Which is / is not an Arbitration Agreement

Introduction

(a) Purpose of Arbitration Act :         The purpose of Arbitration and Conciliation Act, 1996 (‘the Act’)  is to provide quick redressal to commercial dispute by private Arbitration. Quick decision of any commercial dispute is necessary for smooth functioning of business and industry. Internationally, it is accepted that normally commercial disputes should be solved through arbitration and not through normal judicial system. An arbitrator is basically a private judge appointed with consent of both the parties. He is expected to give his decisions quickly as he is not bound by the technical formalities of a court. In India, the need of arbitration is more because of very heavy burden on the judicial system and huge backlog of pending cases.  

(b) Arbitration Agreement      The foundation of an arbitration is the arbitration agreement between the parties to submit to arbitration all or certain disputes which have arisen or which may arise between them. Thus, the provision of arbitration can be made at the time of entering the contract itself, so that if any dispute arises in future, the dispute can be referred to arbitrator as per the agreement. It is also possible to refer a dispute to arbitration after the dispute has arisen. Arbitration agreement may be in the form of a arbitration clause in a contract or in the form of a separate agreement. Section 7 of the Act provides that the agreement must be in writing and must be signed by both parties. The arbitration agreement can be by exchange of letters, document, telex, telegram etc.

(c) Arbitration Clause :            It is quite common to include an arbitration clause in the main contract itself. The clause usually reads as follows –

‘All disputes and differences arising under or in connection with this contract will be settled in accordance with provisions of Arbitration and Conciliation Act, 1996, and the award made in pursuance thereof shall be binding upon both parties thereto’.  

(d) Alternate Dispute Resolution (ADR) :   Arbitration is termed as ‘Alternate Dispute Redressal’ mechanism. It is expected to relieve burden on judiciary. In India, we had a system of ‘Panchayat’ where five senior people from village would resolve disputes between the parties. However, as per section 28 of Indian Contract Act, 1872, any agreement restricting the enforcement of right under a contract by usual legal proceedings is void. Thus, the Contract Act envisaged that all contractual disputes will normally be resolved in courts. The only exception is the Arbitration Agreement.

(e) Advantages of Arbitration :          Advantages of arbitration are – (i) Quick decisions (b) Minimum legal technicalities and formalities. Hence decisions are fast and costs are lower, (iii) Flexibility regarding procedures, venue, language etc. (iv) Arbitrator is usually expert in the subject matter and hence, can understand the dispute quickly and thoroughly. A judge in the court may not be able to fully appreciate the problem, if it is of intricate technical nature, (v) Cost of court fees and other expenses can be quite high, (vi) Once the matter goes to court, adverse publicity in press cannot be avoided.

(f)  Disadvantage of Arbitration :      The disadvantages are – (i) No power to Arbitrator to issue summons, examine witnesses, taking evidence etc. (ii) Chances of bias of arbitrator are high as the arbitrator is appointed by the parties themselves. One of the parties which is in dictating position may force the arbitrator of his choice, (iii) enforcement of Arbitration award can be only through Court.

Which is an Arbitration Agreement: Nomenclature used by the parties may not be conclusive.  One must examine the true intent and purport of the agreement. The courts have laid emphasis on (1) existence of disputes as against intention to avoid future disputes; (2) the tribunal or forum so chosen is intended to act judicially after taking into account relevant evidence before it and the submissions made by the parties before it; and (3) the decision is intended to bind the parties.  Let us examine some case laws on the subject.

1.   In K.K. Modi Vs. K.N. Modi and others (1998) 3 SCC 573 Hon’ble Supreme Court observed that the authorities seem to agree that while there are no conclusive tests, by and large, one can follow a set of guidelines in deciding whether the agreement is to refer an issue to an expert or whether the parties have agreed to resolve disputes through arbitration.

