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Types of Arbitration Agreement


Types of Arbitration Agreement
Types of Arbitration Agreement

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Types of Arbitration Agreement


Arbitration agreements come in diverse forms and can be categorised based on various factual aspects. For instance, an arbitration clause, regardless of its form, may grant one party significantly more bargaining power than the other disputing parties, resulting in asymmetrical arbitration clauses. 



Additionally, even if an arbitration clause meets all the formal requirements, it could still be impractical or challenging to implement, resulting in what are known as pathological clauses. 



Finally, arbitration clauses may adopt a multi-tiered approach to dispute resolution.

 
 

ASYMMETRICAL ARBITRATION CLAUSES 


Asymmetrical arbitration clauses can arise in situations where one party possesses a significantly stronger bargaining position, granting them unilateral authority to initiate either arbitration or litigation. Such clauses, also known as unilateral clauses, allow one party exclusive power to commence dispute resolution proceedings.



For example, in the case of Bhartia Cutler Hammer v. AVN Tubes, the Delhi High Court scrutinised a clause that vested the sole authority to appoint an arbitrator with one party:



"Without prejudice to the above Clause 17 of the contract, the Company, M/s. Avn Tubes Limited, reserves its right to go in for arbitration, if any dispute so arisen is not mutually settled within 3 months of such notice given by the Company to the Contractor.



And, the award of the Arbitrator, appointed by the Company, M/s. Avn Tubes Limited, shall be final and binding on both the Company and the Contractor."



Courts in various jurisdictions have grappled with the validity and enforceability of unilateral option clauses. While the English and Singaporean courts have upheld asymmetrical clauses as enforceable, the status of such clauses in India remains uncertain due to conflicting judgments from different High Courts, particularly the Calcutta and Delhi High Courts.



Valid Asymmetrical Clauses


The Calcutta High Court has historically upheld asymmetrical clauses, emphasising that the option granted to one party to refer the dispute to arbitration does not negate the existence of the arbitration agreement. Cases like New India Assurance Co Ltd v. Central Bank of India & Ors and S&D Securities v. Union of India showed the court's stance on the validity of unilateral option clauses.



Invalid Asymmetrical Clauses


In contrast, the Delhi High Court has declared asymmetrical clauses void due to lack of mutuality and restraint of a party's right to legal proceedings.



Decisions like Bhartia Cutler Hammer v. AVN Tubes and Emmsons International Ltd. v. Metal Distributors highlighted the court's position on the unenforceability of such clauses, citing Section 28 of the Contract Act, which renders void agreements that absolutely restrict a party from enforcing rights under the contract in ordinary tribunals.



However, the 2010 decision in Jindal Exports Ltd. v. Fuerst Day Lawson Ltd. marked a departure from previous rulings, as the Delhi High Court upheld the validity of an asymmetrical clause. Yet, the impact of this decision on established precedent remains unclear.



The Delhi High Court's decisions highlight three potential grounds for challenging the validity of asymmetrical clauses under Indian law: lack of mutuality, contravention of public policy, and restraint of a party's right to legal proceedings. In the absence of a definitive judgement from the Supreme Court, the legal standing of asymmetrical clauses remains unsettled.




PATHOLOGICAL CLAUSES 


Pathological clauses, also known as defective or poorly drafted arbitration clauses, refer to provisions within contracts that lack one or more essential elements of an arbitration agreement, despite being formally valid.



These clauses often arise due to minimal attention given to dispute resolution clauses during contractual negotiations, sometimes referred to as "midnight clauses."



Common defects found in pathological clauses include:


Reference to non-existent arbitral rules:

For instance, in System for International Agencies v. Rahul Coach Builders Pvt. Ltd., the parties agreed to arbitration under the 'by-laws of Indian Company's Act 1956' or 'as per International Trade Laws.' However, the specified rules for arbitration did not exist.



Reference to non-existent arbitral institutions:

In Pricol Ltd. v. Johnson Controls Enterprises Ltd., the parties agreed to refer their disputes to the 'Singapore Chamber of Commerce.' However, the court found that no such institution administered arbitration proceedings.



Unworkable arbitration clauses:

In Insigma Technology Co. Ltd. v. Alstom Technology Ltd., the parties agreed to arbitration before the Singapore International Arbitration Centre (SIAC) but in accordance with the Rules of Arbitration of the International Chamber of Commerce (ICC).



This created a problematic situation where one arbitral institution (SIAC) was tasked with conducting arbitration under the rules of another competing institution (ICC).



Incomplete arbitration clauses:


In Wellington Associates Ltd. v. Kirit Mehta, the agreement contained an exclusive jurisdiction clause and also stated that any dispute 'may' be referred to arbitration. Upon interpretation, the court determined that arbitration was optional but required mutual agreement between the parties.

 
 

MULTI-TIER CLAUSES 


Multi-tier arbitration clauses are provisions within contracts that require parties to undertake specific steps before initiating arbitration, typically aiming to resolve disputes amicably. These clauses often involve initial negotiation, mediation, or conciliation efforts, followed by arbitration if these attempts fail.



A recent case, Centrotrade Minerals & Metal Inc. v. Hindustan Copper Ltd., brought before the Supreme Court, examined the validity of an unconventional multi-tiered dispute resolution clause. 



In this case, the arbitration clause mandated the parties to first engage in domestic arbitration under the Indian Council of Arbitration (ICA). If dissatisfied with the outcome, either party could then initiate a second arbitration under ICC Rules in London.



Disputes arose, leading to arbitration proceedings in India, followed by additional proceedings initiated by the supplier before an ICC tribunal in London. The buyer contested this, arguing that the two-tier arbitration violated Indian public policy. Meanwhile, the ICC tribunal in London issued an award in favour of the supplier.



The Supreme Court deliberated whether such a two-tier arbitration clause was valid and binding, or if allowing parties to 'appeal' the first arbitration outcome in a second arbitration violated Indian public policy. 



Ultimately, the Supreme Court upheld the validity of the clause, emphasising the importance of party autonomy in arbitration agreements. The court highlighted party autonomy as the backbone of arbitrations, affirming parties' rights to determine procedural and substantive law within arbitration agreements.


 
 

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