Arbitration Agreement

Significance of the arbitration agreement

Arbitration takes dispute resolution outside national courts. This ouster of jurisdiction is essentially founded in the
arbitration agreement.

It is also evidence of

• Valid consent of the parties to exclude the jurisdiction of courts which is part of their essential right

• Valid consent to submit their dispute to arbitration- there can be no unilateral withdrawal from such consent of the
parties

• Jurisdiction and source of power of the arbitral tribunal in supplement of law governing arbitration

• Arbitral process- type of arbitration, terms of the process, etc

Therefore, a valid arbitration agreement is a mandatory requirement in all national and international law governing
arbitration.
DEFINITION OF AN ARBITRATION
AGREEMENT
The 1958 New York Convention defined an arbitration agreement in Article II

Under the Convention, each contracting party undertakes to recognize and give
effect to an arbitration agreement when the following requirements are fulfilled

• The agreement is in writing;

• It deals with existing or future disputes;

• These disputes arise in respect of a defined legal relationship whether contractual

or not

• The subject-matter of the dispute is capable of being settled by arbitration

The UNCITRAL Model law followed the definition given in the New York Convention but expanded the scope of

‘agreement in writing’.

Article 7 - Definition and form of arbitration agreement

"Arbitration agreement" is 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. An

arbitration agreement may be in the form of an arbitration clause in a contract or in the form of a separate agreement.

The arbitration agreement shall be in writing. An agreement is in writing if it is contained in a document signed by the

parties or in an exchange of letters, telex, telegrams or other means of telecommunication which provide a record of

the agreement, or in an exchange of statements of claim and defence in which the existence of an agreement is alleged

by one party and not denied by another. The reference in a contract to a document containing an arbitration clause

constitutes an arbitration agreement provided that the contract is in writing and the reference is such as to make that

clause part of the contract.

Definition under the Act

• Section 2(b) defines an arbitration agreement as an agreement referred to in

section 7.

• Section 7 (1) defines an arbitration agreement for Part I as – “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.”
FORMS OF AN ARBITRATION
AGREEMENT- section 7(2)
The 1996 Act conceptualises two basic types of arbitration agreements- the arbitration clause and the

submission agreement.

The arbitration/arbitral clause is a clause which forms a part of the main contract and refers to the

resolution of all or any dispute arising out of the contract by reference to arbitration. It is also called

‘midnight clause’ as it is negotiated invariably at the end of the contract negotiation.

A submission agreement is where a separate agreement is entered into to refer a dispute to arbitration for

its resolution.

Section 7(5) also allows a reference in a contract to a document containing an arbitration clause to

constitute an arbitration agreement if the contract is in writing and the reference is such as to make that

arbitration clause part of the contract.

A valid arbitration agreement
A reading of the Act reveals that to form a valid agreement to arbitrate, the following requirements
exist

a) Legal requirements for entering into a valid contract under the applicable law [section 34 (2) (a)(ii)]

b) Agreement in writing [Section 7 (3), Section 7 (4)]

c) Agreement refers to all or certain disputes arising from the contract or that may arise between the
parties in the future

d) Existence of a defined legal relationship between the parties, whether contractual or not

e) A subject capable of being settled by arbitration in India (Arbitrability) [section 34 (b) (i)]

These requirements were reiterated by the Supreme Court in In Bihar State Mineral Development
Corporation v Encon Builders
a) Essentials of a valid contract

An arbitral award may be set aside by the Court only if the party making
the application furnishes proof that the arbitration agreement is not valid
under the law to which the parties have subjected it or, failing any
indication thereon, under the law for the time being in force.

Therefore, any arbitration agreement, to be valid, has to fulfil the

essentials of a valid agreement under the ICA; namely, free consent of
parties competent to contract, for a lawful consideration and with a
lawful object, and are not hereby expressly declared to be void. 
“Consent”- the parties must be at ad idem to refer the said dispute to
arbitration.

Such intention of the parties to enter into an arbitration agreement

must be gathered from the terms of the agreement in which it is
contained. If the terms of the agreement clearly indicate the parties’
intention to refer disputes between them to an arbitral tribunal for
adjudication and a willingness to be bound by the decision of that
arbitral tribunal on such disputes, it shall constitute an arbitration
agreement.
Damodar v State of Orissa

Contractor of underground water supply facility- Dispute- requested Chief

Engineer, Public Health, to nominate an arbitrator who in turn informed the
respondent that since there was no arbitration clause in the agreement.

