Better the drafting, better the
chances of winning- Arbitration
Chapter I:
Introduction
An arbitration agreement is an agreement between two or more
persons to submit a dispute or a potential dispute arising
between them in respect of their defined legal relationship to
one or more impartial persons for resolution.
• Article 7 (1), UNCITRAL Model Law on International
Commercial Arbitration 2006
• Article II (1), Convention on Recognition and Enforcement of
Foreign Arbitral Award, New York Convention 1958
Arbitration provides for an alternative forum to the time
consuming and expensive court proceedings and ensures speedy
disposal of cases without the court’s intervention.
Section 7 of the Arbitration & Conciliation Act, 1996, states that
‘Arbitration Agreement’ is an agreement by the parties to submit
to arbitration, all or certain disputes which have arisen or which
may arise between them in respect of a defined legal
relationship, whether contractual or not.
• Section 7 modelled on the Report of the United Nations
Commission on International Trade Law.
The Law Ministry has proposed to include a clause in the
1996 Act which would provide for a deemed arbitration
clause unless expressly excluded by the parties in writing.
The said clause would read as follows:
"Unless parties expressly and in writing agree otherwise,
every commercial contract with a consideration of specified
value (Rs. 5 crore or more) shall be deemed to have in
writing specified arbitration agreement."
Chapter II:
Essential elements of an
arbitration agreement
Some relevant cases:
• Bihar State Mineral Development Corporation v. Encon
Builders Ltd, 2003 (7) SCC 418.
• K. K. Modi v. K. N. Modi 1998 (3) SCC 573
Independent Clause:
• Is treated as an independent contract.
• Even if main contract is itself illegal and void.
• The doctrine of Separability was established in English law by
Heyman v. Darwins, [1942] 1 All ER 337
• This doctrine has been incorporated in the UNCITRAL Model
Law on International Commercial Arbitration. The Arbitration
and Conciliation Act, 1996, which is based on the UNCITRAL
Model Law, also explicitly adopts this approach in Section 16
(1) (b)
• Chatterjee Petrochem (I) Pvt. Ltd. v. Haldia Petrochemicals Ltd.
and Ors, AIR 2012 SC 2753
• National Agricultural Coop. Mktg. Federation India Ltd. v.
Gains Trading Ltd, AIR 2007 SC 2327
• When law recognises the same to be independent contract,
then should be give importance. In any commercial
transaction, first concern should be to evaluate the merits of
the ‘exit’ from the contract.
Written Agreement:
• Must be in writing.
• There is no particular form.
• An oral agreement of arbitration is not legally recognized in
India. However, on many occasion Courts may from the
circumstances finds the intention for arbitration. However,
such situation should be avoided.
Capacity of the Parties:
• Must be a valid contract and binding on the parties.
• Not influenced by fraud, coercion or undue influence.
• Capacity for entering into the contract.
Intention:
• Intention to refer disputes already arisen or likely to arise in
respect of a contract.
• Must be mutual.
• Mutual agreement that award should be binding.
• Must give bilateral rights of reference.
Certainty:
• If not certain or capable of being made certain - void.
• The court will do its best, if satisfied that there is a
determinate intention to contract, to give effect to that
intention, looking at the substance and not mere form.
Chapter III:
Concerns
• A badly drafted arbitration agreement increases the risks of
parties engaging in a jurisdictional fight before the substantive
one.
• Translates into increased costs, time and inconvenience to
parties.
• Every arbitration starts with an arbitration agreement.
• It provides the frame work under which the parties’ dispute
will be resolved.
• Often, arbitration agreement is not given serious
consideration.
• An arbitration agreement may affect arbitration either
positively or negatively depending on whether it is properly
drafted.
Make sure to create a binding arbitration agreement:
• Must be clearly stated that the parties have agreed to a
binding arbitration.
