ARBITRATION AGREEMENT

(SECTION 7 – 9)

SCOPE & OBJECT

 The existence of a dispute or difference is an essential requirement for
arbitration.
 Mere default in making the payment would not constitute a default until and
unless the other party denies the liability to make the payment.
 Therefore, provisions of Section 7 of the Act make it amply clear that
arbitration proceedings cannot be initiated in the absence of a dispute
between the parties.

DEFINITION – S.7(1)
An arbitration agreement means:
 Agreement between the parties;
 To submit to arbitration;
 All or certain disputes;
 Arisen between them in respect of well-defined legal relationship;
 Whether contractual or not.

Legal Relationship viz-a-viz Contractual Relationship

 A relationship which though legal may not necessarily be contractual.
 As in case of professional like doctors and a patient or a lawyer and is
client.

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 FORMS OF ARBITRATION AGREEMENT
- SECTION 7(2) -

In common parlance, there are three different types of arbitration agreements,

namely:
1. Arbitration clauses;
2. Submission agreements (arbitration deeds); and
3. Arbitration agreements incorporated by reference. 

1. Arbitration Clause
 Many commercial agreements now have an arbitration clause embedded
within them.
 The clause regulates the method of resolving any possible future disputes.
 Usually these are standard clauses provided by the institution which the
parties have agreed to use to administer the future dispute.
 Such clauses should contain, as minimum, details of (a) the arbitration rules
that will govern the proceedings and the institution, if any, which is to
administer the process; the seat, or legal place of the arbitration, the number
of arbitrators, and the language of the arbitration.
 A clause lacking in one of these respects may be inoperable or allow the other
party to delay the proceedings whilst the ambiguity is resolved.
 For example, if the clause does not state the number of arbitrators and no
agreement is made on such issue, this will need to be determined by the
institution administering the arbitration) or, if the parties have not agreed on
an institution, the courts of the seat.

2. Submission Agreements /  Arbitration Deeds

 We noted that arbitration clauses are made before any dispute arises.
 Submission agreements however are agreements to arbitrate made after the
dispute has arisen.
 Submission agreements are also known as ‘arbitration deeds’, and sometimes
as ‘Terms of Reference’ (although as explained below, an arbitration deed or
terms of reference are usually prepared irrespective of whether the
agreement is by way of a submission agreement or arbitration clause).
 A submission agreement is less common than an arbitration clause. As they
are prepared after the dispute has arisen, they tend to be much longer than
an arbitration clause.
 A submission agreement will contain details of the dispute and the issues
between the parties, and clearly record that it is being referred to arbitration.
 It will then contain the same important details as an arbitration clause, such
as the legal seat and number of arbitrators.
 A submission agreement which does not clearly state the details of the
dispute being referred to the arbitration may be declared later on as null and
void, along with any award made pursuant to it.
 Submission agreements can be made during litigation to remove the dispute
from the jurisdiction of the court provided the Court of First Instance has not
issued its judgment yet and the pleadings stage is still taking place.
 It may be assumed that having an arbitration clause means that there is no
need for a submission agreement.
 The purpose of a submission agreement is to define and specify the scope of
arbitration so as to enable the court – later on – to ensure that the arbitral
award was issued within the limits specified by the parties.

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 3. Arbitration Agreement  incorporated by Reference
 A disputed agreement may not include an arbitration clause.
 Nevertheless, if the agreement refers clearly and explicitly to another
document which does contain an arbitration clause, the arbitration clause will
be deemed to have been incorporated into the main agreement by reference
provided the reference is made clearly
 If the referral is vague or subject to conflicting interpretation, the national
courts may retain jurisdiction.

TWO TYPES OF ARBITRATION AGREEMENT UNDER THE INDIAN LAW –

S.7(2).
It is to be noted that the Indian law on Arbitration i.e., The Arbitration &
Conciliation Act, 1996 by was Section 7(2), provides for only two types of
Arbitration Agreements which are mentioned as follows:
1. Arbitration Clause
2. Separate Agreement/ Submission to Arbitration

The Hon’ble Apex Court in the case of Nimet Resources Inc. & Anr. v. Essar
Steel Ltd has held that as per Section 7 the Arbitration agreement could be in the
following different forms:
 By way of an arbitration clause in a Contract; OR
 In the form of a separate agreement.

However, it emphasised on the fact that in whatever form the agreement might be
in, it must be in writing.
If in case the agreement is not in writing then the same has to be construed by
reference to:
 a document signed by the parties;
 exchange of letters, telex, telegram or other means of communication;
 exchange of statement of claims and defence.

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 CONSTITUENTS OF ARBITRATION AGREEMENT
- SECTION 7(3) & (4) -

WHAT CONSTITUTES ARBITRATION AGREEMENT

It is to be noted that the Apex Court in the Case of Jagdish Chander v. Ramesh
Chander (2007) has held that the following are the well settled principles with
respect to the constituents of an Arbitration Agreement.

Intention of the Parties

 The parties must show an intention to enter into an arbitration
agreement.
 Such intention can be deciphered from the terms of the agreement.
 There must be a willingness to refer the dispute to arbitration.
 There must an apparent obligation to go for arbitration and not merely a
possibility of the same.

Attributes of an Arbitration Agreement

 The agreement should be in writing;
 The parties should have agreed to refer their dispute to the decision of an
arbitration tribunal;
 The tribunal should be empowered to adjudicate the dispute;
 The parties should have agreed that the decision of the tribunal would be
binding on them.

