SECTION 7- ARBITRATION

AGREEMENT
Compiled By- Asst. Prof. Anjali Bhatt
(1)In this Part, "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 [including communication through electronic means]
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 denied by the other.
(5) 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.
• To constitute an arbitration agreement, first of all there should be an agreement,
that is, ad idem. An arbitration agreement like all other contracts must satisfy all
the essential requirements of section 10 of the Indian Contract Act, 1872 i.e., the
parties to the arbitration agreement must be competent to enter into a contract
and the agreement should be made by the free consent of the parties.
• Furthermore, the parties should have the intention of entering into a legally
binding obligation. However, if the arbitration agreement does not fulfil the
requirements of section 10 of the Indian Contract Act, the arbitration agreement
becomes void and any award given to either of the parties will not be
enforceable.
 IMP FEATURES OF AN ARBITRATION AGREEMENT

(1) There must be a valid and binding arbitration agreement. Parties must be at ad idem.
(2)There must be animus arbitrandi
(3)there must be a present or future distpute.
All matters of a civil nature with a few exceptions, whether they relate to present or future disputes,
may form the subject of reference but not a dispute arising from and founded on an illegal
transaction. Though the existence of a dispute is essential to the validity of a reference to
arbitration, an arbitration agreement may provide for a present or a future dispute. If the
agreement relates to a present dispute it will generally amount to a reference but if it has been
entered into merely to provide for any future dispute it is an arbitration clause.
(4)The agreement must be in writing.
• S 7 clearly specifies that the Arbitration Agreement should be in writing. This we see in S7 (3),
it says that an Arbitration Agreement shall be in writing An oral agreement to submi9t a dispute to
Arbitration is not binding .If the Agreement is in writing it will bind, even if some of its details are
filed in by oral understanding .The court ruled thus in the case of Banarasi Das v Cane Commr.
•Telex and Fax
•An agreement by telex has been held to be an agreement in writing. A tacit acceptance of a
written quotation which contained an arbitration clause is sufficient to comply with the
requirements of an agreement in writing.
 IMP FEATURES OF AN ARBITRATION AGREEMENT

• Exchange of Letters
• In the case of Ganga pollution control unit, U.P. Jal Nigam v Civil Judge [2] , a
letter was sent by one party to the other suggesting settlement of disputes, if any,
through arbitration. The other party accepted the same. This exchange of letters
was held to have constituted an Arbitration agreement.
• NO PRESCRIBED FORM OF AGREEMENT
• In Rukminibai v Collector, Jabalpur [3] , the Supreme Court laid down that an
arbitration clause is not required to be stated in any particular form .If the
intention of the parties to refer the dispute to arbitration can be clearly
ascertained from the terms of the agreement, it is immaterial whether or not the
expression arbitration or arbitrator has been used. Nor is it necessary that it
should be contained in the same contract document. An arbitration clause may
be incorporated into an existing contract by specific reference to it.
 IMP FEATURES OF AN ARBITRATION AGREEMENT

(1) An Arbitration agreement may be in the form of a separate contract or in the

form of a clause in a normal contract. Section 16 (1) of the Arbitration and
Conciliation Act, 1996 provides that an arbitration clause which forms part of a
contract shall be treated as an agreement independent of the other terms of
the contract and that a decision by the arbitral tribunal that the contract in null
and void shall not ipso facto entail the invalidity of the arbitration clause.
Amendment Introduced “including communication through
electronic means”
This amendment aligns the Act with the judicial position already
established in cases such as Shakti Bhog Foods Ltd. vs. Kola Shipping Ltd.
[(2009) 2 SCC 134] and Trimex International FZE Ltd. vs. Vedanta
Aluminium Ltd. [(2010) 3 SCC 1] that electronic communication would
constitute an agreement in writing under section 7.