2.   In Russell on Arbitration, 21^st Edn., at p. 37, para 2-014, the question how to distinguish between an expert determination and arbitration, has been examined.  It is stated,

“Many cases have been fought over whether a contract’s chosen form of dispute resolution is expert determination or arbitration.  This is a matter of construction of the contract, which involves an objective enquiry into the intentions of the parties.  First, there are the express words of the disputes clause.  If specific words such as `arbitrator’, `arbitral tribunal’, `arbitration’ or the formula `as an expert and not as an arbitrator’ are used to describe the manner in which the dispute resolver is to act, they are likely to be persuasive although not always conclusive…. . Where there is no express wording, the court will refer to certain guidelines.  Of these, the most important used to be, whether there was an `issue’ between the parties such as the value of an asset on which they had not taken defined positions, in which case the procedure was held to be expert determination; or a `formulated dispute’ between the parties where defined positions had been taken, in which case the procedure was held to be an arbitration.   This imprecise concept is still being relied on.  It is unsatisfactory because some parties to contract deliberately choose expert determination for dispute resolution.  The next guideline is the judicial function of an arbitral tribunal as opposed to the expertise of the expert; …..  An arbitral tribunal arrives at its decision on the evidence and submissions of the parties and must apply the law or if the parties agree, on other consideration; an expert, unless it is agreed otherwise, makes his own enquiries, applies his own expertise and decides on his own expert opinion ….”

3.   Therefore, our courts have laid emphasis on (1) existence of disputes as against intention to avoid future disputes; (2) the tribunal or forum so chosen is intended to act judicially after taking into account relevant evidence before it and the submissions made by the parties before it; and (3) the decision is intended to bind the parties.  Nomenclature used by the parties may not be conclusive.  One must examine the true intent and purport of the agreement.There are, of course, the statutory requirements of a written agreement, existing or future disputes and an intention to refer them to arbitration. (Vide Section 2 Arbitration Act, 1940 and Section 7 Arbitration and Conciliation Act, 1996.)

4.   In the case of Rukmanibai Gupta v. Collector, Jabalpur (1980) 4 SCC 556 Supreme Court dwelt upon the fact that disputes were referred to arbitration and the fact that the decision of the person to whom the disputes were referred was made final, as determinative of the nature of the agreement which the Court held was an arbitration agreement.

5.   In the case of State of U.P.  v.  Tipper Chand  (1980) 2 SCC 341 a clause in the contract which provided that the decision of the Superintending Engineer shall be final, conclusive  and binding on all parties to the contract upon all questions relating to the meaning of the specifications, designs, drawings and instructions was construed as not being an arbitration clause.  The Supreme Court said that there was no mention in this clause of any dispute, much less of a reference thereof.  The purpose of the clause was clearly to vest the Superintending Engineer with supervision of the execution of the work and administrative control over it from time to time.

6.   In the case of Cursetji Jamshedji Ardasser Wadia  v. Dr. R.D. Shiralee AIR 1943 Bom 32 : 44 Bom LR 859  the test which was emphasised was whether the intention of the parties was to avoid disputes or to resolve disputes.  In the case of Vadilal Chatrabhuj Gandhi  v. Thakorelal Chimanlal Munshaw (1953) 55 Bom LR 629 : AIR 1954 Bom 121 the emphasis was on judicial enquiry and determination as indicative of an arbitration agreement as against an expert opinion.  The test of preventing disputes or deciding disputes was also resorted to for the purpose of considering whether the agreement was a reference to arbitration or not.  In that case, the agreement provided that the parties had agreed to enter into a compromise for payment of a sum up to, but not exceeding, Rs. 20 lakhs,

“which shall be borne and paid by the parties in such proportions or manner as Sir Jamshedji  B. Kanga shall, in his absolute discretion, decide as a valuer and not as an arbitrator after giving each of us summary hearing”.

The Court said that the mere fact that a judicial enquiry had been held is not sufficient to make the ultimate decision a judicial decision.  The Court held that Sir Jamshedji Kanga had not to decide upon the evidence led before him.  He had to decide in his absolute discretion.  There was not to be a judicial enquiry worked out in a judicial manner.  Hence this was not an arbitration.

