Arbitration Agreement: Forms, Essential Elements and Effects

An Arbitration Agreement is a contract where parties agree to submit their disputes—whether already existing or likely to arise in the future—to arbitration instead of litigating them in a civil court. It is the very foundation of the arbitral process; without a valid agreement, an arbitral tribunal lacks the jurisdiction to hear a case.

Under Section 7(1) of the Arbitration and Conciliation Act, 1996, an arbitration agreement is defined as 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.

Forms of Arbitration Agreement

According to Section 7(2), an arbitration agreement can take two forms:

1. Arbitration Clause: A provision contained within a larger contract (e.g., a "Dispute Resolution" clause in a construction contract).

2. Submission Agreement: A separate, standalone agreement signed after a dispute has already broken out.

Essential Elements of a Valid Arbitration Agreement

For an arbitration agreement to be legally enforceable, it must satisfy specific criteria outlined in Section 7 and the general principles of the Indian Contract Act, 1872.

1. Must be in Writing

Under Section 7(3), an arbitration agreement must be in writing. An oral agreement to arbitrate is not recognized under the 1996 Act. As per Section 7(4), the requirement of writing is satisfied if the agreement is contained in:

• A document signed by the parties.

• An exchange of letters, telex, telegrams, or other means of telecommunication (including emails) which provide a record of the agreement.

• 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.

2. Intention of the Parties (Consensus ad Idem)

The most critical element is a clear and unequivocal intention to refer disputes to arbitration. Using words like "might" or "may" refer to arbitration is often considered an "option" rather than a binding "agreement." The parties must be ad idem (of one mind) that they wish to bypass the courts.

3. Defined Legal Relationship

The agreement must relate to a "defined legal relationship," which is usually contractual (like a lease or a sales agreement) but can also be non-contractual (such as a tortious claim arising from a specific interaction).

4. Arbitrability of the Subject Matter

Not all disputes can be resolved via arbitration. For an agreement to be valid, the subject matter must be "arbitrable" under Indian law. For example, criminal matters, matrimonial status, insolvency, and guardianship are generally considered non-arbitrable as they involve "rights in rem" (rights against the world) rather than "rights in personam" (rights against a specific person).

5. Capacity of the Parties

The parties entering into the agreement must have the legal capacity to contract under the Indian Contract Act, 1872. This means they must be of sound mind, have attained the age of majority, and must not be disqualified by any law.

6. Doctrine of Severability (Separability)

A unique feature of an arbitration agreement is that it is often treated as a separate contract from the main "container" contract. Under Section 16(1)(b), even if the main contract is found to be null and void, the arbitration clause survives for the purpose of resolving the dispute regarding that invalidity.

Effect of a Valid Agreement (Section 8)

If a party to an arbitration agreement files a suit in a civil court despite the existence of the agreement, the other party can apply to the court to refer the matter to arbitration. Under Section 8, if a valid arbitration agreement exists, the judicial authority is mandated to refer the parties to arbitration, unless it finds that prima facie no valid arbitration agreement exists.

Provisions Regarding Appointment, Types, Qualification and Termination of Arbitrators

The appointment of arbitrators is a critical phase in the dispute resolution process, governed primarily by the principle of party autonomy. The Arbitration and Conciliation Act, 1996, provides a clear framework for how a tribunal is formed and the various forms it can take.

1. Provisions Regarding Appointment (Section 11)

Section 11 of the Act is the primary provision dealing with the appointment of arbitrators. It balances the parties' right to choose their adjudicator with the court's power to step in when the process stalls.

• Nationality (Section 11(1)): Unless otherwise agreed by the parties, a person of any nationality may be an arbitrator.

• Procedure (Section 11(2)): Parties are free to agree on a procedure for appointing the arbitrator or arbitrators.

• Default Appointment (Three Arbitrators): If there is no agreed procedure for a three-member tribunal, each party appoints one arbitrator, and those two appointees then appoint the third "presiding" arbitrator.

• Court Intervention (Section 11(4) & 11(6)): If a party fails to appoint an arbitrator within 30 days of a request, or if the two appointed arbitrators fail to agree on a third, the appointment is made by the Supreme Court (in International Commercial Arbitration) or the High Court (in domestic cases).

• Arbitration Council of India (ACI): Following the 2019 Amendment, the Act envisions that the appointment process will eventually be handled by designated "Arbitral Institutions" graded by the ACI, further reducing direct court involvement.

2. Types of Arbitrators

Arbitrators can be classified based on their role within the tribunal or the nature of their appointment:

• Sole Arbitrator: A single individual who hears the case and renders the award. This is common in smaller or less complex disputes to save time and costs.

• Presiding Arbitrator (Umpire): In a tribunal of three, this is the third arbitrator appointed by the two party-appointed arbitrators. They act as the chairperson of the tribunal.

• Party-Appointed Arbitrator: An arbitrator selected directly by one of the parties. Despite being appointed by one side, they have a legal duty to remain independent and impartial under Section 12.

• Institutional Arbitrator: An arbitrator appointed from a panel maintained by a specialized institution (like the DIAC or SIAC) which administers the arbitration under its own rules.

• Ad Hoc Arbitrator: An arbitrator appointed for a specific dispute where the parties have not chosen an institution to manage the process.

3. Qualifications and Disqualifications (Section 12)

While parties can choose anyone, the law ensures the integrity of the process through mandatory disclosures:

• Disclosure (Section 12(1)): When a person is approached for appointment, they must disclose in writing any circumstances likely to give rise to justifiable doubts as to their independence or impartiality.

• Seventh Schedule: This schedule lists specific relationships (professional, financial, or personal) that make a person ineligible to be an arbitrator unless the parties expressly waive this in writing after the dispute has arisen.

• Fifth Schedule: This provides a guide to the types of circumstances that may give rise to justifiable doubts about an arbitrator’s neutrality.

4. Termination and Substitution

• Termination of Mandate (Section 14 & 15): The mandate of an arbitrator terminates if they become de jure or de facto unable to perform their functions, withdraw from office, or if the parties agree to terminate them.

• Substitution (Section 15(2)): Where the mandate of an arbitrator terminates, a substitute arbitrator shall be appointed according to the rules that were applicable to the appointment of the arbitrator being replaced.