Drafting of Arbitration

Agreement
( V Sem )

Adv. Pooja Deelip Patil

Introduction
• In recent years, arbitration has grown leaps and bounds worldwide. Due to the underlying
principles of party autonomy and confidentiality, it has flourished as a standalone dispute
resolution mechanism.
• The arbitration agreement forms a binding procedure to be followed by the parties as well as
the arbitral tribunal in its decision making. The underlying principles of arbitration such as party
autonomy and confidentiality have made it an attractive choice of dispute resolution among
the parties, however, the technicalities involved in arbitration can make it seem a tad bit
daunting.  
• One must understand that unlike the traditional dispute resolution methods, the arbitral
process does not begin from the date the dispute arises. Regardless of the dispute, the
arbitration process starts when the parties enter into an arbitration agreement. At the time of
dispute, it is the arbitration agreement that mandates, guides and establishes the arbitration
proceedings.
• In other words, the facts decide and guide the law, not the other way round. The arbitration
agreement, therefore, becomes a vital aspect of any agreement where the parties choose to
take their issues to arbitrate and requires considerable brainstorming and foresight.
What is an arbitration agreement?
• It’s typically a clause in a broader contract in which you agree to settle out of
court, through arbitration cases, any dispute that arises with your counterpart.
Arbitration agreements are common in consumer contracts and employment
contracts, but they can be proposed additions to any contract negotiation in
which one or both parties would like to head off the possibility of a future lawsuit.
• To reduce the costs and improve the efficiency of dispute resolution, businesses
often require that their customers and employees to sign an arbitration
agreement.
• An arbitration agreement is a legally binding contract that offers an alternate
dispute resolution between two parties or more. Arbiration agreements provide
an alternative to civil court litigation. Parties sign an arbitration agreement and
enter into a process known as arbitration if a dispute arises.
Purpose Of Arbitration Agreements

• The purpose of an arbitration agreement is that the dispute process is

faster and more affordable than litigation. Cases are less formally
presented than legal proceedings as well. However, there are pros
and cons of signing an arbitration agreement, of which you should be
aware.
Pros of Signing an Arbitration Agreement

• Arbitration agreements have several distinct advantages. Regardless of your industry,

you can use these advantages by including an arbitration clause in your contracts.

These are the pros of signing an arbitration agreement:

• Pro #1: Avoids civil court hostility
• Pro #2: Less expensive than civil litigation
• Pro #3: Resolutions are generally faster
• Pro #4: Process is more flexible than litigation
• Pro #5: Proceedings are not on public record
• Pro #6: Rules of Evidence do not apply
• Pro #7: Parties can mutually agree to an arbitrator
Cons of Signing an Arbitration Agreement

The following are the cons of signing an arbitration agreement:

• Con #1: Limited form of legal redress
• Con #2: Not always a level playing field
• Con #3: Objectivity is questionable
• Con #4: Process is not always transparent
• Con #5: Arbitration costs are rising
• Con #6: Decisions can be made on speculation
• Con #7: Fewer opportunities to appeal the decision
These disadvantages can significantly affect the case's outcome and even how you
choose to move forward in the future. These should be considered carefully when
including them in contracts or being asked to sign one.
Suing After You Sign An Arbitration Agreement

• You cannot sue or be sued after you sign an arbitration agreement. If

the original contract included an arbitration clause, it means that both
parties agreed not to pursue legal action in court against the other.
Any disputes that arise will have to be settled through arbitration.
Arbitration Agreement

• An arbitration agreement is the raison d’être of an arbitration proceeding. It is only

through an arbitration agreement that parties can submit their issues to be adjudicated
by the arbitral tribunal. 
• An arbitration agreement not only engenders an arbitral tribunal but also gives shape to
it. Therefore, it is crucial to understand the position of the arbitration agreement under
the statute.

• In the 1940 Act, the Arbitration Agreement was defined under Section 2(a) as-

“A written agreement to submit present or future differences to arbitration, whether an

arbitrator is named therein or not.”
• The vague definition was replaced in the 1996 Act by Section 7 which stated –

• Section 7. Arbitration agreement. —

(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) a document signed by the parties;
(b) an exchange of letters, telex, telegrams or other means of telecommunication which provide a
record of the agreement; or
(c) an exchange of statements of claim and defense 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.”
• An arbitration agreement once made, cannot be deterred when a
dispute arises. In Ravi Prakash Goel v. Chandra Prakash Goel, the
Supreme Court held that where there is an arbitration agreement
present and applicable, the parties cannot take recourse to the civil
court without first undergoing arbitration. It is mandatory for the
courts under Section 8 of the 1997 Act, to refer the parties to
arbitration when there is an applicable arbitration agreement.
Po int s To R em em be r W hile D raft ing A rbit ratio n A gr ee me nt

1. Seat of Arbitration – This clause specifies the seat or place of arbitration. The seat of
arbitration determines the procedural laws that govern the arbitration procedure. It need not
be the same as the place of hearings. Seat of arbitration is considered to be a place where
arbitrations are held even if the place of hearings differ. Place of hearings don’t by any means
affect the chosen seat of arbitration.

