Article: Importance of Arbitration Agreement

Introduction:
The ever-growing economies of a number of nations have led to the development
of a number of businesses and this has also caused an increase in the number of
disputes that arisen between companies over innumerable issues. Companies now
prefer resorting to methods of Alternative Dispute Resolution as a means of
resolving their disputes rather than relying upon the traditional means. Arbitration
is a method of Alternate Dispute Resolution which companies prefer to resort to,
in order to resolve the various disputes that they face. Arbitration can be deemed
to be regarded as a crucial method of dispute resolution for businesses operating
in India. In fact, it has proven to be a feasible method of alternative dispute
resolution for firms who are based in other countries and conduct their business
with Indian firms. It is imperative to fathom that India is still in its nascent stages
when it comes to referring matters to ADR. However, with the tremendous
growth that India has witnessed in the last few decades, it is imperative for India
to adapt to Alternative Dispute Resolution as means of resolving disputes in order
to ensure speedy justice.
Arbitration could be deemed to be regarded as a cheaper means of dispute
resolution when compared to filing a suit before a court. There are innumerable
benefits of referring a dispute to arbitration and as a matter of fact, a number of
parties in India are choosing to include a specific arbitration clause in their
agreements when they decide to enter into a venture and this arbitration clause is
revoked primarily in case of a dispute that arises between such parties to a
contract. In fact, choosing arbitration as a means of alternate dispute resolution
has its own advantages and the parties could mutually decide upon who they wish
to appoint as an arbitrator in order to resolve the dispute. They could appoint an
individual who has the entire idea of the dispute and the various aspects revolving
around the dispute.

Arbitration:
Arbitration is a form of alternative dispute resolution mechanism, which gives
the parties in dispute an opportunity to refer their present or future disputes to a
neutral third party, who is known as the arbitrator, instead of running from pillar
to post seeking justice. Arbitration is governed by the Arbitration and
Conciliation Act of 1996. The decision of the third party is binding on the
parties to dispute. It saves the parties from undergoing the hassle of waiting for
years together for their cases to be heard and finalised in Courts. Arbitration is a
quasi-judicial process and the disputes between the parties are not referred to
normal courts but to domestic tribunals. It also has the advantage of being cost-
effective and expedient unlike traditional Court procedures.
Case: Jivaji Raja v. Khimiji Poonja & Co 1
Bombay High Court observed that, arbitration is the reference of dispute or
difference between two or more parties to a person chosen by the parties or
appointed under statutory authority, for determination of the same. In a broad
sense, it is substitution of ordinary judicial machinery by a mutually chosen
tribunal i.e., an Arbitrator or an Arbitral Institution.

Arbitration Agreement:
Section 7 of the Arbitration and Conciliation Act of 1996 defines arbitration
agreement as an agreement by the parties to refer to arbitration all or some
disputes which have arisen or will arise on a future date between them with
reference to a defined legal relationship, whether contractual or not. A doctor’s
relationship with his patient or a lawyer’s with his client are both examples of
relations that are legal but not necessarily contractual.
An Arbitration agreement is made by any two parties entering into a contract by
which any disputes arising between them with regard to the contract agreement
is to be resolved, without going to the Courts and with the help of an Arbitrator.
The agreement should mention who should select the arbitrator, regarding what
kind of dispute the Arbitrator should give decision, the place of arbitration, etc.
The parties need to sign the Arbitration Agreement and the decision shall be
binding on the parties. If you are a party to any contract and if you wish to
resolve any disputes with the help of an Arbitrator, without going to court, then
you should make this agreement.
Arbitration agreement is like a contingent contract, meaning thereby that these
agreements come into being or become enforceable contingent to the happening
of a dispute between the parties. It is only enforceable in case there arises a
dispute between the parties.

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AIR 1934 Bom 476
Case: State of U.P. v. Bridge and Roof Co. Ltd. (India) 2
The Supreme Court held that where the parties have agreed to settle their dispute
by arbitration and if there is an agreement in that respect, the courts will not
permit recourse to any other remedy without invoking the remedy by way of
arbitration unless of course both the parties to the dispute agree on another mode
of dispute resolution.
Essentials of Arbitration Agreement
The existence of a dispute is an essential condition for arbitration. Where parties
have effectively settled their disputes, they cannot refute the settlement and
invoke an arbitration clause.

