Arbitration

By
Kavita Singh
Associate Professor
NLIU, Bhopal
 Arbitration Agreement –

 Essentials of a Valid Agreement – (Bihar State Mineral Development Corporation v.

Encon Builders Ltd. 2003 (7) SCC 418 ; K.K. Modi v. K.N. Modi AIR 1998 SC 1297 )

1) There must be a present or future difference in connection with some contemplated matter.

2) There must be intention of the parties to settle such differences by private tribunals.

3) The parties must agree in writing to be bound by the decision of such tribunal.

4) The consent of the parties must be ad idem.

5) The Arbitration Agreement must contemplate that the decision of the tribunal will be
binding on the parties to the agreement.
6) The arbitration agreement must contemplate that the decision of the tribunal will be binding
on the parties to the agreement.

7) The jurisdiction of the tribunal to decide the rights of parties must derive either from the
consent of the parties or from an order of the court or from a statute, the terms of which make it
clear that the process is to be an arbitration.

8) The agreement must contemplate that substantive rights of parties will be determined by the
agreed tribunal.

9) Tribunal will determine rights of the parties in an impartial and judicial manner with the
tribunal owing to equal obligation of fairness to both the parties.
 10) The agreement of the parties to refer their disputes to the decision of the tribunal must be
intended to be enforceable in law.

 Basic Features of an Arbitration Agreement-

1. There should be an agreement between the parties –

2. Agreement should be in writing-

 1. There should be an agreement between the parties –

• There must be an agreement between the parties - meeting of minds -

• To submit to arbitration.

• Regarding disputes which have already arisen or which may arise in future.

• Arbitration agreement may be in the form of an ‘arbitration clause’ in a contract or in the

form of a separate agreement. (No prescribed format for an arbitration agreement)
 2. Agreement should be in writing -

• Arbitration agreement must be in writing. No oral agreement.

• Arbitration agreement not in written form is not binding.

• The section itself prescribes when an agreement is in writing and valid.

 Reference or Arbitration Agreement
• The expression ‘reference’ means actual reference made jointly by parties after dispute has
arisen between them for adjudication to named arbitrator(s).

• The expression ‘arbitration agreement’ is wider and combines two things –(a) an agreement
between the parties that disputes arising between them should be decided or resolved through
arbitration and (b) the actual reference of a particular dispute for adjudication to named
arbitrators.
 Some Principles w.r.t. Arbitration Agreement (Jagdish Chander v. Ram
Chander 2007 6 SCALE 325) –

1. Intention of the parties to enter into the arbitration has to be gathered from the terms of the
agreement.

2. Even if words like ‘Arbitration’ or ‘Arbitrator’ or ‘Arbitration Tribunal’ are not expressly used
in Arbitration Agreement w.r.t. settlement of dispute – it does not detract the clause from being an
arbitration agreement, if it has all the elements of arbitration agreement.

3. Mere use of words like ‘Arbitration’ or ‘Arbitrator’ in a clause – will not make it an arbitration
agreement, if it further requires fresh consent of the parties for reference to arbitration.
 What amounts to Arbitration Agreement ?

• State of Orissa v. Bhagyadhar Dass AIR 2011 SC 3409 – A Clause in the agreement provided
that -

a) the Engineer-in-charge could make additions and alterations in the drawings/specifications;

and that such alterations and additions will not invalidate the contract, but will entitle the
contractor to extension of time for completion of work proportionately;

b) if the additional work that is to be executed is an item for which the rate is not specified in the
contract (or in the schedule of rates for the district), the contractor shall specify the rate and the
Engineer-in- charge may either accept the rate or cancel the order to execute that particular work;
c) if the contractor commences the work with reference to an item for which there is no rate in
the contract and there is no agreement in regard to the rate for execution of such work, he shall be
paid at the rates fixed by the Engineer-in -Charge; and

d) that if the contractor disputes the rate fixed by the Engineer-in- Charge, the decision of the
Superintending Engineer in regard to rate for such non-scheduled item shall be final.

• Question was that whether the said clause could be considered as an ‘Arbitration Agreement’ or
not?

