Home Reforms Arbitration Law Clauses having the effect of an Arbitration Agreement

Clauses having the effect of an Arbitration Agreement

This article is written by Shaily Garg, a Fourth year B.Com. LLB (Hons.) Student of University Institute of Legal Studies, Panjab University, Chandigarh.

Introduction

Arbitration Agreement has got a legal sanctity under Section 7 of the Arbitration and Conciliation Act, 1996. It is a written agreement by which the parties submit a dispute to arbitration. It should be in writing to make it binding, even if some of its details are filled in by oral understandings. The agreement doesn’t need to be on a formal document, nor it is necessary that the written agreement has been orally accepted by the parties or that one has signed and the other has accepted.

There are three methods of arriving at a written agreement. First, when any document is signed by the parties. Second, where there is an exchange of letters, telex, telegrams, or other means of telecommunications (including electronic means) to provide a record of the agreement, and third when there is an exchange of statements of claim and defence under an alleged arbitration agreement which is not denied by the other party.

Clauses having the effect of an Arbitration Agreement – Section 7 of Arbitration and Conciliation Act – Rukmanibai Gupta v. Collector – State of UP v. Tipper Chand

Whatever be the form or contents of the agreement, the Act of 1996 must apply where there should be a mandatory requirement for settlement of the dispute through arbitration. An agreement where the parties may sue each other, or may also go in for arbitration is not an arbitration agreement. When an arbitration clause provides for reference to arbitration of all disputes other than clearly excepted matters, there is no justification for holding that claims relating to a future period are beyond the scope of reference or ambit of arbitration clause because the main aim of arbitration is to settle all disputes between the parties and to avoid further litigation.

Rukmanibai Gupta v. Collector[1],

The Supreme Court laid down that an arbitration clause is not required to be stated in any particular form. If the intention of the parties to refer the dispute to the arbitration can be ascertained from the terms of the agreement, it is immaterial whether or not the expression ‘arbitration’ or ‘arbitrator’ has been used. Also, it doesn’t need to be contained in the same contract document as an arbitration clause may be incorporated into an existing contract by specific reference to it.

Clauses having the effect of an Arbitration Agreement

Whether or not a clause in a contract amounts to an agreement of arbitration depends upon its scope. In State of UP v. Tipper Chand[2], a clause in a government contract provided that the decision of the superintending engineer upon all questions relating to the contract shall be final and binding. An application was made under Section 20 of the Arbitration and Conciliation Act, 1940 (now Section 8 of Act of 1996) to refer a dispute to arbitration on the basis that the above clause amounted to an arbitration agreement.

The Supreme Court rejected the contention and held that the clause does not contain any express arbitration agreement. Also, such an agreement cannot be spelled out from its term by implication and there is no mention in it of any dispute. The purpose of the clause must appear to vest the superintending engineer with the supervision of the execution of the work and administrative control over it from time to time.

Clauses not having the effect of an Arbitration Agreement

A clause provided in case of any dispute or difference between parties of which an amicable settlement has not been possible, reference should be made to a common friend and well-wisher instead of rushing to the court. The court said that the clause could not be construed as an arbitration clause. It had no finality nor any binding effect. 

In International Amusement Ltd. v. India TradE[3] Promotion Organization, a clause in an agreement provided that a dispute is to be referred to the sole arbitration of the Chairman, Indian Trade Promotion Organization or his nominee whose decision is to be binding on parties. The court said that it was not an arbitration clause and the appointment of an arbitrator by a nominee of the Chief Justice was held to be rightly set aside.

In Vishnu v. State of Maharashtra[4], a clause in a government contract empowered the Superintending Engineer to immediately resolve any controversy relating to specifications, designs, drawings, quality of workmanship, or material used. It was also provided that his decision was to be binding on the contractor. The clause was held to be not an arbitration clause.

In P. Dasaratharama Reddy Complex v. Govt. of Karnataka[5], a clause in a contract for works provided that any dispute in the first place has to be referred to the Chief Engineer or designated officer. The officer nominated was not an independent authority. He had control over the contract. The agreement also provided that his decision would be final subject to the rights of parties to approach law courts. The clause in question was held not to be an arbitration clause.

