Chapter 2

ARBITRATION AGREEMENT

I. DEFINITION AND MEANING OF ARBITRATION AGREEMENT

What is meant by the term 'arbitration agreement'?

Section 7(1) of the Act provides that an 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.

Section 7(2) lays down that an arbitration agreement may be in the form of an arbitration clause in a contract or in
the form of a separate agreement.

An arbitration agreement must be in writing.1 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.2

Section 7(5) provides that 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.

An arbitration agreement stands on the same footing as any other agreement. It is binding upon the parties unless it
is influenced by fraud or coercion or undue influence, etc. An essential requirement of an arbitration agreement under
section 7 is that the agreement must be in writing. An oral arbitration agreement is not recognised as arbitration
agreement under this section. The implied requirement of sub-section (1) of section 7 is the

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1. Section 7(3).

2. Section 7(4).

competency of parties to enter into contract. Lack of such capacity invalidates the contract. Section 34(2)(i) makes
an arbitral award liable to be set aside if a party was under some incapacity at the time of entering into the
arbitration agreement.

Whether there is any prescribed form for an arbitration agreement?

There is no specific form in which an arbitration agreement is required to be drawn. The arbitration agreement may
be a single document containing all the terms signed by both the parties or it can comprise of two documents one
containing all the terms signed by one party and the other a plain acceptance by the other party of the first
document or it can be an unsigned document containing the terms of which both parties agree either orally or by a
separate acceptance. Arbitration agreement may be express or can be spelt out by implication or it may be
referential incorporation [Atlas Export Industries v. Kotak and Co., MANU/SC/0538/1999 : AIR 1999 SC 3286].

Essential Elements of an Arbitration Agreement

What are the essential elements of an arbitration agreement?

The Supreme Court in Bihar State Mineral Development Corporation v. Encon Builder Pvt. Ltd., 2003 (3) Arb LR 133
(137) (SC), held the following as the four essential elements of an arbitration agreement:-

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 (i) There must be a present or future difference in connection with some contemplated affair.

(ii) The parties must have the intention to settle such difference by a private tribunal.

(iii) The parties must agree in writing to be bound by the decision of such tribunal.

(iv) The parties must be ad idem.

In K.K. Modi v. K.N. Modi, MANU/SC/0092/1998 : AIR 1998 SC 1297, the Supreme Court held that the following
attributes must be present in an arbitration agreement-

(i) The arbitration agreement must contemplate that the decision of the tribunal will be binding on the parties
to the agreement.

(ii) That the jurisdiction of the tribunal to decide the rights of parties must derive either from the consent of
the parties or from an order of the court or from a statute, the terms of which make it clear that the process
is to be an arbitration.

(iii) The agreement must contemplate that substantive rights of the parties will be determined by the arbitral
tribunal.

(iv) That the tribunal will determine the rights of the parties in an impartial and judicial manner with the
tribunal owing an equal obligation of fairness towards both sides.

(v) That the agreement of the parties to refer their disputes to the decision to the tribunal must be intended
to be enforceable in law; and

(vi) The agreement must contemplate that the tribunal will make a decision upon a dispute which is already
formulated at the time where a reference is made to the tribunal.

Time-bar clause in an arbitration agreement

Write a short note on time-bar clause

Where a clause in an arbitration agreement provides that claims to which the argument applies shall be barred unless
some step to commence the arbitration is taken within a stated time, such clause in an arbitration agreement is
called a time-bar clause. Time-bar clause is also known as Atlantic Shipping clause as it takes its name from a
decision in Atlantic Shipping and Trading Company v. Louis Dreyfus and Company, (1922) 2 AC 250. In that case, it
was held that it was lawful to have a clause that the arbitration must be commenced within a certain time and that
if it was not so commenced, the claim would be barred. It is to be noted that a time-bar clause does not fall within
the mischief of section 28 of the Contract Act as it does not shorten the period of limitation to enforce a right, but
brings an end to the right itself.

