We have been doing video lectures on international arbitration practice, which can be accessed from here. Thirty one lectures have been uploaded so far covering various aspects including drafting arbitration agreements in commercial arbitrations, invoking arbitration in commercial and investment treaty arbitrations. In this post and the next few in this series, we provide the script of these lectures, starting from lecture 1.
Welcome to the 1st lecture in this lecture series titled “Introduction to International Arbitration Practice”. This lecture series will focus on the practical elements of international commercial and investment treaty arbitration. The first lecture in this lecture series will deal with Arbitration Agreements. The focus will be on commercial arbitration agreements.
Most of us are familiar with
arbitration agreements. They are, in simple, agreement to refer disputes to
arbitration, rather than resolving disputes through other forums.
Such agreements could be entered
into for disputes that may arise in future or once a dispute has arisen. Article
7(1) of the UNCITRAL Model Law on International Commercial Arbitration, 1985
states in this regard: “An arbitration agreement may be in the form of an
arbitration clause in a contract or in the form of a separate agreement.”
An identical provision is also contain in Section 7(2) of India’s Arbitration
and Conciliation Act, 1996.
Arbitration agreements can be
either in the form of arbitration clauses forming a part of an agreement (also
called “arbitration clause”) or in the form of separate arbitration agreements
(called in arbitration parlance as “submission agreements”). Arbitration
clauses are usually part of an agreement. Here the agreement precedes the
dispute.
Submission agreements are
agreements for reference of disputes to arbitration. Usually, submission
agreements are entered into after disputes arises and arbitration clauses refer
future disputes to arbitration. It is possible that submission agreements could
replace prior arbitration agreements as well.
Now, which one is better? Arbitration clause or submission agreement, you may ask. The answer is: it depends. But there are two factors you should consider: One, it is very difficult for parties to reach a submission agreement after a dispute has arisen. Two, the time between entering into an arbitration agreement in the main agreement and when dispute arises might be long; and by the time dispute has arisen, the arbitration agreement may not be suitable for resolving that dispute.
Parties therefore opt for the
lesser evil and take the risk of providing for resolution of future disputes
through the arbitration clause. This is because if no arbitration is agreed
upon, parties may have to choose to litigate in the local courts which may not
be desirable for various reasons, including non-flexible procedures,
formalities, lengthy proceedings, etc.
Whatever may be the case, an
arbitration agreement has to satisfy the formal criterial laid down in the
relevant law. We will now discuss what the Indian law on this is.
Arbitration & Conciliation
Act, 1996 (“1996 Act”)- contains different treatment for different types of
arbitration agreements. Part I and Part II of the 1996 Act contain two
different types of definition.
Part I of the Act is applicable
where the place of arbitration is India. S. 2(1)(b) states: “(b)
“arbitration agreement” means an agreement referred to in section 7;”
S. 7(1) states: “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.”
Thus, three main ingredients are
to be satisfied:
- There should be an “agreement by the parties”: Parties is defined in S. 2(1)(h): “(h) “party” means a party to an arbitration agreement.”
- The agreement should be “to submit to arbitration”; and
- The submission for arbitration should be for disputes in respect of defined legal relationship.
The expression defined legal
relationship has been explained in the case of Vidya Drolia v. Durga TradingCorpn., (2021) 2 SCC 1, where the Supreme Court held in Para 24: “24. … The
expression “legal relationship”, again not defined in the Arbitration Act,
means a relationship which gives rise to legal obligations and duties and,
therefore, confers a right.”
Section 7(3) states that
arbitration agreement shall be in writing. So does Article 7(2) of the Model
Law.
Now, we make a brief detour on
the separability doctrine, to the extent useful from a practical perspective.
In simple, separability doctrine enables the arbitration clause to be treated
separately from the main agreement, although it forms a part of the said main
agreement.
The concept of separability
provides doctrinal justification to afford jurisdiction to the arbitral
tribunal to decide even on questions relating to the validity of the
arbitration clause, rather than going to court for decision on such questions.
Article 16(1) of the Model Law recognises this and reads:
“(1) The arbitral tribunal may rule on its own
jurisdiction, including any objections with respect to the existence or
validity of the arbitration agreement.
For that purpose, an arbitration clause which forms part of a contract shall be
treated as an agreement independent of the other terms of the contract. A
decision by the arbitral tribunal that the contract is null and void shall not
entail ipso jure the invalidity of the arbitration clause.”
This has been incorporated in the
1996 Act in Section 16(1), which reads:
“(1) The arbitral tribunal may
rule on its own jurisdiction, including ruling on any objections with respect
to the existence or validity of the arbitration agreement, and for that
purpose,—
(a) an arbitration clause
which forms part of a contract shall be treated as an agreement independent of
the other terms of the contract; and
(b) a decision by the arbitral
tribunal that the contract is null and void shall not entail ipso jure the
invalidity of the arbitration clause.”
The separability doctrine also operates in submission agreements but differently. This has been discussed in the US Supreme Court decision of Rent-A-Center, W., Inc. v. Jackson, 561 US63 (2010) where it was held:
- Application of separability doctrine does not depend on the nature of the remaining portion of the agreement
- Therefore, it applies even to submission agreements
- “delegation” provision contained within an arbitration agreement, providing for resolution of any disputes about the validity or scope of the arbitration agreement by the arbitral tribunal, was itself separable from the more general arbitration agreement
It was therefore held by the US
Supreme Court: “In this case, the underlying contract is itself an
arbitration agreement. But that makes no difference. Application of the
severability rule does not depend on the substance of the remainder of the
contract.”
That’s all in this lecture. In
the next lecture we will deal with an interesting topic, which has immense
practical significance for drafting arbitration agreements.
Hope you enjoyed this first lecture
of the lecture series. Do write to lawbadri@gmail.com
for feedback and comments. Bye bye and stay safe.
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