• Arbitration is a creature of contract, if there is no contract,
there is no agreement to arbitrate. E.g.:
“In case of dispute, the parties undertake to submit to
arbitration, but in case of litigation the Court shall have
exclusive jurisdiction”.
• In case of above clause, the client will end up spending what
will seem like an eternity, and a great deal of money, trying to
resolve the dispute.
• The overriding goal of the drafter should be to draft a
provision that, if, a dispute arises, will help the parties obtain
an arbitration award without a detour through the court
system.
• The drafter must produce an enforceable agreement.
• Note that an unequivocal clause that does not firmly commit
the parties to arbitrate their disputes will not be enforced.
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Make sure to give proper attention:
It is common to find that no one actually paid any attention to
the arbitration clause.
Days are spent to draft the main contract.
However, on the day of closing of the main contract, copy paste
job of the arbitration clause takes place.
More that 30% of the cases before tribunals it is found that the
arbitration clause is not properly drafted.
The clause must be designed to fit the circumstances of the
transaction and the parties.
The clause must anticipate the type of dispute resolution
process which is best suited to the client and the transaction
Be careful about giving in to the temptation to advise the client
to agree to arbitrate some types of disputes and go to court for
others. This is done in case of engineering contracts a lot.
Make sure to avoid omission:
• Should not omit a crucial element from arbitration, e.g.
“Any disputes arising out of this Agreement will be finally
resolved by binding arbitration”.
• This clause is probably enforceable because it clearly requires
the parties to arbitrate disputes. However, it does not achieve
the goal of an arbitration clause, which is to stay out of court.
Make sure to avoid over specificity:
• Rather than providing insufficient detail, the drafter provides
too much.
• Don’t take it as a challenge to show how many terms have
been invented.
• Over specificity may create a situation where the same is
extremely difficult to put into practice.
“The Arbitration shall be conducted by three arbitrators, each of
whom shall be fluent in Spanish and shall have twenty or more
years of experience in the design of buggy whips, and one of
whom, who shall act as chairman, shall be an expert on the law
of the Spanish Empire”.
Make sure to not have unrealistic expectations:
“The claimant will name its arbitrator when it commences the
proceeding. The respondent will then name its arbitrator
within seven (7) days, and the two so named will name the
third arbitrator, who will act as chair, within seven (7) days of
the selection of the second arbitrator. Hearings will commence
within fifteen (15) days of the selection of the third arbitrator,
and will conclude no more than three (3) days later. The
arbitrators will issue their award within seven (7) days of the
conclusion of the hearings.
• It is good to have a deadline or time frame but avoid being
stringent.
• Time frame should be such that it is definite but leaves space
for flexibility.
• Solution is like arbitration to be completed in 90 days or in a
certain number of hearing etc. However, same would depend
on the nature of transaction underling the main contract
Make sure to not be litigation envy:
• Avoid asking the tribunal to follow court rules.
• It should be informal and for speedy disposal of disputes
rather than going through the court procedures.
Make sure to not be overreaching:
• Avoid the temptation to tilt the arbitration process in favor
of his or her client.
Chapter IV:
Factors which must be
kept in mind
Jurisdiction:
• The jurisdiction of the arbitral tribunal is conferred by the
arbitration clause and an arbitral tribunal has no jurisdiction
to entertain any matter not referred to it by the parties.
• Whether an arbitration clause will confer jurisdiction on an
arbitral tribunal to entertain any form of dispute arising from
the substantive or underlying contract depends on whether
the clause is broad enough.
• Broad clause:
“Any dispute or difference which may arise in respect of this
agreement or any of the provisions of this agreement, or out
of or in connection with this contract shall be settled by
arbitration”
• The words 'disputes relating to' or 'arising in connection with'
the contract are wider than disputes 'arising under' the
contract, which a court may interpret as covering only
contractual claims.
• Narrow clause:
“Any dispute or difference arising hereunder”
Funding:
• Parties are liable for the fees & expenses of an arbitral
tribunal in equal shares.
