Essential Elements of an Arbitration Agreement

Author: Vedang Mishra, Research Associate

Arbitration provides for an alternative forum to the time consuming and expensive court proceedings and ensures speedy disposal of cases without the court’s intervention. In India, the provisions of the Arbitration & Conciliation Act, 1996, govern arbitration. As per section 7 of the said Act ‘Arbitration Agreement’ is 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. It may be in the form of an arbitration clause in a contract or in the form of a separate agreement.

Essential Elements of an Arbitration Agreement

  1. Written Agreement: An arbitration agreement must be in writing1. It need not be in any particular form. It may be a single document containing all the terms or can comprise of two documents. However, an oral agreement of arbitration is not legally recognized in India.
  2. Capacity of the Parties: An arbitration agreement must be in compliance with all the requirements of a valid contract. It will be binding on the parties unless it is influenced by fraud, coercion or undue influence. The parties must have requisite capacity for entering into the contract. Lack of such capacity invalidates the contract.
  3. Intention: Another very important element is the intention of the parties to refer disputes already arisen or likely to arise in respect of a contract. A binding contract require consensus ad idem. It generally includes appointment of arbitrators, seat and the venue of the arbitration proceedings, choice of language and other procedures for proceedings and pleadings. If the intention of the parties is clearly discernible from the terms of the agreement, the presence or absence of the words ‘arbitration’, ‘arbitrator’, or ‘arbitral tribunal’ does not matter2.
  4. Independent Clause: An arbitration clause in a contract is treated as an independent contract and even if main contract is itself illegal and void, it does not make the arbitration clause invalid3. The contract survives for determining and measuring the claims arising out of breach and the arbitration clause survives for the mode of their settlement. This provision was incorporated with a view to give power to the arbitral, tribunal not only to rule on its own jurisdiction but also to decide objection with respect to the existence or validity of the arbitration agreement.

Judicial Pronouncements:

Every arbitration agreement must be liberally construed so as to give effect to the intention of the parties. It helps in widening the scope of the arbitrator’s jurisdiction. Indian Judiciary has made significant decisions while interpreting various arbitration clauses. The Supreme Court in Renusagar Power Company Ltd v. General Electric Company,4held that whether a given dispute inclusive of the arbitrator’s jurisdiction comes within the scope or purview of an arbitration clause or not primarily depends upon the terms of the clause itself; it is a question of what the parties intend to provide and what language they employ.

Regarding the intention of the parties, the Supreme Court in another case held that the intention of the parties to refer a matter to arbitration is to be gathered from the expression used in correspondence and the meaning it conveys. In case it shows that there had been a meeting of minds between the parties and they had actually reached an agreement upon all material terms, then and then alone can it be said that a binding contract was capable of being spelt out from the contract or the correspondence5.

In Bihar State Mineral Development Corporation v. Encon Builders (I) (P) Ltd,6following essential elements of an arbitration agreement are observed by the apex court of India

                     i.            There must be a present or a future difference in connection with some contemplated affair.

                   ii.            There must be the intention of the parties to settle such difference by a private tribunal.

                 iii.            The parties must agree in writing to be bound by the decision of such tribunal.

                 iv.            The parties must be ad idem.

In K.K. Modi v. K.N. Modi,7Supreme Court held the following attributes must be present in an arbitration agreement:

         i.            The arbitration agreement must contemplate that the decision of the tribunal will be binding on the parties to the agreement.

       ii.            That the jurisdiction of the tribunal to decide the rights of the parties must derive either, form the consent of the parties or from an order of the court or from a statute.

     iii.            The agreement must contemplate that substantive rights of the parties will be determined by the arbitration tribunal.

     iv.            That the tribunal will determine the rights of the parties in an impartial and judicial manner with the tribunal owing an equal obligation of fairness towards both sides.

       v.            That the agreement must contemplate that the tribunal will make a decision upon a dispute which is already formulated at the time where a reference is made to the tribunal.

Scott v. Avery Clause:

A clause providing that any dispute must go to arbitration first before any litigation commences, is known as ‘Scott v. Avery’ clause. It is called ‘Scott v. Avery’ clause because its validity is upheld in that leading case8. This clause makes arbitration a condition precedent to any court action. The Supreme Court has observed that such clauses have been held to be valid9.

‘Atlantic Shipping’ clause or Time-Bar clause:

Where a clause in an arbitration agreement provides that claims to which the argument applies shall be barred unless some step to commence the arbitration is taken within a stated time, such clause in arbitration is called a time bar clause. Time bar clause is also known as Atlantic Shipping Clause as it takes its name from the decision in Atlantic Shipping and Trading Co. v. Dreyfus (Louis) & Co.10It is to be noted that the time bar clause do not fall within the mischief of Section 28 of the Contract Act, the reason being that they do not shorten the period of limitation to enforce a right, but extinguish the right itself. Generally these clauses are strictly construes against the party relying on them but courts are empowered to appropriately extend the time fixed which had expired on terms, if any, in cases where in the circumstances of the case undue hardship would be caused.

Proposed Amendment in Arbitration & Conciliation Bill, 2003

The bill proposes amendment in section 7 (4) (b) of the act by inclusion of following words in definition of ‘arbitration agreement’:

‘An agreement by implication such as where one party sends a communication to the other which provides a record of the agreement, even though the party which receives the communication does not send a reply, his silence will be treated as amounting to acceptance of the arbitration clause, which is accepted by the other party without demur.’

However, the Central Government withdrew the bill in 2006 and now again comments and suggestions are being invited to for introduction of a new Bill on arbitration so that it can remove the difficulties and lacunas in the existing act and object of enacting Arbitration law may be achieved.

  1. Section 7(3) of Arbitration and Conciliation Act, 1996 []
  2. Sushila Seth v. State of MP, AIR 1980 Del 244 []
  3. Section 16(a) of Arbitration and Conciliation Act, 1996 []
  4. AIR 1985 SC 1156 []
  5. Rickmers Verwaltung GmbH v. Indian Oil corporation, (1999) 1 SCC 1 []
  6. [2003] 7 SCC 418 []
  7. AIR, 1998 SC 1297 []
  8. Scott v. Avery, (1856) 5 HL Cas 811 []
  9. The Vulcan Insurance Co. Ltd. v. Maharaj Singh, AIR 1976 SC 287 []
  10. [1922] 2 AC 250 []