Effect of the Amendment

An exchange of emails, text messages or other electronic
communications which provide a record of the agreement will
also constitute an agreement in writing.
Comparison with the 246th Law Commission Report
The Law Commission also recommended that a section 3A be inserted stating “An arbitration
agreement is in writing if its content is recorded in any form, whether or not the arbitration
agreement or contract has been concluded orally, by conduct, or by other means.” However,
the said recommendation was not adopted.
K. K. Modi v/s K. N. Modi and Others
(1998 AIR SC 1297)
• disputes between Seth Gujjar Mal Modi's five sons - K. K. Modi, V. K. Modi, S. K. Modi, B. K.
Modi and U. K. Modi on the one hand (hereinafter referred to as "Group B") and Kedar Nath
Modi, the younger brother of Seth Gujjar Mal Modi and his three sons - M. K. Modi, Y. K.
Modi and D. K. Modi (hereinafter referred to as "Group A") on the other hand. 
• The Modi family owns or has a controlling interest in a number of public limited companies.
They also own various assets. Differences and disputes have arisen between Kedar Nath
Modi and his sons constituting Group A and the sons of late Gujjar Mal Modi constituting
Group B on the other hand. 
• To resolve these differences, negotiations took place with the help of the financial
institutions which had lent money to these companies, and through whom substantial public
funds had been invested in the companies owned and/or controlled by these two groups.
• Representatives of several banks, Reserve Bank of India and financial institutions were also
invited to participate. Ultimately, on 24-1-1989, a Memorandum of Understanding was
arrived at between Group A and Group B. 
• Under the Memorandum of Understanding so arrived at, it is agreed between the parties
that Group A will manage and/or control the various companies enumerated in clause 1. One
of the companies so included is Modipon Ltd. minus Indofil (Chemical Division) and selling
agency. 
• Under clause 2, Group B is entitled to manage, own and/or control the companies enumerated
in that clause. One of the companies so included is Modipon Ltd. minus Modipon Fibre Division.
• The agreement also provides for division of assets which are to be valued and divided in the
ratio of 40 : 60 - Group A getting 40% of the assets and Group B getting 60% of the assets. The
shares of the companies are required to be transferred to the respective groups after their
valuation
•  Under clause 3, valuation has to be done by M/s. S. B. Billimoria & Company, Bombay.
•  Clause 5 provides for companies which are to be split between the two groups as per the
Memorandum of Understanding. The division has to be done under clause 5 by a scheme of
arrangement to be formulated by M/s. Bansi S. Mehta & Company, Bombay after taking into
consideration the valuation done by M/s. S. B. Billimoria & Company, Bombay.
• Units of a company to be given to a each group are to be given along with assets and liabilities.
Clause 6 provides for interim arrangements which are to be made in respect of the three
companies which are being split - these being Modi Industries Ltd., Modipon Ltd. and Modi
Spinning and Weaving Mills Company Ltd.
• We are not concerned with the other clauses, except to note that the date for carrying out
valuation, the date of transfer, the appointment of independent Chairmen of these companies
which are to be split and certain other matters specified in the Memorandum of Understanding
shall be done in consultation with the Chairman, Industrial finance Corporation India (IFCI)
•

Question 1 : Whether clause 9 of the Memorandum of Understanding dated 24-1-

1989 constitutes an arbitration agreement; and whether the decision of the
Chairman, IFCI dated 8-12-1995 constitutes an award ? 
This case discussed the attributes which are necessary for
considering an agreement as an arbitration agreement.
It was held that among the attributes which must be present are:
1. The arbitration agreement must contemplate that the decision of the tribunal will be
binding on the parties to the agreement.

2. The jurisdiction of the tribunal to decide the rights of the parties must derive from their
consent, 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 agreement must contemplate that substantive rights of the parties will be determined
by the agreed tribunal.

4. The tribunal will determine the rights of the parties in an impartial and judicial manner
with the tribunal being fair and equal to both sides.
5. The agreement of the parties to refer their disputes to the decision of the tribunal must
be intended to be enforceable in law.