1. Written Agreement
An arbitration agreement must be in writing. As per Section 7 (4) of the
Act, arbitration agreement is considered to be 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 defence in which the
existence of the agreement is alleged by one party and not defined
by another.
2. Intention
Intention of the parties is of prime importance. No form has been prescribed
for an arbitration agreement and nowhere has it been mentioned that terms
like arbitration, arbitrator are essential prerequisites in an arbitration
agreement. According to a leading case law in this subject, the intention of
the parties to refer their dispute to arbitration should be clearly discernible
from the arbitration agreement.
3. Signature
An arbitration agreement needs to be signed by the parties. The agreement
may be in the form of a signed document by both the parties containing all
the terms or it may also be a signed document by one party which contains

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AIR 1996 SC 3515
 the terms and an acceptance signed by the other party. It will suffice if one
party puts his signature in the written submission and the other party accepts
it.
In the landmark case of K.K. Modi v. K.N. Modi and Ors3, it was held by the
Hon’ble Supreme Court that the following attributes must be present in an
arbitration agreement:
 The agreement must state that the decision of the tribunal will be binding
upon by both the parties.
 That the jurisdiction of the tribunal on the rights of the parties should be
decided by both the parties consensually or from an order obtained by the
Court which states that the proceeding shall be made through arbitration.
 The tribunal has the right to determine the rights of the parties by being fair
and just.
 The agreement that the parties will refer to the tribunal must be enforceable
by law.
 The agreement must state that any decision made by the tribunal on the
dispute must be formulated prior to the time when the reference is made.

Doctrine of Severability or Separability

Although the arbitration clause is a part of the underlying contract, they are
essentially independent from each other. This is referred to as the "separability",
"severability" or "autonomy" of the arbitration clause.
According to the separability principle, the invalidity of the underlying agreement
will not have an impact on the arbitration clause; likewise, the invalidity of the
arbitration clause will not render the underlying agreement invalid. In other
words, the requirements for validity of the arbitration agreement may differ from
those sought for the validity of the underlying agreement.
In most, disputes, the validity of the agreement is in question. For instance, if a
party claims non-performance of the agreement by the other party, the latter will
claim that the agreement is invalid. However, in order to conduct arbitration
proceedings, the arbitration clause should remain unaffected by the claim of
invalidity. In this context, the doctrine of separability has been introduced and
accepted in the practice of international commercial arbitration. The separability
of the arbitration clause from the underlying agreement has been accepted as a

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. (1998) 3 SCC 573
principle which allows for arbitration proceedings related to an agreement whose
validity is put into question.
According to the separability principle, the invalidity of the underlying agreement
will not have an impact on the arbitration clause, likewise, the invalidity of the
arbitration clause will not render the underlying agreement invalid. In other
words, the requirements for validity of the arbitration agreement may differ from
those sought for the validity of the underlying agreement. Consequently, even if
the underlying agreement is pronounced invalid for any reason, the arbitration
clause will remain valid; on the other hand, if the arbitration clause is invalid, the
underlying contract will remain valid and the dispute arising from the underlying
agreement will be resolved before national courts. Indeed, the arbitration clause
and the underlying agreement are two different agreements despite the fact that
both exist within the same text. While the underlying agreement creates a
relationship of obligation between the parties, the arbitration agreement solely
addresses the settlement of disputes between the parties.
Due to aforementioned reasons, the principle of separability establishes that the
arbitration agreement and the underlying agreement have different qualities; the
arbitration agreement is juridical autonomous and shall not be affected when the
main contract is rendered invalid.³
In a recent decision of the House of Lords in Premium Nafta Products Ltd. v.
Fili Shipping Co. Ltd.,4 the Court categorically observed that the principle of
separability enacted in Section 7 means that the invalidity of rescission of the
main contract does not necessarily entail the invalidity or recession of the
arbitration agreement. The arbitration agreement must be treated as distinct
agreement and can be void or voidable only on grounds which relate directly to
the arbitration agreement.

