Have you ever been stuck in a situation where you are not clear on whether you need to file proceedings in a court of law or invoke arbitration? Have you ever regretted not having taken the time to read through the supposedly ‘boiler-plate’ arbitration clause (which was probably copied from your last agreement)? Well, you aren’t alone! There have been enough instances where parties have engaged in protracted rounds of litigation right up to the Supreme Court of India (‘Supreme Court’) arguing, not on the meat of the dispute between them but on whether the correct remedy lies in a court of law or before an arbitral tribunal. This is especially true in India where court litigation can be a long drawn affair. Why does this happen? Having agreed to refer disputes to arbitration, why is the arbitration agreement then not ‘valid and binding’ upon the parties? Why must parties incur huge expenditure and opportunity cost and endure rounds of unnecessary litigation? The answer lies in a properly and carefully drafted arbitration agreement.

What is an arbitration agreement?

An arbitration agreement, without the bells, whistles and the usual accompanying conundrums, refers to an agreement to submit disputes to arbitration. Simply put, in the event a dispute arises, parties agree that instead of approaching court, they will refer the dispute to arbitration. 

Arbitration in India is governed by the provisions of the Arbitration & Conciliation Act, 1996 (‘the Act’). The Act provides that an arbitration agreement may be in respect of any or all disputes that have arisen or that may arise, in respect of a defined legal relationship, whether contractual or not. The Act further provides that an arbitration agreement may be in the nature of an arbitration clause in a contract, or a separate agreement between such parties.

Significantly, whilst the Act does require an arbitration agreement to be in writing, it provides some relaxation in respect of such a requirement by providing that an arbitration agreement would be deemed to be in writing if it is contained in:

  1. a document signed by the parties;
  2. an exchange of letters, telex, telegrams or other means of telecommunication which provide a record of the agreement; or
  3. an exchange of statements of claim and defence in which the existence of the agreement is alleged by one party and not denied.

Thus, in today’s world of laptops, tablets, blackberries, iPads, the almost-prehistoric fax machines and other unmentioned technologies, it is not entirely impossible or difficult for parties to record, in writing, the existence of an understanding to resolve disputes by referring the same to arbitration and meet the requirements of the Act. Sounds simple enough right? Why then does there exist so much litigation which belies this? As Sherlock Holmes would have said - “Elementary my dear Watson”.

Judgments delivered: have we learnt our lessons

Whilst informal arbitration in India has existed for many decades, arbitration under the provisions of the Act is evolving and is constantly in a state of flux. Significant decisions have come down from the various Courts including the Supreme Court. A careful analysis of such decisions is a telling story that the law surrounding arbitration in India has evolved much beyond one could have anticipated. If parties wish to ensure a quick and efficient arbitration and consciously stay away from unnecessary rounds of litigation in the Indian courts, they had better listen and heed the war stories contained in the myriad judgments that abound. 

The cornerstone of alleged judicial intervention in India was possibly the judgment of the full-bench of the Supreme Court in Bhatia International v. Bulk Trading S.A.1, where it was held that provisions of Part 12 of the Act would apply to all arbitrations and to all proceedings relating thereto. Further, the Supreme Court held that where such arbitration is held in India, the provisions of Part 1 would compulsorily apply and parties were free to deviate only to the extent permitted by the derogable provisions of Part 1. In cases of international commercial arbitrations held out of India provisions of Part 1 would apply unless the parties by agreement, express or implied, exclude all or any of its provisions. In that case the laws or rules chosen by the parties would prevail. Any provision in Part 1, which is contrary to or excluded by that law or rules will not apply. By holding so, many argue that the Supreme Court has opened the floodgates of judicial intervention in international commercial arbitration. It may be noted here that the law set out in this judgment has, in the case of Bharat Aluminum Company Limited Vs. Kaiser Aluminum Technical Service Inc., been referred to a constitutional bench of the Supreme Court and hearings have reportedly begun. However, until any new law is set down by this constitutional bench, this judgment holds the field.   

The starting point of a dispute in respect of an agreement containing an arbitration clause is, of course, a complete disregard for referring the dispute to arbitration as agreed. This apparent failure of the parties to act as agreed usually means that the Courts are required to appoint an arbitrator, as required under the Act. Of late, one sees a number of petitions seeking to rely upon the existence of an arbitration agreement and appoint an arbitrator, being filed in Indian courts (being Section 11 of the Act, which falls under Part 1). Similarly, one sees a number of petitions being filed for interim relief (Section 9 of the Act, which also falls under Part 1) as well as declaratory reliefs.