Time-bar clauses are to be strictly construed against the party relying on them. However, in a case where the time-
bar clause applies, if the court is of the opinion that in the circumstances of the case undue hardship would be
caused, it may on such terms, if any, as the justice of the case may require, extend the time for such period as it
thinks proper.1

Scott v. Avery clause

Write a short note on Scott v. Avery clause

In Scott v. Avery, (1856) 5 HL Cas 811, a marine insurance policy provided that the insured was not entitled to
maintain any action on that policy until the matter had been decided by the arbitrators. Thus obtaining the decision
of the arbitrator was made a condition precedent to maintain an action. The House of Lords decided that though it is
a principle of law that the parties cannot, by contract oust the jurisdiction of the courts, any person may covenant
that no right of action shall accrue till an arbitrator has decided on any difference that may arise between the two
parties to the covenant. The House of Lords upheld the legality of this condition holding that until an award was

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 made, no action could be maintained.

Thus, when a clause in an arbitration agreement provides that no right of action shall arise unless and until an award
has been made, the clause is called a Scott v. Avery clause. The Supreme Court in Vulcan Insurance Co. Ltd. v.
Maharaj Singh, MANU/SC/0333/1975 : AIR 1976 SC 287 observed that a clause like Scott v. Avery has repeatedly
been held to be a valid one.

Construction of the Arbitration Agreement

What are the principles to construe an arbitration agreement?

The Halsbury's Laws of England,2 lays down the following principles for construction of an arbitration agreement-

(i) words must be understood in their plain, ordinary and popular sense unless they have generally acquired a
peculiar sense distinct from the popular sense;

(ii) if detailed semantic and syntactical analysis of words in a commercial contract is going to lead to a
conclusion that flouts

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1. Section 43(3).

2. Vol. 2(3), 4th Edn., p. 15

business common sense, it must be made to yield to business common sense;

(iii) to the extent that the drafting of a term gives rise to lacunae or lacks clarity, the considerations of the
court should not be driven by semantic niceties, but should be guided by the intentions of the parties;

(iv) in ascertaining the intention of the parties, the court should seek to ascertain the meaning which the
document would convey to a reasonable person having all the background knowledge which would reasonably
have been available to the parties in the situation in which they were at the time of the contract; the court
is therefore entitled to consider any factual material which would have affected the way in which the
language of a document would have been understood by a reasonable man, save for previous negotiations
between the parties and declaration of subjective intent (which are excluded for reasons of practical policy).

In Bihar State Mineral Development Corporation v. Encon Builders (I) Pvt. Ltd., 2003 (3) Arb LR 133 (SC), it was held
that if the intention of the parties to refer the dispute to arbitration can be clearly ascertained from the wording of
the agreement or is otherwise clear, it is immaterial whether or not the expression 'arbitration or arbitrator' has been
used. In State of Uttar Pradesh v. Sardul Singh Kulwant Singh, MANU/UP/0134/1985 : AIR 1985 All 67, it was held
that the mere absence of the words 'arbitrator or arbitration' does not make it any the less an arbitration agreement.
But in K.K. Modi v. K.N. Modi, MANU/SC/0092/1998 : (1998) 3 SCC 573, it was held that the mere use of the words
'arbitration', 'arbitrator' or the 'decision will be final', will not necessarily constitute an arbitration agreement if from
the language it appears that the parties had no intention of submitting their dispute to arbitration. In Union of India
v. D.N. Revry and Co., (1974) SCC 147, it was held that the meaning of a contract must be gathered by adopting a
commonsense approach and must not be allowed to be thwarted by a pedantic and legalistic interpretation.