• If, a tribunal’s fee is incomplete, the tribunal may suspend or
terminate the arbitration.
• Situation may arise where a party may stop or refuse to pay
its share of arbitration fees. If this happens, it will mean that
the tribunal’s fee is incomplete and will result in delay,
frustration, stifling of arbitration, suspension and termination
of arbitration
• Most of the known arbitration laws and institutional
arbitration rules does not provide for a solution to such
situation.
• If, non-defaulting party is allowed to pay the entire fees, then
the arbitration proceeding may be subject to issues like:
o Whether the non defaulting party is rich enough to pay the
entire fees
o Whether the non defaulting party would be able to recover
part of the fees from the defaulting party and at what cost
o If the award is passed in favour of the non defaulting party
– same may be subject to issue of biasness.
• Solution - to include in the arbitration agreement that each
party shall continue to pay its shares of the fees and in the
event of default, it shall be deemed that the defaulting party
has will fully admitted to the case of the non defaulting party.
Substantive Law:
• This is the law that governs validity, interpretation,
performance, breach & termination of the underlying
contract, the rights & obligations of the parties therein and
the level of damages. E.g. Indian Contract Act.
• The tribunal will apply Indian Contract Act to adjudicate the
dispute.
• National Thermal Power v. Singer Company and Ors, AIR
1992(3) SCC 551
“The expression proper law of a contract refers to the legal
system by which the parties to the contract intended their
contract to be governed. When the intention of the parties to
a contract with regard to the law governing the contract is not
expressed in words, their intention is to be inferred from the
terms and nature of the contract and from the general
circumstances of the case, and such inferred intention
determines the proper law of the contract.”
Law governing arbitration Agreement:
• National Thermal Power v. Singer Company and Ors, 1992(3)
SCC 551
“The law governing the arbitration is not the same law which
governs the contract, but it is the law which is in force in the
country in which the arbitration is being conducted.”
“The validity, effect and interpretation of the arbitration
agreement are governed by its proper law. Such law will decide
whether the arbitration clause is wide enough to cover the
dispute between the parties. Such law will also ordinarily decide
whether the arbitration clause binds the parties even when one
of them alleges that the contract is void, or voidable or illegal or
that such contract has been discharged by breach or
frustration.”
Procedural Law:
• Referred as the Lex Arbitri or Curial Law.
• Curial law is the law governing the arbitration proceedings.
Sumitomo Heavy Industries Limited v. ONGC Limited and
Others, AIR 1998 SC 825
• To determine the Curial Law in the absence of express choice
of the parties, it is first necessary to determine the seat of
arbitration.
• This is the law that governs the law of the arbitration
• Ascertaining the power of the tribunal to rule on its
jurisdiction
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The conduct of the reference
The form and finality of award
Determines who administers the arbitration
Parties may choose a national law to govern their arbitration
and as well appoint an institution to govern the arbitration.
• It is desirable that parties agree on this at the time of the
agreement.
• Danger inherent in intending to agree on this later is that
parties are not likely to agree once a dispute has arisen
between them.
• Dozco India (P) Ltd. v. Doosan Infracore Co. Ltd., (2011) 6 SCC
179
“The curial law, i.e. the law governing the conduct of the individual
reference.”
“The curial law governs; the manner in which the reference is to be
conducted; the procedural powers and duties of the arbitrator;
questions of evidence; the determination of the proper law of the
contract.”
Language:
• Language for conduct of arbitration.
• May be different from the language of the contract.
Number of Arbitrators to be appointed:
• Whether sole or more than two arbitrators
• Note that cost of arbitration will shoot if more than one
arbitrator
• If there are more than two parties to the arbitration
agreement, the drafting may need to be adjusted.
Voiding the Arbitration Agreement:
• Always use the word ‘shall’.
• Don’t use ‘may’
• The agreement must be certain. It should not be optional but
should be mandatory.
• Improperly drafted or unclear agreement - may be void and
not enforceable.
