ARBITRATION AGREEMENT Q What do you mean by arbitration agreement. Explain its essentials.is signing of parties necessary for an arbitration agreement? ARBITRATION AGREEMENT 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. According to Section 7of Arbitration Conciliation Act, 1996 the features of Arbitration Agreement are : 1) An arbitration agreement may be in the form of an arbitration clause in a contract or in the form of a separate agreement. 2) An arbitration agreement shall be in writing. 3) 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. 4) 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. ESSENTIAL FEATURE IN DETAIL Agreement to be in Writing: One of the points of some formal importance emphasised by these provisions is that the reference should be by means of a written agreement. Section 7(3) most emphatically prescribes that an arbitration agreement shall be in writing. An oral agreement to submit a dispute to arbitration is not binding. If the agreement is in writing it will bind, even if some of its details are filled in by oral understanding. It is not necessary that the agreement should be on a formal document nor it is necessary that the agreement should be signed by both or either party. It is sufficient that the written agreement has been orally accepted by the parties or that one has signed and the other has accepted.
Act recognises in Section 7(4) some three methods of arriving at a written agreement. One of them is an exchange of letters or raising a claim under an alleged arbitration agreement which is not denied by the other party. The Act provides in Section 7 (4) that an arbitration agreement is in writing if it is contained in an exchange of letters, telex, telegrams, or other means of telecommunication which provide a record of the agreement or in 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. Whatever be the form or contents of the agreement, it is necessary for the Act to apply that there should be a mandatory requirement for settlement of disputes by means of arbitration. An agreement that the parties may go in for a suit or may also go in for arbitration is not an arbitration agreement. No prescribed form of agreement: In Rukmanibai Gupta v. Collector, Jabalpur (1980) 4 SCC 556 : AIR 1981 SC 479, the Supreme Court laid down that an arbitration clause is not required to be stated in any particular form. If the intention of the parties to refer the dispute to arbitration can be clearly ascertained from the term of the agreement, it is immaterial whether or not the expression arbitration or arbitrator has been used. Nor it is necessary that it should be contained in the same contract document. An arbitration clause may be incorporated into an existing contract by specific reference to it. Section 7 (5) clearly provides that the reference in a contract to a document containint an arbitration clause constitutes an arbitration agreement if the contract is in writing and the reference is such as to make the arbitration clause a part of the contract. Hence, the whole thing turns upon the intention of the parties. Where the party showed that the arbitration clause in the signed agreement crept in mistake, it was held that the civil court was in error in acting upon a clause which the parties did no intend to be there and appointing an arbitrator on that basis. Arbitration Agreement in different forms: a)tenders Containing Arbitration Clauses : The acceptance of a tender or a work order which carries an arbitration clause, or the membership of an institution the constitution of which provides for arbitration or a contract which contains a provision for arbitration, is sufficient. Acceptance of such a tender by an authorised functionary of the Government would be a sufficient compliance of the formal requirements of Article 299 of the Constitution of India so as to bind the Government by the arbitration clause. b) Arbitration Agreement and Reference : The expressions arbitration agreement and reference have been separately defined. Explaining the purpose and effect of this scheme, the Supreme Court observed in Banwari Lal Kotiya v. P.C. Aggarwal, (1985) 3 SCC 255, 260 : AIR 1985 SC 1003 : 1985 Arb. LR 1003. (The term reference has not been defined in the new 1996 Act, but the statement continue to be valid as emphasising the distinction between an agreement for arbitration and a reference under it) The expression (reference) obviously refers to an actual reference made jointly by the parties after disputes have arisen between them for adjudication to named arbitrator or arbitrators, while the expression arbitration agreement is wider as it combines two concepts,
(a) a bare agreement between the parties that disputes arising between them should be decided or resolved through arbitration and (b) an actual reference of a particular dispute for adjudication to named arbitrator. The facts of Banwari Lal Case, (1985) 3 SCC 255, were that there was a dealing about shares between a Stock Exchange member and an outsider under which a sum of money had become due to the member. The parties signed the contract notes on a prescribed form. The transaction was subject to the rules, regulations and bye laws of the Stock Exchange one of which provided for arbitration in such matters. The member appointed his arbitrator. The other refused to reciprocate. In such cases, the rules provided for appointment by the Exchange. The latter accordingly appointed one. The other party participated in the proceedings under protest that he had not given his consent and, therefore, the award would not be binding on him. The