Arbitration Agreement under Arbitration and Conciliation Act, 1996

Statutory Definition:

Section 7 of the Arbitration and Conciliation Act, 1996 defines Arbitration Agreement as an agreement between the parties to a contract. The Arbitration and Conciliation Act, 1996 defined the arbitration agreement as below:

Section 7. Arbitration Agreement.

(1) In this Part, “arbitration agreement” means an agreement by the parties to submit to arbitration all or certain disputes which have arisen or which may arise between them in respect of a defined legal relationship, whether contractual or not.

(2) An arbitration agreement may be in the form of an arbitration clause in a contract or in the form of a separate agreement.

(3) An arbitration agreement shall be in writing.

(4) An arbitration agreement is in writing if it is contained in—

(a) a document signed by the parties;

(b) an exchange of letters, telex, telegrams or other means of telecommunication which provide a record of the agreement; or

(c) an exchange of statements of claim and defence in which the existence of the agreement is alleged by one party and not denied by the other.

(5) The reference in a contract to a document containing an arbitration clause constitutes an arbitration agreement if the contract is in writing and the reference is such as to make that arbitration clause part of the contract.

From bare reading of the abovesaid provision it is abundantly clear that the Arbitration agreement is an agreement between the parties by which they agree to settle their all or some disputes arising out of a transaction, through Arbitration. The Arbitration agreement is of great significance as by this agreement the parties to a transaction exclude themselves from regular judicial process of law (courts), for settlement of disputes arising out of the transaction. If there is an arbitration agreement between the parties, civil courts are barred from adjudicating the claim wholly covered under the arbitration agreement.

Interpretation:

1.         Not necessarily in writing:

Through various judgments the courts have interpreted Section 7 of the which gives multi dimensional approach to the arbitration agreement.

In Shakti Bhog Food Limited Vs. Kola Shipping Limited ((2009)2 Supreme Court Cases 134 ), it was observed by Supreme Court; “We would want to reiterate that as far as the provision of Section 7 of the Act is concerned, an arbitration agreement may be in the form of an arbitration clause in a contract or in the form of a separate agreement and furthermore an arbitration is considered to be in writing if it is contained in a document signed by the parties or in a exchange of letters, telex, telegrams or other means of telecommunication which provide a record of the agreement or an exchange of statement of claim and defence in which the existence of an agreement is alleged by one party and not denied by the other. So from the provisions of Section 7, it is clear that a charter party agreement need not be in writing signed by both parties and this could as well be made out from the acts of the parties to the agreement by way of their exchange of letters and information through fax, e-mails, etc.”

In this judgment the court held that the arbitration agreement need not be in writing and it can be inferred from the communication between the parties.

2.         Independent of the contract:

The arbitration agreement is an agreement independent of the contract between the parties.

In Firm Ashok Traders and another v. Gurumukh Das Saluja and others, AIR 2004 SC 1433, it has been categorically held that in the scheme of the new Act, the arbitration clause is separable from other clauses of a deed (there it was partnership) and it constitutes an agreement by itself. Further, in a recent decision of the Supreme Court in P. Manohar Reddy and Bros.v. Maharashtra Krishna Valley Development Corporation and others (2009) 2 SCC 494, the Court observed in paragraphs 27 & 28 as under: “27. An arbitration clause, as is well known, is a part of the contract. It being a collateral term need not, in all situations, perish with coming to an end of the contract. It may survive. This concept of separability of the arbitration clause is now widely accepted. In line with this thinking, the UNCITRALModel Law on International Commercial Arbitration incorporates the doctrine of separability in Article 16(1). The Indian law - The Arbitration and Conciliation Act, 1996, which is based on the UNCITRAL Model Law, also explicitly adopts this approach in Section 16 (1)(b).”

Reference of dispute to arbitrator by civil court:

Section 8 of the Arbitration Act, 1996 stipulates that if an agreement provides for an arbitration, the judicial authority before which the disputes arising out of the said agreement has been files, shall refer the said dispute (matter) to the arbitration. The duly imposed upon the judicial authority is mandatory in nature.

Section 8. Power to refer parties to arbitration where there is an arbitration agreement.

(1) A judicial authority before which an action is brought in a matter which is the subject of an arbitration agreement shall, if a party so applies not later than when submitting his first statement on the substance of the dispute, refer the parties to arbitration.

(2) The application referred to in sub-section (1) shall not be entertained unless it is accompanied by the original arbitration agreement or a duly certified copy thereof.

(3) Notwithstanding that an application has been made under sub-section (1) and that the issue is pending before the judicial authority, an arbitration may be commenced or continued and an arbitral award made.

Interpretation:

Reference only on an application for reference:

The civil court can refer the dispute to the arbitration only on an application by the defendant befoe submitting his defence. No one can dispute that a Civil Court has no jurisdiction to entertain the suit after application under Section 8 of the Act is filed but this would be subject to the application otherwise being in conformity with the requirements of the said Section. The jurisdiction of the Civil Court is not ousted on account of an arbitration agreement between the parties. It is ousted because of an application filed under Section 8 of the Act provided it otherwise confirms to the requirements laid down in the Section.