Clauses having the effect of an Arbitration Agreement - Section 7 of Arbitration and Conciliation Act - Rukmanibai Gupta v. Collector - State of UP v. Tipper Chand
Clauses having the effect of an Arbitration Agreement – Section 7 of Arbitration and Conciliation Act – Rukmanibai Gupta v. Collector – State of UP v. Tipper Chand

Following are the clauses having and not having the effect of an arbitration agreement:

Memorandum of Understanding

A memorandum of understanding was drawn with a person who was appointed managing director of the subsidiary company. The company was floated by the holding company with a view to expanding its business.

In Comed Chemical Ltd v. C.N. Ramchand[6], the appointment was made for a minimum fixed period for manufacturing and marketing certain novel products. The MoU provided that disputes, if any, pertaining to the meaning of the MoU or of any nature would be decided by an independent arbitrator. Disputes arose between the holding company and the MD contended as to whether the latter could resign before the expiry of the minimum period. The provision in the MoU was held to be an arbitration clause.

Rent review clause

Where the rent review clause provided that in the event of a failure on the part of the parties to agree to a revision proposed by the lessor, the matter would be decided at the option of the lessee in accordance with the Arbitration and Conciliation Act, 1996.

Will or unilateral document

The question before the Supreme Court in Vijay Kumar Sharma v. Raghunandan Sharma[7], was whether a Will or a unilateral document made subsequent to the Will made by the testator expressing a desire that his children should settle their disputes by arbitration, The Supreme Court said that even on the basis of the erroneous assumption that the Will provided for arbitration agreement, the parties could not have been subjected to arbitration without any express or implied agreement between the parties for the same.

Vague and uncertain clause

 In Sankar Sealing Systems (P) Ltd. v. Jain Motor Trading Co[8]., a clause in an agreement for the supply of goods provided that “any dispute arising in relation to this agreement will be settled by arbitration of a neutral person agreed to by both”. The court said that the clause was vague and uncertain in respect to its language. The expression “neutral person agreed to by both” was not very clear because the identification of a neutral person and how the parties were to develop a consensus as to him was not made clear.

It might not have been the intention of the parties that resort to arbitration was the sole remedy. It only suggested that they could also resort to arbitration if they so wished. A general statement that all disputes would be referred to arbitration could not be regarded as an arbitration agreement within the meaning of the Act.

Conclusion

An arbitration agreement is not required to be in any particular form. What is required to be ascertained is whether the parties have agreed that if disputes arise, they would be referred to arbitration, then such an agreement would spell out an arbitration agreement. If it appears from the terms of the agreement by which a matter is submitted to a person’s decision that the intention of the parties was to hold an inquiry in the nature of a judicial inquiry and hear the respective cases of the party, then the case is one of the arbitrations.

[1] AIR 1981 SC 479.

[2] AIR 1980 SC 1522.

[3] (2015) 12 SCC 677.

[4] (2014) 1 SCC 516.

[5] (2014) 2 SCC 201.

[6] (2009) 1 SCC 91.

[7] (2010) 2 SCC 486.

[8] AIR 2004 Mad 127.

Memorandum of Understanding Rent review clause Will or unilateral document Vague and uncertain clause Memorandum of Understanding Rent review clause Will or unilateral document Vague and uncertain clause Memorandum of Understanding Rent review clause Will or unilateral document Vague and uncertain clause Memorandum of Understanding Rent review clause Will or unilateral document Vague and uncertain clause Memorandum of Understanding Rent review clause Will or unilateral document Vague and uncertain clause

Clauses having the effect of an Arbitration Agreement – Section 7 of Arbitration and Conciliation Act – Rukmanibai Gupta v. Collector – State of UP v. Tipper Chand Clauses having the effect of an Arbitration Agreement – Section 7 of Arbitration and Conciliation Act – Rukmanibai Gupta v. Collector – State of UP v. Tipper Chand Clauses having the effect of an Arbitration Agreement – Section 7 of Arbitration and Conciliation Act – Rukmanibai Gupta v. Collector – State of UP v. Tipper Chand Clauses having the effect of an Arbitration Agreement – Section 7 of Arbitration and Clauses having the effect of an Arbitration Agreement – Section 7 of Arbitration and Conciliation Act – Rukmanibai Gupta v. Collector – State of UP v. Tipper ChandConciliation Act – Rukmanibai Gupta v. Collector – State of UP v. Tipper Chand

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