What is Arbitration Agreement ? What is Valid Arbitration Agreement ?

Introduction

Arbitration is method of dispute resolution between the parties. Parties are king in a sense that they can decide judge(Arbitrator), procedure, extent to which arbitration should apply and disputes which may be submitted to arbitration.

All this arrangement as to arbitrator, procedure, extent and types of disputes are in form of arbitration agreement. Arbitration agreement is whole and sole of entire process.

What is this "Arbitration Agreement" ? What are valid agreements ? How can this agreements be terminated ? Why should we even study this ? Well, we will try to find answers to these questions in this blog.

What is "Arbitration Agreement" ?

For example, Mr Nirav and Mr Mallya enter into contract, where Mr Mallya is seller who agrees to supply 100 cans of Kingfisher beers daily to Mr Nirav of certain quality. Following things could happen

Mr Mallya could supply cow urine saying it's beer!

Mr Mallya could supply low quality beers!

Mr Mallya may skip supplies for particular days.

Mr Nirav may run away from country and default the payment.

So there are chances of many disputes. However both of them agreed that in case of dispute, they will go to Mr Anil for their dispute resolution, at said place on said terms. This "agreement" among them would in layman's term is nothing but "Arbitration Agreement". Well everybody know this!

So, How this is defined in Arbitration and conciliation Act ?

Section 2(1)(b) along with Section 7 gives comprehensive definition of "Arbitration Agreement". Section 2(1)(b) states "Arbitration Agreement" means an agreement referred to in section 7. Chapter 2 in Part I of act deals with "Arbitration Agreement" and Section 7 specifically deals with the definition.

Section 7 states that "Arbitration Agreement" is an agreement between parties to submit all or certain disputes to Arbitration, which have already arisen or may arise in future in respect of some legal relationship. This legal relationship could be contractual or may not be contractual. 

It also provides that such an agreement must be in written format. It could also be exchange on "whatsapp". really!. Section further provides what constitutes written agreement. Below are things which will be considered as written document

1. Document signed by the parties
2. An exchange of letter, telex ,or telegrams or other telecommunication mean (Which include whatsapp too!)
3. Exchange of Statement. For example A writes we will go to Arbitrator and B doesn't deny this, it mean B also have agreed implicitly for arbitration.

Sometimes, Arbitration Agreement could be separate document. In contract it is provided that parties may refer this document. This will also be count as an Arbitration Agreement with respect to that contract. This is also known as Arbitration Agreement through reference.

In nutshell below are essential ingredients of Arbitration Agreement

1.  An Agreement with intention of parties to submit the dispute
2.  It must be in writing
3.  Relating to either present or future dispute
4.  All other necessary things for valid contract  (Consent, capacity to contract,non ambiguity etc)

Now let's understand requirement of valid arbitration agreement.

What are things needed for valid arbitration agreement?

Written format

Unlike contracts, which can be in written as well as oral format, Arbitration Agreement MUST be in written format. It CANNOT be in oral format.

Arbitration Agreement could be in multiple documents. Neither it have particular form or draft.

Clear Intention of parties and consent

There must be clear formulation of intention of parties in Arbitration Agreement. Consent of both the parties must have clearly in agreement. Vague words must not be used to denote the intention.

Existence of legal relationship between parties

There should be legal relationship between parties. When parties enter into contracts then each one have certain obligation and rights. There exist legal relationship between them (Remember Hohfield Analysis ?).

 The term "Defined Legal Relationship" is copy-pasted from UNCITRAL model law. Also you cannot go to Arbitration for illegal activities!

Finality of award and binding

In agreement, it cannot be mentioned that parties will not bound by award/decision by an Arbitrator.What's the point then ?. Such agreement will not be valid.

Parties must have to agree that whatever award given by neutral third arbitrator would be binding and final. However there are certain grounds upon which appeal can be filed, like partiality of arbitrator, invalid procedures etc.

 

Existence of Dispute or future dispute

There must be some existence of dispute, or possibility of certain disputes which will be referred to Arbitration.

How do you terminate Arbitration Agreement ?

By consent

It may happen than parties find litigation more suitable than arbitration. Then by mutual understanding they can terminate arbitration agreement.

Termination of main contract

Arbitration agreement is generally a side hero in main commercial contract. In above example of Mr Nirav and Mr Mallya, there was contract of supply of beer. Now Mr Nirav wants whisky so he rescind the current contract(Novation). After expiry of main or principal contract, any agreement incidental to principle contract will be terminated.

Death of Parties

In Partnership, when partner dies, partnership is dissolved (Unless other partners agreed to continue). However in case of arbitration agreement, it would be enforceable by or against the legal representative of party.

Operation of Law

If Modiji or parliament passed law banning Arbitration(Like demonetization!!), then arbitration agreement would be void.  Arbitration agreement would render useless if any law contrary to what is mentioned in arbitration agreement is passed.

Legalfundaa