This article on ‘Arbitration Agreement: All you need to know‘ was written by Farhat Sultana, an intern at Legal Upanishad.
The Arbitration and Conciliation Act is an essential legislation governing the resolution of commercial disputes in India. Section 7 of the Act lays down the foundation for any arbitration proceedings by defining the “Arbitration Agreement” and its validity. This section is critical as it sets the basis for the formation of an arbitration tribunal and its jurisdiction to resolve the dispute.
In this article, we will explore the key provisions of Section 7, including the definition and importance of an Arbitration Agreement, the form, and validity of an agreement, and its applicability to the parties involved in a dispute. We will also examine the relevant case laws that have shaped the interpretation of Section 7.
Meaning of “Arbitration Agreement”:
According to Section 7 of the Arbitration and Conciliation Act, an arbitration agreement is an agreement between two or more parties to submit their disputes arising out of a particular legal relationship or any future legal relationship to arbitration. The agreement can be in writing, oral, or implied from the conduct of the parties. The agreement must be in writing if it is for international commercial arbitration.
Section 7 outlines the necessary information that must be included in an arbitration agreement to make it valid. These requirements include the following:
- The agreement must be in writing.
- The agreement must contain the subject matter of the dispute.
- The parties involved must agree to the appointment of an arbitrator or a panel of arbitrators.
- The agreement must contain the seat or place of arbitration.
- The agreement must contain the language or languages to be used in the arbitration proceedings.
- The agreement must contain the terms of the arbitration.
Importance of an Arbitration Agreement:
An arbitration agreement is essential because it provides a method of resolving disputes that is faster, cheaper, and more flexible than going to court. It allows the parties to choose their arbitrator, venue, and procedural rules. It also provides confidentiality to the parties as the arbitration proceedings are private and not open to the public. An arbitration agreement can be included in various types of contracts, such as commercial contracts, construction contracts, employment contracts, and consumer contracts.
Case Laws on the Definition of “Arbitration Agreement”:
The definition of an arbitration agreement has been interpreted and clarified by various Indian courts in several cases. In the case of Chloro Controls India Private Limited v. Severn Trent Water Purification Inc. & Ors (2013), the Supreme Court held that an arbitration agreement must be in writing and must be signed by the parties. The court also held that an arbitration clause in a contract can be incorporated by reference to another document, provided that the reference is clear and unambiguous.
In the case of SMS Tea Estates Private Limited v. Chandmari Tea Company Private Limited (2011), the Supreme Court held that an arbitration agreement must be in writing, but it need not be in a single document. The court observed that an arbitration agreement can be in the form of an exchange of letters, telexes, or telegrams, which demonstrate a clear intention to submit the disputes to arbitration.
Requirements for Forming an Arbitration Agreement
For an arbitration agreement to be valid, it must meet certain requirements. These requirements include:
- Writing: The agreement must be in writing. This can be in the form of a document or an exchange of letters, emails, or any other means of communication that provides a record of the agreement.
- Clear Intent: The agreement must clearly indicate the parties’ intent to resolve disputes through arbitration. This can be expressed through specific language or by incorporating an arbitration clause in a contract.
- Parties’ Consent: The agreement must be entered into voluntarily by both parties, without coercion, fraud, or undue influence.
- Identification of Disputes: The agreement must identify the disputes or types of disputes that will be subject to arbitration.
Validity of an Arbitration Agreement
To determine the validity of an arbitration agreement, the court will consider the following factors:
- Capacity: The parties must have the legal capacity to enter into a binding agreement. This means they must be of legal age and have the mental capacity to understand the nature and consequences of the agreement.
- Lawful Object: The agreement must have a lawful object. It cannot be for an illegal purpose or against public policy.
- Proper Formation: The agreement must meet the requirements for formation as discussed above.
- Enforceability: The agreement must be enforceable under the laws of the jurisdiction where it was made.
Another relevant case is the case of Reliance Industries Ltd. v. Union of India (2014), where the Supreme Court held that an arbitration clause incorporated by reference in a contract would be binding on the parties even if the contract is not signed by both parties.
Parties Bound by an Arbitration Agreement
According to Section 7 of the ACA, an arbitration agreement is binding on the parties to the agreement. This means that only those parties who have signed the arbitration agreement are bound by it. However, the Supreme Court of India has held that non-signatories can also be bound by an arbitration agreement under certain circumstances. For instance, if the non-signatory is a group company or a third-party beneficiary of the contract, then they can be bound by the arbitration agreement.
Issues Covered by an Arbitration Agreement
Section 7 of the ACA also lays down that an arbitration agreement should specify the disputes that are covered by it. This means that only those disputes that fall within the scope of the arbitration agreement can be referred to arbitration. If there is a dispute that is not covered by the arbitration agreement, then it cannot be referred to arbitration.
Several cases have been decided by Indian courts regarding the applicability of an arbitration agreement. One of the landmark cases in this regard is the Booz Allen case, where the Supreme Court of India held that the court has to first determine whether a dispute falls within the scope of the arbitration agreement or not. If it does, then the dispute must be referred to arbitration. However, if the court finds that the dispute is not covered by the arbitration agreement, then it cannot be referred to arbitration.
In conclusion, Section 7 of the ACA is essential in determining whether a dispute can be referred to arbitration or not. The parties to the arbitration agreement are bound by it, and only those disputes that fall within the scope of the arbitration agreement can be referred to arbitration. However, non-signatories can also be bound by an arbitration agreement under certain circumstances. Indian courts have also decided several cases regarding the applicability of an arbitration agreement, and it is essential to understand these cases to determine whether a dispute can be referred to arbitration or not.
List of References:
- Katie Shonk, What is an Arbitration Agreement?, Harvard, available at: https://www.pon.harvard.edu/daily/conflict-resolution/what-is-an-arbitration-agreement/
- Shubham Sharma, Arbitration agreement: a primer and a checklist, iPleaders Blogs, 8 October 2020, available at: https://blog.ipleaders.in/arbitration-agreement-primer-checklist/
- K.J. Chendhil Kumar, The Governing Law of Arbitration Agreement: Settling the Unsettled, SCC, 13 May 2021, available at: https://www.scconline.com/blog/post/2021/05/13/the-governing-law-of-arbitration-agreement-settling-the-unsettled