Essentials and validity of an Arbitration Agreement

ABSTRACT

ADR or Alternative Dispute Resolution tools are changing how we resolve disputes in today’s world. Of these types of ADR tools, arbitration is one of the most commonly used methods for resolving disputes outside of the courts. The basis for this form of ADR is an arbitration agreement; the contract that makes up the basis upon which all facets of the arbitral procedure are founded. People prefer Arbitration mainly because of various Reasons. Firstly, it allows them to select their own Arbitrator,  set their own rules of procedure, etc.

This assignment will provide an in-depth review of arbitration agreements, including their definition, key components, and the body of law that governs their enforceability. It is critical to understand arbitration agreements, especially given the extent to which they are used in modern business transactions, including but not limited to: employment contracts, consumer contracts, international business contracts, and collective bargaining agreements.

An Arbitration Agreement is an Essential Foundation of an Arbitration Process.  To be enforceable, an arbitration agreement must fulfil certain requirements as set out by the law. Specifically, the arbitration agreement must demonstrate an agreement between the parties to submit disputes to an arbitrator; be in writing; and relate to a dispute which can be resolved through arbitration

KEYWORDS: Arbitration Agreement, Essentials, Challenges.

MEANING OF ARBITRATION AGREEMENT

If we take the General Meaning of an Arbitration Agreement, it refers to a normal Agreement or a deal between two parties; however, if we take the statutory meaning of an Arbitration Agreement, it is defined under Section 7 (1) of the Arbitration and Conciliation Act, 1996. It says “Arbitration Agreement means agreement by 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.”

OTHER PROVISIONS RELATED TO ARBITRATION AGREEMENT:

• Section 7 (5)

It says “If the reference to a document that contains an arbitration clause is in writing and the reference is sufficiently specific to constitute part of the contract, the reference will result in an arbitration agreement.

FORMS OF ARBITRATION AGREEMENT

Arbitration Clause:

An arbitration clause exists within a larger contract between any two contracting persons, and this is the most commonly used form of arbitration. It is added at the time of contract formation to determine how disputes that arise out of that individual contract will be resolved by arbitration; for example: “Any dispute arising out of or relating to this contract will be resolved by arbitration pursuant to the UNCITRAL Arbitration Rules,” as found in international commercial contracts (i.e., international contracts).

Standalone Agreement:

A standalone agreement is an entirely separate agreement entered into solely to establish an arbitration mechanism for any potential future legal dispute. A standalone agreement can be executed prior to a dispute occurring (as a commitment framework) or after a dispute has already occurred (as a submission agreement to arbitrate an existing dispute).

ESSENTIALS OF AN ARBITRATION AGREEMENT

1. It Must be in Written Form:

A written arbitration agreement is essential to be valid when concluded. This condition for a written arbitration agreement is important as it provides clarity, assists in avoiding disputes and creates a record of the party’s intent to submit their differences to arbitration.

For an arbitration agreement to be valid, it must be in writing. This can be accomplished using one of the methods listed below:

• A signed document executed by both parties.
• Written correspondence, letters, emails, or other forms of communication between the parties that create evidence or documentation of the mutual assent to arbitrate.
• The opposing party must not deny the existence of an arbitration agreement after it has been asserted.
• An electronic record created in accordance with the Information Technology Act, 2000.

Using this approach allows informal written communications to be considered to be valid arbitration agreements when they clearly express the intention of the parties to submit their differences to arbitration.

2. There must be a Mutual Consent:

All members involved in an arbitration agreement need to accept that there is a legitimate, mutual agreement for parties to use arbitration as their means for solving any potential disputes and this also requires that there be no ambiguity as far as the intent of those involved.

A mutual agreement between all of the parties involved through an arbitration agreement is required for the relationship between the parties to be binding, as follows:

• The contracting parties must show a clear intention that they will use an arbitration forum to settle any disputes that may result between them.
• All parties must give free and voluntary consent, without being forced to do so by the use of force or fraud, using misrepresentation or any other form of threat or coercion.
• Any party can choose to have the arbitration agreement in place at the time the contract is entered into, or at the time they have a dispute that requires an arbitration proceeding to be brought about.

3. Defined Legal Relationship:

A clearly defined relationship (either a contractual or non-contractual one) between the disputing parties is necessary in order for an arbitration agreement to be enforceable. Consequently, arbitration can only be utilized to resolve issues that arise out of the particular relationship that exists between the Parties to an Arbitration Agreement.

As such, the defined relationship between the parties delineates the scope of disputes that can be subjected to arbitration. Examples include:

• A construction contract between a contractor and an employer
• An employment contract between an employer and an employee
• Commercial transactions between a vendor and a purchaser

4. A dispute must be there:

To function, an arbitration agreement necessitates that there be a dispute between all involved parties at that time to allow for an arbitration clause to be applied to that particular dispute; therefore, if there is not a dispute, either at that time or at the time the parties executed their respective arbitration agreements, there can be no application of an arbitration clause to the challenge or adhere/hold to a pre-existing, settled matter between those same parties.