7.   In the case of State of W.B. v. Haripada Santra AIR 1990 Cal 83; (1990) 1 Cal HN 76 the agreement provided that in the event of a dispute, the decision of the Superintending Engineer of the Circle shall be final.  The Court relied upon the fact that the reference was to dispute between the parties on which a decision was required to be given by the Superintending Engineer.  Obviously, such a decision could be arrived at by the Superintending Engineer only when the dispute was referred to him by either party for decision.  He was also required to act judicially and decide the disputes after hearing both parties and after considering the material before him.  It was, therefore, an arbitration agreement. 

8.   In the case of J & K State Forest Corpn.  v. Abdul Karim Wani  (1989) 2 SCC 701 (para 24) Supreme Court considered the agreement as an agreement of reference to arbitration.  It has emphasised that (1) the agreement was in writing ; (2) it was a contract at the present time to refer the dispute arising out of the present contract and (3) there was a valid agreement to refer the dispute to arbitration of the Managing Director, Jammu and Kashmir  State Forest Corporation.  The Court observed that endeavour should always be made to find out the intention of the parties, and that intention has to be found out by reading the terms broadly and clearly without being circumscribed.

9.   The decision in the case of Rukmanibai Gupta (supra) has been followed by Supreme Court in the case of M. Dayanand Reddy v. A.P. Industrial Infrastructure Corpn. Ltd. (1993) 3 SCC 137. Commenting on the special characteristics of an arbitration agreement the Court has further observed in the above case that arbitration agreement embodies an agreement between the parties that in case of a dispute such dispute shall be settled by an arbitrator or an umpire of their own constitution or by an arbitrator to be appointed by the Court in an appropriate case (p. 143, para 8)

“It is pertinent to mention that there is a material difference in an arbitration agreement inasmuch as in an ordinary contract the obligation of the parties to each other cannot, in general, be specifically enforced and breach of such terms of contract results only in damages. The arbitration clause, however, can be specifically enforced by the machinery of the Arbitration Act.”

9.1 The Court has further observed that it is to be decided whether the existence of an agreement to refer the dispute to arbitration can be clearly ascertained in the facts and circumstance of the case.  This, in turn, depends on the intention of the parties to be gathered from the relevant documents and surrounding circumstances.

10. The decisions in the case of State of U.P. v. Tipper Chand (supra) and Rukmanibai Gupta (supra) have also been cited with approval by Supreme Court in the case of State of Orissa  v. Damodar Das  (1996) 2 SCC 216.  In this case, the Court considered a clause in the contract which made the decision of the Public Health Engineer, final, conclusive and binding in respect of all questions relating to the meaning of specifications, drawings, instructions ..... or as to any other question, claim, right, matter or thing, whatsoever in any way arising out of, or relating to the contract, drawings, specifications, estimates … or otherwise concerning the works or the execution or failure to execute the same, whether arising during the progress of the work or after the completion or the sooner determination thereof of the contract.  The Supreme Court held that this was not an arbitration clause.  It did not envisage that any difference or dispute that may arise in execution of the works should be referred to the arbitration of an arbitrator.

11. The decision of Hon’ble Supreme Court in K.K. Modi Vs. K.N. Modi and others (supra) has been followed by M.P. High Court, Jabalpur in M.P. Housing Board and another vs. Satish Kumar Raizada 2003 Arb.W.L.J. 109 (M.P.).  The M.P. High Court observed (in para 19) that if there is a provision for reference of the dispute to an authority and it is required to decide it in judicial or quasi-judicial manner after hearing both the sides that would amount to an arbitration agreement.  On the other hand if that authority has to decide the question without any reference to it administratively or as an expert that would not give rise to arbitration agreement. (END)

Note: the views expressed are my personal and a view point only.

Author:

Narendra Sharma, Consultant (Legal)

E-mail: nkdewas@yahoo.co.in