Drafting Arbitration Agreements
Introduction
The proper drafting of any sort of contract or agreement between parties is a pre-requisite for ensuring a smooth and glitch-free functioning of the terms of the agreement. If the agreement itself is drafted in a manner which gives rise to numerous vague interpretations of the terms, there are bound to be disputes between the parties in the course of fulfillment of the terms. In such a scenario, it becomes all the more important to properly draft the dispute resolution clause of the agreement.
A dispute resolution clause in an agreement aims to delineate the process that is to be followed by the parties in case a dispute arises between them. This process is decided by the parties based upon a mutual understanding that they would earnestly attempt to resolve their dispute through the means provided for. Most often, this means that the parties are agreeing, in good faith, to sacrifice their right to head for litigation in courts and instead, would resolve their dispute through acceptable alternate modes such as arbitration, mediation, negotiation and conciliation to name a few.
An agreement by parties to refer to arbitration, all or some disputes which have arisen or will arise on a future date between them with reference to a defined legal relationship, whether contractual or not, is known as an arbitration agreement[1]. The intention behind the formation of an arbitration agreement between two parties entering into a contract is that whenever a dispute arises between them with regard to the contract, they could resolve the same without having to approach the courts. Not only would such a manner of dispute resolution see to the fact that the parties obtain a timely resolution to their dispute thus saving costs, but it also ensures that an enforceable and binding decision is delivered by the arbitrator. To further this intention and bring it into practice, the parties can enter into an arbitration agreement.
It is important to note at this juncture that an arbitration agreement, while a part of the larger contract or agreement, is a separate agreement in itself. In the case of Mulheim Pipe Coatings v. Welspun Fin Trade Ltd.[2], the Court explained the doctrine of separability of the arbitration agreement as follows, “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.”
The United Nations Commission on International Trade Law’s Model Law on International Commercial Arbitration, 1985 also incorporates the doctrine of separability of arbitration agreements in the following words contained in Article 16(1), “an arbitration clause which forms part of a contract shall be treated as an agreement independent of the other terms of the contract. A decision by the arbitral tribunal that the contract is null and void shall not entail ipso jure the invalidity of the arbitration clause.” This position is also asserted in the Indian jurisprudence through the form of section 16(1)(b) of the Arbitration and Conciliation Act, 1996.
Analysis
Essentials of an Arbitration Agreement
In this section, the researcher will discuss the essential elements of any arbitration agreement, the requirement of which is indispensable to the proper functioning of the entire process. Without any of these elements, the arbitration agreement would not hold ground in the eyes of law. Let us take these elements one by one.
1) Written Agreement — The first among all is the requirement of a written agreement. It is absolutely essential that the agreement mandating arbitration be in written form. The following factors[3] are to be considered in determining whether there exists a written agreement or not: (a) it is in the nature of a document; (b) it is through exchange of letters or other means of telecommunication providing a record of the agreement; © it is in the form of an exchange of statements where the existence of the agreement is alleged by one party and not disputed by the other.
2) Intention — This is a particularly important factor for deliberating on the presence of an agreement to arbitrate. The intention of the parties to the agreement plays a crucial role in interpreting the situation as to whether the parties made a consensual agreement and were in the same frame of mind or not. In the case of Zhejiang Bonly Elevator Guide Rail Manufacture Co. Ltd vs. Jade Elevator Components[4], the Supreme Court held that the intention of the parties is important to ascertain the way forward when the dispute resolution clause is vaguely worded.
3) Signature — It is mandatory that the agreement bears the signatures of the respective parties in order to assure validity. It is not necessary that both parties put their signatures to a document putting forth the terms of the agreement, rather, one party can submit a signed agreement and the other can provide his/her signature in acceptance of those terms, thus constituting an agreement.
In a landmark case, K.K. Modi v. K.N. Modi[5], the Supreme Court outlined certain other requirements of an arbitration agreement as follows: first, it must clearly be mentioned in the agreement that the decision of the arbitrators will be binding; second, the agreement must specify the jurisdiction, or the governing laws, to be applied to the arbitration; third, the arbitrators would be given the power to determine the rights of the parties in a fair and judicial manner; fourth, the agreement to arbitrate must be intended by the parties to be enforceable in law; and fifth, the agreement should clarify that the arbitrators will only be rendering judgement upon disputes that have already arisen and formulated by the parties.
There are many other ancillary factors that an arbitration agreement can provide for in order to remove the vagueness from its provisions and eliminate any obstacles in the smooth implementation of the agreement for a speedy dispute resolution. In situations where such ancillaries are not dealt with in the agreement itself, the parties can get stuck in the technicalities of figuring out a mutually acceptable basis for proceeding with the arbitration, such as selecting the seat and language of arbitration, along with deciding the process for choosing the arbitrators.
