An arbitration agreement is defined under Section 7 of the Arbitration & Conciliation Act, 1996 [“Act”] as an agreement by the parties thereto 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. Sub-section (3) of the said provision mandates that in order to be valid, an arbitration agreement must be in writing. Sub-section (4) provides the eventualities in which an arbitration agreement may be considered a ‘written agreement’. By way of example, an arbitration agreement may also come into existence through the exchange of correspondence, including through electronic means, if such correspondence provides the record of the agreement.

Judicial pronouncements on the scope of an arbitration agreement have by and large crystallised the  factors to be borne in mind while drafting such an agreement.

This article attempts to summarise some of the important factors which emerge from an analysis of some important judicial pronouncements on the topic.

Scope of the Arbitration Agreement: ‘all or certain disputes’

First and foremost, it is important to delineate the scope of the intended arbitration agreement/clause. The words ‘all or certain disputes’, used in the provision itself, demonstrate that the parties may exercise their choice of specifying the categories of probable disputes arising out of a contractual relationship which shall be referred to arbitration. In the alternative, the parties are also free to incorporate an all-encompassing arbitration clause in their contract.

The ‘scope’ of the arbitration agreement is based on the answer to the question as to which disputes are covered under the arbitration clause in a given arbitration agreement. To put it simply, to see whether a dispute between parties can be referred to arbitration, one has to look into the arbitration clause binding the parties and ascertain whether the said clause covers such disputes which the parties wish to get adjudicated.

 In Mahanagar Telephone Nigam Ltd. vs. Canara Bank and Ors. reported as AIR 2019 SC 4449, the Supreme Court has held that arbitration agreements are to be construed according to the general principles of construction of statutes, statutory instruments, and other contractual documents. The intention of the parties must be inferred from the terms of the contract, conduct of the parties, and correspondence exchanged, to ascertain the existence of a binding contract between the parties. If the documents on record show that the parties were ad idem, and had actually reached an agreement upon all material terms, then it would be construed to be a binding contract. The meaning of a contract must be gathered by adopting a common sense approach, and must not be allowed to be thwarted by a pedantic and legalistic interpretation. The Court opined that an arbitration agreement is a commercial document and it must be interpreted so as to give effect to the intention of the parties, rather than to invalidate it on technicalities.

Thus being the case, it is advisable to draft an arbitration clause in clear and unambiguous words so as to avoid confusion and also in a way that the clear intent of the parties is reflected on a bare perusal of it.

Appointment of Arbitrator

The parties are free to determine the procedure for appointment of an arbitrator, and the number of arbitrators intended to be appointed. Section 10 of the Act however mandates that the arbitrators shall not be even in number. In the event that the parties do not provide for the number of arbitrators, the arbitration is to be conducted by a sole arbitrator.

Due care, however, must be taken of the fact that the arbitrator proposed to be appointed is not ineligible under the Seventh Schedule of the Act. The Seventh Schedule (read with Section 12(5) of the Act)  sets out certain circumstances under which the arbitrator is rendered ineligible for appointment. This is contemplated in a situation where the arbitrator either has a relationship (of the kinds mentioned in the Schedule) with the parties to the dispute, or with the dispute itself, or in the situation where the arbitrator has a direct or indirect interest in the dispute.

Typically, some contracts are seen to have an upper level employee of one of the contracting parties as the arbitrator. With the insertion of the Seventh Schedule in the Act [By the Arbitration (Amendment) Act, 2016 w.e.f. 23.10.2015], such an appointment is impermissible. Interpreting this Schedule, the Supreme Court has held that while appointing an arbitrator it should be kept in mind that a party who is interested in the outcome of such arbitral dispute cannot have discretion to appoint a sole arbitrator.( Perkins Eastman Architects DPC and Another HSCC (India) Ltd. reported as AIR 2020 SC 59)

The Supreme Court has, however, clarified that a challenge under Section 12 of the Act cannot be made out regarding appointment of arbitrator who is a retired employee of one of the parties in Central Organisation for railway electrification vs. ECI-SPIC-SMO-MCML  reported as 2020 (1) SCALE 134

The amendments made to the Act vide the Arbitration (Amendment) Act, 2019 provide for mandatory qualifications of an arbitrator by way of insertion of the Eighth Schedule in the Act. In addition to providing for certain professional qualifications, the said Eighth Schedule also provides certain ‘General Norms applicable to arbitrators’. These amendments have, however, not been brought into force till date(Vide Notification No. 3154(E) issued by the Ministry of Law and Justice on 30.8.2019, only Sections 1, 4-9, 11-13 and 15 of the Arbitration (Amendment) Act, 2019 have been brought into force.)

