Desiderata of an arbitration agreement

Arbitration agreement is the starting point of initiating any arbitration. It is an agreement to submit to arbitration a present or a future dispute. In one case of UK Jurisdiction from the Technology and Construction Court (TCC) in the name of Turville Heath Inc v Chartis Insurance UK Ltd [2012] EWHC 3019 (TCC), a peculiar situation arose. In this write-up, one attempt is made to point out the necessary aspect of an arbitration agreement.

Many times, the clause in an agreement is referred to as the Arbitration Clause. It is a well-settled principle of construction of document that intention of the parties has to be gathered from reading the document as a whole. Only nomenclature of the clause is not material.

 The clause in dispute is as follows:

'2. Arbitration

If you and we fail to agree on the amount of loss, either party may make a written demand that each selects an independent appraiser. In this event, the parties must notify each other of their selection within twenty (20) days. The independent appraiser will select an arbitrator within fifteen (15) days. If an arbitrator is not agreed upon within that time, either party may request that the arbitrator be selected by the Association of British Insurers or Financial Services Authority. The independent appraisers will then appraise the loss and submit any differences to the arbitrator. A decision in writing agreed to by the two appraisers or either appraiser and the arbitrator will be binding. Each appraiser will be paid by the party that has selected the appraiser. Expenses will be allocated at the discretion of the arbitrator."

The clause looks like any other arbitration clause. If the clause is analysed item by item, then we may get the following points:

1. in the event of a dispute as to amount of loss recoverable under the policy, either party might make a written demand that each was to select an independent appraiser

2. the independent appraisers were then to select an arbitrator

3. failing agreement by the independent appraisers on an arbitrator, the arbitrator was to be selected by the Association of British Insurers or the Financial Services Authority

4. the independent appraisers would then appraise the loss and submit any differences to the arbitrator

5. lastly, “a decision in writing agreed to by the two appraisers or either appraiser and the arbitrator will be binding."

Conclusion:

The basic objective of arbitration in the Arbitration Act, 1996 is to secure the constitution of an independent arbitral tribunal. If there is any indication by reading the clause purporting to be an arbitration clause, that the independence of the so called arbitrator is compromised, then the so called arbitration clause would cease to be an arbitration clause.

In the present case, the reasoning of the Court points to the following ratio:

1. To be an ‘arbitrator’, a sole arbitrator must be able and competent to make his own independent decision on all the matters put before him.

2. The effect of the wording of the clause was that a decision of the arbitrator alone would be of no effect. The arbitrator needed the agreement of one of the appraisers before his decision would bind the parties.

3. The ‘arbitrator’ was not therefore an arbitrator within the meaning of the 1996 Act as he did not have the power to make his own independent decision on all matters put before him.

4. Further, the fact that the operation of the clause would not necessarily produce a decision that was binding on the parties was also a "strong pointer" to the clause not being an arbitration agreement.

In view of this, the above agreement ceased to be an arbitration agreement. It is pertinent to note that the Arbitration Act, 1996 (UK) is pari-materia with Arbitration and Conciliation Act, 1996 (India) as far as the provisions regarding arbitration agreement is concerned. The ratio of this case would apply to India also.