Essentials of a Valid Arbitration Agreement

Introduction?

Arbitration is one of the most convenient and advanced methods of dispute resolution outside the framework of courts wherein the parties agree to refer their disputes to an impartial third party or an institution for adjudication of disputes in case the subject matter lies within the permissible purview of arbitration.??

Arbitration Agreement, as laid down under Section 7 of the Arbitration and Conciliation Act, 1996 refers to an agreement between the consenting parties which lays down the rules, procedure and method of adjudication of disputes arising out of the relation between parties. Arbitration agreements can either be drafted in form of a separate legal agreement or be included through an arbitration clause in any other agreement until the intent of the parties to submit their dispute to arbitration is unambiguous.??

Essential Requirements of an Arbitration Agreement?

The Arbitration and Conciliation Act 1996 lays down numerous requirements for a valid arbitration agreement which are as follows:??

a) Written Agreement?

According to Section 7(3) of the Arbitration and Conciliation Act 1996, every agreement pertaining to resolution of disputes via the mechanism of arbitration must be in written form and include signature of parties, be it in form of exchange of letters, fax or other electronic form of mail. Moreover, such agreements should display the consensus of the parties and should not be unilateral in nature.??

b) Subject Matter of Disputes??

One of the most essential requirements of a valid arbitration agreement is that the dispute in question must be “arbitrable” in nature i.e., the adjudication of dispute by arbitration proceedings must not be barred by law. For instance, in case the subject matter of the dispute cannot be referred to arbitration as specific provisions of law bar the adjudication by arbitration, such disputes cannot be referred to arbitration.

One of the most essential requirements of a valid arbitration agreement is that the dispute in question must be “arbitrable” in nature i.e., the adjudication of dispute by arbitration proceedings must not be barred by law. For instance, in case the subject matter of the dispute cannot be referred to arbitration as specific provisions of law bar the adjudication by arbitration, such disputes cannot be referred to arbitration.??

In the landmark case of Vidya Drolia & Ors. V. Durga Trading Corporation, it was held by the Hon’ble Supreme Court that there are various disputes which are non – arbitrable such as:??

i) Disputes pertaining to criminal offences?

ii) Disputes pertaining to testamentary, guardianship and matrimonial disputes.??

iii) Disputes pertaining to insolvency and winding up of companies.??

iv) Disputes pertaining to proceedings involving penal consequences where intervention of courts is pre – requisite.??

c) Seat of Arbitration??

Seat of arbitration refers to the place where the proceedings of arbitration need to be conducted. Seat also determines the applicable laws in the case along with the supervisory jurisdiction of the court over the arbitration proceedings. Additionally, seat of arbitration also leads to deciding the appropriate forum for resolution of disputes.??

d) Appointment of Arbitrator and Tribunal??

Parties to an arbitration agreement are free to choose the arbitrators or the procedure for their appointment according to Section 11(2) of the Arbitration Act. However, it should be ensured that the arbitrators should be appointed in a fair and impartial manner which does not lead to striking off the agreement and beginning of a trial by the courts.??

One of the allied requirements for the number of arbitrators as specified in the statute is that the Tribunal must consist of odd number of arbitrators in order to avoid a dead – lock situation in the adjudication of the dispute. Additionally, in various settled landmark cases, it has been observed by the Hon’ble Supreme Court that one party should not have a complete monopoly towards the appointment of the arbitrator.??

e) Laws and Rules of Arbitration?

Every arbitration agreement must include the applicable rules and laws which shall govern the proceedings of arbitration along with laying down the applicable conduct of parties in arbitration and the procedure to be followed by the arbitrator for the adjudication of disputes.??

The parties undertaking an arbitration proceeding are also free to select their own procedure for arbitration and are not bound by the mandatory conditions of substantive and procedural laws of the country.??

f) Stamping of arbitration agreements?

Stamping of an agreement refers to affixing the amount of stipulated stamp fee upon an agreement. According to Section 2(h) of the Indian Contract Act, one of the essential requirements of a valid contract is that the agreements must be sufficiently stamped in order to be considered for their validity.??

In the recent ruling of the Hon’ble Supreme Court In Re: Interplay Between Arbitration Agreements Under the Arbitration and Conciliation Act 1996 and the Indian Stamp Act 1989, it was held that there is a distinction between the admissibility of a document and its enforceability. For instance, an adequately stamped arbitration agreement may be inadmissible as evidence but is certainly enforceable against the parties to the agreement. Additionally, it has laid down the fact that courts are not required to look into the question of adequacy of stamping the agreement at the stage of pre – arbitration relief.??

Conclusion?

Arbitration agreement plays a vital role in the arbitration proceedings of a particular case wherein an absence of a valid agreement may lead to refuting the claim of arbitration and beginning of proceedings in court. Therefore, parties which intend to resort to arbitration must ensure that the statutory and other pre – conditions required for finalising a validly applicable arbitration agreement are fulfilled.??

Additionally, in case the parties intend to incorporate an arbitration clause in another document or agreement, they should ensure that the intend to resolve disputes by alternative – dispute resolution method in form of arbitration must be followed. Additionally, any step or clause in an arbitration agreement which may not be statutorily allowed should not be included in order to maintain the sanctity of the agreement.??