The Subordinate Judge allowed the application under Section 8 and

directed the parties to file the agreement in the court and also to nominate
panel of names for appointment as an arbitrator. On revision and appeals
having been filed, the High Court, by its order dated February 15, 1982,
dismissed the revision and miscellaneous appeals.
“Decision of Public Health Engineer to be final - Except where
otherwise specified in this contract, the decision of the Public Health
Engineer for the time being shall be final, conclusive and binding on all
parties to the contract upon all questions relating to the meaning of the
specifications; drawings and instructions hereinbefore mentioned and
as to the quality of workmanship or materials used on the work.”

Held- Not wide enough to act as an arbitral clause. There is no mention

of a ‘dispute’. Therefore, appointment of arbitrator be set aside.
Furthermore, even if the words “arbitration”, “arbitral tribunal” or “arbitrator” are not used in a clause
relating to the settlement of disputes, it does not detract from that clause being construed as an
arbitration agreement if it contains the following attributes: — the agreement is in writing; — the
parties have agreed to refer any disputes (present or future) between them to the decision of a private
tribunal; the said tribunal is empowered to adjudicate upon the disputes in an impartial manner; the
parties agree that the decision of the tribunal would be binding.

For instance, in Visa International Ltd vs Continental Resources (Usa)Ltd , the appellant and the
respondent entered into a JV agreement to set up an integrated Aluminium Complex in Orissa. A dispute
resolution clause in the contract stated “Any dispute arising out of this agreement and which cannot be
settled amicably shall be finally settled in accordance with the Arbitration and Conciliation Act, 1996.“
 
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'

or arbitrators' has been used in the agreement. Intention of the parties is to be gathered from the

correspondence exchanged between the parties and the surrounding circumstances.

 The respondent in none of its letters addressed to the applicant suggested that the dispute

between the parties is required to be settled through conciliation and not by arbitration. In

response to the applicant's letter invoking the arbitration clause the respondent merely objected to

the names inter-alia contending the suggested arbitration would not be cost effective and the

demand for arbitration itself was a premature one.

Therefore, the intention of the parties was to have their dispute settled by arbitration.
A mere use of the words “arbitration” or “arbitrator” does not make it an
arbitration agreement if it requires or contemplates a further fresh consent of
the parties for reference to arbitration. The necessity is that of a concluded
consent of the parties to refer their dispute to arbitration. For instance, in
Jagdish Chander v Ramesh Chander, the clause in question stated that disputes
“shall be referred to arbitration if the parties so determine.” This was held not to
amount to an arbitration agreement. Use of the word “determine” showed that
the parties would have to decide the matter at the time when the dispute arose.
Consensus ad idem to refer the dispute to arbitration was missing.
Jindal Exports v Fuerst Day Lawson- Where a clause specifically excludes one of the attributes stated above, it will
not be considered an arbitration agreement. For instance, an agreement will not be a valid arbitration agreement if

• It permits an authority to decide a dispute without hearing;

• Requires the authority to act only in the interest of one of the parties;

• Provides that the decision of the authority will not be final and binding;

• Allows an unsatisfied party to file a civil suit seeking relief.

For instance, in State of Ordissa v Bhagyadhar Dash, the arbitration agreement provided that the decision of the

Superintending Engineer was to be sought in the event of a dispute between the parties. The SC held that the

clause was not an arbitration clause as-

• It did not refer to arbitration as a mode of settlement of disputes

• The Superintending Engineer was not constituted as an authority to decide the dispute after hearing the parties

to act in a quasi-judicial manner.