Supreme Court came to the conclusion that a fresh consent was necessary on his part. He had consented to the rules and regulation which contained an elaborate machinery for submission. No fresh consent was necessary. c)clauses having the effect of arbitration agreement : Whether a clause in a contract amounts to an agreement of arbitration depends upon its scope. In State of U.P. v. Tipper Chand, (1980) 2 SCC 341 : AIR 1980 SC 1522 : 1980 All LJ 749, before the Supreme Court a clause in a Government contract provided that the decision of the superintending engineer upon all questions relating to the contract shall be final and binding. An application was made under Section 20 of 1940 Act (now Section 8) to refer a dispute to arbitration on the basis that the above clause amounted to an agreement of arbitration. The Supreme Court rejected the contention. FAZAL ALI, J., observed : Admittedly the clause does not contain any express arbitration agreement. Nor can such an agreement be spelled out from its terms by implication, there being no mention in it of any disputes much less of a reference thereof. The purpose of the clause clearly appears to be to vest the superintending engineer with supervision of the execution of the work and administrative control over it from time to time. The court distinguished the case from some earlier rulings in which the clause in question provided that in any dispute between the contractor and the department the decision of the chief engineer shall be final. The court said that this clause was correctly interpreted as amounting to an arbitration agreement. In another case i.e., Rukmani Gupta v. Collector, Jabalpur (1980) 4 SCC 556, a mining lease granted by the State carried a clause that disputes, if any, shall be decided by the lessor (in this case the Governor in whose name the lease was executed) and his decision shall be final. The Supreme Court held that this amounted to an arbitration agreement. DESAI. J., said : Arbitration agreement is not required to be in any particular form. What is required to be ascertained is whether the parties have agreed that if disputes arise they would be referred to arbitration, then such an arrangement would spell out an arbitration agreement.
d)reference of time barred claim : An arbitration agreement may even contemplate reference of a time barred claim. A policy of insurance required the assured to refer the matter to arbitration within twelve months of the company s disclaimer. The assured referred it after twelve months and yet the reference was held to be binding. (Ruby General Insurance Co. Ltd. v. Peare Lal Kumar, AIR 1951 Punjab 440) The significance of Section 25(3) of the Indian Contract Act, 1872 has also to be kept in view. A timebarred claim can, therefore, validly form the subject matter of reference. A distinction, however, is to be made between an arbitration agreement entered into about a time barred claim and a reference made on the basis of an arbitration clause after the expiry of the period of limitation. In the latter case no reference can be made as the right to claim ceases to subsist and the relief with respect to the dispute has become time barred. Adoption of arbitration clause from main contract by sub contract : Where an arbitration clause contained in the main contract is adopted in a sub contract also by a clause declaring that this subcontract is being granted on the terms and conditions applicable to the main contract, it will not necessarily follow that the parties to the sub contract would also be bound by the arbitration clause. For one thing, the parties are different and for another, the purpose of the contract being different, different kinds of disputes are likely to arise than those contemplated by the main contract. Position of Non Parties : An arbitration is a private procedure. It is an implied term that stingers to the agreement are excluded from hearing and conduct of proceedings. Accordingly, an arbitrator cannot, unless all parties consent, order that the arbitration of a dispute between a ship owner and a charterer arising out of a charter party and the arbitration of a separate but closely related dispute between the charterer and a sub charterer arising out of a sub charterer be heard together even though the two disputes are closely related and a consolidated hearing would be convenient. Validity of Arbitration Agreement Reference without agreement or under void agreement : The court may stay arbitration proceedings where the parties have not agreed to refer the particular dispute to arbitration or where the contract which carried the arbitration clause is itself void. The proceedings remain stayed till the matter as to the validity of the reference is decided. A situation of this kind came before the Court of Appeal in England in Ben & Co. Ltd. v. Pakistan Edible Oils Corporation Ltd. (1979). There was a contract to purchase palm oil by a Karachi firm from a Singapore seller. The contract included a London arbitration clause. The Karachi firm contended that the agent who purported to contract on their behalf had no actual or apparent authority to do so. the seller commenced arbitration proceedings in London. The Karachi party applied for a stay. In K.K. Modi v. K.N. Modi, (1998) 3 SCC 573 : AIR 1998 SC 1297, in a family matter before the Supreme Court, a memorandum of understanding was signed between the two branches of the family for bringing about division of property between them. Experts were appointed for valuation and preparation of scheme for division between the two groups the corporate undertakings of the family.
