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Essential Elements of Arbitration Agreement

Essential Elements of Arbitration Agreement
Essential Elements of Arbitration Agreement


The cornerstone of any arbitration process lies in the arbitration agreement, serving as the bedrock for the jurisdiction of every arbitral tribunal. Thus, it demands meticulous drafting, free from hastily composed midnight clauses. 

Components of an Arbitration Agreement

An elucidation of Section 7 of the 1996 Arbitration Act reveals four indispensable constituents of a valid and enforceable arbitration agreement:

1. Mutual consent between the parties to arbitrate present or future disputes.

2. A written manifestation of such agreement.

3. Inclusion within a contract as a clause or as a standalone agreement.

4. The dispute subject to arbitration must pertain to a defined legal relationship, whether contractual or otherwise.


Intent to Enter into an Arbitration Agreement

Implicit in the aforementioned four requisites is the pivotal role of the parties' intention to engage in an arbitration agreement. Each party's intent must align with that of the others; in other words, a consensus ad idem is imperative.

The determination of the parties' intention to enter into an arbitration agreement is derived from the substance of the agreement rather than its formalities. 

Put differently, as long as the parties' intention to submit a dispute to arbitration is unequivocally discernible from the agreement's terms, an arbitration agreement is established, regardless of whether terms like 'arbitration', 'arbitrator', 'arbitral tribunal', or 'reference' are employed. 

The Supreme Court, in Jagdish Chander v. Ramesh Chander, elucidated key principles for ascertaining parties' intent from agreement terms:

- An arbitration agreement exists if the agreement's terms unambiguously demonstrate the parties' intention to refer their disputes to a private tribunal for resolution and to abide by its decisions.

While there's no prescribed format for an arbitration agreement, the language used should indicate a commitment to arbitration, not merely the possibility of it. An agreement that merely hints at the potential for future arbitration is non-binding and void.

- Even if terms like 'arbitration', 'arbitral tribunal', or 'arbitrator' are absent, a clause can still constitute an arbitration agreement if it encompasses the essential elements:

(a) a written agreement,

(b) a commitment to refer disputes (current or future) to a private tribunal,

(c) empowerment of the tribunal to impartially adjudicate disputes, affording both parties a fair hearing, and

(d) agreement that the tribunal's decision on disputes will be binding.

- Mere use of terms like 'arbitration' or 'arbitrator' won't suffice if subsequent or fresh consent of the parties is required for arbitration reference. Clauses suggesting a desire for arbitration without unequivocal commitment render them non-arbitration agreements.

- An arbitration agreement is established when the clause expressly refers disputes to arbitration, without necessitating a detailed exposition of arbitration agreement attributes.

Conversely, if the clause contains provisions contrary to arbitration attributes or detracts from them, it cannot be deemed an arbitration agreement. For instance, an agreement mandating arbitrators to favour one party undermines the arbitration agreement's essence.

Intention can solely be inferred from a written, finalised contract executed by authorised individuals. Consequently, any pre-contractual offers and communications hold no relevance in discerning the parties' intent after the conclusion of a contract. 

Moreover, the offer must be appropriately signed by authorised personnel. In cases where the sole correspondence or agreement containing the arbitration clause is drafted by an unauthorised employee, no arbitration agreement is established.

Requirements for a Valid Arbitration Agreement Under the 1996 Arbitration Act

In addition to the parties' intent, Section 7 of the 1996 Arbitration Act delineates formal prerequisites that every valid arbitration agreement must satisfy:

  • The arbitration clause must be embedded within a contract or structured as a separate agreement (Section 7(2)).

  • An arbitration agreement must be documented in writing (Section 7(3)).

  • Verification that the arbitration agreement is in written form (Section 7(4)), which may include:

  •  A document signed by the involved parties.

  • An arbitration clause can be integrated into a contract through reference (Section 7(5)):

  •  This means if a document containing an arbitration clause is cited in a contract, such reference will constitute an arbitration agreement, provided the contract is in written form and the reference effectively incorporates the arbitration clause into the contract.

An Arbitration Agreement Must Be in Writing

While the Indian Contract Act 1872 acknowledges oral agreements as valid, for an arbitration agreement to be legally binding and enforceable in India, it must be in writing as mandated by Section 7(3) of the 1996 Arbitration Act. 

Consequently, although a contract containing an arbitration agreement may be orally concluded, the arbitration agreement itself is only valid when documented in writing. This requirement aligns with the writing mandate in Article II of the New York Convention.

Under the 1996 Arbitration Act, a written arbitration agreement can manifest through:

  • Documents signed by the parties.

  • Exchange of communications, such as letters, telexes, telegrams, or other telecommunication methods, providing a record of the agreement.

  • Exchange of pleadings wherein one party alleges the existence of the agreement, and the other party does not contest it.

Notably, Section 7(2) of the 1996 Act acknowledges exchange of correspondence and pleadings as written arbitration agreements, without necessitating a signing requirement. Even if a written arbitration agreement lacks signatures, the parties can still be bound to it contractually. 

Additionally, Indian courts have established that handwritten clauses supersede printed text, representing a special variation rendering the printed text inapplicable.

It's pertinent to note that the definition of 'agreement in writing' under Part II of the 1996 Arbitration Act (based on the New York Convention) is narrower than that under Part I.

Part II stipulates that an agreement in writing encompasses an arbitration clause in a contract or an arbitration agreement, signed by the parties or contained in an exchange of letters or telegrams. 

However, it excludes the phrase 'other means of telecommunication which provide a record of the agreement' present in the corresponding definition under Part I.

This disparity between Part I and Part II arises from the antiquated nature of the New York Convention. In 1958, 'exchange of letters or telegrams' was deemed modern trade practice. 

To address this, the 7 July 2006 UNCITRAL Recommendation urged States parties to the New York Convention to apply Article II(2) by acknowledging that the circumstances outlined in the provision 'are not exhaustive.'


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