From a perusal of the judgments that emanate in such petitions, it would seem that when parties enter into arbitration agreements, they fail to adequately provide for a fair, crystal clear and binding process. Similarly, improper and incomplete arbitration agreements are not clear on whether jurisdiction of Indian courts stand included or excluded. Whilst it is necessary for courts to adhere to the main objectives of the Act and minimize interference in the arbitral process, apparent failure and the constant efforts of one party to derail the arbitral process has necessitated some careful interpretation on the part of Indian courts in respect of their own jurisdiction and the applicability of Part 1 of the Act. Some such instances are:

  • In Citation Infowares Ltd. v. Equinox Corporation3, the Supreme Court held that an agreement to resolve disputes using Californian Law (being the substantive law of the contract) would not be an implied exclusion of the provisions of Part 1 of the Act. The Supreme Court proceeded to appoint an ex-Chief Justice of India being Justice Mr. R.C. Lahoti (Retd.), as a sole-arbitrator, to resolve the said matter in accordance with Californian Law.    
  • In Dozco India Pvt. Ltd. v. Doosan Infracore Co. Ltd.4, the Supreme Court held that an agreement to resolve disputes in South Korea under Korean Law would operate as an implied exclusion of Part 1 of the Act. Thus, the arbitration petition seeking an order of appointment of an arbitrator would not be maintainable.
  • In Videocon Industries Limited v. Union of India and Anr5, whilst the agreement was to be governed by the law of India and the venue of arbitration was agreed to be Kuala Lumpur, Malaysia, parties had agreed that the arbitration agreement would be governed by the laws of England. The Supreme Court held that this would operate as an implied exclusion of Part 1 of the Act. 
  • In Yograj Infrastructure Limited v. Ssang Yong Engineering and Construction Company Limited6, the Supreme Court, amongst other things, held that once the parties had agreed to arbitrate under the Singapore International Arbitration Centre Rules with the seat of arbitration in Singapore, Part 1 of the Act would stand excluded.

It must also be said that once the intent and agreement of the parties (to refer disputes to arbitration) comes through, courts will rarely intervene. In fact, courts can and will ask a party to go through the agreed procedure set out in the arbitration agreement before approaching them7. Any intervention is one that is done with a view to get the arbitral process back on track. This is in line with the main objectives of the Act which seeks to minimize the supervisory role of courts in the arbitral process.

Essentials of an arbitration agreement: what you can and should put in

The Act provides parties with tremendous liberties in choosing the manner in which they prefer to arbitrate. This is often the downfall as most parties fail to take adequate care of the contents of this all-so-important clause. Parties to an arbitration agreement can, amongst other things, choose the number of arbitrators, their qualifications, the seat of the arbitration, the rules to be followed, the kind of hearings that may take place and even agree that the arbitrator will pass an unreasoned award (however illogical that may appear).

In light of so many choices, it is important that the arbitration clause so drafted is not vague, confusing or uncertain in any manner whatsoever. It must clearly bring out the intention of the parties to refer all or certain disputes, as the case may be, to arbitration, as well as the manner in which such arbitration is to be conducted. Some essentials of an arbitration agreement can be as under:

  1. An arbitration agreement must be in writing;
  2. An arbitration agreement must comply with the requirements of a valid contract;
  3. An arbitration agreement must be in respect of a dispute that is arbitrable;
  4. Parties may agree on the number of arbitrators and their nationalities (subject to it being an odd number);
  5. Parties may agree on the seat and the venue of the arbitration proceedings;
  6. Parties may agree on their choice of procedure or even to have the arbitration administered by an arbitral institution under its rules;
  7. Parties may agree on the language of proceedings and pleadings;

In cases of an international commercial arbitration, in addition to the above:

  1. Parties can choose the governing law of the contract and the governing law of the arbitration agreement;
  2. Depending upon the seat of the arbitration, parties can also choose whether they prefer to exclude any or all provisions contained in Part 1 of the Act.

Parties must also decide whether they wish to refer disputes to an arbitral institution instead of ad-hoc arbitration. It may be noted here that institutional arbitration in India has now come of age and reputed institutions like the London Court of International Arbitration and the Singapore International Arbitration Centre have a presence in India.

Simply put, parties must take care to ensure that the arbitration agreement is crystal clear and leaves no room for creative and ingenious misinterpretation. Their intention to resolve disputes by way of arbitration and the manner in which such arbitration is to be conducted must come through without a doubt. It must be remembered that the devil can and often does lie in the details.

This article has been written for Asian Mena Counsel and is merely being reproduced on Lexology.