• His decision was final but could not bind the parties.
b) Agreement in writing [Section 7(3)]

Section 7 (4) goes to elaborate that an arbitration agreement is in writing if

it is contained in-

• a document signed by the parties;

• an exchange of letters, telex, telegrams or other means of

telecommunication which provide a record of the agreement; or

• 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.
M/s Caravel Shipping Services Private Limited v M/s Premier Sea Foods
Exim Private Limited (C.A. No.-010800-010801 of 2018 in SLP (C) Nos.
31101-31102 of 2016), the Supreme Court of India held that the only
prerequisite for an arbitration agreement is that it should be in writing,
and the fact that the same is not signed by parties does not make it
invalid.
• A dispute arose between the appellant and the respondent under a Multimodal Transport
Document/Bill of Lading. The BOL specified that "the Merchant expressly agrees to be bound
by all the terms, conditions, clauses and exceptions on both sides of the Bill of Lading
whether typed, printed or otherwise". Further, clause 25 of the BOL, which was a printed
condition annexed thereto, contained an arbitration clause.

• The Respondent had filed a suit before a Civil Court for recovery of certain money under the
BoL. Pursuant to the same, the appellant submitted an application under section 8 of the
Act.

• Both the lower court and the High Court held that the arbitration clause being in a printed
condition annexed to the BOL indicated no intention to arbitrate and the petition was
accordingly disposed.
• Before the SC, the appellant argued that the printed conditions in the
BOL acted as an arbitration clause by virtue of section7(5) of the Act.

• The Respondent argued that the BOL not being signed by the parties,
did not constitute a binding arbitration agreement due to section 7(3)
of the Act.
The appeal was allowed on the following grounds-

• that the BOL specified that the "Merchant" expressly agreed to be bound by all the terms and conditions on both sides of

the BOL whether typed, printed or otherwise;

• that perusal of clause 25 of the BOL showed that the Respondent had expressly agreed to be bound by the arbitration

clause, despite the fact that it was a printed condition annexed to the BOL and applicable to this dispute under section

7(5) of the Act.

• that the Respondent had relied upon the unsigned BOL as part of the cause of action in the suit filed by it arose out of the

same. The Respondent can no longer argue that for the purpose of arbitration, the requirement of the Act is that a valid

arbitration clause should be signed;

• that in Jugal Kishore Rameshwardas v Mrs. Goolbai Hormusji (AIR 1955 SC 812), it was held by the Court that that an

arbitration agreement needs to be in writing though it need not be signed, which principle is also contained in Section

7(3) of the Act. Section 7(4) of the Act should not be construed to mean that in all cases, an arbitration agreement needs

to be signed. The only pre-requisite is that it should in writing.

c) A subject capable of being settled by arbitration in India (Arbitrability) [section 34
(b) (i)]

Arbitration essentially involves ouster of jurisdiction of civil courts by mutual consent

of the parties in lieu of jurisdiction conferred upon a specific person(s) to adjudicate
the dispute. However, there are certain limits to such ouster of jurisdiction.

The Act does not specifically exclude any category of disputes as being not
arbitrable. Sections 34(2)(b) and 48(2) of the Act however make it clear that an
arbitral award will be set aside if the court finds that "the subject-matter of the
dispute is not capable of settlement by arbitration under the law for the time being
in force."
Booze Allen and Hamilton Inc. v SBI Home Finance Limited and Others (Civil Appeal No. 5440 of 2002) decided in 2011

• Capstone Investment Company Private Limited (Capstone) and Real Value Appliances Private Limited (Real Value)

took loans from SBI Home Finance Limited (the respondent) and secured their respective apartments in favour of

the respondent. Capstone and Real Value then permitted Booze Allen Hamilton Inc. (the petitioner) to use the

apartments by entering into separate leave and license agreements (rent agreements) for each apartment. The

respondent was a party to both rent agreements.

• On the day the rent agreements were completed, a tripartite deposit agreement was also entered into between

Capstone and Real Value, the petitioner, and the respondent. Under the tripartite agreement, the petitioner paid a

refundable security deposit to Capstone and Real Value. The tripartite agreement also stated that the rent

agreements and the tripartite deposit agreement, formed a "...single integral transaction, inseparable, co-extensive

and co-terminus in character.“ It also contained a reference to arbitration if disputes arose between the parties to

the agreement.
• While the petitioner was still occupying the apartments, Real Value made a reference to the Board of Industrial and

Financial Reconstruction, under section 15(1) of the Sick Industrial Companies (Special Provisions) Act 1985 (SIC 1985), to be

declared a "sick industrial company" (section 3(1)(o) SIC 1985). Real Value's apartment was taken over by the official

liquidator as a consequence.