6. The agreement must contemplate 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.

Other important factors include whether the agreement contemplates that that tribunal
will receive evidence from both sides and give the parties opportunity to put forth their
issues and hear their contentions;
whether the wording of the agreement is consistent with the view that the process was
intended to be an arbitration; and
whether the agreement requires the tribunal to decide the dispute according to law.
• The courts have laid emphasis on
i. existence of disputes as against intention to avoid future disputes;
ii. the tribunal or forum so chosen is intended to act judicially after taking into account relevant
evidence and submissions made by parties before it;
iii. the decision is intended to bind parties;
Nomenclature used by parties need not be conclusive.
the question how to distinguish between an expert
determination and arbitration, has been examined.
1. This is a matter of construction of the contract, which involves an objective enquiry into
the intentions of the parties.
2. First, there are the express words of the disputes clause.
If specific words such as `arbitrator’, `arbitral tribunal’, `arbitration’ or the formula `as an
expert and not as an arbitrator’ are used to describe the manner in which the dispute
resolver is to act, they are likely to be persuasive although not always conclusive
3. Where there is no express wording, then court will see whether there was an `issue’
between the parties such as the value of an asset on which they had not taken defined
positions, in which case the procedure was held to be expert determination or a
`formulated dispute’ between the parties where defined positions had been taken, in
which case the procedure was held to be an arbitration.

4. judicial function of an arbitral tribunal as opposed to the expertise of the expert.

An arbitral tribunal arrives at its decision on the evidence and submissions of the parties and
must apply the law or if the parties agree, on other consideration; an expert, unless it is
agreed otherwise, makes his own enquiries, applies his own expertise and decides on his own
expert opinion
 JUDGEMENT ALONG WITH THE RATIONALE
• Clause 9 is intended to clear any other difficulties which may arise in the implementation
of the agreement by leaving it to the decision of the Chairman, IFCI. This clause does not
contemplate any judicial determination by the Chairman of the IFCI.
• He is entitled to nominate another person for deciding any question. His decision has
been made final and binding. Thus, clause 9 is not intended to be for any different
decision than what is already agreed upon between the parties to the dispute. It is meant
for a proper implementation of the settlement already arrived at.
• A judicial determination, recording of evidence etc. are not contemplated.
• Moreover, difficulties and disputes in implementation may not be between the parties to
the Memorandum of Understanding. It is possible that the valuer’s nominated in the
Memorandum of Understanding or the firm entrusted with the responsibility of splitting
some of the companies may require some clarifications or may find difficulties in doing
the work. They can also resort to clause 9.
• Looking to the scheme of the Memorandum of Understanding and the purpose behind
clause 9, it is concluded that it is not an agreement to refer disputes to arbitration. It was
meant to be an expert's decision.
• Undoubtedly, in the course of correspondence exchanged by various members of Groups A and
B with the Chairman, IFCI, some of the members have used the words "arbitration" in
connection with clause 9. That by itself, however, is not conclusive.
• The intention of the parties was not to have any judicial determination on the basis of evidence
led before the Chairman, IFCI. Nor was the Chairman, IFCI required to base his decision only on
the material placed before him by the parties and their submissions. He was free to make his
own inquiries. He had to apply his own mind and use his own expertise for the purpose. He
was free to take the help of other experts. He was required to decide the question of valuation
and the division of assets as an expert and not as an arbitrator. He has been authorised to
nominate another in his place.
• The finality of the decision is also indicative of it being an expert's decision though of course,
this would not be conclusive. But looking at the nature of the functions expected to be
performed by the Chairman, IFCI, the decision is not an arbitration award.
 VALADITY OF OPTIONAL CLAUSE
Payal Chawla Singh vs The Coca-Cola Co. & Anr
In 1998, the Supreme Court, in the matter of K. K. Modi v. K N Modi [(1998) 3 SCC 573], held that an essential
attribute of a valid arbitration agreement includes the decision of an arbitral tribunal to ‘be binding on the parties
to the agreement’.  This decision was later relied upon by the Supreme Court – in a dispute relating to the existence
of an arbitration agreement involving a multinational corporation and a past employee (‘Coca-Cola Case’).