Institutional or ad hoc:
• The clause must state whether parties want arbitration to be
administered and supervised by a recognized arbitral
institution or whether they want an ad hoc procedure.
• In an ad hoc procedure one can still use a set of institutional
rules or agree to their own rules and procedures.
Sovereign immunity:
• Sovereign, or state, immunity is the immunity of a state from
being sued in the courts of another state.
• If one is contracting with a state or state body one may need
to consider including a waiver of any immunity, both as to
jurisdiction and execution, in the arbitration agreement.
• The choice of seat is again very important here.
• Where the defense of sovereign immunity is raised, the
tribunal's ability to consider that defense will be determined
in accordance with the law of the seat of the arbitration.
• If one is contracting with a state, one needs to ensure that the
arbitration clause stipulates a seat where the law follows a
restrictive approach on sovereign immunity - for example,
London or Geneva as opposed to the People's Republic of
China.
Seat:
• ‘Seat’ is interchangeable in usage with term ‘place’.
• Note that ‘seat’ is different from ‘venue’. Both may be same
or may be different.
• It determines the national law governing the arbitration.
• National court exercises supervisory and supportive roles.
• Whether an arbitral award will be recognized and enforced.
• Solution: always mention the seat of arbitration e.g. London
• Note and be careful: Enforcement of an award will be
dependent whether the seat is in a country that is party to an
international convention such as the New York Convention.
One must bear in mind that the New York Convention
enforces awards by reference to the seat of the arbitration,
not the country that the parties come from. E.g. Republic of
Yemen is not a signatory, so an arbitration award made in
Yemen is not enforceable under the New York Convention, but
a Yemeni company can enforce an award under the New York
Convention made in Paris.
Venue:
• Parties agree for convenience to hold arbitration in a
particular place.
Place:
• Interchanged in usage with ‘Seat’ and also ‘Venue’.
Chapter V:
Section 9 of the 1996 Act
• It provides for the making of orders for interim relief to
parties before, during or after arbitration.
• Its origins in Article 26 of the UNCITRAL Arbitration Rules,
1976 but differs from this provision insofar as the latter is
restricted in its elaboration of specific grounds under which
interim relief can be claimed.
• In the case of Jindal Vijayanagar Steel (JSW Steel Ltd.) v Jindal
Praxair Oxygen Co. Ltd., (2006) 11 SCC 521:
o Mumbai was the seat
o The arbitration clause specifically provides for a dispute
resolution meeting as a precondition for invocation of the
arbitration clause – such meeting was held in Mumbai.
o The pipeline supply agreement was approved by the Board of
Directors of the appellant Company in Bombay.
o The agreement amended in Bombay.
o The entire senior management of the appellant is located at
Mumbai.
o The appellant had its corporate office at Mumbai.
o Appellant carrying on business at Mumbai
o The appellant shifted its registered office to Mumbai during the
pendency of Section 9 petition in the Bombay High Court.
• Swastic Gases P. Ltd v Indian Oil Corpn Ltd, Civil Appeal No.
5086 of 2013 (Arising out of SLP (C) No. 5595 of 2012):
“though the parties had agreed to the place of arbitration
being Kolkata conferring jurisdiction to the Courts of Kolkata,
this does not oust jurisdiction of Court where the cause of
action has arisen”.
• Bhatia International v. Bulk Trading AIR 2002 SC 1432:
“...In cases of international commercial arbitrations held out
of India provisions of Part I would apply unless the parties by
agreement express or implied, exclude all or any of its
provisions. In that case the laws or rules chosen by the parties
would prevail....”
• The law laid down by in Bhatia case was subsequently
followed in 2008 judgment of Venture Global Engineering v.
Satyam Computer Services Ltd. and Another, (2008) 4 SCC
190.
• In Indtel case, [2008] 10 SCC 308, the courts adopted the
power to appoint arbitrators in arbitrations seated outside
India pursuant to Section 11 of the Act.
