The Arbitration Agreement

Introduction

At the heart of every arbitration lies the arbitration agreement. Without it, there can be no arbitration, because arbitration is founded on party autonomy : the consent of the parties to submit disputes to a private tribunal rather than courts.

The arbitration agreement is therefore not just a contractual clause; it is a jurisdictional document that determines whether disputes will be resolved through arbitration or litigation.

Globally, the arbitration agreement is governed by the UNCITRAL Model Law, 1985 (amended 2006), the New York Convention, 1958, and national legislations such as the Arbitration and Conciliation Act, 1996 in India.

What is an Arbitration Agreement?

Statutory Definition

• UNCITRAL Model Law (Article 7): An agreement by the parties to submit disputes, whether contractual or not, to arbitration.¹

• India – Section 7, Arbitration and Conciliation Act, 1996: An arbitration agreement is an agreement by the parties to submit to arbitration all or certain disputes that have arisen or may arise between them in respect of a defined legal relationship.²

Thus, an arbitration agreement can be:

• A separate agreement (standalone).

• An arbitration clause within a broader contract.

Essentials of a Valid Arbitration Agreement

1. Consent of the Parties

   • Arbitration is consensual; parties must voluntarily agree.

   • Courts cannot impose arbitration without consent (Wellington Associates Ltd. v. Kirit Mehta, 2000).³

2. Form–Writing Requirement

   • Arbitration agreement must be in writing.⁴

   • Writing includes documents, electronic communication, or exchange of statements where existence of agreement is alleged by one party and not denied by the other.

3. Defined Legal Relationship

   • The agreement must arise out of a contractual or legal relationship (e.g., partnership agreement, supply contract, joint venture).

4. Scope of Disputes

   • The agreement must clearly define the disputes to be referred. Ambiguity can render the clause unenforceable.

5. Intention to Arbitrate

   • Mere agreement to "negotiate" or "attempt settlement" is not arbitration.

   • Example: Jagdish Chander v. Ramesh Chander (2007)⁵ — clause must expressly or impliedly show intent to arbitrate.

6. Appointment of Arbitrators (Optional but recommended)

   • While not mandatory, specifying the number and manner of appointment of arbitrators avoids future disputes.

     
     

Validity of Arbitration Agreements

An arbitration agreement must meet general principles of contract validity:

• Capacity of parties.

• Free consent (not vitiated by fraud, coercion, or undue influence).

• The legality of the object.

Additionally, arbitration agreements may be invalid if:

• They are “pathological clauses” – vague, inconsistent, or unworkable.

• They exclude mandatory statutory rights (e.g., criminal liability cannot be arbitrated).

Case Reference

• K.K. Modi v. K.N. Modi (1998)⁶ the court held that an arbitration agreement must clearly indicate intention to arbitrate and must not leave discretion with one party.

  
  

Enforcement of Arbitration Agreements

1. Judicial Recognition

Courts are obliged to enforce arbitration agreements by referring parties to arbitration when a valid agreement exists.

• India (Section 8, Arbitration and Conciliation Act, 1996): Judicial authority shall refer the matter to arbitration if there exists a valid arbitration agreement.⁷

• UNCITRAL Model Law (Article 8): Similar obligation on courts.

  
  

2. Doctrine of Separability

• Arbitration clauses are treated as separate agreements, independent from the main contract.

• Even if the main contract is invalid, the arbitration clause may survive (Heyman v. Darwins Ltd., 1942).⁸

  
  

3. Kompetenz-Kompetenz Principle

• Arbitrators have the power to decide their own jurisdiction, including issues of validity of the arbitration agreement.⁹

• Recognized in Section 16 of the Indian Act and Article 16 of the UNCITRAL Model Law.

  
  

4. International Enforcement

• Under New York Convention, 1958, contracting states are obliged to recognize and enforce arbitration agreements.¹⁰

  
  

Landmark Cases

• Booz Allen & Hamilton Inc. v. SBI Home Finance Ltd. (2011)¹¹: The Supreme Court of India clarified which disputes are arbitrable — generally, disputes relating to rights in personam are arbitrable, while rights in rem are not.

• N. Radhakrishnan v. Maestro Engineers (2010)¹²: Fraud allegations were held non-arbitrable (though later narrowed in A. Ayyasamy v. A. Paramasivam (2016)).

• Bharat Aluminium Co. v. Kaiser Aluminium Technical Services Inc. (2012)¹³: Reinforced party autonomy and clarified limits of judicial intervention in foreign-seated arbitrations.

  
  

Practical Drafting Tips

• Use clear and unambiguous language: “All disputes arising out of or in connection with this agreement shall be referred to arbitration…”

• Specify:

  • Number of arbitrators.

  • Seat/place of arbitration.

  • Governing law.

  • Institutional rules (if any).

• Avoid “pathological clauses” that create uncertainty.

  
  

Conclusion

The arbitration agreement is the foundation stone of arbitration. Its clarity, validity, and enforceability determine whether the arbitration process will proceed smoothly or be bogged down in preliminary objections. By meeting statutory essentials, aligning with international standards, and learning from case law, parties can ensure their arbitration agreements stand the test of judicial scrutiny and serve their intended purpose: efficient and binding resolution of disputes.

References

1. UNCITRAL Model Law on International Commercial Arbitration, 1985, Article 7.

2. Arbitration and Conciliation Act, 1996 (India), Section 7.

3. Wellington Associates Ltd. v. Kirit Mehta, (2000) 4 SCC 272.

4. Arbitration and Conciliation Act, 1996, Section 7(4).

5. Jagdish Chander v. Ramesh Chander, (2007) 5 SCC 719.

6. K.K. Modi v. K.N. Modi, (1998) 3 SCC 573.

7. Arbitration and Conciliation Act, 1996, Section 8.

8. Heyman v. Darwins Ltd., [1942] AC 356 (HL).

9. Arbitration and Conciliation Act, 1996, Section 16; UNCITRAL Model Law, Article 16.

10. Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York Convention, 1958).

11. Booz Allen & Hamilton Inc. v. SBI Home Finance Ltd., (2011) 5 SCC 532.

12. N. Radhakrishnan v. Maestro Engineers, (2010) 1 SCC 72.

13. Bharat Aluminium Co. v. Kaiser Aluminium Technical Services Inc., (2012) 9 SCC 552.