ALTERNATIVE DISPUTE RESOLUTION

(ADR)
Week-4
Arbitration
 Section 7 Arbitration and Conciliation Act

(1) In this Part, “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.

(2) An arbitration agreement may be in the form of an arbitration clause in a

contract or in the form of a separate agreement.

(3) An arbitration agreement shall be in writing.

Section 7 Arbitration and Conciliation Act

4) 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 [including communication through electronic means] which
provide a record of the agreement; or

(c) An exchange of statements of claim and defence in which the existence of

the agreement is alleged by one party and not denied by the other.

(5) 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.
Section 8 (ACA): 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 to the arbitration agreement or any person claiming
through or under him, so applies not later than the date of submitting his first statement on
the substance of the dispute, then, notwithstanding any judgment, decree or order of the
Supreme Court or any Court, refer the parties to arbitration unless it finds that prima facie no
valid
arbitration agreement exists.

(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:

Provided that where the original arbitration agreement or a certified copy hereof is not
available with the party applying for reference to arbitration under sub-section (1), and the said
agreement or certified copy is retained...
Section 8 (ACA): Power to Refer Parties to Arbitration where there is
an Arbitration Agreement
by the other party to that agreement, then, the party so applying shall file such
application along with a copy of the arbitration agreement and a petition praying the
Court to call upon the other party to produce the original arbitration agreement or its
duly certified copy before that Court.

(3) 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.
Pathological Clause
an Arbitration Agreement
Defective or poorly drafted arbitration clauses. (e.g. midnight clauses)
- Lack one or more of the essential elements of an arbitration clause, without affecting
their formal validity.

Some of the common defects:

1. Reference to non-existent arbitral rules: ‘by-laws of Indian Company’s Act 1956’ or
‘as per International Trade Laws’.
2. Reference to non-existent arbitral institutions: ‘Singapore Chamber of Commerce’.
3. Unworkable arbitration clauses: e.g. SIAC to arbitrate according to ICC Rules of
Arbitration
 Pathological Clause
4. Incomplete arbitration clauses:
In Wellington Associates Ltd. v. Kirit Mehta the agreement contained an exclusive jurisdiction clause
and also provided that any dispute ‘may’ be referred to arbitration.

5. Reference to arbitrators who are no longer alive at the time of the dispute: Both appointed
arbitrators passing away (ACC Limited v. Global Cements Ltd.)

6. Conflicting reference to arbitration and courts:

The parties agreed to refer disputes to arbitration in one clause but also included an
additional (and contradictory) clause agreeing that certain courts would have exclusive
jurisdiction over disputes. (AEZ Infratech Pvt. Ltd. v. SNG Developers Ltd.)
Pathological Clause

In implementing pathological clauses, the courts try to make sense of the provision and give
effect to the parties’ mutual intentions. Indian Court’s take on Pathological Clauses:

1. Invalid or unenforceable for vagueness

2. Severed the pathological part and enforced the valid part of the arbitration clause.
3. Rewrote the pathological part of the arbitration clause supplying a reasonable meaning to
the apparent intention of the parties.

(Many times even if the clause is not pathological, a tribunal must ascertain that the parties
had a mutual intent to submit the dispute at hand to arbitration.)
Seprability and Severeability
It is settled law that an arbitration agreement is a separate and distinct agreement, which stands
apart from the main contract. (Section 16(1) of the ACA)

- The doctrine of separability applies to an arbitration clause in a contract so that the invalidity
of the underlying contract will not have an impact on the arbitration clause.
- Invalidity of an arbitration agreement does not affect the validity of the underlying contract.
(i) an arbitration clause which forms part of a contract shall be treated as an agreement
independent of the other terms of the contract; and
(ii) a decision by the arbitral tribunal that the contract is null and void shall not entail ipso jure
the invalidity of the arbitration clause.

‘substantial severability’ and not ‘textual divisibility’ if legal, lawful and otherwise enforceable.
(Shin Satellite case)
 Jagdish Chander v. Ramesh Chander, (2007) 5 SCC 719

Partnership Deed:
Clause 16 →
“If during the continuance of the partnership or at any time afterwards any dispute touching
the partnership arises between the partners, the same shall be mutually decided by the partners
or shall be referred for arbitration if the parties so determine.”

Order appointing arbitrator challenged.

The power under Section 11 of the Act, to appoint an Arbitrator, can be exercised only if there
is a valid arbitration agreement between the parties, and that as there is no arbitration
agreement between the parties, the Arbitrator could not have been appointed.
 Jagdish Chander v. Ramesh Chander, (2007) 5 SCC 719

Issue:
Whether Clause 16 of the Deed of Partnership dated 9.1.1964 is an ‘arbitration agreement’
within the meaning of Section 7 of the Act.

Wellington v. Kirit Mehta:

“It is also agreed by and between the parties that any dispute or difference arising in connection
with these presents may be referred to arbitration in pursuance of the Arbitration Act, 1940 by
each party appointing one arbitrator and the arbitrator so appointed selecting an Umpire. The
venue of the arbitration shall be at Bombay.”

Held - the use of the word “may” could not be construed as “shall” and that the clause was
only an enabling provision and a fresh consent was necessary to go to arbitration.
 Jagdish Chander v. Ramesh Chander, (2007) 5 SCC 719

In State of Orissa v . Damodar:

This Court held that a clause in a contract can be construed as an ‘arbitration agreement' only if
an agreement to refer disputes or differences to arbitration is expressly or impliedly spelt out
from the clause.