A clause clearly mandating the seat of arbitration assumes special importance in international commercial arbitrations as it is also relied upon to ascertain the governing law of the entire process. If the seat is not pre-decided through the agreement, then the parties can struggle to come at a mutual decision on this front once the dispute has arisen, and this will slow down the dispute resolution process considerably. It is not mandatory that the seat and place of arbitration be one and the same. Further, it is extremely essential that the agreement provides for a step-by-step process for selecting the arbitrators, their number and qualifications.
Section 11 of the Arbitration and Conciliation Act, 1996 states that a person irrespective of her nationality may be appointed as an arbitrator, unless otherwise agreed by the parties. The parties can themselves agree on a procedure for appointing the arbitrator(s). Section 10 allows parties to determine the number of arbitrators, although it has to be an odd number.
Common Errors in Arbitration Agreements
In order to gain a proper understanding of the various facets of proper drafting of an arbitration agreement, it is worthwhile to take note of the common errors and mistakes committed by the professionals working in this field. Professor Frignani, of University of Turin, conducted a study[6] into the issues the generally plague the drafting of arbitration agreements. In the study, published in the Arbitration International Journal, the author has extensively listed and categorised the types of errors found in drafting of agreements and has also included several interesting case laws on the same.
The first category of errors is regarding the ambiguity as to whether the dispute is actually being referred to arbitration or not. The vague drafting of agreements leads to such an uncertainty where it cannot be said with finality if the parties have agreed to arbitrate or litigate. A clause mandating that the parties may refer the dispute to arbitration cannot be accepted as a valid one[7]. For instance, an agreement stating that in the event of a dispute, the parties would submit to arbitration while also naming the competent court to be approached if the dispute goes to litigation[8], would not be valid.
Then there arises the contentious issue as to the provisions for appeals against the arbitral awards to traditional courts. The position on this issue varies from country to country. In DeDiseno v. Mendes, the Court of Appeal in France had stated that a clause in the arbitration agreement which provides for approaching courts in appeal of the arbitral award, would be considered as void[9]. However, in the United States, courts have held that the intention of the party is of paramount importance and would prevail in deciding the course of action. Thus, if the intention of the parties was to provide for an appeal to the courts, then it would valid[10].
Next, there are the clauses in arbitration agreements that essentially grant one party the power to choose or opt for going to an arbitration tribunal or not. Professor Frignani has observed that such clauses are perfectly demonstrative of the power that is held and exercised by one party over the other. The implication of this clause is that if party A has the power to decide the course of action to be taken and party B decides to approach the court of law, then A can disrupt these proceedings initiated by B simply by electing to arbitrate instead. Quite recently, the Singapore Court of Appeal[11], in Wilson Taylor Asia Pacific Pte Ltd v. Dyna-Jet Pte Ltd, upheld the validity of such unilateral option clauses. Preceding this judgement, while courts in Italy, UK and Spain have upheld the unilateral clauses, those in France, Russia and Poland have rejected their validity[12].
With regards to the status of unilateral option clauses in India, there have been a few contrasting judgements from the Madras and Delhi High Courts. In Bhartia Cutler Hammer v. AVN Tubes[13], the Delhi HC decided that one party could not have the sole right to initiate arbitration as the Arbitration and Conciliation Act, 1996 was based upon the mutuality in forming arbitration agreement. In Emmsons International Ltd. v. Metal Distributors[14], the reasoning adopted was that a unilateral option clause would violate section 28 of the Indian Contract Act, 1872 and hence, were void. The Madras HC, in Castrol India Ltd. v. Apex Tooling Solutions[15] upheld unilateral validity clauses on the basis of the notion that mutuality was not a mandatory factor in arbitration agreements. Similarly, in Fuerst Day Lawson Ltd. v. Jindal Exports Ltd.[16], the unilateral option clauses were upheld by the Delhi HC.
Another common error found in arbitration agreements is the presence of, are more often than not, such conditions which are unimplementable by their very nature. In one rather fascinating example[17], the arbitration clause of the contract provided as follows, “Any dispute arising … shall be settled by a sole arbitrator … the arbitrator shall be expert in Swiss law and in the production of Arabic bread.” This led to a considerable amount of difficulty in finding a Swiss law expert who was also well-versed with the production of Arabic bread, or even the other way around. Ultimately, the request for arbitration had to be rejected as the clause was unenforceable.
The need to have a broad and all-encompassing arbitration clause that would cover all those sorts of disputes as are intended by the parties is very important. This is so because if the provisions are drafted narrowly, bringing only very few categories of disputes within its ambit, then it can allow the parties to bring in a hurdle in the way of arbitration as and when the dispute does arise in the future. One party can stop the arbitration proceedings by claiming that the interpretation of the clause does not permit arbitration for the type of dispute that had arisen. In Inghams Enterprises Pty Limited v. Hannigan[18], the importance of a well-drafted agreement was recognised by the New South Wales Court of Appeal.