• Court Observed and Held -

• A reading of the said clause shows that it is a clause relating to power of the Engineer-in-Chief to
make additions and alterations in the drawings and specifications and execution of non-tendered
additional items of work (that is items of work which are not found in the schedule of work)

• It does not refer to arbitration as the mode of settlement of disputes. It does not provide for reference
of disputes between the parties to arbitration. It does not make the decision of the Superintending
Engineer binding on either party. It does not provide or refer to any procedure which would show
that the Superintending Engineer is to act judicially after considering the submissions of both
parties. It does not disclose any intention to make the Superintending Engineer an arbitrator in
respect of disputes that may arise between the Engineer-in-Charge and the contractor.
• It does not make the decision of the Superintending Engineer final on any dispute, other than
the claim for increase in rates for non-tendered items. It operates in a limited sphere, that is,
where in regard to a non-tendered additional work executed by the contractor, if the contractor
is not satisfied with the unilateral determination of the rate thereof by the Engineer-in-Charge
the rate for such work will be finally determined by the Superintending Engineer.

• It is a provision made with the intention to avoid future disputes regarding rates for non-
tendered item. It is not a provision for reference of future disputes or settlement of future
disputes. The decision of superintending Engineer is not a judicial determination, but
decision of one party which is open to challenge by the other party in a court of law. The
said clause can not be considered to be an arbitration agreement. The said clause is not, and was
never intended to be, a provision relating to settlement of disputes.
• M.P. Housing Board v. Satish Kumar Raizada AIR 1958 SC 118 –

• A certain clause in a contract read - “ If any party to the contract is not satisfied with the
decision of the SE, it may make a reference to the CE, P.W.D. Madhya Pradesh, through the
Executive Engineer concerned with in 30 days from the date of communication of the
decision of the SE, and the CE will give his decision after hearing the parties and his decision
thereon shall be final , conclusive and binding on all the parties to the contract. In case no
reference is made with in the period specified above , the decision of the SE shall be final,
conclusive and binding on the parties”.
• Question was whether this clause can be held to be an arbitration agreement?

• The Court observed- “ the use of words ‘reference’ in the above clause denoted that the CE
was to act as an arbitrator. Where the words like ‘reference’, ‘final’, ‘conclusive’ and ‘binding’
etc. were used in the clause, it amounts to arbitration agreement” .
• Voltas Limited v. M.P. Entertainment (Appeal no.50 of 2015) – an agreement between the
parties that - ‘ in case of any dispute during the execution of the work and if the matter is
referred to arbitration then it will be resolved by dual arbitrator, one by client and another by
contractor’.

• Upon some dispute between the parties – one of the parties pleaded that the word ‘if’ in the
agreement makes the arbitration optional and not binding.

• The court held – the clause ‘if the parties so determine there would be a reference to
arbitration’, contemplated a further determination, rendering it non mandatory. Hence the clause
cannot be considered as an arbitration agreement.
• Wellington Associates Ltd. V. Kirti Mehta (2000)4Scc 272 - The Court held that an
Arbitration agreement must postulate an agreement which necessarily or rather mandatorily
requires an appointment of an arbitrator. Clauses such as those using the word ‘may’ are merely
enabling provisions by which the parties may agree to go for arbitration and in such cases fresh
consent to go for arbitration would be necessary.

• Enercon (india) Ltd. And ors. V. Enercon GMBH and ors. (Civil Appeal No. 2086 of 2014,
Decided on Feb 14,2014) -

The Court made the arbitration clause workable despite some flaws in the drafting of the
arbitration clause. This was done keeping in mind the business interest of the parties.
• The arbitration clause covered all disputes, controversies or difference including the validity,
interpretation, construction, performance and enforcement of the Agreement.

• The arbitral tribunal was to consist of 3 arbitrators of whom one was to be appointed by each of
the two parties to the Agreement and the arbitrator appointed by Enercon Germany would act as
the presiding arbitrator- the question of how the third arbitrator would be appointed was
not dealt with by the arbitration clause,
• The Supreme Court held that -

a) although there were some errors in the drafting of the clause – such as the clause’s failure to
specify the procedure for appointment of a third arbitrator – the clause was not ‘unworkable’ or
pathological.

b) Courts are required to adopt a pragmatic approach and not a pedantic or technical approach
while interpreting or construing arbitration clauses and must try to give effect to the intention
of the parties to arbitrate – where this is clear.

c) Therefore, when faced with a seemingly unworkable arbitration clause, it is the courts’ duty to
make the same workable within the limits permissible under the law.
d) The Court held that the arbitration clause in the agreement was missing a line to the effect that
the two arbitrators appointed by the parties shall appoint the third arbitrator.

e) The Court felt that this omission was so obvious that the court was entitled to legitimately
supply the missing line in the clause.

f) In the interests of time however the Supreme Court appointed the third arbitrator itself, as the
parties had already appointed an arbitrator each.
 Types of Arbitration Agreement –

A) Arbitration clause – In modern commercial agreements , arbitration clause exists as a part of the
agreement usually in the form of a standard clause . Such clauses specifically indicate the intention of
the parties to refer the existing or future disputes to arbitration.