Before first statement of defence:

The application for refererring the dispute shall be made to the judicial authority before submission of first defence before the judicial authority. In a civil suit first statement of defence is written statement to the suit.

In Smt. Kalpana Kothari vs. Smt. Sudha Yadav and others,  AIR 2002 SC 404. The Court opined that - "In  striking contrast to the said scheme underlying the provisions of the 1940 Act, in the new 1996 Act, there is no provision corresponding to Section 34 of the old Act and Section 8 of the 1996 Act mandates that the Judicial Authority before which an action has been brought in respect of a matter, which is the subject-matter of an arbitration agreement, shall refer the parties to arbitration if a party to such an agreement applies not later than when submitting his first statement. ....... Similarly, having regard to the distinct purposes, scope and object of the respective provisions of law in these two Acts, the plea of estoppel can have no application to deprive the appellants of the legitimate right to invoke an all comprehensive provision of mandatory character like Section 8 of the 1996 Act to have the matter relating to the disputes referred to arbitration, in terms of the arbitration agreement".  The Court had adverted to its earlier decision in P. Anand Gajapathi Raju and Others vs. P.V.G. Raju (Dead) and Others,  2000(4)SCC 539 in observing that there is no bar to referral under Section 8 of the 1996 Act even where such an application had been filed after the first statement (Written Statement) on the substance of the dispute, on the Plaintiff not objecting thereto.

Bifurcation of Cause of Action:

In Sukanya Holdings Pvt. Ltd vs Jayesh H. Pandya & Anr on 14 April, 2003, (Appeal (civil) 1174 of 2002) the Apex court held that “The next question which requires consideration is even if there is no provision for partly referring the dispute to arbitration, whether such a course is possible under Section 8 of the Act? In our view, it would be difficult to give an interpretation to Section 8 under which bifurcation of the cause of action that is to say the subject matter of the suit or in some cases bifurcation of the suit between parties who are parties to the arbitration agreement and others is possible. This would be laying down a totally new procedure not contemplated under the Act. If bifurcation of the subject matter of a suit was contemplated, the legislature would have used appropriate language to permit such a course. Since there is no such indication in the language, it follows that bifurcation of the subject matter of an action brought before a judicial authority is not allowed.

Secondly, such bifurcation of suit in two parts, one to be decided by the arbitral tribunal and other to be decided by the civil court would inevitably delay the proceedings. The whole purpose of speedy disposal of dispute and decreasing the cost of litigation would be frustrated by such procedure. It would also increase the cost of litigation and harassment to the parties and on occasions there is possibility of conflicting judgments and orders by two different forums.”

Thorough abovementioned judgment the Supreme court has held that if the cause of action is not severable and the claim is partly covered under the arbitration agreement and rest by the Civil Court, the civil court is not obliged to refer the dispute to the arbitration.

Interim Measures before commencement of arbitration till award:

Section 9 of the Arbitration and Conciliation Act, 1996 provides for interim orders to be passed by the civil courts before commencement of the arbitration proceedings and till award is made. This provision acts as injunction clause under the arbitration act.

Section 9. Interim measures, etc. by Court:

A party may, before or during arbitral proceedings or at any time after the making of the arbitral award but before it is enforced in accordance with section 36, apply to a court—

(i) for the appointment of a guardian for a minor or a person of unsound mind for the purposes of arbitral proceedings; or

(ii) for an interim measure of protection in respect of any of the following matters, namely:—

(a) the preservation, interim custody or sale of any goods which are the subject-matter of the arbitration agreement;

(b) securing the amount in dispute in the arbitration;

(c) the detention, preservation or inspection of any property or thing which is the subject-matter of the dispute in arbitration, or as to which any question may arise therein and authorising for any of the aforesaid purposes any person to enter upon any land or building in the possession of any party, or authorising any samples to be taken or any observation to be made, or experiment to be tried, which may be necessary or expedient for the purpose of obtaining full information or evidence;

(d) interim injunction or the appointment of a receiver;

(e) such other interim measure of protection as may appear to the court to be just and convenient, and the Court shall have the same power for making orders as it has for the purpose of, and in relation to, any proceedings before it.

Section 9 of the Act which empowers the Court to make interim orders and proceeded to observe: Thus under Section 9 a party could apply to the court (a) before, (b) during arbitral proceedings, or (c) after the making of the arbitral award but before it is enforced in accordance with Section 36. The words “in accordance with Section 36” can only go with the words “after the making of the arbitral award”. It is clear that the words “in accordance with Section” can have no reference to an application made “before”; or “during the arbitral proceedings”. Thus it is clear that an application for interim measure can be made to the courts in India, whether or not the arbitration takes place in India, before or during arbitral proceedings. Once an award is passed, then that award itself can be executed. Sections 49 and 58 provide that awards covered by Part II are deemed to be a decree of the court.

Section 9 has provided a wider power to the civil courts to pass orders till commencement of the arbitral proceedings. Through various judgments the Apex court has held that this discretion must be exercise cautiously, not to encroach upon powers of the Arbitrator.