Place of Arbitration

An arbitration clause should clearly specify the seat of the arbitration. The ‘seat’ determines the court which will have the exclusive jurisdiction to adjudicate any proceedings arising out of arbitration proceedings. An arbitration clause is not governed by the rules of determination of jurisdiction based on the place where the cause of action has arisen. As held by the Supreme Court in Indus Mobile Distribution Private Limited v. Datawind Innovations Private Limited & Ors reported as AIR 2017 SC 2105, under the law of arbitration, unlike under the Code  of Civil Procedure,1908, a reference to the ‘seat’ is a concept by which a neutral venue can be chosen by the parties to an arbitration clause. The neutral venue in the classical sense may not have jurisdiction.

Unambiguous expression of intention to refer disputes to arbitration

An arbitration agreement must reflect the unambiguous intention of the parties to refer the disputes inter se to arbitration. Absent such intent, the vague reference to ‘settlement of disputes’ by a person/ authority or body will not amount to an agreement to refer disputes to arbitration.

The arbitration clause in Karnataka Power Transmission Corporation Limited & Ors. v. Deepak Cables (India) Ltd. reported as AIR 2014 SC 2134 provided for reference of ‘any dispute or difference of any kind whatsoever arising out of the contract’ to the Engineer in charge, who was to give ‘his decision’ within 30 days after being requested by either party to do so. Such a widely worded clause was held not to amount to an unambiguous arbitration agreement. The Supreme Court held:

“On a studied scrutiny of this postulate, it is graphically clear that it does not provide any procedure which would remotely indicate that the concerned engineer is required to act judicially as an adjudicator by following the principles of natural justice or to consider the submissions of both the parties. That apart, the decision of the engineer is only binding until the completion of the works. It only casts a burden on the contractor who is required to proceed with the works with due diligence. Besides the aforesaid, during the settlement of disputes and the court proceedings, both the parties are obliged to carry out the necessary obligation under the contract. The said clause, as we understand, has been engrafted to avoid delay and stoppage of work and for the purpose of smooth carrying on of the works. It is interesting to note that the burden is on the contractor to carry out the works with due diligence after getting the decision from the engineer until the completion of the works. Thus, the emphasis is on the performance of the contract. The language employed in the clause does not spell out the intention of the parties to get the disputes adjudicated through arbitration. It does not really provide for resolution of disputes.”

The Court arrived at this finding after an exhaustive and instructive discussion on the law on Section 7 of the Act.

In Mahanagar Telephone Nigam Ltd. vs. Canara Bank and Ors.(supra) the Court found that the intention to resolve the disputes through arbitration was manifest from the statement by the parties made before a Court in a writ petition between the parties. It was held that the agreement between the parties as recorded in a judicial order was final and conclusive of the agreement entered into between the parties. Further, it was found that the filing of the statement of claim and defence filed before the arbitrator would also constitute evidence of existence of an arbitration agreement, which was not denied by the other party, under Section 7(4)(c) of the Act.

Asymmetric arbitration clause

In Shri Chand Construction and Apartments Private Limited v. Tata Capital Housing Finance Ltd.( CS(OS) 179/2019) the Hon’ble Delhi High Court opined that an arbitration agreement, providing for claims of one of the parties arising in respect of a defined legal relationship to be adjudicated by arbitration, while excluding the claims of the other party arising in respect of the same legal relationship from the scope of arbitration would be contrary to the public policy prohibiting splitting up of claims and causes of action as enshrined in the provisions of the CPC and would result in multiplicity of proceedings, with claims of one of the parties to a legal relationship being decided by one forum and the claims of the other party to the same legal relationship being decided by another forum and possibility of conflicting findings.

