Essentials of a Valid Arbitration Clause

The Arbitration and Conciliation Act, 1996 (hereinafter “Arbitration Act”) was enacted to consolidate laws relating to domestic arbitrations, international commercial arbitrations and enforcement of arbitral awards. An arbitration clause is a vital part of contractual agreements, as it lays down the foundation for dispute resolution. It states that if any dispute has arisen or may arise between the parties, it shall be resolved by referring the dispute to an impartial third party, rather than resorting to litigation in courts.  

In India, Sections 2 and 7 provide the essentials for drafting a valid arbitration clause. In accordance with Section 7 of the Arbitration Act, the arbitration agreement may be either in the form of a clause or a separate agreement. It must be in writing, signed by the parties and must indicate the intention of the parties to refer disputes to arbitration. An arbitration agreement can be formed through a signed document, an exchange of communications (including electronic means), or an exchange of claim and defence. A vague and ambiguous arbitration clause will lead to challenges during reference to arbitration and in further proceedings. 

One of the main requirements for an arbitration agreement to be enforceable is that the impugned dispute must be ‘arbitrable in nature’. The dispute should not be barred for reference to arbitration by law. For instance, the following disputes are non-arbitrable:

1. Disputes dealing with criminal offenses.

2. Disputes dealing with insolvency and winding up of companies.

3. Disputes dealing with guardianship, custody and matrimony.

4. Disputes dealing with tax and revenue. 

Landmark judgments delivered in K.K. Modi vs K.N. Modi & Ors, 1998 (3) SCC 573 and Vidya Drolia vs Durga Trading Corporation, (2019) 20 SCC 406 are relevant on these aspects.

Otherwise, the arbitration clause/agreement must clearly mention the seat and venue of the proceedings. Seat is important as it determines the supervisory jurisdiction, the procedural law, appropriate forum and enforcement rules that will govern the proceedings. This must be mutually decided by the parties involved. Such specification avoids confusion, especially in international commercial arbitrations. Specifying the language is also crucial as it ensures that all documents, hearings, and awards are understood by all parties involved. 

Procedure for appointment of arbitrators must also be included in the arbitration clause. As per Section 11(2) of the Arbitration Act, parties are free to choose their arbitrators. Parties can also name arbitrator(s) in the arbitration clause or prescribe qualifications for the arbitrator(s). However, one party cannot have complete authority in appointment. Thus, the appointment process must be fair and impartial. The number of arbitrators shall be odd. The qualification of these arbitrators must be according to the nature of dispute. Some disputes require technical expertise while others require legal expertise. 

An arbitration agreement should be sufficiently stamped in compliance with Indian Stamp Act, 1989. Unstamped agreements are generally inadmissible in Courts as clarified by the Supreme Court in N.N. Global Mercantile Private Limited vs. Indo Unique Flame Ltd. and Ors., MANU/SC/0445/2023. however, not inherently void. The insufficient stamping or non stamping can be cured by impounding or otherwise. An arbitration clause may also include a confidentiality provision which reinforces that the proceedings, details and the outcome of the dispute will remain private. Costs may also be specified in the arbitration clause. The clause shall outline how the costs of the arbitration will be borne, whether equally shared or by the losing party. 

Arbitration as a means of dispute redressal is being considered as a primary method of resolution especially among businesses and corporations. Thus, the need for a meticulously drafted arbitration clause has become more pronounced in today’s legal climate, in order to avoid challenges based on jurisdiction and constitution of the arbitral tribunal.