The Court laid down a few Guidelines:

(i) The intention of the parties to enter into an arbitration agreement shall have to be gathered
from the terms of the agreement. If the terms of the agreement clearly indicate an intention
on the part of the parties to the agreement to refer their disputes to a private tribunal for
adjudication and an willingness to be bound by the decision of such tribunal on such disputes,
it is arbitration agreement. While there is no specific form of an arbitration agreement, the
words used should disclose a determination…
 Jagdish Chander v. Ramesh Chander, (2007) 5 SCC 719

and obligation to go to arbitration and not merely contemplate the possibility of going for
arbitration. Where there is merely a possibility of the parties agreeing to arbitration in future, as
contrasted from an obligation to refer disputes to arbitration, there is no valid and binding
arbitration agreement.

(ii) Even if the words 'arbitration' and 'arbitral tribunal (or arbitrator)' are not used with
reference to the process of settlement or with reference to the private tribunal which has to
adjudicate upon the disputes, in a clause relating to settlement of disputes, it does not detract
from the clause being an arbitration agreement if it has the attributes or elements of an
arbitration agreement. They are : (a) The agreement should be in writing. (b) The parties should
have agreed to refer any disputes (present or future) between them to the decision of a
private tribunal.
 Jagdish Chander v. Ramesh Chander, (2007) 5 SCC 719

(c) The private tribunal should be empowered to adjudicate upon the disputes in an impartial
manner, giving due opportunity to the parties to put forth their case before it.

(d) The parties should have agreed that the decision of the Private Tribunal in respect of the
disputes will be binding on them.

(iii) Where the clause provides that in the event of disputes arising between the parties, the
disputes shall be referred to Arbitration, it is an arbitration agreement. Where there is a specific
and direct expression of intent to have the disputes settled by arbitration, it is not necessary to
set out the attributes of an arbitration agreement to make it an arbitration agreement. But
where the clause relating to settlement of disputes, contains words which specifically exclude
any of the attributes of an arbitration agreement or contains anything that detracts from an
arbitration agreement, it will not be an arbitration agreement.
 Jagdish Chander v. Ramesh Chander, (2007) 5 SCC 719

For example, where an agreement requires or permits an authority to decide a claim or dispute
without hearing, or requires the authority to act in the interests of only one of the parties, or
provides that the decision of the Authority will not be final and binding on the parties, or that
if either party is not satisfied with the decision of the Authority, he may file a civil suit seeking
relief, it cannot be termed as an arbitration agreement.

iv) But mere use of the word 'arbitration' or 'arbitrator' in a clause will not make it an
arbitration agreement, if it requires or contemplates a further or fresh consent of the parties
for reference to arbitration. For example, the use of words such as "parties can, if they so
desire, refer their disputes to arbitration“ or "in the event of any dispute, the parties may also
agree to refer the same to arbitration" or "if any disputes arise between the parties, they should
consider settlement by arbitration" in a clause relating to settlement of disputes, indicate that
the clause is not intended to be an arbitration agreement.
 Jagdish Chander v. Ramesh Chander, (2007) 5 SCC 719

Similarly, a clause which states that "if the parties so decide, the disputes shall be referred to
arbitration" or "any disputes between parties, if they so agree, shall be referred to arbitration" is
not an arbitration agreement. Such clauses merely indicate a desire or hope to have the disputes
settled by arbitration, or a tentative arrangement to explore arbitration as a mode of settlement
if and when a dispute arises.

Such clauses require the parties to arrive at a further agreement to go to arbitration, as and
when the disputes arise. Any agreement or clause in an agreement requiring or contemplating a
further consent or consensus before a reference to arbitration, is not an arbitration agreement,
but an agreement to enter into an arbitration agreement in future.
 Jagdish Chander v. Ramesh Chander, (2007) 5 SCC 719

Held in this case:

“If the clause had merely said that in the event of disputes arising between the parties, they
"shall be referred to arbitration", it would have been an arbitration
agreement. But the use of the words "shall be referred for arbitration if the parties so
determine" completely changes the complexion of the provision.”

“The expression "determine" indicates that the parties are required to reach a decision by
application of mind. Therefore, when Clause 16 uses the words “the dispute shall be referred
for arbitration if the parties so determine", it means that it is not an arbitration agreement but a
provision which enables arbitration only if the parties mutually decide after due consideration
as to whether the disputes should be referred to arbitration or not.”
 Jagdish Chander v. Ramesh Chander, (2007) 5 SCC 719

Held in this case:

“In effect, the clause requires the consent of parties before the disputes can be referred to
arbitration. The main attribute of an arbitration agreement, namely,
consensus ad idem to refer the disputes to arbitration is missing in Clause 16 relating to
settlement of disputes. ”

“Therefore it is not an arbitration agreement, as defined under Section 7 of the Act. In the
absence of an arbitration agreement, the question of exercising power under
Section 11 of the Act to appoint an Arbitrator does not arise.”

“Therefore, Section 89 CPC has no application. It should not also be overlooked that even
though Section 89 mandates courts to refer pending suits to any of the several
alternative dispute resolution processes mentioned therein, there cannot be a reference to
arbitration even under Section 89 CPC, unless there is a mutual consent of all parties, for such
reference.”
 Jagdish Chander v. Ramesh Chander, (2007) 5 SCC 719

“The existence of an arbitration agreement as defined under Section 7 of the Act is a condition
precedent for exercise of power to appoint an Arbitrator/Arbitral Tribunal, under Section 11
of the Act by the Chief Justice or his Designate. It is not permissible to appoint an Arbitrator
to adjudicate the disputes between the parties, in the absence of an arbitration agreement or
mutual consent.”