• Real Value's failure to repay the loan taken from the respondent resulted in a mortgage suit (instituted by the respondent)

in the High Court of Bombay (High Court). The High Court granted an interim relief directing the petitioner to continue to

occupy the apartment, but restricted the petitioner from creating any third party rights, or any interest of any nature on the

apartment. The petitioner then applied to the High Court requesting that the dispute be referred to arbitration, as

arbitration was provided for in the tripartite agreement. The High Court dismissed the application and the petitioner

appealed to the Supreme Court of India (Supreme Court).

“ Every civil or commercial dispute, either contractual or non-contractual,
which can be decided by a court, is in principle capable of being adjudicated
and resolved by arbitration unless the jurisdiction of arbitral tribunals is
excluded either expressly or by necessary implication. Adjudication of certain
categories of proceedings are reserved by the Legislature exclusively for public
fora as a matter of public policy. Certain other categories of cases, though not
expressly reserved for adjudication by a public fora (courts and Tribunals), may
by necessary implication stand excluded from the purview of private fora.”
The test: Right in rem v Right in personam

A right in rem is a right exercisable against the world at large, as contrasted from a right in
personam which is an interest protected solely against specific individuals.

Actions in personam refer to actions determining the rights and interests of the parties
themselves in the subject matter of the case (resulting in judgment against a person), whereas
actions in rem refer to actions determining the title to property or status of property and the
rights of the parties, not merely among themselves but also against all persons at any time
claiming an interest in that property (resulting in a judgment regarding status of some
property).

Generally and traditionally all disputes relating to rights in personam are considered to be
amenable to arbitration; and all disputes relating to rights in rem are required to be
adjudicated by courts and public tribunals, being unsuited for private arbitration.
Consequently, where the cause/dispute is inarbitrable, the court where a suit is pending,

will refuse to refer the parties to arbitration, under section 8 of the Act, even if the

parties might have agreed upon arbitration as the forum for settlement of such disputes.

The well recognized examples of non-arbitrable disputes are :

(i) disputes relating to rights and liabilities which give rise to or arise out of criminal

offences;

(ii) matrimonial disputes relating to divorce, judicial separation, restitution of conjugal

rights, child custody;

(iii) guardianship matters;

(iv) insolvency and winding up matters;

(i) testamentary matters (grant of probate, letters of administration and succession

certificate); and

(ii) eviction or tenancy matters governed by special statutes where the tenant enjoys statutory

protection against eviction. Further, the Supreme Court in Shri Vimal Kishor Shah v. Jayesh

Dinesh Shah & Ors (Civil Appeal No. 8614 of 2016) further carved out a seventh category of

dispute that is incapable of being subject to private arbitration:

(iii) disputes arising out of trust deeds and under the Trust Act.

(iv) Also, disputes governed by statutory enactments creating special tribunals (such as NCDRC)

for a specific public purpose cannot be mandatorily referred to arbitration.

The rule in Booz Allen is not rigid or inflexible. Disputes relating to sub-
ordinate rights in personam arising from rights in rem have always been
considered to be arbitrable. For instance, disputes related to patent
validity affects rights-in-rem while disputes relating to patent use and
infringement concern only rights-in-personam, and are by that virtue
arbitrable.
Application of the test evolved in Booz Allen
• Haryana Telecom Ltd v Sterlite Industries Ltd- The power to order winding up of a company is contained under
the Companies Act and is conferred on the court. An arbitrator, notwithstanding any agreement between the
parties, would have no jurisdiction to order winding up of a company.

• Chiranjilal Goenka v Jasjit Singh and Ors- Grant of probate is a judgment in rem and is conclusive and binding not
only the parties but the entire world. Therefore, courts alone will have exclusive jurisdiction to grant probate and
an arbitral tribunal will not have jurisdiction even if consented to by the parties.