The agreement also provided that any dispute, clarification, etc. in the matters of implementation would be referred to the Chairman of the Industrial Finance Corporation of India. It was held that this did not constitute an arbitration agreement. It only amounted to a reference of issues to an expert for decision. Dispute Nature of Dispute : Disputes which can be referred to arbitration are : 1) Present or future disputes which are, 2) In respect of a defined legal relationship, whether contractual or not. Present or Future Disputes : All matters of a civil nature with a few exceptions, whether they relate to present or future disputes may form the subject of reference but not a dispute arising from and founded on an illegal transaction. Though the existence of a dispute is essential to the validity of a reference to arbitration, an arbitration agreement may provide for a present or a future dispute. If the agreement relates to a present dispute it will generally amount to a reference, but if it has been entered into merely to provide for any future dispute, it is an arbitration clause. Cases of Special Jurisdiction : Where the law has given jurisdiction to determine, certain matters to specified tribunals only, such matters cannot be referred to arbitrations, e.g., a) Insolvency proceedings b) Probate proceedings c) Suit under Section 92, CPC d) Proceedings for appointment of guardian e) Matrimonial causes except settlement of terms of separation or divorce f) Industrial disputes g) Title to immovable property in a foreign country h) Claim for recovery of octroi duty. Not necessary to specify dispute: It is not necessary to specify the dispute either in the arbitration agreement or in the reference to the arbitrator. Such specification can also be made in the proceedings before the arbitrator. Statutory Arbitrations: The disputes which may be the subject of an arbitration agreement need not necessarily arise out of a contract. They may also arise out of statutory provisions.
Who can make reference Reference to arbitration may occur in any of the following ways : Under Statutory Provisions: A reference can be made under the provisions of an Act. There are many Acts of Parliament which provide that any dispute about their provisions shall be settled by arbitration. The electricity Supply Act, 1948, for example, provides for disposal by arbitration the disputes that may arise about its provisions. By Consent of Parties : The parties to a dispute may agree to have their differences resolved by arbitration. The method of having arbitration though the intervention of the court has been dropped by the 1996 Act. The policy of the Arbitration and Conciliation Act, 1996 is to minimise the intervention of the court. The new Act minces no words in declaring in Section 5 that notwithstanding anything contained in any other law for the time being in force, in matters governed by part I of the Act no judicial authority can intervene except where permitted by the provisions of Part I. Accordingly, an arbitration can now by only parties agreement and not through court or through intervention of court. On this point, Section 8 of the 1996 Act carries this provision that where a party to an arbitration agreement nevertheless files a suit the other party may apply to the court and the letter may order reference to arbitration. Q 2Explain the power of Judicial Authority to refer parties to Arbitration. What are measures adopted by court. Effect of Arbitration Agreement: Stay of Suits (Section 8) Power to refer parties to arbitration where there is an arbitration agreement : 1) A judicial authority before which an action is brought in a matter which is the subject of an arbitration agreement shall, if a party so applies not later than when submitting his first statement on the substance of the dispute, refer the parties to arbitration. 2) The application referred to in sub section (1) shall not be entertained unless it is accompanied by the original arbitration agreement or a duly certified copy thereof. 3) Notwithstanding that an application has been made under sub section (1) and that the issue is pending before the judicial authority, arbitration may be commenced or continued and an arbitral award made. Power of court to order parties to arbitration: The Arbitration and Conciliation Act, 1996 is intended to help the parties to settle their differences privately by conciliation or by arbitration and thereby to spare
