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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

(a) a document signed by the parties;

(b) an exchange of letters, telex, telegrams or other means of telecommunication which

(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

___________

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:-

(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

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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 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;

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

_____________

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

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

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.

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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 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

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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.

_________

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]

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

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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

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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 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.

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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 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.
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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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