A GUIDE TO DRAFT AN EFFECTIVE ARBITRATION AGREEMENT

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INTRODUCTION

An arbitration clause embedded in a contract or a separate arbitration agreement or an act of the party in accordance with Sec. 7(4)(b) and 7(4)(c) of the Indian Arbitration and Conciliation Act, 1996 (hereinafter ‘the Act’) or Incorporation by reference is a prerequisite to commencing an arbitral proceeding. Usually, these prerequisite encounters little or no attention during the formulating and drafting process. An inadvertence of effective arbitration clause/separate arbitration agreement (hereinafter ‘arbitration agreement’) can be disastrous, allowing for interpretation before a court of law. Most of the time the terms of the arbitration agreement become crucial in the event of all or certain future/existing disputes. Therefore, it is always advisable to draft an effective arbitration agreement which leaves no scope for interpretation before a court of law.  

    
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* Section 7(2) of the Arbitration and Conciliation Act, 1996
** Section 7(4)(b) and 7(4)(c) of the Arbitration and Conciliation Act, 1996
*** Section 7(5) of the Arbitration and Conciliation Act, 1996

ARBITRATION AGREEMENT UNDER THE ACT
This part of the blog is specifically focused on the arbitration agreement in accordance with the Act. As already discussed, it is very essential to draft an effective arbitration agreement according to the type of the main contract. Otherwise, it will ensue in a midst of arbitration as well as a court proceeding out of that ineffective arbitration agreement. The Act in Section 2(1)(b) renders the definition of “arbitration agreement”- “means an agreement referred to in Section 7”. Section 7 of the Act enumerates the indispensable requisite for an arbitration agreement. At the outset of an arbitration agreement, section 7 has to be complied with in entirety. The gist of essential ingredients of section 7 are as under:
Sec. 7 (1)-  
o   an agreement by parties to ‘submit to arbitration’ “all or certain       existing/future disputes”
o       The dispute shall be in respect of a defined “legal relationship”
o    It can be contractual or not. [Legal but not contractual relation: for     instance, Doctor/ Patient, Lawyer/Client etc.]
Sec. 7(2)-
                An arbitration agreement may be (i) arbitration clause (ii) separate                                arbitration agreement
Sec. 7(3)-
                It shall be in writing.
Sec. 7(4)-
                 It is regarded in writing if it is contained in
o        Documents signed by the parties
o An exchange of letters, telex, telegram or other means of   telecommunication [including communication through electronic means]
o   Non-denial of the existence of the agreement in the defence statement.   [See, S.N. Prasad v. Monnet Finance Ltd., 2010 (7) SCC 851]
[Note: From the above provision of Section 7(4), it is abundantly clear that the arbitration agreement need not to be writing signed by both parties and this could be well made out from the act of the parties to the agreement by way of their exchange of letters and information through fax, e-mails etc. – M/S Shakti Bhog Foods Limited v. Kola Shipping Limited (2009) 2 SCC 134.]

Sec. 7(5)-
Incorporation of the arbitration agreement by ‘reference’ [See, M.R. Engineers and Contractors Private Limited v. Som Datt Builders Limited, (2009) 7 SCC 696; See also, M/s. Dulo Felguera v. M/s. Gangavram Port Limited, [Arbitration Petition No. 30 of 2016] decided on 10.10.2017.]

OTHER REQUISITES TO CONSIDER BEFORE DRAFTING AN ARBITRATION AGREEMENT
1.  Arbitration Agreement should be in conformity with Indian Contract Act, 1872- (i) Sec. 10- What agreements are contracts (ii) Intention of entering into a legal obligation (iii) ad-idem and, (iv) Other important parts of the Contract Act.
2. Ascertaining that disputes are arbitrable (the subject matter of dispute is capable of adjudication by arbitration). These arbitrable [right in personam] and non-arbitrable [right in rem] disputes are not specified in the Act thereby, it is left open for the court of law to decide the arbitrability of disputes on a case by case basis. Some non-arbitrable disputes are (a) disputes relating to rights and liabilities which give rise to or arise out of criminal offences (b) matrimonial disputes (c) Insolvency and winding-up matters etc. [See, Booz Allen and Hamilton Inc. v. SBI Home Finance Ltd. 2011 (5) SCC 532]
3.  Domestic Arbitration is governed by Part I of the Act whereas International Commercial Arbitration is governed by the Part II of the Act (except when the seat of arbitration is in India and proviso of Sec. 2(2) of the Act*). An arbitration agreement clause should be drafted in conformity with the kind of arbitration i.e., Domestic Arbitration or International Commercial Arbitration.
4.  There should be a specific and direct expression of intent to have the disputes settled by arbitration. Therefore, an optional agreement for instance, “may go to suit or arbitration” is not an arbitration agreement. This statement of giving two options will detract from an arbitration agreement and result in no arbitration agreement at all.
5. Type of Arbitration: Selecting ad-hoc or institutional arbitration method according to the advantages and disadvantages of each.
6. The doctrine of Separability: An arbitration agreement is independent of the underlying contract. And, the arbitration agreement is not required to be in any particular form.
7. Appellate Arbitration – There is nothing in the Act which prohibits the second instance or appellate arbitration either explicitly or implicitly. [See, M/s Centrotrade Minerals and Metals Inc. v. Hindustan Copper Ltd., AIR 2017 SC 185].
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* Provided that subject to an agreement to the contrary, the provision of section 9, 27 and clause (a) of sub-section (1) and sub-section (3) of section 37 shall also apply to international commercial arbitration, even if the place of arbitration is outside India, and an arbitral award made or to be made in such place is enforceable and recognized under the provision of Part II of this Act.

