ARBITRATION AGREEMENT
In terms of section 2(1) (a) of the Arbitration and Conciliation Act, 1996, “arbitration” means any arbitration whether or not administered by permanent arbitral institution.
In the famous case of Collins v Collins, Romilly M.R. defines arbitration as,
“An arbitration is the reference to the decision of one or more persons, either with or without umpire, of a particular matter in difference between the parties”
In simple words, arbitration is a process where the parties involved in a conflict agree to let one or more arbitrators decide the outcome of the dispute. The arbitrators’ decision is final and enforceable. By choosing arbitration, the parties avoid taking the dispute to a public court.
In Rameshwardas v Mrs. Goolbai Hormusji AIR 1955 SC 812
It was observed that an arbitration agreement needs to be in writing though it need not be signed. The fact that the arbitration agreement shall be in writing is continued in the 1996 Act under section 7(3) thereof.
WHAT IS ARBITRATION AGREEMENT?
Section 7 of the Arbitration and Conciliation act defines Arbitration Agreement as follows:
“(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.
(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.”
An arbitration agreement is a smart choice for parties who want to avoid the hassle and expenses of going to regular court. It is a legal contract that says any disputes between them will be resolved by arbitration process. The parties agree to submit their disputes to an impartial arbitrator or a panel of arbitrators, who will listen to both sides and make a final and enforceable decision.
Usually, an arbitration agreement sets the terms for resolving disputes by arbitration. It covers the dispute scope, process rules, arbitrator selection, location and other key points.
Essentials of arbitration agreement:
- There must be a dispute between the parties: An arbitration agreement is valid only if there is a dispute between the parties. Without a dispute, the arbitration clause cannot over-ride a prior settlement.
- The Agreement must be in writing: An arbitration agreement is a legal contract that requires the parties to sign it and put it in writing. The written form can be flexible, such as a document, an email, or a clause in another contract.
- The intention of the parties: The parties’ intention to arbitrate is essential for the agreement. It does not matter if they use specific words, as long as they agree to use arbitration for their disputes.
- No prescribed form of agreement: The Act does not prescribe any format for an Arbitration Agreement. It can form a part of the main contract or in a separate agreement.
In Rukmanibai Gupta v. Collector, Jabalpur 1980,
The Supreme Court observed 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 terms 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.
5. Defined legal relationship: Section 7 (1) of the Arbitration and Conciliation Act 1996 states that: “An 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.”
This implies that the dispute must be related to a legal relationship that is clearly specified in the agreement, and not based on moral or spiritual grounds. Such matters are not subject to arbitration, as they are not enforceable by law.
Thus an arbitration is an important alternative dispute resolution process that is encouraged to reduce the backlog and cost of court cases.
The effectiveness of dispute resolution through arbitration largely depends on the precision and professionalism with which an Arbitration Agreement is drafted. Therefore, parties entering into an Arbitration Agreement should ensure its meticulous drafting at the time of its creation.