The intention of the parties to refer a matter to arbitration is to be gathered from the expressions used in the
correspondence and the meaning it conveys. In case it shows that there had been a meeting of minds between the
parties and they had actually reached an agreement upon all material terms, then and then alone can it be said that
a binding contract was capable of being spelt out from the contract or the correspondence [Rickmers Verwaltung
GmbH v. Indian Oil Corpn. Ltd., MANU/SC/0726/1998 : (1999) 1 SCC 1].

II. POWER OF JUDICIAL AUTHORITIES TO REFER PARTIES TO ARBITRATION

Discuss the power of judicial authorities to refer the parties to arbitration

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 Section 8(1) of the Act provides that a judicial authority before which an action is brought in a matter which is the
subject of an arbitration agreement shall refer the parties to arbitration if a party so applies not later than when
submitting his first statement on the substance of the dispute.

An application for so referring the parties to arbitration must be accompanied by the original arbitration agreement or
a duly certified copy thereof. [Section 8(2)]

Section 8(3) lays down that an arbitration proceeding may be commenced and an arbitral award may be made
notwithstanding the fact that an application for referring the parties to arbitration has been made and the issue is
pending before the judicial authority.

The object of the Arbitration and Conciliation Act, 1996 is to help the parties to settle their disputes privately.
Sometimes, the parties to an arbitration agreement take recourse to dilatory tactics. The provisions of section 8
ensures that a matter covered by an arbitration agreement shall not be litigated upon in any court of law
whatsoever, except for the purpose of making the arbitration really effective. Thus, section 8(1) of the Act lays
down that if any party to an arbitration agreement brings before a judicial authority the matter covered by the
agreement, the other party may apply for stay of the suit and for an order of reference to arbitration. In P. Anand
Gajapati Raju v. P.V.G. Raju, MANU/SC/0281/2000 : AIR 2000 SC 1886, the Supreme Court held that the following
requirements must be there for passing an order of stay in a suit and referring the parties to the suit to arbitration:

(i) there must be an arbitration agreement;

(ii) a party to the agreement brings an action in the court against the other party;

(iii) the subject-matter of the action is the same as the subject-matter of the arbitration agreement;

(iv) the other party moves the court for referring the parties to arbitration before submitting the first
statement on the substance of the dispute.

The provisions of section 8 are mandatory and if the basic requirements are there, the court must ask the parties to
refer to arbitration and declare that the suit is not maintainable. In Hindustan Petroleum Corpn. Ltd v. Pinkcity
Midway Petroleums, MANU/SC/0482/2003 : AIR 2003 SC 2881, the Supreme Court held that if in an agreement
between the parties before the civil court, there is a clause for arbitration, it is mandatory for the civil court to refer
the dispute to an arbitrator. In T.N. Electricity Board v. Sumathi, (2000) 4 SCC 543, the Supreme Court held that if
during the pendency of the proceedings in the Court, the parties have entered into an arbitration agreement, then
they have to proceed with the matter in accordance with the provisions of the Arbitration and Conciliation Act.
When the award is made, it is a decree. It has to be filed in the 'Court' as defined in section 2(e) of the Act for its
enforcement as a decree under section 36.

Though section 8 does not prescribe any time-limit for filing an application and only states that the application under
it should be filed before submission of the first statement on the substance of dispute, the scheme of the Act and
the provisions of section clearly indicate that the application thereunder should be made at the earliest. (Booz Allen
and Hamilton Inc. v. SBI Home Finance Ltd., MANU/SC/0533/2011 : AIR 2011 SC 2507).