CHECKLIST FOR AN ARBITRATION AGREEMENT
□   Keep it simple- ambiguous drafting will open the doors of judicial interpretation.
□   There should be a clear and specific reference to arbitration.
□   Details of the contracting party [For separate arbitration agreement].
□   Details of nature of the legal relationship between the parties [For separate arbitration agreement].
□   Nature and detail of disputes (Whether all or certain disputes emerging from the contract).
□   Seat of Arbitration [For International Commercial Arbitration].
□   Substantive Law: Law of the contract [For International Commercial Arbitration].
□   Governing Law (Curial law): Law of the Arbitration Agreement, unless it is opposed to public policy [For International Commercial Arbitration].
[Note: In Domestic Arbitration there cannot be forum shopping]
□   Arbitrator- procedure for appointment, number of arbitrator/s and it should be in odd number and, qualification etc.
□   Amendment clause of the arbitration.
□   The Language of the arbitration. 
□ Duly Stamped.
□   Privacy and Confidentiality.
□   Cost.
□   The arbitration agreement shall state that the decision of the tribunal will be binding on the parties to the agreement.
□   Can add multi-step resolution clause (Optional).
□   Place and Date [For separate arbitration agreement].
□   Representative Signature [For separate arbitration agreement]
Be cautious regarding
□   Selecting the seat of arbitration: Review the implication of other laws
□   Too much specific qualification for an arbitrator: It will reduce the pool of arbitrators
□   Don’t copy paste the model clause. Every arbitration agreement should be made according to the main contract and essential factors regarding the position of the parties.

SOME MODEL ARBITRATION CLAUSE/ ARBITRATION AGREEMENT

ICC
“All disputes arising out of or in connection with the present contract shall be finally settled under the Rules of Arbitration of the International Chamber of Commerce by [one or more]/[one]/[three] Arbitrator[s] appointed in accordance with the said Rules.”

LCIA
“1. Any dispute arising out of or in connection with this contract, including any question regarding its existence, validity or termination, shall be referred to and finally resolved by arbitration under the LCIA Rules, which Rules are deemed to be incorporated by reference into this clause.
 (a) the number of Arbitrators shall be [one/three];
(b) the seat, or legal place, of arbitration shall be [city and/or country];
(c) the language to be used in the arbitral proceedings shall be[ ].
2. The governing law of the contract shall be the substantive law of [ ].”

UNCITRAL
Model arbitration clause for contracts
Any dispute, controversy or claim arising out of or relating to this contract, or the breach, termination or invalidity thereof, shall be settled by arbitration in accordance with the UNCITRAL Arbitration Rules.
Note. Parties should consider adding:
(a) The appointing authority shall be ... [name of institution or person];
(b) The number of arbitrators shall be ... [one or three];
(c) The place of arbitration shall be ... [town and country];

(d) The language to be used in the arbitral proceedings shall be ...

 Refer the websites
International Chamber of Commerce Arbitration Clause:  https://iccwbo.org/dispute-resolution-services/arbitration/arbitration-clause/
Recommended Clauses by LCIA- India: http://www.lcia-india.org/arbitration-clauses
Recommended Clauses by LCIA:  http://www.lcia.org/dispute_resolution_services/lcia_recommended_clauses.aspx ; http://www.lcia.org/dispute_resolution_services/lcia_mediation_clauses.aspx
The Indian Council of Arbitration, COMMERCIAL ARBITRATION, CONCILIATION & MARITIME ARBITRATION CLAUSES: http://www.icaindia.co.in/ICAARBITRATIONCLAUSE.pdf
World Intellectual Property Organization Model Arbitration Clause: https://www.wipo.int/amc/en/clauses/arbitration/
Singapore International Arbitration Centre Model Clause: http://www.siac.org.sg/model-clauses 
UNCITRAL Arbitration Rules as revised in 2010: https://www.uncitral.org/pdf/english/texts/arbitration/arb-rules-revised/arb-rules-revised-2010-e.pdf

(for further information be my guest at lawyer.akt@gmail.com)

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