2. Procedure for Appointing Arbitrators – Section 11 of the Arbitration and Conciliation Act
talks about the appointment of arbitrators. It provides that a person of any nationality may
be appointed as an arbitrator, unless otherwise agreed by the parties. The parties are free to
agree on a procedure for appointing the arbitrator(s). If the parties fail to reach an
agreement, in an arbitration with 3 arbitrators, each party shall appoint one arbitrator, and
the two arbitrators shall thereafter appoint a third arbitrator, who shall be the presiding
arbitrator. The appointment of parties may be by the parties themselves, or by the
designated authority or by the arbitral institutions. In places where the dispute involves
international commercial transaction, then the arbitrator to be appointed shall not be of the
same nationality as the parties to the dispute.
3. Language of Arbitration – It is important to mention the language of arbitration
in the agreement itself. Especially, in a country like ours, where Hindi and English
aren’t the only two languages spoken, it would get very difficult to decide and
settle the disputes. Choosing the language of arbitration is also very cost effective,
because it would save you from paying exorbitant fees to the translators.

4. Number and Qualifications of Arbitrators – According to Section 10 of the

Arbitration and Conciliation Act of 1996, parties can determine the number of
arbitrators, provided that the number is an odd number. Failing to determine the
no. of arbitrators, the arbitral tribunal shall consist of a sole arbitrator.

5. Governing Law – This is the law that governs the main point of contention
between the parties to a dispute. It is even known as the substantive law. The
parties should mention the law they want to be governed by, failing which may
give way to disputes in the future.
6. Type of Arbitration – Parties can choose between Institutional or Ad hoc arbitrations. If the parties
choose the former, then they have to be bound by the rules of the arbitration institutions. All these
institutions have their own set of rules for arbitration and these rules would be applicable to arbitral
proceedings conducted by them. Whereas, in case of Ad-hoc arbitrations, arbitrations are both agreed to
and arranged by the parties themselves. No help is sought from the arbitral institutions in Ad-hoc
arbitrations.
Some of the arbitration institutes in India are Delhi International Arbitration Centre (DIAC), Nani Palkhivala
International Arbitration Centre,, and Mumbai Centre for International Arbitration (MCIA). The ad hoc
system grants more autonomy and is cost-effective. On the other hand, the institutional arbitration model
offers pre-established fine-tuned procedure, administrative assistance and qualified empanelled
arbitrators.
In India, ad hoc arbitration is more prevalent as compared to institutional arbitration. Through the
Arbitration and Conciliation Amendment Act, 2019, through the Arbitration and Conciliation Amendment
Act, 2019, the government has tried to push the arbitral institutions to develop into cost-effective centres
for domestic and international arbitration. 

7. Name and Address of the Arbitration Institution – If the parties to the dispute are referring their
disputes to an arbitration centre, then it is pertinent that they mention the name and address of the
arbitration facility in clear and unambiguous words. Such inadvertent mistakes can lead to the nullification
of the arbitration clause.
Whether an arbitration agreement needs to be signed

• In Svapn Const. v. IDPL Employees Co-op. Group Housing Society Ltd.,

it was held that the agreement need not be signed by the parties if it
is established by another written
• contemporaneous document, which is binding between the parties.
However, in 2018, the Supreme Court held in M/s Caravel Shipping
Services Pvt Ltd v M/s Premier Sea Food Exim Pvt Ltd that an unsigned
arbitration agreement is valid as the only prerequisite for a valid
arbitration agreement under the 1996 Act is that it must be in
writing. 
Whether an arbitration agreement needs to be stamped

• Arbitration Agreement is chargeable under Section 5 of the Indian

Stamp Act, 1899. With respect to the 1940 Act, the Calcutta High Court
held in Bengal Hire Purchase Corpn v. Harendra Singh that an
unstamped arbitration agreement cannot be given effect unless the full
stamp duty is duly paid.
• The courts would first impound the unstamped agreement and send it
to the relevant authorities for the payment of stamp duty and penalty
(if any). Only after ensuring that the lacuna is cured, the arbitration
agreement can be executed. The Supreme Court held the same position
with respect to the 1996 Act in Garware Walls Ropes Ltd. v. Coastal
Marine Constructions & Engineering Ltd. 
When the Arbitration Agreement is Vague

• The Calcutta High Court held in State Trading Corporation of India Ltd. v.
Owners & Parties Interested in the Vessel M.V. Baltik Confidence, that an
application referring to an ambiguous and ambiguous agreement will not
be maintained.
• However, in the judgement of Zhejiang Bonly Elevator Guide Rail
Manufacture Co. Ltd. v. M/S Jade Elevator Components, the Supreme Court
while dealing with a vague arbitration clause, scrutinized the clause
examining the intention of the parties instead of doing away with the
agreement itself.
• Therefore vague and unclear arbitration agreements can hold validity as
long as the intention to refer the parties to arbitration is clear. and upheld
the validity of the arbitration agreement. 
Case Laws
• Rashid Raza Vs. Sadaf Akhtar Judgment dated 04 September 2019 in
Civil Appeal No. 7005 of 2019.
Conclusion

• When the dispute resolution mechanism can have such far-reaching

effects, it shall be dealt with meticulous attention to detail. The
interpretations by the various High Courts and the Hon’ble Supreme
Court highlight the need to carefully draft the arbitration clauses in
the agreement. Treating it like just another boilerplate clause may as
well be like playing with fire.