Arbitration Agreement, Essentials, and Rule of Severability

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This Article is written by Siya Sharma of 1^st semester of Damodaram Sanjivayya National Law University

Abstract

Arbitration has become an increasingly popular method for resolving disputes outside traditional court systems. As parties seek a more efficient and confidential alternative, arbitration agreements have gained significant importance. This article provides a comprehensive exploration of the essentials of an arbitration agreement and delves into the rule of severability, shedding light on their significance in the arbitration process.

Keywords

Voluntary agreement, Mutual Consent, Written agreement, New York Convention, Washington Convention, Geneva Convention, UNCITRAL Model law

Introduction

Arbitration agreements serve as the foundation for resolving disputes through arbitration. By mutually agreeing to submit their disputes to arbitration, parties opt for a private and streamlined process that avoids the complexities of traditional litigation. At the core of this process lies the arbitration agreement, a contractual foundation that enables parties to voluntarily submit their disputes to arbitration. Understanding the essentials of such agreements and the rule of severability is crucial for individuals and businesses navigating the realm of alternative dispute resolution.

Arbitration unquestionably provides benefits, but some types of conflicts may not be amenable to arbitration. However, there are numerous circumstances where choosing arbitration as the alternative dispute resolution method in a specific agreement does not consider whether possible issues can be arbitrated. Legal obstacles brought on by these contradictory inclusions lengthen the dispute resolution process and raise the expense. Before deciding the method of dispute resolution to use, the contractual parties must carefully analyze the nature of the agreement, any potential conflicts that may result from it, and their intentions.

Definition of Arbitration Agreement

According to Section 7 of The Arbitration and Conciliation Act, 1996, an “arbitration agreement” is defined as a commitment by the parties to subject to arbitration any or all disputes that have occurred or may arise between them about a specified legal relationship, regardless of whether they are expressly stated in a contract or not[1]. An arbitration agreement is also known as a submission agreement. An arbitration agreement is a legal contract entered into by two or more parties that stipulates any disputes or disagreements arising between them will be resolved through arbitration rather than litigation in court. It is a mutual agreement between the parties that their disagreements will be brought before an arbitrator or arbitral tribunal, which will render a binding judgment based on the facts and arguments offered by both sides.

An arbitration agreement typically outlines the terms and conditions under which the parties agree to submit their disputes to arbitration. It may include details such as the scope of the disputes covered, the rules and procedures to be followed during arbitration, the selection process for appointing the arbitrator(s), the venue or location for conducting the arbitration, and any other relevant provisions agreed upon by the parties.

Essentials of an Arbitration Agreement

An arbitration agreement serves as the foundation for initiating and conducting arbitration proceedings. To ensure the effectiveness and enforceability of an arbitration agreement, several essential elements should be considered:

Voluntary Agreement

For an arbitration agreement to be valid, it must be a product of the parties’ free will and voluntary consent. Coercion, fraud, or undue influence should not taint the agreement, ensuring that parties willingly choose arbitration as their preferred method of dispute resolution.

Mutual Consent

Mutual consent forms the core of an arbitration agreement. All parties involved must provide their consent to resolve disputes through arbitration. There must be a clear indication of mutual acceptance and intention to engage in arbitration. Without the explicit consent of all parties, an arbitration agreement cannot be enforced.

Inclusion of Applicable Rules and Procedures

The agreement should specify the rules and procedures that will govern the arbitration process. This may include referencing established sets of rules provided by recognized arbitration institutions or bodies. The language and provisions of the agreement should reflect this intention, leaving no ambiguity regarding the chosen method of resolution.

Legal Capacity

All parties entering into an arbitration agreement must possess the legal capacity to do so. Minors, individuals lacking mental capacity, or parties acting under duress may not be able to enter into a valid arbitration agreement.

Form and Writing

While the form and writing requirements for arbitration agreements vary across jurisdictions, it is generally recommended to have the agreement in writing. A written arbitration agreement provides clarity and evidence of the parties intention to arbitrate. It helps avoid misunderstandings and disputes regarding the terms of the agreement.

Enforceability of Arbitration Agreements

The enforceability of arbitration agreements is governed by national laws and international conventions. These legal frameworks may vary across jurisdictions, and it is crucial to understand the specific laws applicable to the agreement.