Use of words expressly excluding an Arbitration Agreement

 As a general rule, it’s not necessary to include the words ‘arbitrator’,
‘arbitration agreement’, ‘arbitral tribunal’ in the clause pertaining to
arbitration.
 However, if the agreement or the contract in one of its clauses clearly
contains any statement to the effect that the arbitration shall not be
resorted to or any other word which does not constitute the essentials of
the arbitration agreement in such a case arbitration would not be
resorted to.
 For example, if the agreement includes that the decision of the authority
will not be binding on the parties, in such case it would not be deemed to
be an arbitration agreement.

Clauses requiring the Parties to arrive at a further Agreement to go

to Arbitration
 Mere use of the words ‘arbitrator’, ‘arbitration agreement’, ‘arbitral
tribunal’ does not make a particular clause to be an arbitration
agreement.
 What is to be seen is the obligation of the parties to submit to arbitration.
 The use of words such as ‘if so desires’, ‘if so agree’, ‘may also agree’
clearly indicate that the parties do not show an apparent intention to
refer their dispute to arbitration.
 It shows that the parties are only willing to explore arbitration as one of
the options to settle the dispute, further that the parties are not showing
any willingness to be bound by the decision of the Arbitral Tribunal.
 Thus, presence of such a clause does not constitute an arbitration
agreement.

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ARBITRATION AGREEMENT MUST BE IN WRITING – S.7(3)
 The Act of 1940 recognized oral agreements & awards, however the 1996
Act clearly provides that the arbitration agreement must necessarily be in
‘writing’.
 No particular form is prescribed for the same.
 However, a bare perusal of the clause pertaining to arbitration shall clearly
vent out the intention of the parties to refer their dispute for arbitration and
be bound by the decision of the arbitrator.

ARBITRATION TO BE SIGNED BY THE PARTIES – S.7(4)(A)

 The agreement shall be in form of a written document.
 It must necessarily contain the signatures of both the parties.
 The document may be signed by one of the parties, and subsequently
accepted by another party.
 Thus, it is sufficient if one party signs the written submission and the other
accepts it.

PRINCIPLE OF ‘MUTUALITY’
 Mutuality is the sine qua non of the validity of a contract and the same
squarely applies to the arbitration agreement as well.
 Mutuality in simpler sense would mean consensus between the parties qua
the terms contained in the agreement/contract.
 In case of an arbitration agreement there shall be mutuality qua the
following aspects:
 Initiation of arbitration proceedings;
 Number of arbitrators;
 Binding nature of the award;
 Bilateral right of reference of dispute.
 Any clause in the agreement which confers unilateral powers on either of the
party, would make the agreement null and void.
 However, if the unilateral right to make a reference flows from advanced
consent by the other party and agreed terms in the contract, then such an
arbitration agreement would be perfectly valid and enforceable.

‘SEVERABILITY’ OF ARBITRATION AGREEMENT – S.16

 As a general rule if the entire contract is invalid/void or terminated due to
efflux of time all the clauses contained therein also go along with the
terminated/invalid/void contract.
 Therefore, a vital question arises with respect to the validity of the
arbitration agreement in such a case.
 The following points can be construed from a cursory reading of Section 16
of the 1996 Act which squarely applies to the abovementioned legal issue:
 The arbitration clause in a contract is considered to be separate from
the main contract;
 It shall be treated as independent from the other terms of the contract;
 The arbitration tribunal will decide on the existence and validity of the
Arbitration Agreement;
 The fundamental principle behind this principle is that the Arbitral
Tribunal has the power to govern its own jurisdiction.
 Therefore, a decision by the arbitral tribunal that the contract is null and void
shall not entail ipso jure the invalidity of the arbitration clause.

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 POWER TO REFER PARTIES TO ARBITRATION
- SECTION 8 -

SCOPE AND APPLICABILITY

 There must be two or parties to arbitration;
 Suit filed by one of the parties;
 Defendant files an application that the dispute shall be referred to
arbitration.

In such case once the defendant files an application, the Court has to
ascertain the following:
a) Existence of arbitration agreement;
b) Whether the parties to suit are the same as parties to arbitration
agreement;
c) Whether the disputes mentioned in suit also form part of the arbitration
agreement;
d) Whether the defendant had applied before filing his statement in the
suit;
e) Whether the relief claimed can be adjudicated by arbitration.

REFUSAL TO REFER THE MATTER TO ARBITRATION

The Court may refuse to refer the matter to arbitration in the following
circumstances;
 Defendant did not file the arbitration agreement;
 Also contested the suit;
 Where the arbitration clause was limited to the extent of interpretation of
clauses only;
 Where the contract was oral and the arbitration agreement was not in
written form.

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 INTERIM MEASURES BY COURT
- SECTION 9 -

SCOPE & OBJECT

 These powers have to be exercised along with the powers under CPC.
 The existence of an arbitration agreement is a sine qua non for securing an
interim order from the Court.

CONDITIONS TO INVOKE THIS SECTION

1. Dispute arisen;
2. Subject matter of agreement, referable to arbitral tribunal;
3. Manifest intention to take recourse to the arbitration proceedings;
4. The subject matter shall fall within the original civil jurisdiction and the
pecuniary and territorial jurisdiction.

THE COURT MAY PASS INTERIM ORDERS FOR THE FOLLOWING PURPOSES:
 Appointment of guardian for minor or person of unsound mind;
 Interim measure of protection in respect of:
 Interim custody or sale of goods;
 Detention, preservation or inspection of any property’
 Appointment of receiver;
 Other interim measure of protection.