B) Arbitration deed – A formal agreement in the form of an arbitration deed. Usually this is prepared
after the dispute has arisen i.e an arbitration deed will contain details of the dispute and the issues
between the parties , and clearly record that it is being referred to arbitration. This can also be done
between the parties during litigation to make a reference to arbitration.

C) Arbitration agreement incorporated by reference – If the agreement clearly refers to another

document which contains an arbitration clause , the arbitration clause will be deemed to have been
incorporated in to the main agreement by reference. However, such reference should be very clear and
not vague.
 Premium Nafta Products Ltd. V. Fily Shipping Co. Ltd. (2007) UKHL 40 –

• The Court made the following observations regarding the interpretation of arbitration
agreement –

1) Where commercial entities and persons of business enter into such dealings, they do so with
knowledge of the efficacy of the arbitral process. The commercial understanding is reflected
in the terms of the agreement between the parties. The duty of the court is to impart
commercial efficacy.

2) As a rule of construction, it is necessary to inquire into the purpose of the arbitration clause.
The parties have entered into a relationship – an agreement, which may give rise to disputes.
 3) The construction of an arbitration clause should start from the assumption that the parties
might have intended any dispute arising out of the relationship into which they have entered or
purported to enter to be decided by the same tribunal. The clause should be construed in
accordance with this presumption unless the language makes it clear that certain questions were
intended to be excluded from arbitrator’s jurisdiction.

4) Arbitration clause has to be read as a whole . A clause should not be read in isolation and may
be best understood when considered in conjunction with related clauses. This contextual
approach is consistent with the objective of contractual construction ‘to reach a proper
interpretation of the meaning and effect of the contract as agreed by the parties.
5) Doctrine of Severability - An arbitration agreement specifically provided that if
there is any dispute between the parties , then it shall be referred to and finally
resolved by arbitration and the decision in the arbitration shall be final and binding
and such decision cannot be further challenged. Also parties have the right of
appeal.

• So far as intention of the parties to refer the dispute to arbitration is legal , but so
far as restraint in approaching a court of law is concerned, it can be separated and
severed (Shin Satellite Public Co. Ltd. V. ?Jain Studios Ltd. AIR 2006 SC 963)
 Contents of Arbitration Agreement –

• All the relevant clauses and terms must be incorporated in a single document dealing with
different aspects or subjects avoiding any overlapping. There should not be any vagueness or
confusion in the agreement containing arbitration clause (M.K.Abraham &Co. v. State of
Kerela AIR 2010 SC 1265)

• A well drafted arbitration clause should specify the following –

a) What disputes will be referred to arbitrator eg. Dispute arising under , out of or relating to the
contract and any subsequent amendment of the contract including , without limitation, its
formation, validity, binding effect, interpretation, performance, breach or termination, as well
as non contractual term.
b) Mode of appointment of arbitrators e.g. by Indian Council of Arbitration, or Indian Society of
Arbitrators or some Chamber of Commerce or appointment of arbitrators by some name or
designation.

c) Number of arbitrators. If amount involved is huge, it is advisable to 3 arbitrators – each side

selecting on and the two selected ones select the third arbitrator.

d) Qualifications of arbitrators.

e) Venue of Arbitration.

f) Cost of Arbitration e.g. to be born equally or by whom.

g) time limit for commencement of arbitration.

h) Hearing oral or inwriting.

i) Arbitration Procedure.

j) Law applicable – In case contracts involve foreign party, the law applicable may be Indian law
or law of any specified foreign country, which should be specified.

k) Interim relief to be obtained from court/Tribunal.

l) In case of International Commercial Arbitration, where place of arbitration is outside India,

whether or not provisions of Arbitration and Conciliation Act,1996 shall apply or not

m) Language of Arbitration.
THANK - YOU