Arbitration agreements are drafts signed by two or more parties, who mutually agree to resolve any dispute related to the contract/business agreement between them through arbitration. This is a viable option considering parties may need to continue working together after the dispute is resolved, which is not quite possible in case they decide to resolve the dispute through litigation.
Although arbitration may result in taking up more time, lead to more expenses and be more tedious to deal with, a well drafted arbitration agreement can ensure you resolve disputes and mitigate risks without compromising any other aspect of the agreement between the parties.
What is the Scope of the Arbitration Agreement?
The scope of an arbitration agreement refers to the different types of disputes that may be referred to arbitration. An improperly drafted arbitration agreement can be the key factor for disputes and limit judicial authorities from getting involved in certain or all disputes between conflicting parties. The key aspects to consider while drafting such agreements are language, carve outs and the parties involved.
Commonly used terms like arising ‘out of’, ‘under’ or ‘in connection with’ can have different meanings, with some being broader than others.
Carving out certain kinds of disputes must be avoided wherever possible as it can potentially result in unanticipated consequences.
The parties entering into an agreement must be adept to do so. This basically means that the agreement should only be signed by parties against whom any award can be made. For example, consider a company and a director of the same company who have signed an arbitration agreement with a Fortune 500 company. While the company holds its own assets, the director’s assets are also those that belong to the company. As such, it is viable to enter into an agreement with the company, as it will be the entity that holds the assets to deal with awards against them.
What are the Essentials for an Arbitration Clause?
- Nominating/Appointing an Arbitrator
The number of arbitrators as well as their appointment process must be mentioned in the arbitration clause. It is imperative to comply with
Section 10 of the Arbitration and Conciliation Act, 1996, according to which
the number of arbitrators should not be even. If no number of arbitrators are specified, a sole arbitrator shall be appointed to oversee the dispute resolution process.
- As such, parties may mutually decide on any odd number of arbitrators and choose the process as per which the arbitrators shall be appointed as well.
- It is strongly recommended to appoint a single arbitrator for small and medium financial disputes and three arbitrators to oversee disputes related to a large amount of money. This is advised considering the cost of the arbitrator has to be borne by all parties involved in the dispute.
| You must define the timeline according to which the involved parties must make sure to comply with the rules. This is an important step as some parties may choose to take undue advantage and take too much time, which may defeat the intention of arbitration. |
You must determine beforehand the language in which arbitration shall be conducted in case of disputes. This will help avoid further disputes, the extra cost of translation and facilitate smooth arbitration proceedings. It is advisable to establish the language for such arbitrations to be that which is used in their primary place of business.
- Applicable Laws & Jurisdiction According to Seat & Venue of the Arbitration
Defining the laws and jurisdiction that shall be applicable in case of disputes is one of the most important aspects of any arbitration clause. The law defined beforehand governs arbitration, while the ‘Seat’ of arbitration determines the Courts that would have jurisdiction over such proceedings. The location defined as ‘Venue’ of arbitration shall be the place where arbitration shall take place.
| Note: If ‘Seat’ of arbitration is not defined, the ‘Venue’ shall be considered as the ‘Seat’ for arbitration proceedings. |
The arbitration clause should clearly state its applicability and define a provision to safeguard any class, collective or representative action, which includes action taken by a private attorney general and prevent the arbitration proceedings from being combined with any other proceedings. This is a crucial aspect as class arbitration is subject to a much less judicial review. As such, if a class action waiver is overturned, the company may demand for the entire arbitration clause and the claims decided upon in the Court shall be invalidated.
Defining how the arbitration costs shall be divided amongst the parties is an essential step in arbitration clause as well. This is crucial to ensure there are no issues later and the proceedings can be conducted smoothly. Although costs are generally equally divided between parties, in some cases, one of the parties involved may have to bear the entire expense.
Arbitration proceedings cannot be unilateral, where one of the parties chooses their employee as the arbitrator or only one of the involved parties has a say in appointing a sole arbitrator.
This was noted in the case of
TRF Ltd. vs. Energo Engineering Projects Ltd., where the Supreme Court held that an arbitration clause that allows the appointment of a sole arbitrator shall be considered invalid if the appointed individual has some interest in the results of the arbitration.
Furthermore, such individuals are not only not allowed to act as arbitrators but may not appoint anyone in their place as well. This was mentioned by the Supreme Court in the landmark judgment of
Perkins Eastman Architects DPC vs. HSCC (India) Ltd., where it was provided that a sole arbitrator cannot be appointed by an individual who can be considered an interested party with regard to the arbitration result. This was a game changing scenario, as it resulted in nullifying the usual approach of the more influential party in an agreement getting to choose an arbitrator for proceedings. Now, they must take the consent of the other party and take their choice into consideration as well.
- Applicability in Case of Changes
Arbitration clauses are actually an entirely separate agreement that becomes a clause when added to a contract. As such, even when a contract is deemed null and void, the arbitration clause still exists, as it is a completely different and independent contract. To ensure the arbitration clause is applicable in case of some changes in a part of the clause, a relevant provision for the same must be added stating that the remainder of the arbitration clause shall be applicable in case any part of the clause is changed or invalidated.
In case something needs to be excluded from arbitration proceedings, there should be an exclusive note stating the same. There may be instances where the parties may not wish to resolve every small dispute via arbitration and may choose to exclude all small claims, claims related to intellectual property rights and claims intended for injunctive relief from the arbitration clause.
- Binding Nature of Arbitration Results
Specifying that the result of arbitration proceedings shall be final and binding is imperative to avoid any disputes from being further continued after arbitration. The only option left for the dissatisfied party would be to appeal in the High Court and challenge the award under Section 34 of the Act. Besides, as noted in the case of
MMTC Ltd. vs. Vedanta Limited, parties cannot challenge an award based on merits.
Conclusion
Although there are many things to keep in mind, it is imperative to keep a clear mind and not over-analyze the potential issues you may encounter. On the contrary, it is advisable to have a simple approach when drafting arbitration clauses and focus on accurately drafting the clause and the contract. Besides, to avoid litigation and unnecessary hassles that follow, you must pay extra attention when it comes to drafting the contract and ensure it tackles potential risks and is not ambiguous in any way at all.
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