Indian Law Applicable to Arbitration Agreement - Consequences

2.1 Validity of Arbitration Agreement

2.1.1 Matters that may be referred to arbitration - restrictions under specific laws

Generally, all disputes which can be decided by a civil court, involving private rights, can be referred to arbitration. Thus, disputes about property or money, or about the amount of damages payable for breach of contract etc., can be referred to arbitration. However, according to the general practice, following matters are not referred to arbitration.



1. Matrimonial matters, like divorce or restitution of conjugal rights;



2. matters relating to guardianship of a minor or other person under disability;



3. testamentary matters, for example, questions about the validity of a will;



4. insolvency matters, such as adjudication of a person as an insolvent;



5. criminal proceedings;



6. questions relating to charities or charitable trusts;



7. matters falling within the purview of the Monopolies and Restrictive Trade Practices Act;



8. dissolution or winding up of a company.
   (The list is not intended to be exhaustive).

Broadly, the reasons underlying this position is that matters involving morality, status and public policy cannot be referred to arbitration.

Sections 2(3) of the new law provides that the provisions in Part I (which apply to arbitration which takes place in India) shall not affect any other law for the time being in force by virtue of which certain disputes may not be submitted to arbitration.

An arbitration agreement being an "agreement", must possess legal validity according to the general law of contracts. As regards the capacity of the parties, sections 10 to 12 of the Indian Contract Act, 1872 deal with the subject. The position is broadly as follows:-

Parties’ capacity to enter into arbitration agreement



• Every person (including a foreigner) who is competent to contract can enter into an arbitration agreement. He must have attained the age of majority according to the law to which he is subject and must be of sound mind and must not be disqualified from contracting by the law by which he is governed.



• In the case of a partnership, a partner may enter into an arbitration agreement on behalf of the partnership, only if he is so authorised in writing by the other partners or in the partnership agreement itself.



• The Directors or other officers of a company can enter into an arbitration agreement on behalf of the company, subject to the restrictions, if any, contained in the Memorandum of Association or Articles of Association of the Company.



• Central and State Governments can enter into such agreement, subject to fulfillment of Constitutional requirements.



• Public undertakings can enter into an arbitration agreement like any private party. Such agreement can be with private parties within the country or with foreign parties or foreign States and State agencies.

Section 7(1) envisages an ‘arbitration agreement’ as agreement to submit disputes to arbitration. Hence there is an implied requirement that the parties must be competent to contract.

An arbitration agreement must be in writing, but no special form has been prescribed for it. It can be in one document or it can be gathered from several documents or from correspondence consisting of a number of letters, fax messages, telegrams or telex messages.

The arbitration agreement may provide that arbitration shall be conducted according to the rules of an arbitral institution. In such a case, those rules will form part of the arbitration agreement. This has been the legal position though the Act of 1940 did not contain any provision to this effect.

Section 7(3) of the new Act requires that the arbitration agreement must be in writing. Section 7(2) provides that it may be in the form of an arbitration clause in a contract or it may be in the form of a separate agreement. Under Section 7(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, providing a record of agreement, (c) or an exchange of claims and defence in which the existence of the agreement is alleged by one party and not denied by the other. In section 7(5), it is provided that a document containing an arbitration clause may be adopted by "reference", by a contract in writing.

An arbitration agreement must evince an intention to refer the difference to arbitration. An arbitration clause may or may not contain the name(s) of the arbitrator(s). It usually includes a provision for the mode of appointment of arbitrator(s). Ideally, it should precisely define the scope and the subject matter of the reference, so as to leave no vagueness or uncertainty about it when the dispute arises in the future and also clearly confer competence on the arbitrator to deal with the dispute. It should preferably specify the venue also.

In the case of international arbitrations, the arbitration clause usually provides for the place of arbitration and the substantive law applicable to the contract. Where they are not provided in the clause, then in the case of ad hoc arbitrations, the parties may agree to them at the time of reference to arbitration. Failing agreement, they may leave it to the arbitrator to decide. In the case of institutional arbitration, venue will ordinarily be decided as provided in the Rules of the Institution.

Under Section 11(2) the procedure for appointment of arbitrators can be set out by the parties in their agreement. Failing agreement, under Section 11(4) in the case of sole arbitrator if a party does not appoint him after notice, the appointment should be made upon request by a party, by the Chief Justice of the High Court or by any person or institution designated by him. Similar procedure is provided when there are three arbitrators — see section 11(3) and 11(5). Certain other details relating to appointment of arbitrations are set out in clauses 11(5) to 11(12).

2.1.5 Validity of the Agreement Containing Arbitration Clause - Existence of Arbitration Clause

In Waverly Jute Mills Co. Ltd. Vs. Rayman & Co. (India) Pvt. Ltd. AIR 1963 SC 90 the Supreme Court of India held that if a contract contained an arbitration clause and the contract was itself illegal and void, the arbitration clause would also perish with the contract.

In UP. Rajkiya Nirman Nigam Ltd Vs. Indore Pvt. Ltd. JT 1996 (2) SC 322 and also in Union of India Vs. G.S. Atwal & Co. (1996) 21 CLA 264, the Supreme Court held not merely that no arbitration agreement existed in the facts of that case and that the reference to arbitration was illegal but that the arbitrators had no power or jurisdiction to decide conclusively the question of the existence or validity of the agreement.

Section 16 of the new law empowers the arbitral tribunal to rule on its jurisdiction:




1. Under the new law, the arbitration tribunal can rule on its own jurisdiction, including ruling on any objections with respect to the existence or validity of the arbitration agreement, and for this purpose
   
   
   1. an arbitration clause which forms part of a contract will be treated as an agreement independent of the other terms of the contract; and
   
   
   
   2. a decision by the arbitral tribunal that the contract is null and void will not entail, ipso jure, the invalidity of the arbitration clause.
   
   
2. A plea that the arbitral tribunal does not have jurisdiction will, however, have to be raised not later than the submission of the statement of defence. However, a party shall not be precluded from raising such a plea merely because he has appointed, or participated in the appointment of an arbitrator.



3. A plea that the arbitral tribunal is exceeding the scope of its authority has to be raised as soon as the matter alleged to be beyond the scope of its authority is raised during the arbitral proceedings.



4. The arbitral tribunal may, in either of the cases referred to above, admit later a plea if it considers the delay justified.



5. The arbitral tribunal has to decide on a plea about lack of jurisdiction or about the tribunal exceeding the scope of its authority and where the arbitral tribunal takes a decision rejecting the plea, it shall continue with the arbitral proceedings and make the arbitral award.



6. A party aggrieved by such an arbitral award is free to make an application for setting aside the award under section 34 of the new Act. Section 34(2)(a) inter alia permits a challenge to an award on the above grounds.