Significance of Arbitration Clause in an Agreement

Introduction

In the complex environment of business activities, it is impossible to avoid conflicts. In the current Globalised world, each time there is a dispute between two parties, the mode of resolving that dispute is arbitration because of its features such as flexibility, efficiency and confidentiality. It mainly deals with an arbitration agreement as the core of this recognised approach to the resolution of disputes. 

This blog aims to explain what an arbitration agreement is, why it is crucial, what legal provisions govern it, and what factors should be taken into account by a business putting an arbitration agreement into effect. 

It is intended to offer useful information for those entities seeking advice on how to counter arbitration clauses and matters relating to the enforceability of arbitration agreements.
 

Arbitration clause – what is it?

Arbitration is a negotiating provision inserted into a contract which states that parties will resolve disputes with the assistance of third party arbitrators rather than going to court. Ordinarily, it describes the process to be adopted in the event of a disagreement, and identifies arbitration as the means of addressing any disagreement. It may be incorporated into the main contract or be in a separate agreement; The important issues commonly covered in this clause include: the place or Seat of arbitration (which dictates jurisdiction), the arbitrators (their number, qualification and method of appointment), the procedure to be followed in the arbitration process whether institutional or ad hoc, and the attitude that the court shall take if a party seeks its interference with the arbitral award.

Therefore, the effect of the arbitration clause is to provide a mechanism of preventive dispute resolution. The parties’ consent to arbitration rather than litigation in case of a dispute.

It is advisable to seek legal recourse to understand the complex laws related to arbitration procedures in India.

Significance of Incorporation of the Arbitration Clause

It is important for several reasons that is why the arbitration clause is considered as essential in modern commercial contracts. First of all, it prevents court trial proceedings. Arbitration reduces the time for cases to be handled in court since it acts as a substitute for cases that would take a long time to be handled in court, more so it is cheaper than going to court. This has the effect of decreasing legal expenses and works effectively to prevent the kind of unending process of lawsuits most of the time associated with the legal processes.

Arbitration is also cheaper and faster as it does not consume a lot of the parties time and resources. It also means that the businesses can quickly resolve the dispute with less number of procedures to be followed as compared to the court proceedings. Also, it is more of an informal process, which ensures that any information disclosed by businessmen is not available for the public since business people do not go to court to seek justice, unlike common citizens, and hence preserves the businesses’ secrets.

Authorities consider flexibility to be another plus of arbitration. The parties to the contract can select the procedure for the arbitration, arbitrators and even the law governing the arbitration making the arbitration flexible enough to suit the parties.

Moreover, since arbitration awards remove the likelihood of long-term legal contests following the clarification of the dispute, such awards are typically both final and conclusive with very few provisions for appeals.

Finally, arbitration proceedings are widely known throughout the world. Arbitration clauses are imposed almost in all countries, especially those countries which are party to international instruments such as the New York convention which provides for the enforcement and recognition of awards made in foreign countries.

Legal Framework of Arbitration Contracts

The arbitration agreements in India are mainly regulated by The Arbitration and Conciliation Act, 1996. The Act has some important and noteworthy provisions among which are Section 7 which sets out what may be termed legal drafting of a valid arbitration agreement. This section provides the requirement that an arbitration agreement should be in writing; it may be part of a contract, letters or other means of electronic communication.

Section 8 of the Act allows a court to intervene and refer the parties to arbitration if they agree and sign an arbitration agreement even when one party wants to proceed to court. Section 9 provides that parties may be entitled to seek avenues from courts before or during the commencement or the pendency of the arbitration process for orders or directions that adequate protection be given to the status as between the parties.

Section 34 deals with the annulment of the arbitral award, whereby the parties can annul the award in court but this can be done based only on procedural irregularity, conflict with public policy, or bias. Also, the New York Convention on recognition and enforcement of foreign arbitration award and the UNCITRAL Model law also have the institutional support that require nations to honor arbitration contracts and award thus making arbitration an internationally recognized means of dispute resolution.

To understand the arbitration clause in an agreement one should consult a legal professional. They can help you understand your stand and opportunities to deal with any discrepancies arising out of the contracts through arbitration clauses. 

Elements That Define Effective Arbitration Agreements 

Choosing appropriate clauses for an arbitration agreement should be detailed to provide clarity and completeness and particularistic to the context of the business. The clauses used in the agreements also need to be worded in such a way that it would not leave any doubt to the intention of the parties to refer the disputes to arbitration. It should also specify those kinds of disputes that will be referred to arbitration like contractual disputes or tort claims, or particular kinds of claims like intellectual property claims.

