Dispute Resolution

Validity of the Arbitration Agreement

What is Arbitration?

Arbitration is a legal procedure in which parties resolve disputes outside of the court system. In addition, it is a less formal way of dispute resolution. The World Intellectual Property Organisation defines arbitration as a procedure in which there is[1]:

  • submission of dispute
  • agreement of parties
  • arbitrators make a binding decision in the dispute

According to section 2(1)(a) of the Arbitration and Conciliation Act, 1996[2], arbitration includes all sorts of arbitration, whether or not administered by a permanent arbitral institution.

Firstly, it is a less time-consuming procedure of dispute resolution. Secondly, it is an effective way of resolving disputes. Thirdly, it helps willing parties to avoid the long route of litigation.

The Supreme Court in Dharma Prathishthanam v. Madhok Constructions (P) Ltd.[3] held that “arbitration is the reference of a dispute or difference between not less than two parties for determination, after judicially hearing both sides, by a person or persons other than a court of competent jurisdiction.”

What is an Arbitration Agreement?

An arbitration agreement is a precondition for the commencement of arbitral proceedings.[4] There must be a legal relationship between the parties. Contractual nature is not necessary. An arbitration agreement can be either of the three:

  • clause in a contract
  • separate agreement to arbitrate one aspect
  • separate agreement to arbitrate certain disputes

Either one aspect or certain disputes can be arbitrated. There can be a separate arbitration agreement or an arbitration clause in an agreement. Examples of arbitration agreements:

  • contract for goods and services
  • signing employment contracts
  • signing leases
  • cell phone contracts

Contractual relationships that have long-term consequences usually have an arbitration clause in their agreements.

Basic requirement of a Valid Agreement

The basic requirements of a valid agreement are as follows:

  • Parties must have legal capacity

Section 11 of the Indian Contract Act, 1872 defines capacity to contract. Also, the parties must have attained a majority. Under the Indian Majority Act, 1875, the majority age is 18 years.  In addition, parties must have a legal capacity to enter the agreement. After all, the validity of the arbitration agreement depends on the parties’ legal capacity to contract. A person should be of sound mind before entering an agreement.[6]

  • Consent of the parties

Parties to the arbitration agreement must give their consent freely.[7] Therefore, if one party coerced the other party, there would be no real consent. Thus, the arbitration agreement will be invalid.

Essentials of Valid Arbitration Agreement

Section 7 of the Arbitration Act deals with the essentials of a valid agreement.[5] The validity of the arbitration agreement depends on the following:

Written agreement

Section 7(3) of the Act states that the arbitration agreement must be in writing.[8] Valid arbitration agreements can be:

  1. a document signed by the parties;
  2. an exchange of letters, telex, telegrams or other means of telecommunication which provide a record of the agreement; or
  3. non denial of existence of arbitration agreement by other party

However, there is no particular form of the arbitration agreement.

Intention of the parties

The intention of the parties to refer the dispute to arbitration is sufficient. The use of words ‘arbitrator’, ‘arbitration’ is not necessary. The intention should not be a mere probability. However, it must be determinant in nature.

Separable from the main contract

A valid arbitration agreement is separable from the main contract. The validity of the arbitration agreement does not depend on the main agreement. The invalidity of the main agreement does not mean the arbitration agreement is also invalid.

Signature of the parties

The validity of the arbitration agreement depends on the signatures of both parties. Also, both parties should accept the terms and conditions of the agreement.

Binding Decision of the tribunal

It must be specified in the contract that the tribunal’s decision will be binding. In other words, the tribunal will be fair and equal to both parties. The agreement must be enforceable by law.

The intention of the parties plays a crucial role in the agreement. After all, arbitration agreements help in saving one’s time and efforts. Parties must keep in mind all the important points while drafting the agreement. Parties must be mutually and physically capable of entering into a contract with each other. The agreement must also contain all necessary information. Both parties must include all the crucial points in the arbitration agreement. In conclusion, the validity of the arbitration agreement is an important aspect.

[1] WIPO, ‘What is Arbitration’<https://www.wipo.int/amc/en/arbitration/what-is-arb.html> accessed 04 September 2021.

[2] The Arbitration and Conciliation Act, 1996, §2(1)(a).

[3] Dharma Prathishthanam v. Madhok Constructions (P) Ltd., 2005 (9) SCC 686.

[4] ‘Arbitration in India- A Handbook’ <https://www.lakshmisri.com/Media/Uploads/Documents/L&S_Arbitration_Booklet_Oct2014.pdf> accessed 04 September 2021.

[5] The Arbitration and Conciliation Act, 1996, §7.

[6] The Indian Contract, 1872 §12.

[7] UNCTAD, <https://unctad.org/system/files/official-document/edmmisc232add39_en.pdf> accessed 04 September 2021.

[8] The Arbitration and Conciliation Act, 1996, §7(3).

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