5. Signature of the Parties:

The signatures of both parties establish the validity of the arbitration agreement. There are two scenarios in which signatures would be present on the arbitration agreement:

Mutual agreement:

 A written document that both parties sign listing the relevant terms and conditions of the agreement; or

Unilateral agreement:

One party will sign the document containing all relevant terms and conditions (i.e., agreement), and the other party will indicate its acceptance (via an email or otherwise), and the agreement becomes binding upon the other party’s acceptance.

6. Capacity:

To enter into an Arbitration Agreement, parties must have the capacity to do so. The three necessary components of capacity are:

• There must be no one who doesn’t have the majority age of 18 years under Indian law.
• Able to demonstrate sufficient mental capacity to be able to understand the nature and effect of the contract.
• No statutory prohibition for the party to be able to contract, i.e. an insolvent person is limited in his/her ability to contract.

VALIDITY OF AN ARBITRATION AGREEMENT

An Arbitration Agreement shall be Valid if it satisfies criteria such as

1. Statutory Requirement:

To meet the statutory requirements of a  written arbitration/mediation agreement, the agreement must be:

• In writing
• Signed by the parties or otherwise evidenced in writing
• Relates to an established legal relationship (whether contractual or non-contractual)

2. Capacity:

All contract parties need to possess the legal ability (competency) to agree according to contract law. Those who have been determined to be unable to legally form a contract include:

• Minors
• Those who are deemed to have no mental capacity (mental incapacity)
• Those who are legally barred from forming a contract (partial or totally incapacitated)

3. Clear Intent to Arbitrate:

There needs to be a clear intention by both parties that they would prefer to settle any disagreement through arbitration rather than go through the civil courts to resolve that disagreement. In order for there to be a valid arbitration agreement, both parties must demonstrate, through the content of their contract, that they intend to resolve their disagreement through arbitration. Ideally, the parties’ wish to enter into an arbitration agreement should be expressed through a tangible medium.

4. Following the Arbitration Norms:

Many arbitration agreements define key features such as the name of the arbitrator(s) and their location. While there is no requirement in all legislation for such information, specifying the arbitrator’s location and related inventory items helps to create certainty and clarity for all parties participating in the arbitration.

5. Seat of Arbitration:

Arbitration seat means the location where arbitration is conducted. Seat also establishes governing law and gives the court supervisory jurisdiction over the arbitration proceedings. Moreover, the arbitration seat also plays a role in determining the proper venue for resolving disputes.

CHALLENGES OF VALIDITY

1. Incapacity of Parties:

A party that lacks legal capacity when they sign a contract (through means like being a minor, having a mental health disagreement or having no authority) has grounds for challenging the contract. To do this, the party must show credible evidence that they were not legally able to enter into the contract. If a party later becomes legally competent and subsequently ratifies the contract, it will cure any defects that existed because of an earlier lack of legal capacity.

2. Fraud:

Challenge should be made at arbitration agreement obtained through fraudulent misrepresentation or the concealment by a party of material facts through fraud, to be possible to set vacation agreement aside. This type of fraud includes the active concealment of material facts, a false statement made with knowledge of the statement as being false, and/or knowingly failing to disclose material facts.

3. Lack of Consent:

When one party does not agree with a contract or cannot give their consent to it, the contract could be void; an example would be an instance where one party does agree to the arbitration clause. In most cases, adhesion contracts provide an example of how one party may not read the arbitration clause at all or may have read it but did not understand what it meant. However, most courts do not consider a lack of consent to be established simply by a lack of understanding.

LEGAL PRECEDENTS

“Jagadish Chander v. Ramesh Chander (2007) 5 SCC 719:

In this case, it was held that the following conditions are necessary for an Arbitration Agreement to be valid –

1. Both parties fully understand that their intent is to resolve problems with an arbitration process.
2. The contract requires that all contracts contain a dispute resolution clause.
3. It is clear from both parties’ actions that they intend to resolve disputes through an arbitration process.
4. The term “arbitration” does not need to be used within the contract; however, it must be evident to outside individuals that the intention of both parties is to use an arbitration method for resolving disputes.
5. Each party must obtain mutual consent from the other before taking any action on the agreement.”[1]

CONCLUSION

An agreement to arbitrate is an essential part of the process of arbitrating disputes and determining how those disputes may be resolved. It is an alternative to the formal court system (the traditional means by which parties resolve disputes with each other) in that it provides a more efficient, flexible, and private method for resolving disputes than could otherwise be achieved within the context of a traditional civil litigation process. In order for an arbitration agreement to be enforceable and valid, it must meet certain minimum legal requirements (such as being in written form, showing evidence of agreement between both parties, being between competent individuals, relating to a definite legal relationship, and clearly showing that the parties intended to resolve their disputes using arbitration).

Further, the courts have said that all parties will have expressed common terms and conditions that are agreed upon by all parties to establish their respective relationship for arbitration purposes. Parties should therefore carefully draft their arbitration agreements to reduce the risk of any possible disputes regarding the enforceability of those agreements.

[1]Jagadish Chander v. Ramesh Chander (2007) 5 S.C.C 719 (India).