themselves of wasteful and vexatious litigation. If the matter covered by an arbitration agreement could still be litigated upon, the arbitration, instead of being a cheaper and less time consuming alternative to litigation, would involve duplicity of expenditure and effort and would in essence be self defeating. It is, therefore, necessary to provide, to make arbitration meaningful and a real alternative to litigation, that the matter covered by an arbitration agreement shall not be litigated upon in any court of law whatsoever, except for the purposes of making the arbitration really effective. In recognition of this principle Section 8(1) of the Arbitration and Conciliation Act, 1996 provides that if any party to an arbitration agreement brings before a judicial authority the matter covered by the agreement, the other party may apply for stay of the suit and for order of reference to arbitration. The question whether the dispute in question is arbitrable or not has to be decided by the court. It has also to decide whether the dispute brought before it is the subject matter of the arbitration agreement. In satisfying itself whether the dispute is arbitrable or not the court has to go into the aspects of validity, existence etc. of the agreement. Under the Arbitration and Conciliation Act, 1996 (Section 8), the word used is shall. The effect is that the court has no choice or discretion in the matter and is bound to refer the parties to arbitration. The Supreme Court in Anderson Wright Ltd. v. Moran & Co. AIR 1955 SC 53, stated the requirements of stay as they applied under the 1940 Act; In order that a stay may be granted it is necessary that the following conditions should be fulfilled : 1) The proceedings must have been commenced by a party to an arbitration agreement against any other party to the agreement; 2) The legal proceeding which is sought to be stayed must be in respect of a matter agreed to be referred. The subject matter of the action should be the same as the subject matter of the arbitration agreement. 3) The applicant for stay must be a party to the legal proceedings and he must have taken no step in the proceedings after appearance. [Under the 1996 Act, the requirement is before submitting first statement on the substance of the dispute ] It is also necessary that he should satisfy the court not only that he is but also was at the commencement of the proceedings ready and willing to do everything necessary for the proper conduct of the arbitration; and 4) The court must be satisfied that there is no sufficient reason why the matter should not be referred to an arbitration in accordance with the arbitration agreement. The discretionary element in the power of the court is not applicable under the 1996 Act. Under the new provision (Section 8 of 1996 Act) the requirements of stay application and of an order for reference to arbitration were stated by the Supreme Court in P. Anand Gajapathi Raju v. P.V.G. Raju AIR 2000 SC 1886 as follows :
1) There must be an arbitration agreement; 2) A party to the agreement brings an action in the court against the other party; 3) The subject matter of the action is the same as the subject matter of the arbitration agreement; 4) The other party moves the court for referring the parties to arbitration before submitting the first statement on the substance of the dispute. Matter of stay should be within arbitration agreement: Firstly, the matter about which a suit has been filed should be within the scope of the arbitration agreement. The words used in the section are : In a matter which is the subject of an arbitration agreement. Impartiality of Nominated Arbitrator : The impartiality of the arbitrator or lack of independence on his part is under the 1996 Act a ground for having him substituted and not for staying legal proceedings because Section 8 is couched in mandatory form. The court has no choice in the matter but to order the parties to reference. The Supreme Court pointed out in U.P. Cooperative Federation vs. Sunder Bros., Delhi (1966) that a stay will not be granted if there is a good reason for apprehending that the selected arbitrator is likely to show bias or that he will not act fairly or that he has been guilty of unreasonable conduct or that for some reason it is improper that he should arbitrate in the dispute. Bias may arise, for example, from the fact