Judicial Authority

The term judicial authority has not been defined in the Act. In S.B.P. and Co. v. Patel Engineering Ltd,
MANU/SC/1787/2005 : (2005) 8 SCC 618, the Supreme Court opined that the expression judicial authority means a
court as defined in section 2(1)(e) of the Act or any other Judicial fora including a special tribunal like the Consumer
Forum. The expression 'Judicial authority' is wider than the expression 'court' and includes those authorities upon
which the judicial power of the state in conferred. In Managing Committee, Senior Secondary School v. Vijay Kumar,
MANU/SC/0556/2005 : AIR 2005 SC 3549, the Supreme Court held that the Tribunal constituted under section 11 of
the Delhi School Education Act, 1973 was covered by the expression judicial authority. Under the provision of section
8, the judicial authority is authorised to refer the parties to arbitration, before which an action in a matter which is
the subject of an arbitration agreement is pending, if an application is made to it by a party. The jurisdiction under

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 section 8 can only be invoked by a party making an application to the judicial authority in opposition to an action
that has been brought before it in a matter, which in the subject-matter of an arbitration agreement [W.B.S.E.B. v.
Shanti Conductors Pvt. Ltd., 2004 (2) Arb LR 159 (Gau)].

The question as to the arbitral tribunal's jurisdiction including existence or validity of the arbitration agreement, can
only be decided by the arbitral tribunal and not by the judicial authority. 1 But if the action is brought before the
judicial authority in a matter which is the subject of an arbitration agreement, the judicial authority can go into the
question as to whether the matter is the subject of an arbitration agreement. When a judicial authority receives an
application for referring the parties to arbitration, it is the judicial authority who is to consider whether the subject-
matter of the action is the same as the subject-matter of the arbitration agreement. If the judicial authority finds
that the subject-matter in both cases is the same, it will refer the parties to arbitration.

Two simultaneous proceedings under section 8(3)

Section 8(3) lays down that notwithstanding that an application has been made to a judicial authority, under section
8(1), for referring the parties to arbitration, the arbitration proceedings may, if already have commenced may
continue or an arbitration may be commenced and the arbitral tribunal may make an award. Section 8(3) thus
permits two proceedings at the same time, one before the judicial authority on the jurisdictional issues and the other
before the arbitral tribunal on merits of the case. The pendency of an action before a judicial authority does not
preclude a party from initiating arbitral proceedings. Similarly, where an arbitration has already been commenced, the
parties are not barred from continuing the arbitration proceedings, resulting in an arbitral award, while the issue is
pending before the judicial authority.

III. INTERIM MEASURES, ETC. BY COURT

Discuss the power of courts to grant interim measures in an arbitration proceeding

Section 9 of the Arbitration and Conciliation Act, 1996, provides that a party may, before or during arbitral
proceedings or at any time after the making of the arbitral award but before enforcement, apply to a court for the
appointment of a guardian for a minor or a person of unsound mind for the purposes of arbitral proceedings.

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1. Section 16(1).

Section 9 also provides that a party may, before or during arbitral proceedings or at any time after the making of the
arbitral award but before it is enforced, apply to a court for an interim measure of protection for-

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

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

(iii) the detention, preservation or inspection of any property or thing which is the subject-matter of the
dispute in arbitration, 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;

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

(v) such other interim measure of protection as may appear to the Court to be just and convenient.

The Court has the same power for making an interim order under section 9 of the Act, for the purpose of appointing
a guardian or for preservation, interim custody etc. of goods, as it has for the purpose of, and in relation to, any
proceedings before it. [Section 9]

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 Section 9 like section 8 of the Act is an exception to the general rule provided under section 5 of the Act, that in
connection with the matters governed by Part I of the Act, no judicial authority shall intervene except where so
provided in this Part I. These provisions i.e. sections 8 and 9 specifically provide for judicial intervention in arbitration
proceedings. The power of the Courts under section 9 is mandatory and the parties cannot avoid the provision of
this section by agreeing otherwise. This section is not subject to party autonomy. It is to be noted that the powers
of the Court under the provisions of section 9 can be exercised only where the place of arbitration is in India.

The object of interim measures of protection as provided under section 9 is to support the arbitration by making it
effective. The Court may intervene in support of arbitration by granting interlocutory injunctions.