In India, the law governing arbitration agreements is primarily based on the Arbitration and Conciliation Act, of 1996 (the “Act”). The Act provides a comprehensive legal framework for the conduct and enforcement of arbitration in India. The Act provides for the autonomy of the parties in determining the procedure for conducting the arbitration, subject to certain mandatory requirements. The parties are free to agree on the number of arbitrators, the appointment procedure, the place of arbitration, and the language to be used in the proceedings. The Act also establishes the role of the courts in the arbitration process. The courts have the power to intervene in various aspects of arbitration, such as the appointment of arbitrators, granting interim measures, setting aside arbitral awards, and enforcing awards.

International conventions play a significant role in facilitating the recognition and enforcement of arbitration agreements in India. The key international conventions that govern arbitration agreements in India are as follows:

New York Convention: India is a signatory to the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards, commonly known as the New York Convention[2]. This convention sets out the rules for recognizing and enforcing arbitral awards made in other countries. It provides a framework for the mutual recognition and enforcement of arbitral awards among the contracting states, including India.
Geneva Convention: India is also a signatory to the Geneva Protocol on Arbitration Clauses of 1923[3]. This convention focuses specifically on arbitration agreements. It states that signatory countries shall recognize the validity of arbitration agreements and honor them when disputes arise, subject to certain conditions.
Washington Convention: India is a party to the Washington Convention’s International Centre for the Settlement of Investment Disputes (ICSID), which was formed to settle investment disputes between states and citizens of other states. This convention provides a mechanism for resolving investment disputes between states and nationals of other states through arbitration.

International conventions provide a framework for the enforcement of arbitration agreements in India, they operate in conjunction with domestic legislation, primarily the Arbitration and Conciliation Act, of 1996, which sets out the procedural and substantive law governing arbitration in India.

Rule of Severability

The “autonomy of the arbitration clause” is another name for the “doctrine of severability”. The rule of severability is a fundamental principle in arbitration law that ensures the autonomy and enforceability of arbitration agreements. Also known as the doctrine of separability, it allows the arbitration clause within a contract to be treated as a separate and independent agreement from the rest of the contract. In other words, if a contract contains an arbitration clause, the arbitration agreement is treated as a distinct and separable part of the contract.

Section 16(1) of the Arbitration and Conciliation Act, 1996 defines the concept of ‘severability’ and states, any arbitration provision included in a larger contract must be viewed as a separate agreement from the other provisions, and if the arbitral tribunal rules that the entire agreement is void, the arbitration provision will not automatically become ineffective as a result.

The severability principle ensures that challenges to the validity of the underlying contract do not automatically render the arbitration agreement invalid. Arbitrators have the authority to determine the validity and enforceability of the arbitration agreement independently, regardless of any disputes related to the main contract.

Application in International Arbitration

The rule of severability is particularly significant in international arbitration. In cases where parties from different jurisdictions have entered into a contract with an arbitration clause, the separability of the arbitration agreement ensures that the dispute can proceed to arbitration even if there are conflicts regarding the substantive aspects of the contract.

The rule of severability is commonly recognized and applied in international law, including international trade and investment agreements. It is also reflected in international arbitration rules and guidelines, such as those promulgated by the International Chamber of Commerce (ICC), the United Nations Commission on International Trade Law (UNCITRAL), and other arbitral institutions.

Article 16(1) of the UNCITRAL Model law of 1985 on international commercial arbitration defines the doctrine of severability and states that: The arbitral tribunal has the authority to decide on its jurisdiction and to settle any disputes originating from the Arbitration Agreement, as well as any challenges to the agreement’s legality[4]. An arbitration provision included in a contract is regarded for this purpose as a separate agreement from all other provisions.

Application of the rule of severability may still vary depending on the specific laws and legal frameworks of the relevant jurisdictions involved in the international agreement.