that the arbitrator is related to one of the parties. Similarly, where the arbitrator has to play the role of a witness also, it is improper that he should arbitrate, and, therefore, an action would be allowed to proceed. Thus, where a contractor worked for a corporation and the disputes, if any, were to be referred to the corporation s engineer, a dispute which arose involved conflict of evidence between the contractor and the engineer, it was held that the engineer was not the proper person to arbitrate and so the suit should be allowed. These rulings would be applicable under the Arbitration and Conciliation Act, 1996 only when the circumstances are such and the arbitration agreement is such that the substitution of the arbitrator is not possible under the challenge procedure permitted by Section 12 and 13 of the Act. Fraud by one party to arbitration : The court may refuse a stay where the question is whether one of the parties to the arbitrator, agreement has been guilty of fraud. In such cases a special issue for setting aside the agreement on the ground of fraud under Sections 17 and 19 of the Indian Contract Act, 1872 would have to be raised. Agreement to exclude courts altogether : An arbitration agreement which seeks to exclude altogether the jurisdiction of the courts would be void, being contrary to the arbitration and conciliation Act, 1996 itself. For example, the court s power to ask the arbitrator to submit a question of law for determination by the court under the earlier 1940 Act could not be ousted. But it is open to the parties to stipulate that the award of the arbitrator shall be a condition precedent to the maintainability of any suit. In such cases no action may be allowed until an award has been obtained. This was laid down in Scott v. Avery (1856) HCL 811 and such a clause is also known by the name of that case.
A policy of insurance on a ship provided that in the event of loss the amount of loss would be determined by arbitration and that the award of the arbitrator would be a condition precedent to the maintainability of any suit. The House of Lords accordingly held that no action was maintainable until the award was obtained. The validity of Scott v. Avery clause was approved by the Supreme Court in Vulcan Insurance Co. v. Maharaj Singh(1976) 1 SCC 945 : AIR 1976 SC 287. A factory was insured against fire. It was lost in a fire, but the insurance company repudiated all liability under the policy. The policy provided that if any dispute arose as to the amount of any loss or damage, the same would be decided by arbitration. The assured attempted to appoint an arbitrator by filing the agreement in the court. UNTWALIA, J., held that the repudiation of liability was not a dispute as to the amount of an loss or damage and, therefore, it was outside the arbitration agreement. The proper course for the assured was to commence a suit to determine the question and once a court had decided that the company could have been held liable, the matter could have been referred to arbitration as to the amount of liability. Such a suit was not barred by the policy. A suit of this kind is not barred unless there is the Scott v. Avery clause. Effect of Legal proceedings upon Arbitration (Section 8, 1996 Act) : Sub section (3) of Section 8, 1996 Act deals with this point : Notwithstanding that an application has been made under sub section (1) and that the issue is pending before the judicial authority, an arbitration may be commenced or continued and an arbitral award made. Under Section 8 of the new Act unless a party objects to the legal proceedings, they are valid. The arbitration agreement does not oust the jurisdiction of the courts by itself. Where no party comes forward to object to the suit, the arbitration agreement becomes ousted. A suit would have no effect on the arbitration proceeding if it is pending, or even commenced. Such proceedings can be continued and an award made. Waiver of Rights Waiver of Right to Object : A party who knows that : 1) Any provision of this Part from which the parties may derogate, or 2) Any requirement under the arbitration agreement, has not been complied with the yet proceeds with the arbitration without stating his objection to such non compliance without undue delay or, if a time limit is provided for stating that objection, within that period of time, shall be deemed to have waived his right to so object.