The dispute resolution clause of the contract between the parties went as follows, “A party must not commence court proceedings in respect of a dispute arising out of this Agreement (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 of the contract provided first of all that the parties must proceed for mediation to resolve the disputes, first informally and then formally. Further, the clause mandated that if the dispute was regarding any monetary amounts owed by either party to the other and they failed to resolve that dispute within twenty-eight days of appointment of the mediator, then the parties must submit the dispute to arbitration.
When the contract was terminated, one of the parties claimed their loss of profits from the other. The mediation in this regard failed to materialise to any suitable resolution and hence the party was to commence arbitration. However, the opposite party approached the courts seeking for a stay on the arbitration proceedings. The Court held that since this matter fell within the scope of clause 23, the arbitration could proceed. On appeal to the Court of Appeal, the Court stated that the dispute was concerned with damages arising out of the termination of the contract, and not regarding any money owed to the other party under the agreement. Therefore, the Court of Appeal held that such a dispute could not be referred to arbitration. This decision highlights how important the proper drafting of arbitration clauses proves to be.
Arbitration Agreements and ODR
With the quick emergence of Online Dispute Resolution (ODR) procedures, especially during the COVID-19 pandemic when the functioning of the traditional modes of dispute resolution came to a halt, it has become quite necessary to analyse the validity of the present form of arbitration agreements to ascertain whether the same would be considered as valid and functional in law. Online arbitration has sufficient legal validity in terms of the Arbitration and Conciliation Act 1996. Section(s) 4 and 5 of the Information Technology Act, along with Section 65-B of the Evidence Act, mandate that electronic records and signatures can be given legal recognition. Moreover, Section 10A of the IT Act grants validity to electronic contracts. These provisions are in tune with the UNCITRAL Model Law on Electric Commerce, 1996 and the Model Laws on Electronic Signatures, 2001.
As specified in section 7(4) of the Act, an arbitration agreement need only be in written form, but it is not necessary that written form only refers to being on paper, rather the definition is very expansive and also recognises agreements entered into between the parties by exchange of emails or through any other means of telecommunication. Such agreements have been held to be valid and enforceable by the Supreme Court of India in Shakti Bhog Foods Ltd. v. Kola Shipping Ltd.[19] and also in Trimex International FZE Ltd. v. Vedanta Aluminum Ltd[20]. Nevertheless, even in agreements mandating online arbitration it is absolutely essential for the parties to specify technicalities such as the governing law, language, jurisdiction, procedure for selection of arbitrators, medium and procedure of arbitration and so on.
Conclusion
Therefore, it is of paramount importance that an arbitration agreement be drafted with the exercise of due care and diligence. Vague and confusing clauses providing for arbitration are a recipe for disaster as they not only lead to obstacles in the initiation of arbitration and resolution of disputes, but it also gives one party to pose unnecessary hurdles in the path of justice for the other party. Although there cannot be one standard form of agreement for arbitration as the sort of agreement would depend upon various factors such as the area of expertise involved etc. Hence, the parties to the agreement must make sure that they have the necessary deliberations regarding the technicalities of the proposed arbitration before finalising the agreement. A properly drafted arbitration agreement would ensure that dispute resolution proceeds smoothly.
Footnotes
[1] Section 7(1), Arbitration and Conciliation Act, 1996.
[2] 2013 SCC Online Bom 1048.
[3] Section 7(4), Arbitration and Conciliation Act, 1996.
[4] 2018 SCC Online SC 1503.
[5] (1998) 3 SCC 573.
[6] ALDO FRIGNANI, Drafting Arbitration Agreements, Arbitration International, Vol. 24, Issue 4, 2008, pp. 561–569.
[7] Calberson v. Schenker, (1998) Rev. Arb.
[8] Techniques de ITngenieur v. Sqfel, Tribunal de Grande Instance de Paris, 1 February 1979, (1980) Rev.
[9] (1995) Rev. Arb. 26.
[10] Lupine Tech. Corp. v. Kyocera Corp., 130 F.3d 884 (9th Cir. 1977).
[11] [2017] SGCA 32.
[12] Nishanth Vasanth, Rishabh Raheja, Examining the Validity of Unilateral Option Clauses in India: A Brief Overview, http://arbitrationblog.kluwerarbitration.com/2017/10/20/examining-validity-unilateral-option-clauses-india-brief-overview/, October 20.
[13] 1995 (33) DRJ 672.
[14] 2005 (80) DRJ 256.
[15] (2015) 1 LW 961 (DB).
[16] MANU/DE/3204/2009.
[17] ALDO FRIGNANI, Drafting Arbitration Agreements, Arbitration International, Vol. 24, Issue 4, 2008, pg. 567.
[18] [2020] NSWCA 82.
[19] AIR 2009 SC 12.
[20] (2010) 3 SCC 1.