Advantages of Arbitration Agreements

Arbitration agreements offer several benefits that make them an attractive choice for resolving disputes:

Confidentiality: Arbitration provides a confidential forum for dispute resolution. Unlike court proceedings, arbitration allows parties to keep their disputes and related information out of the public domain. This confidentiality can be particularly advantageous in sensitive commercial or personal matters.
Flexibility: Arbitration offers flexibility in terms of procedural rules, the choice of arbitrators, and the place of arbitration. Parties have the freedom to tailor the arbitration process to suit their specific needs, making it a more efficient and adaptable alternative to litigation.
Efficiency and Speed: Arbitration often offers a faster and more streamlined process compared to traditional litigation. Parties can choose the rules and procedures that best suit their needs, allowing for a more efficient resolution. Additionally, the availability of dedicated arbitrators and the absence of court delays can significantly expedite the proceedings.
Expertise and Neutrality: Arbitration allows parties to choose arbitrators who have expertise in the relevant field. This ensures that the dispute will be resolved by individuals with specialized knowledge, increasing the likelihood of a fair and informed decision. Additionally, arbitrators are typically neutral and independent, which promotes impartiality in the resolution process.
Cost-effectiveness: While arbitration can involve costs, it can still be more cost effective than traditional litigation in certain cases. The streamlined process, reduced discovery, and shorter timelines can lead to lower legal fees and other expenses associated with litigation.

The benefits of arbitration agreements may vary depending on the specific circumstances and the preferences of the parties involved.

Disadvantages of Arbitration Agreements

Arbitration agreements have certain disadvantages that individuals or businesses should consider before agreeing to them.

Limited judicial review: When parties agree to arbitration, they typically waive their right to pursue the matter in court. This means that the decision made by the arbitrator is final and can have limited opportunities for appeal.
Unequal power dynamics: In some cases, one party may have more power, resources, or expertise compared to the other. This power imbalance can potentially disadvantage the weaker party during the arbitration process.
Limited discovery process: The discovery process in arbitration is generally more limited compared to court proceedings. This means that parties may have less opportunity to gather evidence, examine witnesses, or compel the other party to disclose relevant documents. As a result, important information that could influence the outcome of the dispute may not come to light.
Lack of precedent: Arbitration decisions do not create legal precedents in the same way that court judgments do. This can lead to inconsistency in the interpretation and application of the law, as each arbitration case is typically treated as an individual matter.

Conclusion

Arbitration agreements are clauses in contracts that mandate that parties arbitrate their differences instead of taking them to court. The rule of severability further strengthens arbitration agreements by treating them as independent from the underlying contract. This principle ensures that challenges to the validity of the contract do not automatically invalidate the arbitration agreement, promoting party autonomy and international arbitration stability.

In today’s globalized world, arbitration agreements can be a valuable tool for resolving disputes efficiently and privately, but parties need to approach them with a clear understanding of the advantages, disadvantages, and implications they may have on their legal rights and access to justice.

References

[1] Section 7, Arbitration and Conciliation Act, 1996 available at < https://indiankanoon.org/doc/1846895/ > last seen on 16/5/2023

[2] United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York, 10 June 1958) available at < https://www.newyorkconvention.org/english > last seen on 17/5/2023

[3] Protocol on Arbitration Clauses (Geneva, 24 September 1923) available at < https://www.arbitrationindia.com/geneva_protocol_1923.html#:~:text=Each%20of%20the%20Contracting%20States,differences%20that%20may%20arise%20in > last seen on 17/5/2023

[4] International Centre for Settlement of Investment Disputes (ICSID) Convention, Regulations, and Rules available at < https://icsid.worldbank.org/rules-regulations > last seen on 17/5/2023

[5] Section 16(1), Arbitration and Conciliation Act, 1996 available at < https://indiankanoon.org/doc/1763282/ > last seen on 17/5/2023

[6] Article 16(1), Chapter IV. Jurisdiction of Arbitral Tribunal, UNCITRAL Model law of 1985 available at < https://www.trans-lex.org/450910/_/uncitral-model-law-on-international-commercial-arbitration-with-amendments-2006/#head_22 > last seen on 18/5/2023

[1] Section 7, Arbitration and Conciliation Act, 1996 available at < https://indiankanoon.org/doc/1846895/ > last seen on 16/5/2023

[2] United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York, 10 June 1958) available at < https://www.newyorkconvention.org/english > last seen on 17/5/2023

[4] Article 16(1), Chapter IV. Jurisdiction of Arbitral Tribunal, UNCITRAL Model law of 1985 available at < https://www.trans-lex.org/450910/_/uncitral-model-law-on-international-commercial-arbitration-with-amendments-2006/#head_22 > last seen on 18/5/2023