Pursuant to such an agreement, it may be necessary to state the number of arbitrators and their qualifications, and how they are to be appointed. The physical venue of arbitration or the legal seat of arbitration must in particular be spelled out as this defines jurisdiction within which the arbitration shall take place. In addition, the clause must state which arbitration rules shall apply, whether institutional or ad hoc arbitration rules.

Another issue that needs to be resolved in the course of signing the agreement is the choice of the language used in arbitration that would also define what language or languages would be used in arbitration in case the contract has been signed in several languages as is often the case in international contracts. Further, it also should outline how long it should take to proceed with, or complete the arbitration of the dispute.

Some Factors to Have in Mind While Drafting Arbitration Clauses

Businesses that are entering into contractual relations are faced with questions that need to address when drafting an arbitration clause, namely the question of whether it will be institutional or ad hoc arbitration. Institutional arbitration is conducted under certain rules and regulations provided by the arbitration institutions while ad hoc have flexible procedures. The types of matters not to be referred to arbitration must be identified especially in case the arbitration clause contains concise language on the kinds of disagreements that can be referred to arbitration.

Whereas the clause should state who will be appointed as competent and unbiased arbitrators and this aspect should be clearly outlined. Moreover, the businesses may also care to name mediation or conciliation as a preliminary stage before considering arbitration. It can offer a less confrontational approach and, therefore, can be more efficient in terms of costs.

Other clauses include cost and fee provisions. The shares of costs related to arbitration for example the fees of the arbitrators, costs of administration of the arbitration and lawyer fees should also be described in detail in the agreement. Last but not the least the contract reached should be capable of being suitably implementable and must be in concordance with the national and international lawful requirements.

It is advisable to draft any agreement with the help of a legal professional. They can ensure you the best draft of contracts to avoid any problem in the future businesses. 

Legal Binding of Arbitral Clauses

Arbitration agreement must satisfy the law to be enforceable as well as the contract under which arbitration clause is included. The performance of an arbitration agreement is also invalid if the contract itself is void or unenforceable. There is considerable judicial endorsement for the implementation of arbitration clauses under the Arbitration and Conciliation Act, 1996 although such clauses are not likely to be set aside unless valid legal grounds exist for doing so.

These obstacles consist of problems with the consent of the parties, vagueness of contract terms, or doubt as to the competence of the arbitrators. Also international recognition and enforcement of arbitration agreements may sometimes pose challenges including the jurisdiction of the country in which the arbitration is to take place and the fact that the country may not be a member of international conventions such as the New York convention.

Conclusion

Arbitration agreements play a significant role in organizations that seek to address their losses in an efficient, economic, and more importantly, private way. Choice of arbitration clause is also a complicated process that depends on several factors such as subject-matter, arbitrators, and applicable laws. The implications are as follows: It is recommended that best practice should be followed and the legal provisions understood by businesses to prevent arbitration agreements from being challenged later. 

It is for this reason that arbitration continues to be an important means for companies seeking to sort out legal matters with an eye on the sort of outcomes which they desire.

FAQs

What is the main difference between an arbitration provision and dispute resolution provision?

An arbitration clause basically provides that any dispute will have to be resolved through arbitration while a dispute resolution clause provides that certain types of disputes will have to be resolved through such methods as mediation, conciliation or litigation in addition to arbitration.

Is it possible to modify an arbitration agreement after signing?

Yes it does and further it is for the information of the parties that the arbitration agreement can be amended by mutual consent of the parties. However, such amendments must be in writing and signed by all parties Identifying these issues is a good starting point to solving some of the most challenging legal problems.

Is an arbitration agreement enforceable when either of the parties has not signed the agreement?

Usually an arbitration agreement is effective if both parties have signed it although it may be effective if concluded through written communication or other equivalent means.

What are the penalties for not going through arbitration?

In cases where a party decides to act in such a manner to frustrate the arbitration process, the other party can seek an order compelling arbitration. Arbitration agreements are generally favored by courts unless there are good reasons for their refusal.

How do International Arbitration Awards operate in India?

Arbitration awards made in other countries shall be recognized and enforced in India under the New York convention. However enforcement can be challenged only on prescribed grounds like on the grounds of public policy.