A telephone call or telex message could, within seconds of the service of a writ, put all liquid assets out of the reach
of the creditor. So, court intervention by way of ordering interim measures of protection, is essential in urgent
situations particularly when granting relief is beyond the jurisdiction of the arbitral tribunal, or where the arbitral
tribunal is yet to be constituted.

The purpose which section 9 serves is to ensure that the property which is the subject-matter of arbitration, is not
diverted or destroyed and also to ensure that the parties are able to fully exploit the evidentiary value of the
property in dispute. For this purpose, the court has been expressly vested with the same powers for making orders
as it has for the purpose of, and in relation to, any proceedings before it. Thus, the court will act according to the
powers vested in it by the procedural laws such as the Code of Civil Procedure and the Indian Evidence Act.

Interim Measure: Breach of Agreement

There was breach of agreement to supply iron by way of export. No specific allegation was made in case that
appellant had started transferring his assets for payment. It was held that interim relief directing applicant to furnish
security by way of bank guarantee of value of 20% of sale price and in default attachment of immovable property
was in nature of attachment before award was illegal and it was also held that the court should be guided by some
principles which were required to be followed while disposing of applications under sections 38-40 of C.P.C. (Rashmi
Cement Ltd. v. Trafigura Becheer B.V., AIR 2011 Cal 7)

Protection of Goods

The term 'goods' has not been defined in the Arbitration and Conciliation Act, 1996. Section 2(7) of the Sale of
Goods Act, 1930 defines "goods" as every kind of movable property other than actionable claims and money and
includes stock and shares, growing crops, grass, and things attached to or forming part of the land which are agreed
to be severed before sale or under the contract of sale. This definition of the term 'goods' is relevant for the
purposes of section 9 of the Arbitration and Conciliation Act. Section 9(ii)(a) of the Act confers power on the court
for preservation, interim custody or sale of any goods which are the subject-matter of the arbitration agreement.
The court can protect the subject-matter of the arbitration agreement from damage, deterioration or destruction
and also from being misappropriated by the party who has control or custody of them. If the goods are of perishable
nature or likely to deteriorate, the court can order sale of such goods and secure the proceeds of sale by paying into
court or otherwise.

Securing the amount in dispute in arbitration

How the amount in dispute in arbitration is reward?

Section 9(ii)(b) of the Act conferred on court the power of attachment before judgment. The provision of section
9(ii)(b) will not be attracted unless the amount sought to be secured is actually in dispute in the arbitration. For
making an order under section 9(ii)(a), it is not necessary for the court to find out whether the respondent is
seeking to dispose of the property or taking the property outside the jurisdiction of the Court. The provision
contained in Rule 5 of Order 38 of the Code of Civil Procedure is not applicable in cases falling under section 9(ii)(b)
of the Act, although analogus principles may be kept in mind while passing an order under this section. Each case
under section 9(ii)(b) of the Act has to be considered in its own facts and circumstances and on the principles of
equity, fair play and good conscience. In Golbal Company v. National Fertizers Ltd., AIR 1998 Del 397, it was held

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 that for obtaining an order under this section the applicant must produce adequate material before the court on the
basis of which the court can form its opinion that unless the jurisdiction is exercised under this provision, there is a
real danger of the respondent defeating, delaying or obstructing the execution of the award made against it.

Detention, preservation or inspection of any property

Discuss the provisions regarding detention, preservation or inspection of any property which is the subject-
matter of dispute in arbitration

Under the provision section 9(ii)(c) of the Act, the Court can pass order for detention, preservation or inspection of
any property or thing which is the subject-matter of the dispute in arbitration. The purpose of such interim measures
is to prevent the property or thing from being altered, destroyed or disposed of, before the evidence of existing
state can be secured for the purpose of the arbitration. An interim measure under section 9(ii)(c) can also be
ordered by the Court in relation to property or thing regarding which any question may arise in the arbitral
proceedings.