Extent of Judicial Intervention : Notwithstanding anything contained in any other law for the time being in force, in matters governed by this Part, no judicial authority shall intervene except where so provided in this Part. Judicial Intervention : This section bars the jurisdiction of courts to interfere or to intervene in arbitration proceedings except to the extent provided in Part I. This Part provides for intervention of Courts in the following cases : 1) Section 8 making reference in a pending suit. 2) Section 9 passing interim orders. 3) Section 11 appointment of arbitrators. 4) Section 14(2) terminating mandate of arbitrator. 5) Section 27 Court assistance in taking evidence. 6) Section 34 setting aside an award. 7) Section 37 entertaining appeals against certain orders. 8) Section 39(2) directing delivery of award. Some of the cases where Courts exercised jurisdiction under the repealed Arbitration Act, 1940, and in which the jurisdiction is barred under the present Act were : 1) Section 11 removal of an arbitrator or umpire 2) Section 14 filing of an award in court. 3) Section 15 modification of award by court. 4) Section 16 power of court to remit an award for reconsideration. 5) Section 17 pronouncing judgment in terms of an award. 6) Section 19 superseding an agreement. 7) Section 20 filing of arbitration agreement in Court and seeking an order of reference 8) Section 28 enlarging time for making an award. Provision of Interim Relief by Courts Interim Measures by Court : A party may, before or during arbitral proceedings or at any time after the making of the arbitral award but before it is enforced in accordance with Section 36, apply to a Court
1) For the appointment of a guardian for a minor or a person of unsound mind for the purposes of arbitral proceedings; or 2) For an interim measure of protection in respect of any of the following matters, namely : a. the preservation, interim custody or sale of any goods which are subject matter of the arbitration agreement; b. securing the amount in dispute in the arbitration; c. the detention, preservation or inspection of any properly or thing which is the subject matter of the dispute in arbitration, or as to which any question may arise therein and authorising for any of the aforesaid purposes any person to enter upon any land or building in the possession of any party, or authorising any samples to be taken or any observation to be made, or experiment to be tried, which may be necessary or expedient for the purpose of obtaining full information or evidence; d. interim injunction or the appointment of a receiver; e. such other interim measure of protection as may appear to the Court to be just and convenient. and the court shall have the same power for making orders as it has for the purpose of, and in relation to, any proceedings before it. Power of Court : The section provides for the making of orders for interim measures to provide interim relief to the parties in respect of arbitration. Section 41 and Schedule II of repealed 1940 Act dealt with this subject matter. Those provisions have been deleted. The powers of the court include an order in respect of the following matters : 1) the preservation, interim custody or sale of any goods which are the subject matter of the reference. 2) Securing the amount in difference in the reference. 3) The detention, preservation of inspection of any property or thing which is the subject of the reference or as to which any question may arise therein and authorising for any of the aforesaid purposes any person to enter upon or into any land or building in the possession of any party to the reference, or authorising any samples to be taken, or any observation to be made, or experiment to be tried, which may be necessary or expedient for the purpose of obtaining full information or evidence. 4) Interim injunctions or the appointment of a receiver. 5) The appointment of a guardian for a minor or person of unsound mind for the purposes of arbitration proceedings.
Effect of Interim Measures : An interim measure does not put to rest the rights of the parties. The rights of the parties are required to be adjudicated finally when a reference is made. The court has the authority and jurisdiction to pass interim orders for protection and preservation of rights of the parties during the arbitration proceedings but that does not necessarily mean that if a party has availed of a benefit under this jurisdiction, the other party cannot put his claim in the main proceedings which is before the arbitrator. The interim arrangement made by the court has to be given the interim status. Where an arbitration clause exists in a contract and an order relating to the contract is passed and the parties do not abdicate the arbitration clause and, on the contrary, take a recourse to the same, at the disputes inclusive of benefits arising or having already arisen, have to be decided by the arbitrator. IMPORTANT QUESTIONS Q.1. Q.2. Q.3. What are the salient features of Arbitration and Counciliation Act, 1996? Discuss. Explain the requirements of a valid arbitration agreement. An arbitration agreement cannot be revoked due to the death of either of the party to dispute. Comment. Q 4 What do you mean by arbitration agreement.explain its essentials.is signing of parties necessary for an arbitration agreement? Q 5 Explain the power of Judicial Authority to refer parties to Arbitration.What are measures adopted by court.