• Aftab Singh v. Emaar MGF Land Limited & Anr. (Consumer Case No. 701 OF 2015, Order Dated 13.17.2017) While
rejecting the plea of the respondent-builder to refer consumer dispute to arbitration, the NCRDC reiterated the
view of Supreme Court in Booz Allen and Ayyasami that disputes governed by statutory enactments creating
special tribunals (such as NCDRC) for a specific public purpose cannot be mandatorily referred to arbitration.
Question of arbitrability- at what stage?
Where the issue of `arbitrability’ arises in the context of an application under section 8 of the Act in a

pending suit, is the Court empowered to decide on jurisdiction of the arbitral tribunal?  

The 2015 amendment to Section 8 of the Act has, however, created uncertainty with respect to the

court’s power to decide upon arbitrability of dispute at the pre-arbitration stage.

The amended Section 8 introduces a non-obstante clause, which reads as follows:

“..notwithstanding any judgment, decree or order of the supreme court or any other court, refer the

parties to arbitration unless it finds that prima facie no valid arbitration agreement exists.”

In contrast, Section 8 of the 2006 UNCITRAL Model Law and Section 45 of the Act provide that:

“..unless it finds that the agreement is null and void, inoperative and incapable of being performed.”
The amended Section 8 suggests that the courts can only inquire the prima facie existence of a valid arbitration
agreement and leave the rest to be determined by the arbitral tribunal by virtue of the principal of Komptenz-
Komptenz as enshrined under Section 16 of the Act. The courts only have the power to set aside the arbitral award
under Sections 34(2)(b) or 48(2) of the Act on the ground that the subject matter of the dispute is not arbitrable as
per the public policy of India.

The effect of the non-obstante clause on pre-arbitral jurisprudence by the courts is yet to be determined by the
Supreme Court. Once the parties to a dispute have agreed to resolve their disputes through binding arbitration,
the purpose of arbitration would be defeated and precious time of the parties would be wasted in the
determination of the validity of arbitration agreement before the national courts.

The correct view would be that while non-arbitrable disputes should not be referred to arbitration, the courts
under Section 8 have only a limited scope of interference and cannot undertake an in-depth analysis into the
merits and arbitrability of disputes at a pre-arbitration stage. Further, a dispute should be categorized as non-
arbitrable only on limited grounds, in cases of compelling public interest.
 Autonomy of the arbitration agreement
Section 16- Competence of arbitral tribunal to rule on its jurisdiction.—(1) The
arbitral tribunal may rule on its own jurisdiction, including ruling on any
objections with respect to the existence or validity of the arbitration agreement,
and for that purpose,

(a) an arbitration clause which forms part of a contract shall be treated as an

agreement independent of the other terms of the contract; and

(b) a decision by the arbitral tribunal that the contract is null and void shall not
entail ipso jure the invalidity of the arbitration clause.
Enercon India Ltd v Enercon Global

• A joint venture agreement- Respondent agreed to transfer to the Appellant the right and the technical know-how

for the manufacture of certain hardware specified therein under a licence. They entered into a draft called the

“Agreed Principles" for the use and supply of the windmill technology. The second page of the Agreed Principles,

inter alia, provides as follows: “The Agreed Principles as mentioned above, in their form and substance, would be

the basis of all the final agreements which shall be finally executed.”

•  A draft Intellectual Property License Agreement (“IPLA”) was executed between the parties. The Appellants

contended that this IPLA was not a concluded contract. According to the Appellants, the draft IPLA was initialled

by Appellant only for the purpose of identification, with the clear understanding that the said draft still contained

certain discrepancies which had to be brought in line with the Agreed Principles. Thus, the case of the Appellant is

that the draft IPLA was not a concluded contract. On the other hand, Respondent took the stand that IPLA was a

concluded contract and hence, binding on the parties.

The Supreme Court rejected the Appellant’s submissions and observed that their existed a legal
relationship between the parties and the arbitration clause in the IPLA abundantly indicated
the intention of the parties to arbitrate.

Irrespective of whether the ILPA fructified into a full-fledged agreement, the parties had agreed
to subject all disputes, arising out of and in connection to the MoU, to arbitration. Such an
agreement would constitute a separate and independent agreement in itself.

The Court further observed that the concept of severability of the arbitration clause/agreement
from the underlying contract is a necessity to ensure that the intention of the parties to resolve
the disputes by arbitration does not evaporate into thin air with every challenge to the legality,
validity, finality or breach of the underlying contract.

Reva Electric Car Co. (P) Ltd. v. Green Mobil