The Court has power under section 9(ii)(c) of the Act or order an inspection for obtaining full information and
evidence, regarding the property which is the subject-matter of the dispute in arbitration or as to which any
question may arise in the arbitration. The Court may authorize any person for this purpose to enter upon any land or
building which is in possession of any party to the arbitration proceeding. The Court may also authorise such person
to take any samples or make any observation or conduct any experiment for obtaining full information or evidence.
The arbitrator has the power to inspect the property in respect of which an issue arises in the arbitration. He may do
so on being authorised by the Court under section 9 or ex officio under section 17 of the Act.

It is to be noted that as section 9 expressly vests the court in exercising its power under this section with the same
power as it has for the purpose of, and in relation to, any proceedings before it, the court can exercise its powers
vested in it by the Code of Civil Procedure for summoning and compelling the attendance of witness or production of
documents or by the Evidence Act for examination of witnesses and production of documents.

In Sundaram Finance Ltd. v. NEPC India, MANU/SC/0012/1999 : (1999) 2 SCC 479, the Supreme Court held that an
application can be made to the Court for an interim measure of protection under section 9, even before the
commencement of the arbitration proceedings.

Principles governing grant of injunction under section 9

What are the principles which govern the grant of injunction under section 9 of the Arbitration and Conciliation
Act, 1996

The principles governing grant of ad interim injunction in case of arbitration matters, are the same as in other civil
matters. It is on the plaintiff to show that he has a prima facie case and that the balance of convenience lies in his
favour and if the injunction is not granted he is likely to suffer irreparable injury [D.M. Fabricks v. Sand Plast India
Ltd., 1995 (1) Arb LR 282]. The grant of interim injunction is a discretionary remedy and the courts is exercising such
discretion will take into consideration the following, namely,-

1. Whether the person seeking temporary injunction has made out a prima facie case.

2. Whether the balance of convenience is in his favour, that is, whether it could cause greater inconvenience
to him if the injunction is not granted than the inconvenience which the other party would do if the injunction
is granted.

3. Whether the person seeking temporary injunction would suffer irreparable injury [Dorab Cawasji Warden v.
Coomi Sorab Warden, MANU/SC/0161/1990 : (1990) 2 SCC 117].

It is not necessary that all the conditions stated above must be present for obtaining an order of temporary
injunction. The condition 1 must be present which is a sine qua non and along with it at least any one of the other
two conditions must be present. A mere proof of one of the three conditions does not entitle a person to obtain

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 temporary injunction.

Temporary injunctions are regulated by Order 39 of the Code of Civil Procedure. Rule 1 of Order 39 of the Code of
Civil Procedure provides that an order of temporary injunction can only be granted, if the plaintiff proves by affidavit
or otherwise that-

(a) any property in dispute in a suit is in danger of being wasted, damaged or alienated by any party to the
suit, or wrongfully sold in execution of a decree; or

(b) the defendant threatens, or intends to remove or dispose of his property with a view to defrauding his
creditors, or

(c) the defendant threatens to dispossess, the plaintiff or otherwise cause injury to the plaintiff in relation to
any property in dispute in the suit.

The object of interlocutory injunction in to protect the plaintiff against injury by violation of his right for which he
could not be adequately compensated by damages recoverable in the action if the uncertainty were resolved in his
favour at the trial.

Appointment of Receivers

A receiver is a disinterested person appointed by a court, or by a corporation or other person, for the protection or
collection of property that is the subject of diverse claims.1 The court can under section 9(ii)(d) appoint a receiver
on an application made to it by a party to the arbitration proceedings. Such application can also be made during the
course of arbitral proceedings or at any time after the arbitral award has been made, but before it is enforced. The
receiver who is so appointed by the court is under a duty to collect in the property over which he is appointed and
thereby ensuring its protection and preservation pending the arbitration. The procedure for appointment of receivers
is provided in Order 40 of the Code of Civil Procedure.

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1. Black 's law Dictionary, 7th Edn., p. 1275.

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 © Universal law Publishing Co.

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