• In the peculiar facts of the Coca-Cola case, the arbitration clause was embodied in a company
policy applicable to employees, known as the Solutions Program.
• The arbitration agreement also provided that in the event the employee was not satisfied with
the arbitral award, the employee would have the option to pursue the dispute in court.
• Relying on K.K. Modi (Supra), the Court was of the view that the agreement of the parties to
be bound by the decision of the arbitrator is an ‘integral element‘ of arbitration.
• In contrast, the Solution Program left the employee with the ‘option to accept or reject the
decision of the arbitrator’ and hence held there was no binding agreement to arbitrate. 
 State of U.P. v. Tipper Chand (1980) 2 SCC
341
• A clause in the contract which provided that the decision of the Superintending
Engineer shall be final, conclusive and binding on all parties to the contract upon
all questions relating to the meaning of the specifications, designs, drawings and
instructions was construed as not being an arbitration clause.
• The Supreme Court said that there was no mention in this clause of any dispute,
much less of a reference thereof.
• The purpose of the clause was clearly to vest the Superintending Engineer with
supervision of the execution of the work and administrative control over it from
time to time.
 DOCTRINE OF SEPERABILITY
• The “separability doctrine” was articulated comprehensively by the United States Supreme
Court in Prima paint Corp v. Flood & Conklin Manufacturing Co. [5] where the Court ruled
that arbitration clauses can be ‘separable’ from the contracts in which they are included.
• The plaintiff in Prima paint Corp brought an action to rescind a contract on the grounds that
the contract has been fraudulently induced.
• The defendant moved to stay the court action, invoking the contract’s arbitration clause and
contending that an arbitrator, and not a court, should decide whether the contract was valid.
• Agreeing with the defendant, the Supreme Court concluded that because the plaintiff was
challenging the underlying contract generally rather than the arbitration clauses specifically,
arbitration of plaintiff’s fraudulent inducement claims were required.
• The court was careful to distinguish this from a claim that the arbitration clause itself had
been fraudulently induced.
• The doctrine would not apply in situations where parties claim that they never agreed to
arbitrate, or they were fraudulently induced into signing an arbitration agreement.
 DOCTRINE OF SEPERABILITY
• In the international context, arbitration clauses are generally deemed to be
presumptively “separable” or “severable” from the underlying contract within
which they are found. The “separability doctrine” is specifically provided for by
leading institutional arbitration rules, and by national arbitration legislation or
judicial decisions from many jurisdictions, including the United States and India.
• The separability doctrine provides that an arbitration agreement, even though
included in and related closely to an underlying commercial contract, is a separate
and autonomous agreement. According to a leading international arbitral award,
“The principle … of the autonomy or the independence of the arbitration clause …
has been upheld by several decisions of international case law.”
• The analytical rationale for the separability doctrine is that the parties’ agreement
to arbitrate consists of promises that are distinct and independent from the
underlying contract: “the mutual promise to arbitrate form the quid pro quo of one
another and constitute a separable and enforceable part of the agreement.”
 DOCTRINE OF SEPERABILITY
• The separability doctrine is regarded as having important consequences for the
arbitral process: “Acceptance of autonomy of the international arbitration clause
is a conceptual cornerstone of international arbitration.”
• Among other things, the separability doctrine is generally understood as implying
the continued validity of an arbitration clause (notwithstanding defects in the
parties’ underlying contract), and as permitting the application of different
substantive laws to the parties’ arbitration agreement and underlying contract.
  AN UNSIGNED ARBITRATION AGREEMENT IS
NOT A BAR TO ARBITRATION
• M/s Caravel Shipping Services Private Limited v M/s Premier Sea Foods Exim Private Limited (C.A.
No.-010800-010801 of 2018 in SLP (C) Nos. 31101-31102 of 2016)
• Facts
• The dispute between M/s Caravel Shipping Services Private Limited (Appellant) and M/s Premier Sea
Foods Exim Private Limited (Respondent) arose of out of a document titled "Multimodal Transport
Document/Bill of Lading" dated 25 October 2008 (BOL).
• The BOL specified that "the Merchant expressly agrees to be bound by all the terms, conditions,
clauses and exceptions on both sides of the Bill of Lading whether typed, printed or otherwise".
Further, clause 25 of the BOL, which was a printed condition annexed thereto, contained the
arbitration clause.
• The Respondent had filed a suit before the Sub-Judge's Court in Kochi (Sub-Court, Kochi) to recover
a sum of INR 26,53,593, in which suit the BOL was expressly stated to be a part of cause of action.
• Pursuant to filing of the suit, an interlocutory application (IA) was filed by the Appellant under
Section 8 of the Arbitration and Conciliation Act, 1996 (Act) which, inter alia, pointed to the Sub-
Court, Kochi that an arbitration clause was included in the printed terms annexed to the BOL. The IA
was dismissed by the Sub-Court, Kochi.
• Aggrieved by the dismissal, the Appellant filed a petition before the Kerala High
Court (High Court) under Article 227 of the Constitution of India. In deciding on
the appeal, the High Court stated, inter alia, that the arbitration clause being in a
printed condition annexed to the BOL indicated no intention to arbitrate and the
petition was accordingly disposed.

