process in which two parties make discussion over a dispute between them
with the help of a third neutral party, called Conciliator, who helps the two
parties to arrive at a mutual acceptable agreement over a dispute between
them.

Appointment of Conciliator
Powers and functions of Conciliator under Arbitration and Conciliation
Act, 1996.

In any Conciliation proceedings, there shall be only one Conciliator, provided

that, if the parties agree that there shall be two or three Conciliators then such
member of Conciliators appointed by the parties should act jointly. (S.63)

The parties appointing the Conciliator, may agree on the name of a sole
Conciliator, if there is only one Conciliator.

In case of Conciliation proceedings with two Conciliators, each party may

appoint one Conciliator.

Whereas, in case of a conciliation proceedings with three Conciliators, each

party may appoint one Conciliator and agree the name of the third Conciliator.

In the Conciliation proceedings with three Conciliators, the third Conciliator

acts as a Presiding Conciliator.

As per S.64(2), while appointing the Conciliator, parties to the proceeding can
take the help of any person or institution for the appointment of a Conciliator.
Parties may request such person or institution for the recommendation of a
suitable individual who can act as a Conciliator. Alternatively, they may agree
that such person or institution should directly appoint one or more
Conciliators.

While appointing or recommending one or more Conciliators, such person or

institution should take into considerations, such aspects,that lead to the
appointment of an independent and impartial Conciliator. Also, while
appointing a sole or third Conciliator, if such person or institution is advised as
to the nationality of the Conciliator, then such person or institution should
appoint the Conciliator of a nationality, which is different from the nationality
of the parties. As per S.66, the Conciliator so appointed is not bound by the
Code of Civil procedure, 1908 and the Indian Evidence Act, 1872 with respect
to the Conciliation proceeding before it.
S.67 - The Conciliator should help the parties in an independent and impartial
manner, so that an amicable settlement can be reached between them for their
dispute. The Conciliator while dealing with the Conciliation proceedings,
should work with the principles of fairness, objectivity and justice. He should
consider the factors, such as :

a) The rights and obligations of the parties ;

b) Presence of any trade usage, etc. ;

c) Circumstances leading to the dispute ;

d) Presence of any previous business practice between the parties ;

The Conciliator should take into account the circumstances of the case, and
conduct the Conciliation proceeding in an appropriate manner. Due
consideration should be given to the wishes that may be expressed by the
parties, such as :

a) The hearing of oral statement by the Conciliator ;

b) The need of speedy settlement of dispute ;

While conducting the Conciliation proceedings at any time, the Conciliator can
propose for the settlement of dispute. It is not necessary that such proposal
should be in writing accompanied by the statement or reasons thereof.

The parties or the Conciliator with the consent of the parties, may arrange for
the administrative assistance by a suitable institution or person to facilitate the
conduct of the Conciliation proceedings.

Prohibition of Conciliator in other proceedings (S.80)

Unless the parties to the Conciliation proceedings have agreed, the Conciliator
is prohibited to do the following acts –
a) The Conciliator is prohibited to act as an Arbitrator or as a representative or
counsel of the party in any of the Arbitral or Judicial proceedings of a dispute,
which is the subject matter of the Conciliation proceedings.

b) The Conciliator cannot appear as a witness for the parties in any Arbitral or
Judicial proceedings.

Powers and functions of Conciliator

1) Submission of statement to Conciliator (S.65)

After the Conciliator is appointed, the Conciliator, may request each party to
submit –

a) A written statement describing the general nature of the dispute ;

b) Issues to be considered ;

Each party should send a copy of such statement to other party to the dispute.

The Conciliator may request each party to submit to him :

a) A further written statement stating the facts of the dispute, his position as to
the dispute and grounds in support of the dispute.

Such written statement may be accompanied by any documents and other

evidence, as the party may deem fit.

Each party should send a copy of such statement, documents and other
evidence to the other party.

At any stage during the Conciliation proceeding, the Conciliator may ask the
party to submit such additional information, as he may deem appropriate.

2) Communication between Conciliator and Parties

The Conciliator may invite the parties to meet him, or may communicate with
them orally or in writing. While doing so, he may meet or communicate with
the parties together or separately with each of them. If the parties have not
agreed upon the place of meeting with the Conciliator, then, having regard to
the circumstances of the Conciliation proceeding, the Conciliator shall fix the
place of meeting after consultation with the parties.

3) Disclosure of information (S.70)

The information regarding the facts of the dispute received by the Conciliator from one party should be
communicated to the other party, in order to enable the other party to give any explanation, which he
considers appropriate. If the Conciliator receives any information on the condition of confidentiality, the
Conciliator shall not disclose such confidential information to the other party.

4) Parties to co-operate with Conciliator

The parties should co-operate with the Conciliator and submit the written
materials, evidence, etc. as asked by the Conciliator.

Parties to Conciliation proceedings should attend the meetings as and when

fixed.

Provisions relating to Conciliation proceedings in the Arbitration and

Conciliation Act, 1996.

Conciliation is a process by which a dispute is settled with the help of a third

party known as Conciliator. The dispute is settled amicably between the parties
through Conciliation.

S.61 to S.81 give statutory recognition to Conciliation as another means of

settlement of disputes. For invoking the Conciliation proceeding, a prior
Agreement is not required. Conciliation can be invoked even during the
pendency of Arbitral proceeding.

Application and scope (S.61)

S.61 lays down the application and scope of Part-III of the Arbitration and
Conciliation Act, 1996.

According to S.61, provisions of Part-Iii applies to-

a) Conciliation of disputes arising out of legal defined relationship, whether

contractual or not ;

b) To all the proceedings relating to Conciliation proceedings.

Provisions of Part-III shall not apply to the disputes –

i) Where the parties to the dispute have expressly agreed for the exclusion of
Conciliation proceedings ;

ii) Where the Conciliation provisions are made inapplicable by any law for the
time being in force ;

iii) Where certain disputes are prohibited to be submitted to Conciliation by

any law for the time being in force.

Commencement of Conciliation proceedings S.62

No prior agreement is required to initiate Conciliation proceedings. Only the

procedure by one party and acceptance of proposal by other party is required
to initiate Conciliation proceedings. As per s.62, the party who wants to
conciliate, should send the written invitation to the other party, mentioning the
subject matter of the dispute. When the other party accepts the invitation in
writing, the Conciliation proceedings begin. But, if the other party rejects the
invitation, there cannot be any Conciliation proceedings.
If the party who sends the invitation to conciliate, does not receive any reply
from the other party within a period of thirty days from the date on which he
sends the invitation to conciliate or within such other period as mentioned in
the invitation, then the party sending the invitation my elect, this non-reply as
rejection.

If he selects the non-reply as rejection, then he should accordingly, inform the

other party in writing.

Conclusion of Conciliation proceedings :

The Conciliation proceedings can be concluded in the following manner :

1) By signing the settlement Agreement S.76(a) :

The Conciliation proceedings can come to an end when the settlement comes
into existence. The Settlement Agreement has the same status as that of an
Arbitral Award.

2) By written declaration of the Conciliator S.76(b)

The Conciliator may, after consulting the parties to the dispute, declare in
writing that further efforts to conciliate are no longer justified as on the date of
declaration, and as such, Conciliation proceedings stand terminated.

3) By written declaration of parties to Conciliator S.76(c)

The parties to the dispute may, by making a declaration in writing to the

Conciliator, declare that the Conciliation proceedings stand terminated as on
the date of declaration.

4) By written declaration of a party to Conciliator and other party

One of the party to the dispute may declare in writing to the Conciliator and
other party to the dispute that the Conciliation proceedings show terminated as
on the date of declaration.