An arbitration clause – in the making

With an ocean of disputes with unscalable depths, justice is often delayed in India, and the commercial-legal ecosystem thrives on ADR for resolving their future disputes while having the ease of doing business.

While anarbitration clause forms part of a number of commercial contract, the terms of the same have to be meticulously drafted so as to nip the problem at the bud in the event of a dispute.

AnArbitration clause consists of core elements and additional elements.The core of the clause include:

1. Governing Law;
2. Procedure of Appointment;
3. Number of Arbitrators;
4. Seat and Venue.

While the additional elements comprise of:

1. Language;
2. Qualification of the arbitrators;
3. Specialization;
4. Online Dispute Resolution;
5. Evidence;
6. Award;
7. Appeal.

Section 10 of the Arbitration and Conciliation Act, 1996 (‘Act’) mandates that the number of arbitrators shall not be even, and if the agreement does not provide for the number of arbitrators, then a sole arbitration shall be appointed.

The parties can therefore choose to appoint an odd number of arbitrators and also specify the procedure for the same and can even mention a list of names to choose from.

The procedure and number of arbitrators in itself will not suffice the purpose if the time frame of appointment is not strict and the parties are not bound by the same so as to linger on the appointment at their own sweet will and making the entire intent of having arbitration over litigation infructuous.

The parties should expressly mention the place of arbitration along-with the governing law of either the Act or any institution under which the appointment is affected. The seat of arbitrationdetermines the governing law which in turn refers to the courts that will have the exclusive jurisdiction over the arbitral proceedings. This is one of the most core elements of an arbitration clause. In case the arbitration clause fails to provide for a seat of arbitration, the same may cause delay as it will have to determined which court will have the jurisdiction to adjudicate the disputes between the parties. Whether the venue can betreated as a seat of arbitration depends on the facts of each case and theconstruction of the arbitration clause.

The Language in which the proceedings will take place becomes another important element, particularly incase of an international arbitration which if not mentioned might lead to unnecessary disputes over the language in which the arbitral to bear the expenses of translation of the documents.

It is important to mention and abide by the fact that the award so passed by the arbitrator shall be final and binding on the parties to the agreement. As per Section 7(3) of the Act, the only prerequisite for an arbitration agreement to be valid is that it should be in writing. The intention of the parties to submit to the Arbitration is often deduced by the court from the performance of the contract by the parties.

The Supreme Court of India came down heavily in unilateral arbitration clauses and in TRF Ltd. v Energo Engineering Projects Ltd. (Civil Appeal No. 5306 of 2017) has observed that an arbitration clause wherein the sole arbitrator is appointed by a party having some interest in the outcome of the dispute is invalid as a person who is interested in the outcome is not eligible to function as a fair arbitrator and therefore becomes ineligible for appointment (Perkins Eastman Architects DPC v HSCC (India) Ltd. (Arbitration Application No. 32 of 2019)).

Further, an arbitration clause contained in an agreement which is not stamped although required to be stamped, can be enforced as it is trite law that an arbitration agreement is independent from the substantive commercial contract. (M/s. N.N. Global Mercantile Pvt. Ltd. v M/S. Indo Unique Flame Ltd. &Ors. Civil Appeal Nos. 3802 – 3803 / 2020 arising out of SLP (Civil) Nos.13132-13133 of 2020 and SMS Tea Estates Pvt. Ltd. v. M/s. Chandmari Tea Co. Pvt. Ltd. (2011) 14 SCC 66)

With the advent of the novel coronavirus and consequent advancement in technology in the courts all over the country, Online Resolution of Disputes has gained momentum whereby the parties can have a hearing over a video call and expeditiously be heard and redress their gradiences. This is particularly beneficial in arbitrations where there is party autonomy. While the matters before courts are getting delayed, the same fate does not have to be suffered in arbitrations. In order to resolve the disputes, the parties are coming forth in conducting the arbitral proceedings through video conferencing.

Keeping the aforesaid principles in mind, the following model arbitration clause can be incorporated in agreements:

“In the event of any dispute between the parties arising out of or in connection with this Agreement, it shall be referred to resolved by a sole arbitrator mutually appointed by the parties within 7 days from the date of dispute from the list of arbitrators as provided in Schedule I of the Agreement. The said proceedings shall be governed by the Arbitration and Conciliation Act, 1996 and the seat shall be in New Delhi.” The aforesaid model arbitration clause can be modified in terms of the aforesaid core and additional elements discussed, keeping in mind the requirement of parties to the agreement.