What is Arbitration Clause

Meaning of Arbitration Clause

Its a clause in a written Contract laying down that in case disputes arise between the parties they should be resolved by Arbitration. Businessmen often include Arbitration clause in their contracts to avoid costly litigation. Clause can propose holding of Arbitrations through Ad-hoc Arbitrators or through Arbitration Institution like The IDRC.

As such Arbitration clause is a contract provision which states that dispute resolution shall be carried out by way of Arbitration.

Section 7 of The Arbitration and Conciliation Act, 1996 provides - 

Section 7. Arbitration Agreement

(1) 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.

(2) An arbitration agreement may be in the form of an arbitration clause in a contract or in the form of a separate agreement.

(3) An arbitration agreement shall be in writing.

(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 [including communication through electronic means] 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.

(5) 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.

Should you include an Arbitration clause in your contract?

It is always recommended to go for ADR methods as the obvious advantage of including an arbitration clause in your contract before the dispute arises is that once the dispute does arise, you can decide to keep out of the court system, and you can compell the other side to arbitrate.

What should an arbitration clause include?

Drafting of an Arbitration clause is important for any Arbitration to function smoothly. Where arbitration clauses contain defective wordings one may observe, recurrent scenarios of unnecessary incidents and procedural debates. 

Points to be kept in mind while drafting Arbitration Clause-

1. Read standard Arbitration Clauses of Institutional Arbitration Centres.

2. Use all terms wisely and precisely as they are important and are going to be interpreted by the arbitral tribunal.

3. Some best drafted arbitration clauses are those which are simple, precise and unambiguous.

4. Be clear about the scope and ambit of application of the arbitration clause ie the specific issues and disputes that are sought to be covered by the clause. 

5. The parties are free to agree on the number of Arbitrators that will sit on an arbitral tribunal.

6. Be clear about the specific applicable Substantive Law and Procedural Law.

7. Be clear about the Seat and Venue of Arbitration hearings.

8. Include the specific desired language of arbitration in their arbitration clause.

9. Go for Institutional Arbitration if you need timebound disposal of dispute through not-for-profit Institutions like The IDRC.

What is the purpose of including an arbitration clause?

The purpose of the Arbitration Clause is to submit present or future disputes between the parties to a particular arbitrator or Institutional Arbitration Centre to resolve their disputes arising out of a particular business relationship.

Are arbitration clauses good?

Arbitration is one of the most popular Alternative Dispute Resolution Mechanism.

In Commercial World Arbitration is opted over Court Litigation as it is-

• Usually cheaper than litigation.
• Help resolve disputes peaceably rather than escalate angst and hostility.
• Quick and result oriented.
• Its procedure is flexible.
• Confidentiality is maintained at all stages.
• Availablity of Domain Experts

What are the pros and cons of arbitration clauses?

Pros of Arbitration includes-

1. It helps resolve disputes in a cordial manner
2. Result quicker as compared to Litigation 
3. Procedure of Arbitration is flexible.
4. Parties are able to maintain confidentiality
5. Domain Experts pitch in as Arbitrators

Cons of Arbitration are-

1. It is always looked upon as a Rich man's ADR
2. Large Corporations have better chances of success against Employees
3. Lack of clarity of applicable Laws
4. Procedures uncertain
5. Absence of dedicated Bar Members for Arbitration.
6. International Arbitration quite costly.
7. Frequent interference by Judicial Courts.

Can I sue if I signed an arbitration agreement?

Arbitration Clause allows parties to submit present or future disputes between the parties to a particular arbitrator or Institutional Arbitration Centre. However it does not totally prohibit filing of a Civil or Commercial Suit altogether. When one Party files a Court Case the other side has an option to move Section 8  Arbitration and Conciliation Act, 1996 objection.

But if no such objection is signed then the Suit shall continue to survive and shall be decided as per law applicable.

Can you refuse Arbitration?

In case there is no binding Arbitration Clause, either of the disputing Party can resist and refuse Arbitration.

How is arbitration clause legal?

Resolution of disputes by way of Arbitration is permissible in India and world over.

 The statutory recognition to Arbitration is more than century old. Law governing Arbitration in India is Arbitration and Conciliation Act, 1996.