Arbitration In IndiaDrafting of an effective Arbitration Agreement

Introduction – Alternative Dispute Resolution Mechanism

The Indian judicial system is known for its heavy burden, long years of litigation which is the reason, alternative dispute resolution mechanisms have been put into place to resolve disputes speedily and arrive at a settled situation for parties under a commercial understanding.

Arbitration is one of such alternative dispute resolution mechanisms that is governed by the Arbitration & Conciliation Act, 1996 which upholds party autonomy and speedy disposal. The system is constantly evolving and more and more business contracts acknowledge the method of arbitration as their mode of dispute resolution.

The same is emerging as a preferable means and a topic of interpretation by the Courts to make India a suitable seat for arbitration around the globe.

ARBITRATION CLAUSE – SEPARABILITY                                                                                                                                   

Section 7 of the Arbitration & Conciliation Act, 1996 enshrines the essentials of an Arbitration Agreement. It states that the Agreement should be in writing and it can either be a separate agreement or be a part of the clauses of the Principal Agreement.

However, it is important to draft a valid arbitration clause in order to resort to the ADR mechanism. Therefore, it is necessary to take appropriate legal advice before incorporating an arbitration clause in an Agreement so that parties do not face invalidity when the dispute arises or face long court hearings discussing the intention of the parties.

If the Agreement is declared null and void, it is a settled principle of law that the Arbitration clause/agreement is considered as a separate agreement and therefore, it survives even after the rest of the Agreement is declared void.

Any invalidity in the Agreement does not affect the arbitration clause and is considered to be an independent and separate contract.

The same is also discussed in the case of Mulheim Pipecoatings GmbH v. Welspun Fintrade Ltd. 2013 SCC Online Bom 1048:

“The consequence of the doctrine of separability has been explained in Russell on Arbitration 14 as follows:

Consequences of separability. The doctrine of separability underlines the potential width of an arbitration agreement because it establishes that an arbitration agreement has a separate life from the matrix contract for which it provides the means of resolving disputes. This enables the arbitration agreement to survive breach or termination of the matrix contract of which it forms part. The consequence of this separate existence is that even if the matrix contract has been brought to an end, for example by accepted repudiation or frustration, the arbitration agreement continues in being in order to deal with any disputes in respect of liabilities under the matrix contract arising before or after termination.”ig Russell on Arbitration restates the position that Section 7 of the Arbitration Act, 1996 in the U.K. enables the arbitration agreement to survive not just the termination or breach of the matrix contract but even if the contract in which it is contained is regarded as invalid, non-existent or ineffective. Moreover, even where the matrix contract is held to be void, the arbitration agreement may still be upheld as a valid and independent agreement so that any dispute must be referred to arbitration.”

Australian Court- Scope of Arbitration Agreement was Narrow

However, it becomes important to have a steady arbitration clause covering all disputes and damages and not to draft it narrowly. Like in the case of Inghams Enterprises Pty Limited v. Hannigan [2020] NSWCA 82 before the Court of Appeal, New South Wales on 04.05.2020 delivered a judgment enshrining the importance of a well-drafted Arbitration Agreement.

The parties had entered into a chicken growing contract with the following dispute resolution clause under Clause 23.1:

A party must not commence court proceedings in respect of a dispute arising out of this Agreement (“Dispute”) (including without limitation any Dispute regarding any breach or purported breach of this Agreement, the interpretation of any of its provisions, any matters concerning a party’s performance or observance of its obligations under this Agreement, or the termination or the right of a party to terminate this Agreement) until it has complied with this clause 23.”

Clause 23 made provision, in sub-clauses 3 and 4, for the initial informal and then formal mediation of disputes. Clause 23.6 provided as follows:

23.6.1   the Dispute concerns any monetary amount payable and/or owed by either party to the other under this Agreement, including without limitation matters relating to determination, adjustment or renegotiation of the Fee under Annexure 1 or under clauses 9.4, 10, 11, 12, 13 and 15.3.3; and

23.6.2   the parties fail to resolve the Dispute in accordance with Clause 23.4 within twenty eight (28) days of the appointment of the mediator then the parties must (unless otherwise agreed) submit the Dispute to arbitration using an external arbitrator (who must not be the same person as the mediator) agreed by the parties or, in the absence of agreement, appointed by the Institute Chairman.”

On termination of Contract by the supplier of chickens, the purchaser claimed loss of profits. On failure of mediation, the supplier commenced proceedings in the Supreme Court to restrain the referral to arbitration. However, the Court held that the Purchaser fell within the Scope of clause 23 and was entitled to damages claim to arbitration under Clause 23.6.

Therefore, the Appellant approached the Court of Appeal.

The Appellate Court declared that the as the Dispute was with respect to damages and not any amount payable or owed under the Agreement, the same was not liable to be referred to Arbitration.

The Court construed the terms “concerns” and “under this Agreement” to hold that the arbitration clause was narrowly drafted.

Conclusion

An arbitration agreement should be meticulously drafted while anticipating various factors of the transactions. If there exists an iota of doubt then an expert guidance shall be resorted to so that even under dispute you should not lose even before an award is passed.It is imperative to  include as to which disputes can be referred to an arbitration  and the same needs to mentioned with the governing law, seat of arbitration, venue of arbitration, panel of arbitrators, etc., in case of an ad hoc arbitration. 

While in case of an Institutional Arbitration, the parties can just submit their disputes to the said Institutions taking recourse to their Model Clauses.Time has come when a more conscious approach be taken as arbitration can be resorted under online dispute resolution as well and these aspects can create a difference in the times to come.