Benefits of Arbitration Agreement

 It is faster and less expensive – As you do not have to pay for filing and
court fees, you will save money by choosing the arbitration option. It is
also faster because you will be able to complete the entire process quicker
than if you were to try to go to court over the same matter.
 It is confidential – Using arbitration means that you will not have to
publicly testify. No matter what, the details of the dispute will not be put

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[2007] UKHL 40
 on public record for anyone to find. Instead, they will be kept secret in the
confines of the arbitration room so you can make sure that no negative
details are leaked.
 Choice your arbitrator – If you include this as part of your arbitration
agreement, you can have the ability to choose the arbitrator who will be
determining the outcome of the dispute at hand. This can be a very helpful
component if you want to try to find someone who may have some specific
experience dealing with the type of dispute you have or someone who has
a bit of experience in your field and can better understand what is
happening as a result.
 As an employer, you can refuse to hire someone who does not sign the
arbitration agreement – You have the option of refusing to hire someone if
they do not abide by your rules and sign your agreements. The arbitration
agreement is part of that. This can also be related to not hiring another
company to do work for you if they refuse to sign it. If you have something
like this in place, you will want it to be active for everyone you do business
with anyway.
 You can avoid including a jury – When you have an arbitration agreement,
you will not use a jury to help determine any disputes. A jury can be very
beneficial in many situations, but they can also be very stressful in a
situation where there is a business dispute or even in business matters. It
does not usually make sense to use a jury and you can make sure you avoid
the entire thing by having an arbitration agreement in place for all of your
business relationships.
 It can help you to avoid hostility – When a case goes to court, there is more
of a likelihood that there will be constant disputes and fighting on every
single issue. This added hostility may never go away and may even make
it difficult for you to do business with others later on. However, arbitration
is a much more relaxed kind of environment, and while there is an existing
conflict, it can be a lot easier to manage without hostility because there is
an arbitrator present. Both parties will have to cooperate with each other in
order to reach a mutual agreement. This can lead to less hostility and can
help keep the reputation of both parties intact.
Practical Problems in Arbitration Agreement
 Fixation of Costs
Fixation of costs can be deemed to be regarded as another hindrance which
caused since there is no criteria for the fixation of costs in an arbitral
proceeding and usually retired Judges are called upon assume the charge
of an arbitrator and this renders arbitration as a costly method of dispute
resolution and often the council and the courts appoint arbitrators from the
pool of retired professionals and these professionals usually turn an
arbitration proceeding into a court proceeding, thereby delaying the entire
dispute resolution process. A number of times, there is a lack of
transparency between the parties and they do not have complete
information of the Arbitration clause, or the arbitration agreement which
they are entering into, leading to the matter being again appealed before a
law court thereby significantly increasing the costs of the parties to the
dispute.

 Delay in Arbitration
It is often advisable to the parties that while drafting the arbitration
agreement they should draft it carefully while adding the clauses to a
particular agreement. The parties need to be extremely cautious about the
kind of documentation they are maintaining for a particular kind of
transaction. The reason why arbitration proceedings are stretched for a very
long period of time is because the whole Civil Procedure Code is followed
because often the parties do not have proper documentation or incomplete
documents and every document should be proved during the proceedings.
Another issue is the imposition of costs onto the parties when there is an
insignificant delay in arbitration proceedings. However, there should be a
stringent provision in this regard.

Conclusion:
The growth of arbitration signifies that there is a fundamental change that is
present in our way of legislating. Another significance is in deciding the matters
in a significantly lesser amount of time and the different or the separate clauses
mentioned in the commercial contract. These are paving the way for the most
effective and the most suitable remedy without having to go through the recourse
of the courtrooms. Arbitration is generally the most efficient form of remedy for
settlement of disputes amongst the parties, which actually does not require any
long procedures of the Court for the decisions to be made. It is cost-efficient, it is
time-saving, it also permits one to choose their own arbitrators. Through this, the
decisions are given swiftly, and according to the nature of the case, they are also,
most of the time satisfactory. The severability, separability, and the autonomy
principle of the Arbitral agreement prevent the validity of one agreement from
being overlapped by the other. Nonetheless, the two agreements may co-exist.
Having such a principle does not negate the value of the other principles
mentioned in the contract, but mostly adds on to those principles. Thus it plays
an important role when the contractual clauses arise when dealing with the
disputes.