THE MAIN ARGUMENTS EXTENDED BY THE APPELLANT WERE AS FOLLOWS:

1. that printed conditions of the BOL were expressly referred to in the BOL and
accordingly both parties were bound by the same; and
2. that in accordance with Section 7(5) of the Act read with the Court's judgment
in M.R. Engineers and Contractors Private Limited v Som Datt Builders
Limited ((2009) 7 SCC 696) (M.R. Engineers Case), there was a reference in the
contract to the arbitration clause. Further, the arbitration clause was in writing
and the reference was such that the arbitration clause formed part of the
contract.
Respondent's Arguments
• The main arguments extended by the Respondent were as follows:
1. that Section 7(4) of the Act required an arbitration agreement to be in a
document that is signed by the parties; and
2. that since the BOL was not signed by the Respondent, it was not bound by the
arbitration clause contained in that document.
Findings of the Court
• Having heard both the parties, the Court held the following:
1. that the BOL specified that the term "Merchant" expressly agreed to be bound by all the terms and
conditions on both sides of the BOL whether typed, printed or otherwise;
2. that perusal of clause 25 of the BOL showed that the Respondent had expressly agreed to be bound
by the arbitration clause, despite the fact that it was a printed condition annexed to the BOL;
3. that the Respondent had relied upon the unsigned BOL as part of the cause of action in the suit filed
by it arose out of the same. In view thereof, the Respondent can no longer argue that for the
purpose of arbitration, the requirement of the Act is that a valid arbitration clause should be signed;
4. that in Jugal Kishore Rameshwardas v Mrs. Goolbai Hormusji (AIR 1955 SC 812), it was held by the
Court that that an arbitration agreement needs to be in writing though it need not be signed, which
principle is also contained in Section 7(3) of the Act. Section 7(4) of the Act should not be construed
to mean that in all cases, an arbitration agreement needs to be signed. The only pre-requisite is that
it should in writing; and
5. that Section 7(5) of the Act read with the M.R. Engineers Case implied that the reference in the BOL
is such as to make the arbitration clause part of the contract between the parties.
• The Court has clarified the meaning and purport of an arbitration agreement. The
Court has rightly held that in terms of Section 7(3) of the Act, the primary pre-
requisite for there to be a valid arbitration agreement is that it should be in
writing. The Court further says that the conditions under Section 7(4) of the Act
are not exhaustive to the extent that the same are merely circumstances to show
that there is an arbitration agreement between parties. However, it would be
incorrect to interpret that if the conditions under Section 7(4) are not met, there
would not be a valid arbitration agreement. That is to say, what is primarily
required is that the arbitration agreement be in writing.