• Bharat Aluminium Co. (2012) 9 SCC 649
“...In a foreign seated international commercial arbitration, no
application for interim relief would be maintainable under
Section 9 or any other provision, as applicability of Part I of the
Arbitration Act, 1996 is limited to all arbitrations which take
place in India. Similarly, no suit for interim injunction simplicitor
would be maintainable in India, on the basis of an international
commercial arbitration with a seat outside India....
• Bharat Aluminium Co. (2012) 9 SCC 649
o Para 96 changes the law as was settled by Jindal Case.
o The term "subject matter of the arbitration" cannot be
confused with "subject matter of the suit".
o The term "subject matter" in Section 2 (1) (e) is confined to
Part I.
o The provision in Section 2(1) (e) has to be construed keeping
in view the provisions in Section 20 which give recognition to
party autonomy.
o The legislature has intentionally given jurisdiction to two
courts i.e. the court which would have jurisdiction where
the cause of action is located and the courts where the
arbitration takes place.
o This was necessary as on many occasions the agreement
may provide for a seat of arbitration at a place which would
be neutral to both the parties. Therefore, the courts where
the arbitration takes place would be required to exercise
supervisory control over the arbitral process.
• In Vachaspati Case, 2013 SCC Online Bom 1296 & Stewarts
Case, 2014 SCC Online Bom 18:
o Interpreted BALCO Case and in particular para 96.
o That it applies prospectively and law of land.
o Court of venue and also cause of action both have
jurisdiction.
o Appeal pending in Supreme Court.
• Problems:
o Balco appear to have used ‘seat’ and place’ as
interchangeable.
o Now two courts will have jurisdiction.
o Have not expressly overruled Tindal Case.
o Affect of section 42 of the 1996 Act – if first application in
Venue Court then what happens to sections 34 and 36
applications.
Chapter VI:
Check list
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Have the parties been properly identified?
Is there a clear reference to arbitration?
What disputes are to be referred to arbitration?
Where is the seat of arbitration to be?
How is the substance of the dispute to be determined?
What is the law of arbitration to be?
Is there a choice of the procedural law?
How will the tribunal be appointed?
Is there an appointing authority?
Is the tribunal required to have any particular attributes or
qualification?
• How many members of the tribunal will there be?
• Are procedural and/or evidential rules or the rules of an
institution to be adopted, and, if so, which ones?
• What will be the language of arbitration?
• Is specific provision for confidentiality required?
• Should applications and appeals to the court be excluded (to
the extent permissible under the Arbitration and conciliation
Act, 1996)?
• Is a waiver of sovereign immunity required?
• Are provisions for multi party arbitration, consolidation or
concurrent hearings required?
Chapter VII:
Conclusion
• Please do not narrow your thought process with terms like
‘corporate’.
• Law evolves with time through its interpretations by the
courts etc.
• Litigation, in whatever form, goes to the root of legal system
and practice.
• Ensure that litigation is one of the first foundation step in your
legal career.
• Whatever transaction work – you have to know that no
commercial relation is for eternity.
• Whatever transaction work – you draft documents because
parties want certainty and do not trust each other.
• Whatever transaction work – you have to anticipate the worst
outcome i.e. litigation
• Whatever foundation work - you have to think the way out i.e.
exit.
• For all planning you need to control your ideas/thoughts.
• To control ideas/thoughts - you need to know the facts.
• To control facts, you should do the following:
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Arrange the file date wise chronologically
Paginate and use post tic
Make List of Dates
Get the List of dates approved by Client
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Remember Client is the creature of the facts
Then look at the relevant law
Draft the Arbitration Agreement
Drafting is the process by which you have to
accommodate the thought within the four corner of the
paper.
o Ensure that you use simple, no Latin phrase and that a
third party is able to read and understand what you have
written.
LAW IS COMMONSENSE MADE
COMPLICATED