This means, that in a case where the contract has been entered into between the parties at place ‘A’, for supply of goods from place ‘B’ to place ‘C’, the parties may name place ‘Z’, which may have no connection whatsoever to the performance of the contract, as an exclusive seat of the arbitration proposed between the parties.

The ‘venue’ of arbitration is merely a place of convenience where the proceedings may be conducted and it does not confer jurisdiction on courts under whose territorial jurisdiction the said venue is. The Supreme Court has clarified in BGS SGS SOMA JV vs. NHPC Ltd. reported as 2019 (17) SCALE 369  that the venue of an arbitration proceeding can change and it would not result in change in jurisdiction.

To mitigate protracted litigation, it is imperative that parties should, in unambiguous words state their intent to designate a seat and also may state their desirable place and venue where the said arbitration proceedings can be conducted.

Arbitration clause in an unstamped & unregistered document

It is important to be mindful of the requirement of registration (under the Registration Act, 1908) or of stamp duty payment (under the Indian Stamp Act 1899 or the relevant statute) qua the agreement being entered into between two contracting parties, if such an agreement is to contain an arbitration clause. The legal position in this regard has been laid down in Garware Wall Ropes Ltd. v. Coastal Marine Constructions & Engineering Ltd reported as AIR 2019 SC 2053  by the Supreme Court. While entering into the contract containing an arbitration clause, the parties must ensure that the stamp duty due on the agreement has been duly paid. This is because the Supreme Court has held that in case of an unstamped agreement, or an agreement which is not duly stamped, the arbitration clause cannot be enforced until the instrument is duly stamped. Therefore, a party approaching the Court under Section 11 of the Act for appointment of an arbitrator on the basis of an unstamped instrument or an instrument not duly stamped will have to wait for the appointment until the instrument is impounded by the Court and stamp duty is duly paid there on.

On the other hand, however, if a compulsorily registerable agreement is as a matter of fact not so registered, the arbitration agreement contained therein may yet be acted upon.

Doctrine of Separability: The doctrine states that an arbitration clause is separate from the underlying contract in which it appears. However, the existence of the contract is necessary for the terms of arbitration clause. This can be seen from the position laid down by the Apex Court in the case abovementioned.

Incorporation of an Arbitration Clause by reference to another contract

Section 7(5) is a specific provision which provides for incorporation of an arbitration clause by reference to another contract, albeit upon satisfaction of certain specific conditions. Situations where the parties are in engaged in regular contractual dealings with each other and therefore have entered into several contracts with each other; or classic cases of Government contracts where the terms of one contract may refer to another; or cases where the parties choose to refer to an institutional mechanism for arbitration, without specifying the procedure to be followed for initiation of the arbitration separately in the contract; are not uncommon in commercial transactions. In one such case in Duro Felguera S.A. v. Gangavaram Port Limited reported as AIR 2017 SC 5070 the parties split their contract into 5 separate ‘packages’, each of which separate package contained an arbitration clause. Additionally, one party executed a corporate guarantee in favour of the other which contained a separate arbitration clause. The 5 agreements were then followed by an MoU, and it was argued that the MoU subsumed all the agreements and the arbitration clause in the MoU must thus prevail. The Supreme Court rejected this argument and in the course of its judgment referred to M.R. Engineers and Contractors Pvt. Ltd. v. Som Dutt Builders Ltd reported as 2009 (9) SCALE 298. which laid down the following essentials for the incorporation of an arbitration clause by reference:

  • The contract should contain a clear reference to the documents containing the arbitration clause;
  • The reference to the other document should clearly indicate an intention to incorporate the arbitration clause into the contract;
  • The arbitration clause should be appropriate, that is capable of application in respect of disputes under the contract and should not be repugnant to any term of the contract.

In conclusion, while there may not exist a mandatory form of an arbitration agreement and while procedures and appointment may have been left to the discretion of the parties to the contract, due care must be taken that the arbitration clause is worded in clear, unambiguous terms where the intent of the parties to refer the disputes (either specific, or all) to arbitration must be evident.

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Akshay & Ankita are Associates in the Disputes Resolution team of Innovatus Law, a New Delhi based multi-disciplinary law firm specializing in dispute resolution and general corporate practice. Akshay can be reached at akshay@innovatuslaw.in. Ankita can be reached at ankita@innovatuslaw.in

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