Chapter 4: Arbitration Agreement and Its Essentials
The Arbitration and Conciliation Act, 1996, lays down the framework for arbitration agreements in India. This chapter will explore the essentials and validity of an arbitration agreement, the process of referring parties to arbitration, and the types of disputes that can be arbitrated.
Essentials and Validity of an Arbitration Agreement
An arbitration agreement is defined under Section 7 of the Arbitration and Conciliation Act, 1996. According to Section 7(1), an arbitration agreement is an agreement by the parties to submit to arbitration all or certain disputes which have arisen or may arise between them in respect of a defined legal relationship, whether contractual or not. The agreement must be in writing and can be part of the contract or a separate agreement altogether.
Section 7(3) specifies that an arbitration agreement shall be in writing. It is considered to be in writing if it is contained in:
- A document signed by the parties
- An exchange of letters, telex, telegrams, or other means of telecommunication, including electronic means
- An exchange of statements of claim and defense in which the existence of the agreement is alleged by one party and not denied by the other
The Supreme Court in M/s Caravel Shipping Services Pvt Ltd v M/s Premier Sea Foods Exim Pvt Ltd 1 held that even a reference to a charter party containing an arbitration clause in a bill of lading would constitute a vali agreement.
Section 7(2) provides that an arbitration agreement may be in the form of an arbitration clause in a contract or in a separate agreement. However, Section 7(4) clarifies that an arbitration agreement shall be treated as a distinct agreement independent of the other terms of the contract. This is known as the doctrine of separability or severability, which means that the invalidity or termination of the main contract does not affect the validity or enforceability of the arbitration agreement.
The Supreme Court in SMS Tea Estates Pvt Ltd v M/s Chandmari Tea Co Pvt Ltd 2 held that if an arbitration clause is contained in an unstamped contract, it cannot be acted upon until the contract is duly stamped. However, this does not affect the validity of the arbitration clause as such.
Referring Parties to Arbitration
The court plays a pivotal role in referring parties to arbitration under Section 8 of the Arbitration and Conciliation Act, 1996. If an action is brought before a judicial authority that is subject to an arbitration agreement, the court is obligated to refer the parties to arbitration.
Section 8(1) provides that a party may apply to the court for referring the parties to arbitration before submitting its first statement on the substance of the dispute. The court shall refer them to arbitration unless it finds that prima facie no valid arbitration agreement exists.
Section 8(2) provides that if an application under Section 8(1) is made along with a copy of the arbitration agreement, then such copy shall be admitted as evidence without further proof unless there is any challenge to its authenticity.
The Supreme Court in Vidya Drolia & Ors v Durga Trading Corporation3 held that while referring parties to arbitration under Section 8, the court has to examine whether there exists a valid and enforceable arbitration agreement, whether there are disputes between parties which are arbitrable, and whether all parties to the suit are parties to the it.
Arbitrability of Disputes
Not all disputes can be referred to arbitration. Certain matters are considered ‘excepted matters’ and are non-arbitrable. For instance, if an agreement containing an arbitration clause specifies that certain matters will not be referred to arbitration, then these matters are considered non-arbitrable.
The Supreme Court in Vidya Drolia & Ors v Durga Trading Corporation3 laid down a four-fold test for determining arbitrability:
- Whether the dispute relates to actions in rem (rights exercisable against the world at large) or actions in personam (rights exercisable against specific persons)
- Whether the dispute affects third-party rights or requires centralized adjudication by specialized courts
- Whether the dispute relates to inalienable sovereign or public interest functions
- Whether there is any statutory restriction on arbitrability
Applying this test, the Supreme Court identified six categories of disputes that are non-arbitrable:
- Disputes arising out of criminal offences
- Matrimonial disputes
- Guardianship matters
- Insolvency and winding up matters
- Testamentary matters
- Eviction or tenancy matters
However, this list is not exhaustive and may evolve with changing times and circumstances.
Understanding the essentials and validity of an arbitration agreement is crucial for the effective resolution of disputes through arbitration. The Arbitration and Conciliation Act, 1996, provides a comprehensive framework that governs these aspects, thereby ensuring that the arbitration process is both effective and fair.